Funds with 'rockstar' stock pickers are funds to be avoided, says Pinnacle founder and managing director Ian Macoun.

The company - which as of March had around $89 billion in funds under management - helps fund managers branch out on their own by providing working capital and business services in exchange for a minority stake in the new boutique.

While small teams can present 'key person risk', Macoun says Pinnacle only backs key people who operate in a team like way. 

He says 4-star Pinnacle (PNI) is well placed to snap up market share from funds that don't adequately manage this risk. 

A high-profile example is Magellan (MFG), which saw net outflows of $50 billion between 2021 and 2022, or around 50% of FUM, after underperformance and the loss of its CEO Brett Cains and cofounder Hamish Douglass.

Morningstar spoke with Mr Macoun on the sidelines of the 2023 Morningstar Investment Conference in Sydney. 

How do you mitigate key person risk?


Ian Macoun: So obviously we have key people, but we look for key people who operate in a team, in a team like way we don't have a culture of stars. You know the old rockstar culture of fund managers, we don't like that at all and they're not the sort of people who we have. So each of our affiliates has some key people, but a whole team and we're always focused on continuing to develop people and on succession.

What do you look for in a fund manager?


Macoun: So the most talented investors, they are particular kinds of individuals, they have particular personality traits. They're pretty unusual and they operate best in a certain environment where they have independence and autonomy and they don't have a boss telling them what to do. So we provide that environment where they can just focus on investing without the sort of distractions that exist in a lot of other organisations. They're purely focused on their clients and delivering the best outcomes for their clients.

We do the heavy lifting on distribution and all the running of the business and so on. So what is going to give us the best likelihood of delivering the best investment outcomes for the clients? Well, we need these talented people. We need them to be with us for a very long period of time because clients don't like turnover, which has been typical in our industry. So it's ideal for us if we can have these people happy and getting about their business for a very long period of time. Normally for the rest of their career, because they're equity owners in the business, they have no reason to go elsewhere.

Why invest a boutique fund?


Macoun: So we would argue that, on average, over reasonable periods of time, they'll get better performance, they'll get better returns for given levels of risk and they also have greater stability and longevity, investors want to choose their fund manager and stay with them for a very long period of time. Investors hate turnover and we don't have turnover in our boutiques.

Where are the growth opportunities for Pinnacle?


Macoun: It will continue to grow. We still have a very high level of inquiry from people who want to set up their own boutiques and who are getting demand from clients for what they do. So it will continue to grow, part of that is taking market share from other participants who are quite a few people retiring from the industry. There are some of the previously well regarded fund managers have encountered problems and they've been losing funds, that creates opportunities for us.