Pantheon International (LON:PIN) is the topic of conversation when Hardman and Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: You titled your piece “History of value added to portfolio by holding Pantheon”. What were your key conclusions?
A1: The company has had significant long-term out-performance against most benchmarks. That was known. What we tried to do in the report was quantify that. To look and see what a manager’s portfolio would have done if they replaced part of their portfolio, as measured by the indices, with PIN. The analysis was done over a range of timescales but taking a five-year view, replacing 10% of the benchmark/portfolio with PIN’s share price saw improved average monthly performance against all these benchmarks: FTSE 100, FTSE 250, S&P 500 GBP hedged, PI global growth, PI growth, FTSE 350 Equity Investments. In the case of FTSE 100, you got 1.16x the average monthly performance.
The same analysis saw significantly reduced monthly volatility by replacing 10% of the portfolio again against all these benchmarks too. With the adjusted portfolio, FTSE 100 you got 91% of benchmark volatility, FTSE 250 93%, PI growth 96%, and similar levels for all the others too.
There were two other conclusions. First, using PIN’s NAV reduces volatility significantly more. Second, the one benchmark we looked at where volatility increased was the PI conservative portfolio, which is largely made up of very low risk, low volatility assets. If you replaced 10% of that benchmark with PIN, the volatility rose 3% but on average you got nearly 50% per month outperformance.
Q2: How do they deliver that performance?
A2: PIN has delivered 11.9% average annual NAV growth since inception in 1987. This is a ca.4% annual outperformance compared with benchmark indices over this period and ca.1.5x the market level of returns after taking account of all costs. It has not come about by accident, but reflects returns generated from: i) Firstly, the PE process adds value, with multiple operational, strategic, financial, cultural and expertise levers to generate superior returns; ii) Second, PIN’s flexible, global mandate means it can invest in whichever sub-segments of the PE market that offer the most value; iii) Third, the mandate is flexible, the portfolio is diversified, moderating extreme return volatility; iv) Fourth, being part of the PIN family brings multiple benefits, including economies of scale, access to deals, a broad network of relationships, experience and expertise. It also brings strong corporate governance, with both the Pantheon/PIN relationship but also a visibly independent board; and v) Finally, as a fund investor, manager selection is key. We outlined in our initiation note the sophisticated process by which PIN’s underlying managers are chosen.
Q3: So that explains the outperformance. Why does it also lower the volatility?
A3: We believe the diversity of their investments is important here. It adds diversity by geography, by sector, by specific counterparty, currency. In fact, by pretty much every measure it adds diversity to any of the benchmarks. Taking a simple example, the geographic mix means it is not exposed to Brexit in the same way as the FTSE 100 (even with its overseas earnings businesses) let alone the more UK orientated FTSE 250. Compared with wealth managers, growth portfolio benchmark again it adds geographic and sector diversity. PIN is an unusual equity in that in itself it has exposure to a diversified portfolio of shares in private companies globally and so in economic risk terms it could be viewed as more of an index than a specific security.
Q4: Why does using the net asset value add even more to performance and reduces volatility even more?
A4: As we detailed in our 6 September initiation on Pantheon International called “11.9% average annual NAV growth since 1987” the company is currently trading on a discount. We outlined some factors that could lead to a re-rating but in terms of performance the NAV has risen by more than the share price so replacing part of a portfolio with PIN at its NAV adds even more to returns than using its share price. In terms of volatility, the NAV has a small accounting factor in that they receive its valuations from underlying managers sometime after a period end, so a change its NAV will fall into a later period than the change in market prices.