Platinum: In search of the unloved

Platinum Asset Management was born on 1 March 1994, the boutique brainchild of Kerr Neilson and a team of six other former BT Funds Management international equities experts.

Platinum Asset Management was born on 1 March 1994, the boutique brainchild of Kerr Neilson and a team of six other former BT Funds Management international equities experts.

Six short years later, the Sydney based group has $2 billion funds under management and has just taken line honours in the Money Management Fund Manager of the Year awards for international equities.

The secret to Platinum’s success, says head of business development John Mennega, lies with its people and its process.

“At BT, these guys had a really stellar performance in international equities, for around seven years. So although the Platinum team has only been established for six years, they really have around 13 years of experience,” Mennega says.

Today the Platinum team numbers 20. About half of these people are investment analysts and four of the investment team hail from the BT days.

Becoming a member of this elite little outfit is not easy — as Mennega says, the selection criteria is high.

“When we recruit, we look for people who are strong on research because our process is very research driven. We’re looking for interpretative skills. Information is commoditised these days. It’s no longer what you know that’s important, it’s what you do with it.”

In the early days, Platinum’s mission was two-fold. The first was to be a truly independent fund manager. Platinum today doesn’t have a parent and its shareholders are staff and non-institutional outside investors. The second mission was to focus on absolute returns and absolute risk.

“Platinum wanted to look at it from an investor’s perspective,” Mennega says.

“A lot of managers are very benchmarked to index which means there’s a high degree of correlation between managers.”

This mission too, has been accomplished. Platinum has been able to generate good returns for lower risk. Mennega explains the process that enabled them to do that.

“Our focus is identifying the gap between the market price of a stock and its inherent value. We do that by assessing its future growth potential which we do in two ways.

“First we conduct very detailed research on the company. Second, we develop themes about what we believe is happening in world industry. We focus strongly on value. We assess value - not just market value but business worth. We look for gaps between business value and market price and then we put them in context with themes around the world to judge where the next opportunity might be.”

It’s an interesting approach which propels the fund manager to look both backwards and forwards.

“We look backwards to find where a company is undeservedly unloved,” says Mennega.

“For example, we bought AMD which is a competitor of companies like Intel and manufactures chips. We bought it when it was fairly unloved. We did some detailed analysis which said that the degree of unloving was unwarranted. So we bought that company and it moved up - to the point where we had to sell.”

Platinum also looks forward, at the trends it sees developing around the world.

“We’re not really looking at stocks here, we’re looking at themes. One we identified was business to business e-commerce. We chose i2 Technologies on the basis that it was well placed in the area of business to business e-commerce and the company has moved up substantially.”

The boutique also pays close attention to the trends developing in individual countries.

“We saw that listed brokers Nomura, Nikko and Daiwa, based on their volume and structure, were going to be profitable companies and we’re looking closely at the direction in which Japan was heading and the market behaviour in brokers’ volume. Those themes are very much where we saw a gap between market price and company value.

“A company can be unrealistically unloved because it is not understood or it can be unrecognised in its positioning and future potential.”

If we’re judging Platinum on performance, it certainly comes up trumps.

As the table illustrates, Platinum ranked in the first quartile in 1999, for all periods from three months to five years. And the performances of Platinum funds against the indices speak for themselves.

But, while exciting, Mennega says the figures are not the only thing that turn Platinum on.

“The fact that we are significantly lower risk is the really exciting thing. Historically, Mercers’ figures show that when you look at our volatility risk, we are lower than our index and lower than our peers.”

But it is not simply performance or lower risk that makes Platinum so sexy, according to ASSIRT’s Patrick Bennett.

“We like them because they’re different. They’re very active, they have a very concentrated portfolio and they specialise in only one asset class from a boutique point of view. They have a good track record over the long term and their focus is on industry as opposed to geography which is sensible and logical given the globalisation of larger cap industries in the world today.”

Bennett also likes the fact that they are not index huggers. In a nutshell, Bennett says, “They’re interesting”.

So what does this interesting boutique manager see ahead?

“We see a market that’s become very divergent,” Mennega says. “We’ve all heard about the old and the new economy where the new economy is taking off like a rocket and the old one is sitting around saying ‘you don’t love me any more’. This creates market stresses and those stresses in some areas are quite strong. We think we’re well positioned relative to those stresses.”

And they’re putting their money where their mouths are, developing two new products to take them into this divergent market. The first, reflecting the new economy, is a technology fund. It will invest in companies around the world, including providers of computing, networking and telecommunications equipment, software, semi-conductors and related equipment providers as well as IT services, network operators, content providers and internet based businesses. But it is the second product which excites Mennega.

“We’ll be bringing out the Platinum International Brands Fund in May. It’s not exactly the opposite of a tech fund but it focuses on the old economy which is currently out of favour. So it’s looking for holdings in household names which have been disappointing.”

The concept behind the fund is that the process of globalisation which involves the removal of impediments for ownership, international trade and promotion will see the emergence of what he calls “mega brands”. And companies with these strong positions are likely to be able to augment the growth in their relatively mature, stable home markets by tapping faster growth in emerging markets which are experiencing rising living standards.

“It will have stocks and funds which won’t shoot lights out but which behave more predictably,” Mennega says.

“We’re looking for where the catch up may take place. So we’ll see a lower level of market return, but we’ll also see lower volatility and more predictability.”

Platinum Fund Calendar Year 1999 Index

Japan Fund 146.8% 51.4%

European Fund 50.6% 8.6%

Fully Global International Fund 60.6% 17.9%