Is Pinnacle the next success story?

A highly profitable business could provide the sequel to another great success story.

In late 2012, I purchased shares in Treasury Group at just under $4.40 each. The stock has almost tripled in price since then and this year it's on track to deliver more than 50c a share in dividends - a fully franked dividend return of more than 11% on my purchase price. It's been a wonderful success so far and highlights the potential in this type of business.

Treasury is what's known in the industry as an "incubator". It invests in smaller "boutique" fund managers and helps them build their businesses. Generally, the key people in such businesses are stock pickers. They're not so interested or skilled in things such as marketing, information technology or administration. An incubator like Treasury can provide such services, allowing the fund managers to focus on investing. In exchange, the incubator gets a stake in the funds management business and sometimes a fee on top for providing services.

When the plan comes together, the fund manager grows strongly with the support of the incubator and everyone benefits. Funds management businesses have mostly fixed costs. So when revenue exceeds those costs, further growth often leads to explosive profit growth.

Vital statistics

At the time I bought in, Treasury's nine boutiques had total funds under management (FUM) of $16.4 billion and Treasury's net profit was $8.1 million. Treasury itself was valued at $130 million, or 16 times its then profit. Today the stock price is almost three times as high, as is total FUM, and net profit is up 21/2 times.

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