Andrew co-founded Platinum in 1994 as the Deputy Chief Investment Officer, having worked alongside Kerr for several years at Bankers Trust and perfecting the craft of.. More
Platinum recently completed its 2019 capital city investor and adviser roadshow. Here is a video of the Sydney investor presentation.
To view the slides of the presentation please click here.
To start the roadshow presentation, we also showed six short videos. The first captured what being an analyst means to our team; the others portrayed thematic insight, demonstrating interaction within this group and animating our hunt for ideas.
Our goal is to provide capital growth over the long-term by investing in undervalued companies.
To achieve this, our philosophy has been constant for 25 years. We avoid the crowd, explore change and buy out of favour companies. Today’s buzzwords of behavioural finance and disruption encapsulate this.
Over market cycles we expect to outperform, but often lag bull markets. We remain well ahead of the market since its 2007 peak.
We have a continuous energised debate about businesses, evolving from four people talking about stocks to today’s larger team, drawn from a diverse range of backgrounds, united by curiosity and their love of business.
Intense interaction in our single Sydney location harnesses collective experience and insight, producing a steady stream of investment ideas. Analysts travel regularly, but cross-checking, idea-sharing and triangulation is critical. Face to face communication is vital. Nuances are lost in emails, or across time zones.
The morning meeting starts our day. Standing in a circle, the team shares critical, actionable ideas; informal discussions then break out. Regular, formal meetings with minutes blogged inform everyone about idea evolution.
Our work on cohesion has highlighted the benefits of bringing people through the system, often from industry not finance, and developing them ourselves. 14 portfolios managers have built outstanding track records; this can’t be coincidental.
There is a Platinum way, not a Platinum view; each portfolio manager has their own opinions, drawing on our analysts’ work. We don’t seek agreement or consensus; it is safe to disagree. We challenge the market and must take opposing views to others, including colleagues.
There is important data in disagreement. When portfolio managers disagree, we embrace it. If two people with over a decade working together, mutual respect, the same philosophy and the same information make different conclusions, we must learn. Analysts are forced to address all concerns. Rather than find consensus we pursue the risks to our hypothesis.
Our analysts must co-operate and collaborate. Many firms are set up to seek internal consensus, diluting insights, or compete internally, prohibiting sharing and information flow.
The videos explore investment cases for significant themes in our portfolios. They also convey a deeper sense of the debate that takes place. We strive to better interpret our complex world, generating ideas to meet our simple objective of providing capital growth over the long-term by investing in undervalued companies.
Platinum Roadshow 2019 - Introduction
Platinum Roadshow 2019 - Auto Industry
Platinum Roadshow 2019 - Health Care
Platinum Roadshow 2019 - Asian Financials
Platinum Roadshow 2019 - Semiconductors
Platinum Roadshow 2019 - Oil Industry
Investor and Adviser Roadshow – Popular Questions and Answers
Our roadshow, from 1-30 May 2019 visited Brisbane, Sydney, Canberra, Adelaide, Perth and Melbourne. In each venue we hosted an adviser lunch and a direct investor evening event, seeing close to 3,000 people in total. At each session we took questions from the floor following the formal presentations. A number of themes recurred, and this brief note addresses these, rather than dealing with questions about specific stocks and themes that arose once.
Far and away the biggest concern was China – predominantly around trade as the situation deteriorated during the month, and Huawei’s woes were front and centre of the news.
There is clearly a general suspicion of China among many clients, not helped by ours, or America’s media, but we have been investing there for decades without trouble, and have made a lot of money there in recent years. It remains the largest single country exposure in the funds, yet we have short positions on the currency as insurance against macro risks such as trade.
The trade war is not rational from an economic perspective and it is hard to analyse in that way. The actions of the US government towards Huawei in particular are unprecedented in recent times, and designed to destroy that company, and impinge on China’s growth. In early May, when it was clear the trade deal was not reaching agreement we took preventative action, and reduced net exposure by more than 10% to protect the portfolio from risks that had become asymmetric.
A number of people asked about examples of disagreement within the team, as this had been a focus of the discussion of the process; the idea that we did not seek internal agreement, but focused on deep understanding of any investments each portfolio manager made.
The best example of this that we gave in some of the venues, was Clay Smolinski, and Andrew Clifford as co-portfolio managers of the Platinum International Fund disagree on whether to hold BMW, which was one of the top opportunities Andrew was presenting. In essence while Clay is exposed to a number of the beneficiaries of electrification, his key concern around BMW is the additional cost and complexity of offering petrol, plug-in hybrid and full electric vehicle options across its already substantial range of models, that have increased dramatically from the historic core of 3, 5 and 7 series. This disagreement is manifested by Andrew owning the stock, and Clay not, at the time of writing.
There were several concerned about the end of the bull market, the challenge for expensive growth stocks, and how we thought about risk management, whether via cash or shorts?
Increasingly there are flags, the IPOs of loss making companies, the excessive valuations for broad swathes of growth stocks; this idea of paying 15, 20, 25x sales for businesses is a serious concern. It is reminiscent of the technology bubble in many ways. While a very small number may succeed, there is a high risk in most cases of a permanent loss of capital. We have short positions on several SaaS stocks (software as a service) and over the last year have done well shorting Nvidia and Tesla.
But there is not a bull market everywhere; China and Japan indices remain at almost half of levels in 2007 and 1989, so this is predominantly still a US phenomenon as its market has more of these high tech and biotech companies.
In recent weeks, with concerns around trade issues, we have increased cash and shorts and are running exposure in the mid-60s per cent which is relatively low against the past decade, but we were lower for much of the period 1997-2009 when we had concerns firstly about technology valuations and later about the lending practices which led to the GFC.
Raising cash and finding shorts tend to act somewhat in tandem as they reflect market conditions – in the recent specific case, to get protection on quickly, we added around 10% index shorts in markets exposed to trade such as Germany, Japan, Hong Kong.
The process for finding shorts is broadly similar but psychologically harder as there is unlimited downside, and the payoffs tend to be very lumpy. They have, however, acted to smooth investor experiences at the most critical times, bear markets.
As always, we were asked several times about our views on the Australian dollar.
Our approach to currency is to take positions at extremes, with a default position for the local unit that is neutral, we think clients are best served by the diversification benefits of owning other currencies, having entrusted us to manage international share portfolios.
At this point in time, the Australian dollar is not clearly undervalued as there are conflicting forces at play. On the one hand, improving terms of trade, and a recovering Chinese economy would be seen as positive, but on the other, the rate cycle weighs, with property cooling in the largest markets on the Eastern seaboard, and there are risks of this spilling over into the general economy and labour market. As a result, we see no reason at present to hold Australian dollar cash, or to hedge portfolios.
The theme of the impact of ETF’s, and the challenges for active managers came up a few times.
It is hard to pinpoint exactly the impact of ETF’s on market liquidity, trading ,etc, though it is definitely there. The biggest concerns are where the underlying constituents are relatively illiquid, or where there are derivatives involved to replicate exposure.
It is certainly concerning when more and more people think they can be fund managers and play around with ETF’s – this is typical as the bull market attracts people to invest. You still have to determine what to invest in, and this is not easy. With ETF exposure, you have no choice in how capital is allocated i.e. what you are owning, within a certain market, the market is dictating that to you. Ask a Japanese person about index investing, with the Nikkei down 50% or so over 30 years.
As for active, it is true the average active manager underperforms, the key is to find those that can, and importantly, stay true to their philosophy and with a stable team. If an active manager doesn’t they won’t stay in business over the longer term. At Platinum we believe a process of fundamental research, selecting undervalued companies, and trying not to lose money is a superior way to allocate capital than investing passively. We have consistently demonstrated that we add value over the full cycle and that is a powerful proposition in our view.
Debt in the system, the outlook for interest rates, and modern monetary theory (“MMT”) were front of mind at some of the events.
It is hard to make a judgment on when the level of debt will impact the system – it can go on for a long time, but it may act as a headwind. We don’t see near term risks of much higher interest rates, however, the impacts of so-called MMT could be a risk to this view in the longer term. Fiscal discipline has been one of several drivers of the eradication of the inflation we saw in the 1970s, along with globalisation which is under threat too if trade wars escalate significantly. MMT is not Modern, having been used in the 1930s, but effectively removes the need for governments to even try to balance budgets, which would certainly be a change. This would likely take an electoral cycle or two to play out.
Ironically we are relatively well-positioned for MMT as higher rates would hit the expensive growth stocks, via the discount rates, the safe havens by the alternative of cash becoming more attractive, while a lot of the cyclicals we own could benefit from the economic activity it aimed to generate.
There remained some questions about relative performance, despite this being addressed in the presentations.
We would emphasise the following points in relation to the Platinum International Fund – since the last market peak in May 2007, we are well ahead of the market, and for the five years to April 2019, we kept up for the first four years with 75-80% market exposure despite expensive growth stocks, and not so-safe safe havens dominating. In the last twelve months, we suffered relatively from May-September as growth (e.g. Biotech, technology) surged and we did not participate, and then absolutely, but fell less than market in Q4 as there was nowhere to hide. Year-to-date to the end of April, the Fund was up double digits, and marginally behind markets commensurate with lower net exposure.
It is important to remember, nowhere in the process do we consider whether the stocks will outperform all other stocks (i.e. “the market”). We believe this is not a sensible way to invest. Instead as we stressed in the presentation we weigh up each investment on its own merits, and believe that this approach, across a portfolio of ideas, and a full investment cycle will come out in front.
We were asked a couple of times about how we determine the distributions from the Funds.
Given the timing of the roadshow, this is very relevant with distributions due on 30 June, and we are currently publishing forecasts weekly on our website.
The distributions are determined by trust law, which states that trusts are a pass through vehicle from a tax perspective. All income, after expenses, and any realised capital gains must be paid out to investors, who are then taxed at their marginal rates.
Over time this has meant that distributions can vary widely from year to year. They are NOT dividends, and should not be thought of as a steady income stream. However, over time, distributions tend to be close to the long term returns of the underlying funds as gains and income are passed to investors, and these have been substantially higher than dividend yields alone.
We were asked about which of our Funds’ investors should be using right now?
This question comes up every year and we always sidestep it! The Platinum International Fund is our most flexible – it can go anywhere, while the other funds have additional restrictions on their universes. That means our best ideas can always get into the flagship, however, in any given time period one of the smaller funds tends to be the strongest, usually based on favourable sector or regional dynamics.
The weightings in the International Fund give a sense of the proportion of ideas we are finding in each region (Asia, Japan, Europe) and sector (Brands – a broad definition of Consumer, Healthcare and Technology) but we never specifically recommend one, and leave that choice to investors.
Finally, although we were only asked once, by an investor in Canberra, a great question we were asked was “What is the biggest lesson we have learned, as investors, over the last 12 months”?
The answer Andrew gave was that we were, with the benefit of hindsight, slow to react to the slowdown in China last year. This was despite it being fully visible, as we saw the tightening and the higher rates in the US that were sucking capital out of emerging markets. The real warning sign was the trade dispute. Our view initially was that the economy was strong enough to withstand these impacts, but it became clear the loss of business confidence and the challenges of making purchasing or capex decisions in an uncertain environment were not good for businesses or markets.
The lesson was to act more swiftly to such signals, and while the whole world learned in 2018 to pay more attention to China, and that it had arrived on the global stage, we were able to put this lesson into place in May 2019 when we saw the first signs of the trade war reigniting.
This summary attempts simply to capture the essence of the key discussions that took place, and is no means exhaustive.
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.
Update - Trade War Escalation
The Appeal of the Anti-Predictable
Audio - 31 March 2019 Quarterly Report