You asked us

At our annual Client Roadshow we talked about today’s big investment themes and were delighted to answer client and adviser questions submitted in advance or asked in person at the event. Here’s an edited and updated review of some of those questions. 

Q. Why continue to invest in China?
A: Clay Smolinski, Co-Chief Investment Officer

Until recently¹ the Chinese stockmarket was in a serious slump.
 

• Economic growth was muted. It’s averaged nearly 9% a year since 1978.²  But  Covid lockdowns and a property crisis broke that pattern. It fell to just 3% in 2022 and in 2023 was a comparatively weak 5.3%.³
• As they often do, the property crash in China bled into the wider economy, denting consumer spending, investor confidence and construction activity.
• Whilst Chinese policymakers had cut interest rates, wary consumers and businesses were more focused on repaying debt than using cheap money to spend or invest.
• Increasing competition between China and the West raised the risk of geopolitical instability (such as conflict in the Taiwan Strait) and economically damaging trade wars.

With all these forces working against it, why did we continue to invest in China?

When we compared investment opportunities from around the world we found there were many high quality companies in China, delivering healthy profits and selling at very attractive valuations. Our view was that any positive change – such as effective stimulus policies or a resolution to the property crisis - could see a significant upward revaluation of Chinese stocks.

We’ve been here before

This is not the first time Platinum has invested in a market that looked unattractive on economic fundamentals.

The most powerful parallel is the United States in 2012. The US was dealing with the aftermath of the GFC – the very definition of a property crash.⁴ New home starts had fallen 70% and unemployment was 8%. Despite low rates, consumers and entrepreneurs stayed on the sidelines.

As the chart below shows, sentiment was so poor that some very high quality businesses were available at bargain prices. As the right column indicates, they then delivered stellar returns for long-term investors.

There’s a lesson here around focusing on quality and value even when sentiment and economic news is negative. In 2012 Platinum had one of its highest ever exposures to US stocks and benefited from the extraordinary recovery in some of these stocks.



Q. What opportunities is the market not fully appreciating?
A: Nik Dvornak, Portfolio Manager, Platinum International Brands Fund

Opportunities often occur when a change is not fully understood by the market. That can allow us to buy good companies at attractive prices.

Autonomous vehicles are one example. Five years ago there was a lot of hype about driverless cars. Now there’s much less noise but much more reality. In Phoenix, Arizona, a company called Waymo has been running driverless taxis for four years. They’ve been operating in San Francisco for two years. Waymo’s driverless taxis now do 50,000 trips per week.

This could be a huge social and economic change. The next generation may never need to own a car or learn to drive. We’re investing in this theme through Alphabet (Google) which owns Waymo. And through companies like Microchip which make the semiconductors these vehicles use.

Interest rate normalisation

Many companies were negatively affected by the long run of post-Covid rate rises. As rates normalise (the US Federal Reserve cut rates by half a percent on 18 September) some of those companies could bounce back strongly.

One Platinum holding we believe could gain from that trend is the US credit bureau TransUnion. They collect lending data on consumers: who is paying back their loans, how often they miss payments and so on. Banks need this data to decide who to lend to and how to price their loans.

We think TransUnion is an exceptional business. Barriers to entry are high. Competitors are few. It collects data once but can sell it many times, so it can scale-up easily. Over the last decade it’s grown three-fold and averaged a 50% Return on Capital.

So why doesn’t everybody own it?

Rising interest rates hurt TransUnion because US mortgage applications fell 75% as interest rates peaked. Mortgage data was a huge part of their business so the stock price halved over 2022. That temporary problem gave us a rare opportunity to buy this exceptional business at a Price to Earnings ratio of around 17.

So now we own a business aligned to the growing use of consumer data by banks, insurers, retailers, advertisers and governments. With all sorts of exciting AI applications coming, this data will only get more valuable. TransUnion also has a 70% market share in India, a market growing 30% pa.



Q. Can you discuss the performance of the Platinum Asia Fund?
A: Cameron Robertson, Portfolio Manager, Asian Strategies

The Fund has matched or beat the MSCI Asia index over fiveyears, 10 years and since inception but over the past three years performance has been weaker. Over that period, many Asian economies and businesses continued to grow, but their valuations fell, creating a challenging environment for investors. The region – and the portfolio – have been held back by a couple of factors.

Economic weakness in China effects Chinese companies but also Asian companies who have sold into China or supplied its importers. While China has been weak since Covid, a recovery will be felt across the region – and likely reflected in Asian sharemarkets.

Asia is dominated by emerging market (EM) economies. They can generate attractive long-term growth, but are vulnerable to underperformance when US rates rise. In a rate rise environment, global investors switch capital out of EMs into the US, attracted by a lower-risk, cash return in US dollars. As the US rate environment changes, money could flow back to Asia’s sharemarkets.

As I’ve written in my recent Quarterly Reports, the portfolio is now fully invested and we’ve kept very little cash in the Fund. We are finding many attractively valued opportunities. With US rates starting to decline and China taking increasingly aggressive action to bolster its property market, economy and private sector, the headwinds of the past couple of years may turn into tailwinds for investors in Asia.
 
Q. Why is the Platinum Asia Fund not more heavily invested in India?
A: Kirit Hira, Senior Investment Analyst, Asian Strategies

The MSCI India Index is up 40% over the past year. ⁵

I’ve just returned from a research trip and, while India’s long-term prospects are bright, there are signs of over-exuberance.

An extraordinary amount of retail investors’ savings is going into the market - as high as 25% of financial savings. People are using unsecured debt to get into the market and there’s a ballooning futures and options market – some 84% of all equity options globally were traded on Indian bourses in the June Quarter. The IPO market is also hot – one recent U$800m IPO was 60x oversubscribed.

In bull markets, companies down the quality/liquidity spectrum often do best. Small and mid-cap stocks are doing well but in an emerging market like India those stocks have high starting valuations and limited liquidity and we don’t want to take on that risk. Public sector companies are also outperforming but they are often inefficient enterprises not completely focused on shareholder returns. The bull market is also extending to companies with demonstrated poor corporate governance. 

The stocks we do own in India are truly world class. Interglobe, our largest holding in India, is the country’s leading airline, with excellent profitability and on-time performance. It’s a world class business on any measure.

There’s amazing growth potential in India but right now we think valuations are excessive and we’re focused only on the highest quality opportunities.

Q. How do distributions work in managed funds like the Platinum Trust Funds?
A: Douglas Isles, Head of Investment

It’s important to bear in mind the structure and legal rules governing managed funds when you look at your distributions.

Unlike listed investment companies or industrial companies, where the Board decides what dividend to pay, managed funds like the Platinum Trust Funds, must by law distribute, within the Australian tax year:

• income – the dividends received from shares held in the Fund, plus interest on any cash; and
• realised capital gains – any net gains on the sale of shares.

The distributions you receive may include a range of different tax components. These components have different tax implications which are shown in your Annual Distribution and Tax Statement from Platinum.

A large Fund distribution does not always correlate with strong Fund performance (and vice versa, a small distribution does not always correlate with weak performance).  The amount of the distribution is influenced by dividends received, the amount of realised gains on the sale of the shares during the year, any gains/losses on shorting and the bringing forward of prior year capital tax losses.

It’s important to remember that ultimately, the objective of a Platinum Trust Fund is long-term capital growth and therefore we will hold shares if we believe they have further upside.  As that growth has not yet been ‘realised’ (the shares aren’t yet sold), you benefit from the growth in the unit price.  You aren’t taxed on that appreciation until you withdraw units (or we eventually sell the shares within a Fund).

The tax you pay on distributions is separate to the Capital Gains Tax you may pay on the withdrawal of units in your managed fund.

Tax is complex and personal in nature. You should always consult your financial adviser and/or accountant about tax considerations.

• You can find more information on investing with Platinum here.
• You can watch the Platinum Investor Roadshow on the Journal section of our website.

1: As we write (late September 2024) the Chinese government had just announced a set of stimulus policies. Chinese stocks soared.
2: https://www.worldbank.org/en/country/china/overview
3: https://tradingeconomics.com/china/full-year-gdp-growth
4: For a dramatic but insightful retelling of the genesis of the GFC, see Michael Lewis' The Big Short
5: Source: Factset, 1/10/24, local currency