For personal use only
19 July 2022
The Manager
ASX Market Announcements
Australian Securities Exchange Limited
Sydney NSW 2000
By e-Lodgement
Quarterly Investment Manager's Report
The 30 June 2022 quarterly investment manager's report is attached to this announcement. For more information in relation to Platinum Capital Limited please refer to the website at:
www.platinum.com.au/Our-Products/All-Products/Platinum-Capital-Limited
Authorised by
Joanne Jefferies | Company Secretary
Investor contact
Elizabeth Norman | Director of Investor Services and Communications
Platinum Investment Management Limited
Tel: 61 2 9255 7500
Fax: 61 2 9254 5555
Level 8, 7 Macquarie Place, Sydney NSW 2000, Australia | GPO Box 2724, Sydney NSW 2001
Telephone 61 2 9255 7500 | Investor Services 1300 726 700 | Facsimile 61 2 9254 5555 | Email invest@platinum.com.au | Website www.platinumcapital.com.au
Platinum Capital Limited ABN 51 063 975 431
For personal use only
Platinum
Capital® Limited
Quarterly Investment
Manager's Report
30 June 2022
2 PLATINUM CAPITAL LIMITED (ASX CODE: PMC)
Investment Update
Performance
(compound p.a.* to 30 June 2022) | ||||||
only | SINCE | |||||
QUARTER | 1 YR | 3 YRS | 5 YRS INCEPTION | |||
Platinum Capital Limited | 0.1% | -6.3% | 3.9% | 5.3% | 11.1% | |
MSCI AC World Index^ | -7.9% | -8.0% | 6.9% | 9.4% | 7.1% |
usePMC's returns are calculated using PMC's pre-tax net tangible asset (NTA) backing per share as released to the ASX monthly. PMC's returns are calculated after the deduction of fees and expenses, have been adjusted for taxes paid and any capital flows, and assume the reinvestment of dividends.
PMC's returns are not calculated using PMC's share price.
Portfolio inception date: 29 June 1994.
* Excluding quarterly returns.
^ Index returns are those of the MSCI All Country World Net Index in AUD. Historical performance is not a reliable indicator of future performance. Source: Platinum Investment Management Limited for PMC's returns; FactSet Research Systems for MSCI Index returns. See note 1, page 11.
Net Tangible Assets
The following net tangible asset backing per share (NTA) figures of Platinum Capital Limited (PMC) are, respectively, b fore and after provision for tax on both realised and unrealised income and capital gains.
personal | PRE-TAX NTA | POST-TAX NTA | |
31 March 2022 | $1.4753 | $1.4580 | |
30 April 2022 | $1.5259 | $1.4947 | |
For | |||
31 May 2022 | $1.5369 | $1.5030 | |
30 June 2022 | $1.4695 | $1.4598 |
S urce: Platinum Investment Management Limited.
In Brief:
- The US Federal Reserve's decision to sharply increase interest rates from 0.5% to 1.75% over the course of the quarter in response to the accelerating rate of inflation was the key driver of markets. This resulted in a significant setback for the popular growth stocks that have led the bull market over the last three years. Asia, particularly China, was the notable outperformer for the quarter.
- Our short positions were the strongest contributor to PMC's performance, adding 7% to returns. On the long side, many of our Chinese investments (Trip.com, ZTO Express, China Overseas Land & Investment) provided a positive return. Energy companies (Saras, Suncor Energy), global insurance player Beazley, and Japanese bathroom fixtures manufacturer Lixil also contributed positively.
-
PMC's net invested position fell from 65% to 58%.
The make-up changed significantly, with short positions reduced from 28% to 18%, and cash increased from
7% to 24%. This cautious positioning continues to reflect our concerns regarding the impact of rising interest rates on what has been a very speculative stock market. - The months ahead will likely remain volatile as markets transition away from the near-zero interest rate environment.
- The portfolio is positioned for this environment with investments predominantly comprising profitable businesses trading at attractive valuations. Short positions continue to be held in popular growth stocks and market indices to reduce the portfolio's exposure to further market declines. Ample cash reserves will allow PMC to take advantage of new opportunities as they arise.
QUARTERLY INVESTMENT MANAGER'S REPORT | 30 JUNE 2022 | 3 |
PMC returned 0.1% for the quarter versus the market's decline of -7.9%.1
onlyThe key factor driving markets was the decision by the US Federal Reserve (Fed) to sharply increase interest rates from
0.5% to 1.75% over the course of the quarter in response to the accelerating rate of inflation. This resulted in a significant setback for the popular growth stocks that have led the bull market over the last three years. Notably, the US market was the weakest of the developed markets over the period (-17% in local currency terms), reflecting its heavy weighting to such companies. Asia (-6%), particularly China (+5%), was
usethe notable outperformer for the quarter.2
Our short positions were the strongest contributor to PMC's performance, adding 7% to returns. On the long side, many of our Chinese investments provided a positive return, a good o tcome given market circumstances. Online travel agent Trip.com (+19% over the quarter), parcel delivery giant ZTO
Express (+10%) and property developer China Overseas personalLand & Investment (+6%) were key contributors to
performance. Contributors outside of China included energy companies Saras (+99%) and Suncor Energy (+11%), global i surance player Beazley (+19%) and Japanese bathroom fixtures manufacturer Lixil (+11%).
Detractors from performance included Allfunds (European fund platform, -30%) and St. James's Place (UK wealth management, -24%). Both businesses have revenue streams based on assets under management, and as such, falling stock markets reduce short-term earnings. MinbeaMitsumi (industrial and electronic components, -14%) and Microchip T chnology (semiconductors, -23%) saw share price declines due to concerns around slowing global growth prospects.
Changes to the Portfolio
PMC's net invested position was reduced from 65% to 58% over the quarter. The make-up of that position changed
Forsubstantially, with short positions reduced from 28% to 18%, and cash increased from 7% to 24%. This cautious positioning c ntinues to reflect our concerns regarding the impact of rising interest rates on what has been a very speculative stock market.
- References to returns and performance contributions (excluding individual stock returns) in this Platinum Capital Limited report are in AUD terms. Individual stock returns are quoted in local currency terms and sourced from FactSet Research Systems, unless otherwise specified.
- MSCI USA Index, MSCI Asia ex Japan Index and MSCI China Index,
respectively, in local currency. Source: MSCI.
Disposition of Assets
REGION | 30 JUN 2022 | 31 MAR 2022 |
Asia | 24% | 24% |
Europe | 23% | 23% |
North America | 15% | 21% |
Japan | 8% | 13% |
Australia | 3% | 8% |
Other | 3% | 4% |
Cash | 24% | 7% |
Shorts | -18% | -28% |
Numerical figures have been subject to rounding. See note 2, page 11. Source: Platinum Investment Management Limited.
Net Sector Exposures
SECTOR | 30 JUN 2022 | 31 MAR 2022 |
Industrials | 15% | 18% |
Financials | 12% | 13% |
Materials | 11% | 16% |
Consumer Discretionary | 8% | 7% |
Information Technology | 6% | 9% |
Energy | 4% | 4% |
Communication Services | 3% | 5% |
Health Care | 3% | 5% |
Real Estate | 3% | 3% |
Consumer Staples | 0% | 1% |
Other | -8% | -16% |
TOTAL NET EXPOSURE | 58% | 65% |
Numerical figures have been subject to rounding. See note 3, page 11. Source: Platinum Investment Management Limited.
Top 10 Holdings
COMPANY | COUNTRY | INDUSTRY | WEIGHT |
ZTO Express Cayman Inc | China | Industrials | 3.4% |
Ping An Insurance Group | China | Financials | 2.9% |
Microchip Technology Inc | US | Info Technology | 2.6% |
MinebeaMitsumi Co Ltd | Japan | Industrials | 2.4% |
UPM-Kymmene OYJ | Finland | Materials | 2.2% |
Trip.com Group Ltd | China | Cons Discretionary | 2.1% |
Shell PLC | Netherlands | Energy | 2.0% |
Beazley PLC | UK | Financials | 2.0% |
Samsung Electronics Co | South Korea | Info Technology | 1.9% |
Weichai Power Co Ltd | China | Industrials | 1.9% |
As at 30 June 2022. See note 4, page 11.
Source: Platinum Investment Management Limited.
For further details of PMC's invested positions, including country and industry breakdowns and currency exposure, updated monthly, please visit www.platinumcapital.com.au.
4 PLATINUM CAPITAL LIMITED (ASX CODE: PMC)
The reduction in the short positions simply reflects that many positions were closed for significant gains. Indeed, the closure of short positions was greater than it appears, as a number of
onlynew short opportunities were identified and added during the period.
The increase in cash reflects both the banking of profits on shorts and the trimming of existing long positions that had performed well. These included Mosaic (fertilisers), China Overseas Land & Investment (Chinese residential property developer) and Glencore (mining, commodities trading).
useWe have been relatively cautious about putting funds to work in this environment, as we expect the market to provide a range of new opportunities in the months ahead. Having said that, we did add to existing positions in JD.com, Allfunds and Infineon Technologies (German semiconductor manufacturer).
Commentary
personalThe focus of markets over the last quarter has returned to inflation and interest rates. While there is much debate
round how many interest rate rises will be needed to suppress inflationary pressures and whether this pushes economies into recession, this misses the critical point for investors. The mechanism that created inflation is precisely the same one that created the extraordinary speculative bubble in stock prices. As discussed over the last two years in our reports, that mechanism was the rapid growth in money upply that resulted from the funding of government spending that occurred throughout 2020 and 2021 in
r sponse to the COVID-19 pandemic. As has been xperienced in the past, this excessive growth in money supply found its way into rising asset prices over the course of the next two years.
Now, as government spending has receded over the last 12 months, money supply growth has fallen. In the US, M2
Forg owth, having peaked at an annual rate of around 25% in 2020, then falling back to mid-teen levels during 2021, is now running at only 6%.3 In addition, interest rate rises will further suppress any potential bounce in money growth by discouraging private sector borrowing. Not only can one expect inflation to recede over the course of the next two years, but asset prices will also come under pressure. Additionally, we have the Fed starting to unwind its quantitative easing (QE) policy of the last decade. While QE had little discernible impact on the consumer price index (CPI) over the last decade, it almost certainly resulted in lower long-term interest rates. In doing so, it created a strong
tailwind for not only stock markets but across a range of asset prices, including property, infrastructure and private equity.
Of course, this is already apparent with stock markets falling this year, particularly in the more speculative end of the market. The question is how much further is there to go. Many commentators will observe that valuations already look far more reasonable, particularly for many of the large market cap favourites of recent years, such as the FANGs and Microsoft. While certainly, this is the case, we would debate whether they are at attractive levels. More importantly, though, once monetary conditions change and bear markets take hold, what becomes more significant are the real-world effects on company earnings.
We can already see that funding has dried up for start-ups and private companies, particularly in high-growth technology and e-commerce sectors. One can observe high-profile venture capital firms directing their investee companies to conserve cash and move toward profitability. Similarly, companies that have already listed and seen their stock price collapse will likely struggle to raise additional funds and will be under similar pressures to achieve profitability. Cost-cutting measures will see fewer software engineers writing code, cuts to advertising and promotional expenditures, and smaller sales teams. This will impact the sales and profits of a range of providers of software tools, cloud services and digital advertising. Additionally, the companies making the cuts will see their own growth rates slow, further impacting the price investors are willing to pay for their shares. Similar dynamics will play out across the broader economy, not just the technology sector, with impacts on profits across the board. Weakening profits will likely drive the next leg down in share prices.
At some point, we will see inflation subside and the central banks reverse their course on interest rates. The unanswered question is where will interest rates settle beyond this inflationary spike. We think it is unlikely they will return to near-zero levels, as investors, having suffered the inflationary consequences of very low rates, are likely to demand a positive real return on their funds. This means that even if inflation returns to pre-Covid levels of approximately 2%, interest rates of at least 2% to 3% should be expected. This would mean the strong tailwind of falling interest rates that have helped drive asset prices over the last decade will no longer be present. In this new environment, what has worked well for investors over the last 10 years, is unlikely to work in the years ahead.
3 Source: Federal Reserve Bank of St. Louis. M2 includes cash, checking deposits, and easily-convertible near money.
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Platinum Capital Limited published this content on 19 July 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 19 July 2022 06:53:05 UTC.