The Case for Pacific Current (PAC)
I have been a long term holder of PAC. You may well ask, why? Some of those companies in or near its peer group include Pinnacle Investments (PNI) and Magellan (MFG.). Let’s look at the last 5 years. While PNI is up around 800% and MGF has risen 100%, PAC has risen from about $4.80 to $5.80, or about 20%. So for the last 5 years, PAC has been the perennial under performer.
The reason I still hold it is that it has been a good dividend yielder and I need a few of those in our SMSF. But is it a value trap? Well, it has not gone down in value, but neither has it gone up much. It has always looked like it was on the threshold of doing something well, but falls over at critical times. It has made some great boutique fund manager investments – its core business, but has also had some very poor selections.
A little bit of history – the company grew out of a merger around 2015 between Treasury Group and Northern Lights. Treasury Group was Australian listed and had a portfolio of well-known Australian based boutique fund manager investments, for example Investors Mutual (Anton Tagliaferro). In an effort to broaden its base, it went looking for an overseas partner and chose Northern Lights, a privately owned US based organization with a portfolio of US boutique fund managers. There were initially some teething problems such as who would drive the company forward, and who received the best deal. I think Australian investors felt that they came off second best, and they were probably right. But over the last 5 years, a number of the boutique investments have been sold off at substantial profits, non-performers have been sold back to their original owners at around what they had been bought for, and the worst performers have been shut down or virtually given away. The proceeds of these sales, which have dramatically outweighed the losses, have been reinvested in other fund managers.
The wash out is that the business has become progressively more US focused, but also with some European investments. The ownership/profit sharing arrangements with all of the more recent purchases have been individually tailored to each transaction. The nature of these arrangements is rarely revealed. This means that there is a lack of ability for investors to be able to do any worthwhile prediction of earnings. Brokers have also nearly given up on covering PAC. The only one left standing is Ord Minnett, who have not provided an update for 6 months. Their target price has drifted back from over $8 to $6.70 over the last couple of years. Due to the complexity of all these various shareholdings, PAC has had trouble with reporting in the required time frames. They usually only get there on the very last day and a couple of years ago they had to restate their earnings. This led to a change of CFO and since then there has been some improvement.
So PAC is a bit of an orphan. We are predominantly in the hands of US based CEO Paul Greenwood, who prior to Covid, has gone out of his way to spend time in Australia. Paul seems to have spent the majority of his career selecting and advising on the selection of boutique investments for companies such as PAC. From my observations with PAC he has had maybe a 75-80% success rate. He has brought together a portfolio increasing based on closed ended FUM, non $AU earnings, and managed funds that are not equity based (such as property, private equity and lending organisations)
So to invest in PAC, you need to have a belief in Paul Greenwood. He has some pretty generous incentive options which run out in over the next 12 months, so his mind is focused on some outperformance. From my reading independently and in PG’s briefings most of the current portfolio seem to now be firing. As a bit of insurance the PAC portfolio has gone from being 100% Australian based prior to the merger, to 6% $AU, 92% $US, all done when the $AU was in the 80c to 100c $US range. With the $AU headed to sub $US 0.70 in next couple of months we will have the exchange currency working in our favour in regard to repatriated earnings.
On this basis, I am prepared to hang in there a bit longer.
Cheers Gingerbeer
