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Fear and greed drive markets, it is gripped by fear at the moment

Financial News Q&A with Ian Macoun about his frustration with poor performing fund managers, and why mega mergers are often doomed to fail.

Australia-based Pinnacle Investment Management was founded by Ian Macoun in 2006, after he spent a period working in the country’s civil service before embarking on a fund management career which included overseeing Westpac’s asset management unit. 

Pinnacle, which oversees almost AUD84bn, has 16 affiliates and launched its first business in the UK two years ago — an ESG emerging markets boutique called Aikya Investment Management comprised of former investment professionals from Stewart Investors and Fidelity. 

Financial News spoke to Macoun about Pinnacle’s multi-boutique structure, his frustration with poor-performing fund managers, and why mega mergers are often doomed to fail. 

You had aspirations to become head of the state treasury in Queensland — why set up Pinnacle? 

It’s funny how things work out. I always believed in the importance of money and doing good things with it and to potentially enhance people’s lives. Money can do a lot of damage, but there are vast numbers of people who can be better off if investments produce better returns. 

Working in the state treasury was about improving people’s lives. I was given the task of figuring out what to do with the state pension fund. That was just at the time that superannuation became compulsory in Australia. Most people don’t like compulsion, but vast numbers of people just don’t pay attention to retirement. It got me excited and I was asked to set up a new organisation, which was a public sector investment corporation. I was the first CEO and that’s what got me into the industry before I went on to run Westpac’s fund management subsidiary. 

What sparked interest in striking out on your own? 

I had 10 years running institutional-owned fund managers, and forming views on what made excellence. There are a lot of good life-owned, insurance-owned fund managers. But there were weaknesses with that ownership that held back investment excellence. 

I left Westpac and with a few experienced people in the industry who were refugees from industry institutions, we thought there has to be a better model. We were all poaching each 

other’s key people. We were doing it to each other and clients hated it — they’d wake up and find a key person had moved somewhere else. 

We reached the conclusion that many of the most talented investment professionals, once they were experienced and well known, there was an environment where the best could prosper and go about producing investment excellence on their own terms. If you set it up correctly, they’d never need to leave. 

Under our model, the investment professionals — who are majority owners of our affiliates — go about their job and we provide the distribution and infrastructure. The idea is to free them of distractions. It might not sound like much, but we believe there’s a scarcity of talent in investing. These people are precious and the best use of their time is on investment. 

What’s the benefit of having such a multi-boutique model? 

It’s about delivering what you promise. People who join us were previously paid a lot of money, and we ask them to back themselves. You have to be an idiot to do that if you weren’t confident you could deliver or be a commercial success. 

The only reason I took equity in the business was because it couldn’t afford to pay me as a start-up. I was being paid a lot of money and I gave all that up to earn very little for a long time. It’s genuine skin in the game. 

The people I attracted to be our leaders in distribution and infrastructure, all did the same. If you left within less than six years, you forfeited the equity. We weren’t interested in people coming for a short time. The same for investment professionals who join our affiliates. 

How has Pinnacle fared during the recent market volatility? 

We always come out of market downturns stronger. Institution-owned asset managers very often cut costs as they have tensions and issues. Standalone boutiques can also be very challenged. We’ve always continued to operate and have been able to find people through crises. 

Being diverse is also helpful. We’re not only in equities. Our private market affiliates — such as our private credit, listed credit, infrastructure, water and agriculture manager — they’ve been unaffected by this period. 

What’s your assessment of the current M&A wave sweeping the sector? 

When we see forces for mega mergers and people talking about the importance of scale, we shake our heads. A great many of these fail. 

If people are thinking of investment excellence, scale can be fine in certain functions, but you need to keep investment cultures the way they need to be for investment excellence. Putting investment teams together is often the opposite of what you need to do. 

I’ve heard investment banks say the only way western asset managers can grow is through mergers, increasing scale and reducing costs. To be honest, we actually like seeing that happen, because so often you get investment fallout and teams leaving. We’re there to back people who decide to set out on their own. 

Why are so many underperforming asset managers allowed to survive? 

The market will treat harshly those investment managers who are not excellent. But you have to wonder why our industry has so many mediocre and underperforming groups. The organisation and alignment of incentives are wrong for a great many of them. It saddens me that many of the groups I’ve been in awe of as great active managers over many decades, have lost their way. They became asset gatherers and better at marketing than investing. They forgot what made them awesome investors. It’s a tragedy when people are allowed to continue to be active managers when they’ve lost their excellence. Our affiliates die if they don’t convince client to give them money to manage. If you’re owned by a bank or insurance company and get the money anyway, you don’t necessarily have the sharpness to stay excellent. 

What about the star fund manager culture? 

We have key people in our affiliates, but never just one person. We’ve always been aware of the danger. We always think of teams and succession and the ongoing development in each affiliate. We don’t want a fund manager that will blossom and then die when an individual leaves. 

There’s something wrong with an organisation if they allow one single star to become the vital cog for billions of pounds. That’s just not smart. 

But that doesn’t mean you need to go for mediocre people. We want great people, just not a star environment. 

It’s been a challenging year for the asset management sector so far. With inflation soaring and outflows persisting, what’s your outlook for the rest of 2022? 

A lot of the mistakes made in investing are when people become focused on the short term. The fact there are outflows — people taking money out of investments after markets have gone down — that’s a tragedy. 

We put huge emphasis on the longer term. It’s just too hard to predict the short term. The downturn in 2020 when markets tanked 30% was very short lived. That shocked a lot of people how quick the recovery came. It’s different now because we don’t have the fiscal stimulus from central banks, so it might be a tougher road. It’s difficult to predict because of geopolitical events too. But there are likely to be more outflows. 

Fear and greed drive markets, but it is gripped by fear at the moment. 

This article was written by David Ricketts for Financial News. It was first published here.

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