Christmas has come early for the bank’s shareholders with the decision to slightly increase the 2024 dividend – despite a single-digit decline in the net profit and cash earnings.
Beating the market benchmark is never easy, with 72 per cent of Australian actively managed global equity general funds trailing the S&P World Index in the six months to June 30, 2024. Domestic equity funds performed slightly better, albeit against a significantly lower bar set by the S&P/ASX 200 Index.
Platinum renaissance is gathering steam
Whilst the Australian ‘oracle’ Hamish Douglass and his Magellan Financial Group continue to capture most of the media attention, renowned value manager, Platinum, has shown signs of regaining lost ground. Where Magellan took a risk off view ahead of the vaccine announcements in the December quarter, resulting in rare underperformance against the benchmark, all but two of Platinum’s ten equity strategies outperformed.
The biggest highlights came from the China-focused International Brands and European funds, which were 17.9 per cent and 16.6 per cent higher for the quarter alone. The Asia Fund, which recently lost its respected portfolio manager Dr Joseph Lai, something we covered here, was a rare underperforming, growing 9.6% compared to its benchmark return of 10.2 per cent.
The group was founded in 1994 seeking to capitalise on the lack of options for Australians to invest overseas. Under the leadership of the South African-born Kerr Neilson, and apparently with the financial backing of activist investor George Soros, the group has grown to AUD$24 billion in assets under management today. Oft-forgotten due to the incredible success of Magellan Financial Group and their more growth-oriented focus, the ‘contrarian’ philosophy of Platinum appears to be back in vogue, powered by the pandemic.
Speaking in the group’s latest quarterly commentary, Chief Investment Officer, CEO and Portfolio Manager of the dedicated Asia Fund, Andrew Clifford raises significant concerns about market valuations and explain those companies which have been most important to Platinum’s renaissance.
Titled ‘Regulation, Rates and Inflation’ the macroeconomic overview focuses on those issues that every investor should be worried about. Unfortunately, most get caught up in daily news flow and fast-growing momentum stocks, unable to step back and look at the bigger picture. Clifford believes a number of issues are under appreciated noting ‘the continued economic recovery potentially poses a threat via higher inflation and interest rates’, if stark contrast to those calling for ever stronger markets in 2021.
Similarly, he notes the ‘anti-monopoly movement is gaining momentum, not only in the US and Europe, but also in China’ suggest extreme caution towards the market’s ‘high-flyers’. It isn’t all negative though, with ‘opportunities abound elsewhere’. Semi-conductors, more common in growth-focused portfolios, have been a key driver of returns due to the ‘deep interdependence of the US and China economies’ and their inability to operate without each other in the medium term; Taiwan Semiconductors has been a strong performer for the group.
FAANGs in focus
Turning to growth stocks, Clifford highlights the ‘speculative mania’ that has continued unabated to a large extent. He suggests ‘extraordinary’ valuations have now moved even higher. An inflation scare remains a major risk that could push long-term interest rates higher with ramifications for ‘stocks whose valuations are based on the premise of near-zero interest rates’.
According to Clifford, “when a collapse in the stock prices of growth stocks comes, it too should not come as a surprise”. With more companies being valued on multiples of sales (not profits) of 20 times or more, the probability that their business will meet investor expectations on growth rates and profitability, according to him, is simply remote.
A select few may achieve what is needed to provide investors with a reasonable return, but in aggregate one should ultimately expect substantial losses on the holding of a portfolio of such stocks.
Value-led recovery
On the outlook Clifford is positive, highlighting the rollout of vaccination programs as a ‘light at the end of the tunnel’. He stresses the importance of valuing companies based on a decade of future profits, not just the next six to 12 months as we tend to during bull markets. Fiscal stimulus is likely to benefit commodity and cyclical businesses significantly, with the focus now on ‘real world’ activities, like infrastructure and decarbonisation having an immediate impact on growth.
According to Platinum, one interest development has been shortages in commodities ranging from steel to silicon wafers, whether due to lockdowns or lack of inputs. This is suggested to offer a strong tailwind for profitability in the second half. Three sectors in focus are European banks, building materials and semi-conductor manufacturers.
In terms of European banks, both the Bank of Ireland and Banco Santander have delivered strong returns due to the combination of extreme monetary support along with far lower than expected loan losses from the pandemic. The former adding 109 per cent and the latter 57 per cent in the December quarter alone.
US building materials supplier, Louisiana Pacific (LP), has been a recent addition with its now duopoly with ASX-listed James Hardie (ASX: JHX) expected to see strong operating leverage as side boarding sales recover on the back of more house sales and renovations in 2021. Finally, it is Taiwan Semiconductor Manufacturing (TSMC) which is owned alongside Samsung to benefit from the oligopolistic structure of the advanced node semiconductor foundry industry. Both companies are investing heavily to further exert their dominance.
