Graduating as dux of Finance from university and a brief stint as an accountant at Grant Thornton gave Clay the grounding to deconstruct financial statements. But it is his.. More
A prolonged period of low interest rates will affect us all, and the question of which stocks to own requires more careful consideration than ever before.
This is an edited extract from the presentation given by Clay Smolinski at the 2016 Platinum Asset Management Investor and Adviser Forums. It followed a presentation given by Andrew Clifford, “Interest rates to be lower for much longer”, providing an overview of the current macroeconomic environment from a historical perspective.
The passive index-tracking approach that has served many in the last few years appears to be becoming fashionable at exactly the wrong time.
The key effects will be threefold:
Although negative rates are unprecedented, we have seen extended periods of low rates before. Japan, being a country where the interest rate has been below 1% for over 20 years, offers an interesting case study. Platinum is unique among Australian asset managers to have managed a dedicated Japan fund for 18 years, which has over that period delivered 14.6% per annum against a market return of about 1.5% p.a. (MSCI Japan Index in $A). We have direct experience of what worked in a low rate environment and, importantly, the distortions that low rates caused.
This paper will address three key strategies that worked and one to avoid, and will (in the footnotes) provide some examples of stocks we own today that meet these criteria. The analysis draws from a series of back-testing done by Credit Suisse HOLT as well as Platinum’s own quantitative studies. It is worth noting that the strategies shared by Credit Suisse would have also worked in the US and Europe, as they rely on investing common sense, but to a much lesser extent.
In summary, an investment approach like Platinum’s – paying close attention to price and going against the herd – makes a lot of sense and is effective, particularly in a market like Japan where there is little growth in the economy and interest rates are already close to zero. There was a widespread sense in Japan that the economy was very vulnerable to shocks and that the policy-makers had used up all their bullets. So when problems did arise, whether it was at a company level or a macro level, one would often see wild swings in sentiment and investors would get very pessimistic. If the world today indeed resembles the Japan of the last two to three decades, then we expect our tried-and-tested stock selection approach will have a good chance of delivering solid outcomes for our investors in the years ahead.
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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