How Australia’s richest fund manager beat the market: Boyd

Australia’s best international fund manager, Kerr Neilson, has shared the strategy he used to beat the MSCI world stock index by 35% in 2009.

Neilson’s $7.9 billion Platinum Capital fund achieved a return in the year to June of 18.4% when the MSCI World Index fell 15.7%. Platinum’s nearest best competitor was Arrowstreet which had a return in the year to June of 3.9%, according to research group Morningstar.

Neilson says there were five important investment decisions that contributed to the 2009 performance.

The first was avoiding the resources bubble. Neilson says he never swallowed the “stronger for longer” China theme that captured the market’s imagination in 2008.

Scepticism about the resources boom led to the second important decision – go short resources stocks.

Neilson says the bearish view on iron ore producers and other commodity suppliers led to the decision to go short mining engineering companies because of the value destruction from a collapse in Chinese demand.

He also put shorts in place in companies that he describes as “the predictables”. Companies that were regarded as defensive and not going to get hurt by the downturn eventually did suffer. “Nothing is impregnable when your touchstone has been shifted,” he says.

The next big decision was made in late 2008 when the fund started buying companies that had been marked down hard because of too much debt.

Neilson took the view that the global financial crisis was a transient event and good companies with quality global brands were being caught in the sell-off. Examples of this were the French liquor group Pernod Ricard and the Italian luxury goods company PPR.

In January, Neilson began adding cyclical stocks to the portfolio. That decision flowed from the view that the world was not going to end.

Platinum’s annual report revealed that stocks that were added to the portfolio during the turmoil included China Mengniu Dairy, Wumart China, Mosaic, Metso, Corning and Rohm.

Platinum is classified by the research houses as a large cap blend-style value manager. But Neilson says that the bulk of the fund’s trading during the year occurred in stocks outside of the top 20. The top 20 make up about 40% of the portfolio.

According to Morningstar, the portfolio is split into three main segments: information economy 28%; service economy 29%; and manufacturing economy 43%.

In currencies, the fund made useful gains in the Japanese yen.

Neilson says the fund made two big mistakes during the year. It was too light in its exposure to the Australian dollar, which has risen 33% since its low in March and it sold short the financials too soon.

The latest results show that Neilson can make money in up markets and down markets. He did it in 1987 at BT Funds Management and he did it again during the tech wreck in 2000-2001.

The message from those events as well as 2009 is that people too easily get caught up in the crowd. The way to avoid that is to invest a lot in research and stick to your convictions.

One of philosophies that guide Neilson is summed up in this quote: “The difference between a good investment and a good company is about the price you pay”.

He says the worst thing a fund manager can do is back a company based on poor research. That usually results in a back-flip at a time when your resolve is being tested.

The Platinum research goes beyond stock picking. It includes themes and trends. Neilson copped criticism in 2004 for going into India but it proved to be the right move.

Neilson says net flows have turned positive across the funds management sector or in his words “the boys are back”.

Morningstar’s analysis of the fund says that Platinum tends to hold around 150 long positions, about 80 to 90% of the portfolio, and about 30 short positions, or 10 to 20%.

Neilson says he will hold up to 1% of the fund in one stock or about $80 million.

The listed Platinum Capital is highly rated which is why it is trading at a 20% premium to its net tangible assets (NTA). This premium explains why many investors prefer to access the fund at NTA through wrap platforms.

But there is a trade off for getting access to the fund at a discount to the listed share-price.

Performance tables published by Morningstar show that buying into Platinum Capital via wrap platforms has delivered returns ranging from 15.5% to 16.9%. That is a seriously big clipping of the ticket.

This article first appeared in Business Spectator.