Takeover bids and high-profile staff departures have embroiled some listed wealth managers. At the same time, the outlook for all wealth managers has been impacted by testy markets. It is a challenging outlook for these businesses, particularly as market swings have spooked investors. This has seen outflows from a number of investment firms, notably Magellan reported net outflows of $50 billion in September.

Perpetual of course is involved in a tussle over its bid for Pendle and this week, its star stock picker announced he would leave the firm. Despite this market pessimism, not all wealth managers are the same. Morningstar equity analyst Shaun Ler has uncovered a pinnacle opportunity for investors. Indeed, this prospect is Pinnacle Investment Management (ASX: PNI). It was a business that was already identified as being well positioned in a challenged environment. However, now Pinnacle shares have fallen below Morningstar fair value amid the market drop in market sentiment. The icing on the cake for this business is that it is also moat-rated—as Morningstar’s Mark LaMonica reminded us recently—moats matter.

Morningstar has a narrow economic moat on Pinnacle based on the intangible asset of its brand and switching costs. As Ler notes, these sources of competitive advantage help provide stability and growth in funds under management in all market swings.
In the current environment, this is crucial. Already investors are shifting their money from these wealth managers given the market volatility. However, Ler expects Pinnacle to regain its lost mandates, and attract mandates from poorer performing competitors when investor appetite for listed assets returns.

“We think this is cyclical and the market underestimates Pinnacle's superior ability to gather and retain assets relative to other managers,” Ler said in this note.

Importantly, Ler added that “high capital requirements, alongside the durability of Pinnacle's intangible brand among investors, make replicating the firm's achievements difficult”.

Current market turbulence is also driving an investor shift from active to passives investing, according to Ler. Investment managers under the Pinnacle banner including Hyperion Asset Management and Firetail Investments are active managers. That is, they aim to actively manage their portfolios over and above the market index. In contrast, passive investors, track a market index. Again, Ler believes Pinnacle is well-placed amid this shift. “We believe Pinnacle's strategy of running a multi-strategy captive business, supports share wins over competing active managers and makes up for share losses ceded to passive options.

Furthermore, Ler believes investors are overly fixated on the temporary underperformance of select boutiques like Hyperion and Firetrail. “On aggregate, Pinnacle affiliates are outperforming benchmarks more consistently and at greater magnitudes than peers,” Ler says.

In fact, a recent in-depth report from Morningstar uncovered the performance of the top 10 active strategies by investment managers, based on returns for the 10 years to 30 September 2022.

The Hyperion Growth Companies Fund (3344) was a top performer in the list.

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“We believe Pinnacle can grow its share of the retail market, supported by its growing reputation, the ease of accessing its products, and its captive distribution strategy,” Ler says.

“The market is pricing Pinnacle as if it were a mature firm. We contend it has room for above-market earnings growth. We believe Pinnacle has stronger investment and valuation appeal versus its comparable peers who are more vulnerable to redemptions, fee compression, or loss of key personnel.”

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