Australasian Investment Review

Platinum Capital is one of the country's more successful funds managers specialising in offshore investments, especially in Asia.

Its been hit, as so many other offshore fund managers have, by the fall in markets and then the rise in the value of the Aussie dollar which has trimmed or eliminated the impact of the strong rebound in foreign markets, especially those in and around our region, plus the US and Europe.

We featured the commentary from the group a few months ago at the end of the 2009 financial year.

It was optimistic, but hedged with doubt about the strength of the rebound; but value was seen in China and some other markets.

At the end of the September quarter, there's still that conservative approach to the impact of the financial crisis.

The group says its Investment Manager is of the opinion that "it is likely to be several years before the consequences of the credit crisis have fully played themselves out".

"With such an uncertain background, it is impossible to forecast profit a year ahead, acting chairman Peter Clarke told the AGM 10 days ago.

And there also doubt that the rebound can be sustained for much longer.

"What I can report is that in the first quarter in the year to the 30th September the Company's net asset value (ASX: NAV.ax) was up 6.09% after tax to a level of $1.41 per share post tax. As at 21st October, it was $1.39 down 1.41%.

"Given this satisfactory start to the year, and assuming there will not be another catastrophic crash in world share markets we can reasonably hope to maintain the dividend payment at a 10 cents per share annual rate.

"You will appreciate, of course, that this is an aspiration and not a promise."

The fund manager is the associated Platinum Asset Management and in its report for the quarter, had these comments on the outlook. Its AGM is today week.

"The pattern of market movements established during the June quarter persisted over the latest three months.

"Investors continued to favour lesser quality and more highly leveraged companies over those with more predictable earnings and more robust business models.

"This renewed willingness to embrace risk is probably explained by the remarkably swift change in sentiment concerning monetary stability and the surprisingly strong company earnings that have been reported post the "global financial crisis" (GFC).

"It is doubtful if this pattern will persist as the recovery flattens out from its very steep initial trajectory and as more traditional values come to be attributed to higher quality.

"Looking at Platinum's performance, it is the tail of our holdings, which by its nature tends to be composed of smaller companies, which has been the largest contributor to our performance.

"Some of these companies suffered disproportionately in the crisis as their prices were marked down in the chase for liquidity.

"The disposition of our assets has also played a part, with our high exposure to Asia and, in particular, China and Korea, being very profitable.

"Our Japanese stocks made a small loss but strong outperformance in North America and Europe more than compensated for this.

"When disaggregating returns among longs, shorts and currency for the last three months, we find that longs rose by around 14%, but that shorts and the appreciation of the rampant Australian dollar cost the company just over 5% with the rise of the A$ being responsible for a good two thirds of this negative effect.

"The net outcome for the quarter was that the company rose by 8.9% (pre-tax) versus the MSCI World index which rose by 8%.

"For the last twelve months the outperformance is much more stark with the company rising by 21.5% while the MSCI lost 10.7%.

"We believe that the five and 10 year figures are the most valuable timeframe in which to assess a manager's skill and these are respectively 7.7% and 13.6% compound pa for Platinum versus the MSCI's return of 0.5% compound pa for the last five years and -1.5% compound pa for the last 10 years.

"A very strong market in smaller companies has been used to further reduce our positions in such companies particularly Airports of Thailand, Gamuda and effervescent property stocks in Hong Kong like Henderson Land.

"We have completed our exit from AES, a power producer that we bought at the worst of the crises when debt and exposure to emerging markets was highly unfashionable.

"Setbacks in China allowed us to add to holdings of China Life and China Resources Enterprises.

 'Reed Elsevier also had a setback when it placed new stock to repay some debt and this gave us an excellent top-up opportunity.

"Among companies we have initiated positions in are Sotheby (the auction house), Allianz (insurance), Electronic Arts (video game publisher), MGIC (a US mortgage insurer) and Nikon (cameras and IC production equipment).'

Platinum pointed out that the strength of the Australian dollar is surprising.  

"As noted above, the Australian dollar continued to punish our returns. We commented on this last quarter and arguably, have remained too cautious. 

"With the RBA leading the field with a reversal of interest rate policy it looks as though only a growth scare will dent the A$.

"We have, nevertheless, reduced our exposure to the A$ further and added a position in other currencies which are in a similar position to the A$ yet with less foreign debt.

"These are the Norwegian kroner and Indian rupee.

"Our exposure to the Japanese yen is about half our physical position in Japanese shares as we believe ultimately the authorities in that country will have to address their compromised fiscal status.

"Regarding the US dollar we are ambivalent in a sea of negative sentiment

"As regards the fear we mentioned, this has all but evaporated as investor confidence has leapt in response to the lifting cloud of uncertainty.

"We now find many shares and even some country indices trading at levels higher than those that prevailed before the Lehman collapse.

"It is, however, not certain that this rebound is safe or sustainable.

"The G7 nations have incurred vast public mortgages in exchange for private debt obligations and losses.

"Further, bank balance sheets are now deeply impaired and willingness to lend is much reduced.

"In aggregate, the loan to deposit ratio of leading banks is about 120%, while the current and potential debt obligations for G7 governments are in excess of 160% of GDP.

"After the initial sharp fall in company earnings there have been some good recoveries.

"Helping this process has been an astoundingly rapid reduction in the operating costs of businesses as management laid-off workers and removed capacity.

"There is, however, a high correlation between robust earnings forecasts and robust government stimulation which means some caution is required when looking beyond the short-term.

On the first anniversary of the "GFC", one was inundated for commentary from the press about the lessons learned. Astonishingly, most discussion was accompanied by the suggestion that the crisis was a complete surprise and the remedial action indubitably praiseworthy.

It is as though there has been a communal sigh of relief about a near miss and we can now resume our previous behaviour.

"We have noted before in these reports and would like to emphasise again our view that the English speaking world has for some years been on a debt binge not so different to that of the Japanese in the late 1980s.

"There are differences but these are not so great as to cause one to believe that we can avoid a long work-out.

"Rather than heeding the endless chatter about the kind of recovery ahead, we suggest there are two indicators that should be watched: employment levels and bank lending.

"We believe there are sufficient positive influences to drive the world economy forward.

"The expansion will, however, be uneven with good growth experienced by the emerging powerhouse nations, particularly in Asia, but only modest recovery experienced in the fully industrialised areas, the US, Japan and Europe.

"Within these latter areas some commentators' forecasts of corporate earnings strike us as optimistic so that average companies are, in our opinion, fully valued.

"Having said this, there still appear to be a reasonable number of good, high quality concerns which are cheap compared to their historic valuations and against the market as a whole.

"Our research continues to identify some of these attractive opportunities and this is our best guide to making you money in the coming months."

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