An actuary by training, Douglas first joined Platinum in 2003 as an investment analyst, having spent some time at the Commonwealth Bank as a product actuary and, prior to that.. More
Investment specialist, Douglas Isles, explains how to think about total return (income and capital growth) when investing in international equities.
The Platinum Trust Funds must distribute their income and net realised gains within the Australian tax year in which they are earned. In recent years, the distribution profile has, for some Funds, been more volatile than many investors had come to expect. The more recent “hunt for yield” has made this more of a concern, but in reality, total returns are the key.
The total return can be utilised to provide income and growth requirements as needed. The focus on yield and predictable investments has resulted in many of the better opportunities in markets (as of June 2013) within lower yielding and cyclical stocks. Hence, the income and associated distribution issue will likely persist.
This factsheet tries to help explain the current lower distributions and their inherent volatility. For further information on Platinum’s philosophy and portfolios, please email Douglas Isles, Investment Specialist on firstname.lastname@example.org
International shares tend to pay lower dividends than Australian shares; a function of pay-out ratios. Many overseas companies invest more back into their businesses, while some prefer to buy their own stock. Tax regimes influence capital allocation decisions for corporates. Franking credits only apply to Australian shares; for Australians investing in international shares this is not a consideration.
Total return is the key objective of the manager, and this cannot be emphasised enough. For all but 0% tax-payers (who are neutral) there is a fiscal preference for long-term capital gains over income, but note that stocks are not retained in the portfolio for tax reasons – the investment case is key.
In buying “neglected” stocks, Platinum captures dividends, growth and the revaluation of prospects – the last is a major component. The dividend yield of global markets is c. 2% in 2013, long-term trend earnings growth adds 2% plus inflation, while the Platinum International Fund has delivered 13% pa since 1995. The dividend stream received by Platinum International Fund since inception demonstrates the rising trend that one would expect to receive from a portfolio of good businesses.
Platinum employs risk management strategies, particularly short-selling and currency management. Short-term instruments such as index futures contracts and foreign exchange forwards by their nature have a meaningful impact on the income profit and loss. Such techniques often act like insurance with small losses in many environments and lumpier “payoffs” when markets sell-off, such as in 2008-09.
The realisation of capital gains and losses is driven by stocks achieving target price levels, or being removed from the portfolio. Stocks are evaluated on a 3-5 year investment horizon; the average holding period is around two years in the Platinum International Fund. Realisation of capital gains is likely to be more prevalent in strong markets, when stocks tend to be more fully appreciated. In any year the contribution from managing risks and realising capital gains is likely to outweigh (in either direction) the dividends received by the Fund, which are relatively stable.
As at 2013, for several Funds, there are historical losses on the income and/or capital accounts that have not been fully recovered. It is also worth highlighting in a strong year like 2013, the reappraisal of the prospects of the companies in the portfolio far outweighs any income that could be derived from owning international shares.
DISCLAIMER: The above information is commentary only (i.e. our general thoughts). It is not intended to be, nor should it be construed as, investment advice. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. Before making any investment decision you need to consider (with your financial adviser) your particular investment needs, objectives and circumstances. The above material may not be reproduced, in whole or in part, without the prior written consent of Platinum Investment Management Limited.
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