Platinum Investment Management Limited (PTM) Earnings Call Transcript & Summary

Good morning, and welcome to Platinum Half yearly Analyst Briefing. My name is Dean McClelland, and I have Platinum's 3 executive directors here with me today. In the middle, I have Andrew Clifford, Platinum's CEO, co-CIO and portfolio manager; Elizabeth Norman, Platinum's Investor Services and Communications Director; and we have Andrew Stannard, Platinum's Finance Director. I'd like to note that we will be answering the live questions at the end of today's presentation. Please submit your questions using the Q&A function in Zoom. I'll now hand you over to Andrew Clifford.

Thanks, Dean, and good morning, everyone. Welcome to our analyst briefing. The biggest enemy of the investor is confirmation bias. We all see whether investing on other pursuits, we tend to seek out the information that confirms our already-held views. Today, we're going to have by assuming a wide-ranging discussion across a number of topics, but I'm going to be distressing 3 particular items. And I just asked you to consider them carefully before you reconfirm your view on the outlook for Platinum. So if we turn to the first slide, the key items on this slide, one of them is performance. I would note the outperformance of the international fund and also the Asia fund over 1 year. These are very good numbers, but they're also important for the outlook of our business. And I'll talk about that a little further in a moment. So that's one of the things I really want you to take onboard. The fact that our performance is improving. The other item on this first slide, I think, is critical in assessing our future is the fact that 70% of our funds under management are retail. And again, I'll go further into detail on that in a moment. Otherwise, the last half year have been productive. We have launched our health sciences strategy in the European market and our global transition fund locally. Both of these areas in health sciences, driven by biotech is going to be one of the huge thematics for the next decade and beyond. Similarly, with the global transition plan, which is focusing on the investment thematic of decarbonizing globally and the energy transition. This is clearly also an area of great promise for investors. And as both of thematics that you will find through all of our funds, I should say, most of our funds. They aren't going to move the needle in the next 6 months or even likely in the next 18 months, but I do believe they will both be significant contributors to growth over the next 5 years. Moving on to the next slide, which has the financial highlights. Well, the numbers are the numbers, this is a simple business. There really isn't a great deal more to be said although obviously, I will leave it to Andrew Stannard after my words to take you through some of the more important items that we think you should be focusing on. So let's move on to the next slide. So one of the interesting things about our performance, and we see this time and time again is that when our performance comes good, it tends to happen across most of our strategies at the same time. There's obviously one outline here, which is health care. But even here, I'd say this is like one of the great opportunity sets at the moment, the big calls that we've seen in biotech shares. But the rest of the funds have come good in this last year. So what's important about -- now people talk about value and growth, and I have, for our convenience, used those words. These are a mathematician's construct the way they're used today. I'd put it more simply, we've ended a speculative period, where investors actually want to see a tangible return on the money they're investing in. So what I am saying is that, that return and it is better for the international fund than the others, but it has not just been a bit of luck on the short side that has seen us generate these returns. And indeed, the Asian fund has done this while running a fully -- fairly fully invested position over the course of the year. So let's explore what this performance means for our business. So if we go to the next slide, and I will just talk you through exactly what this slide is demonstrating. What it shows is the outperformance years for the international fund or our global long-shot strategy as it's also known. In the years where the financial years to June, where it has shown a positive outcome, the following year on every occasion has seen us return to inflows -- net inflows across the firm. This has happened since 2000, every time. The question I think you need to consider is, will it be different this time? Again, going a little further into our performance and going to the next slide. One of the benefits of our approach to investing is our very clear focus on the downside. We do this in terms of our loan book by avoiding the crowd, very careful assessment of valuation, but it's also done through moving to cash when there are not good opportunities and using shorts to further give us downside protection through the very long term, through the cycle, the benefit of this is taking out both outlier, down years where we have a very significant downside. But it has another appeal to clients, and that is at the time of their greatest distress because undoubtedly, they'll be feeling this across the rest of their portfolio, they have someone there who is holding before for them. So it results in better compounding through time as our long-term record clearly demonstrates but it also puts clients in a more comfortable position so that in those times of stress, they are not making ultimately the worst investor decision, which is to sell out at the bottom of the market. So moving on to my next point on the next slide. As I said at the start, our client base is predominantly retail. But there's something that is a bit different about our client base. First of all, we do have a very significant number of direct-client accounts. So as you can see, our Platinum Trust Funds had around 20,000 direct clients, our listed investment companies and quoted managed funds another 26,000. Of course, there's some overlap here. But in reality, what this is not telling you about is that a very significant amount of our funds clearly come through the platforms. And at a bare minimum, our total client numbers underlying that are in the hundreds of thousands. So then look on the right side of that slide and look at the number of potential clients with significant assets -- liquid assets to invest. We are clearly represented in a very large portion of Australian household portfolios. Now you might say, well, that would be true for any retail manager with the $20-odd billion or $18 billion that we're managing but it's very different here. This is held in predominantly 2 strategies. It's not scattered across hundreds and what that means is that when our clients experience our good performance, they all experience it. So a very large portion of Australian households with substantial assets to invest, we'll see the good results we've just produced. Also, on the financial planner side, clearly, the numbers there show a very large proportion of financial planners will have Platinum in some of their portfolios. They will also see this good performance. And the real benefit of that is they will spread the word. So if we go to the next slide, just to highlight again, we have a highly differentiated offering compared to the field. And there's numerous things that we can talk about here, but ultimately, I'll just focus on a couple of things. One is, I already discussed that focus on downside protection, but also is very clearly seen in our portfolios. So if you were to go and look at the funds, where all the money came in up to the, let's say, the end of 2021, and you looked at those funds, and you looked at their top 10 holdings, there would be extreme levels of commonality. And not only commonality across those active funds, those large positions in those funds were also the big index stocks. So anyone who is using those funds together with the index is getting minimal diversification. You would find our top 10 holdings had no commonality with those others. And this differentiated approach is important in forming portfolios. The other thing is that we are clearly a business that is investment-led. I've spent most of our time already, and I'll continue to talk about investment returns. This is not a sales-led business. So let's talk about -- Mark if you can just get a couple of slides ahead, please. I don't really want to talk about the equity markets and where we are for 1 reason, and that is how that impacts our outlook. You've heard this from me before, we are clearly in a period where we've had a historic U.S. equity bubble and it's deflating. We've seen the first stage of it, rising interest rates, where we are on that, is really anyone's guess that were later in the day than earlier. But the next thing, the playbook. We know this has happened in every other cycle, and this is the most dramatic interest rate cycle in history. And that is the earnings disappoint and responds the next leg-down in an equity market. Now clearly, this impact is strongest in the U.S, is relevant for other developed markets, but it's not true of the whole world. So for an investor who's truly flexible in their approach, there are opportunities out there, both in the sectors of the market that have been ignored in the bull market and also in countries that have not been part of it. And most notably, that's China, but many countries that benefit from China's growth. The other statement about the world we're in is the long -- the environment for the long term has fundamentally changed. We had 15 years of easy monetary policy. This was an extreme tailwind to asset prices. This has changed a rate, it is very unlikely we go back to such a period. And the simple message is that what has worked over the last 10 to 15 years, and let's highlight what works in equities, it was growth, it was quality. Outside of equities, it was real estate, infrastructure, private equity. This is unlikely to continue to work, and it will be a general headwind for all asset prices. But nevertheless, for an investor with genuine flexibility, there are opportunities out there to make money, and I certainly think 2023 is going to be a year of opportunities. So to sum up my position on the outlook. Clearly, performance has improved. So that's thing number one -- point number one, I want you to take away, that's important for the outlook for the business. We have a great environment to continue that, and we have a very deep and experienced team in place to take advantage of this investment environment. Two, we have a very deep client base who I think will appreciate, who have been waiting for us to deliver and I think that adds to the strength of our position. The third thing I want you to take away is this, and I have not yet discussed it, and that is we are changing our pricing model. Historically, we have talked about 1 fee for all. And it's not really exactly a precise description of what our fee schedule looks like. We've clearly had a flat fee and a performance fee that is there for all investors, and for retail investors, that fee has always been low. It's been low from day 1 for that market. In the institutional side, and here I talk about $1 billion plus pipe accounts. We've also had in place a much lower base fee, but with a higher performance fee which we think should 3x give us an equivalent outcome. So we had that pricing in place. But what that does leave uncovered is the mid-range there for the wholesale market or mezzanine level. And here, we are changing our pricing and the reason for doing that is that simply right now, there is a large part of the market that is unaccessible or inaccessible to us with our current fee structure. And doing so will open up a very significant new potential client base. If you want to think about that in the context of the Australian market, the most obvious segment here is a very fast-growing, separately managed accounts segment. So in terms of things that can change the outlook for this business dramatically over the next 18 months. I think when you put our improving performance together with the opening up of an entire new marketplace to us, these are the things -- together with that strong base of clients from which we operate, these are things I would ask you to focus on when you think about the next 18 months and beyond the Platinum. So thanks for your attention. I will now hand over to Andrew Stannard to go through the finer points of the financials. Thank you.

Thanks, Andrew. And before I start on the numbers. If you have not already, please I can remind you to enter any questions that you may have into the system. So turning now to Page 16 and an overview of the financial results and taking the first column first. Net inflows improved by 12% on the previous half led by an improvement in retail but held back slightly by 1 institutional client redemption from our strongly performing Asian fund. Despite the slowing outflows, overall average fund was down 12%, fee revenue 17% and profits 9% -- or 29%, if improved mark-to-market on seed investments are excluded. The picture for the corresponding period of last year is broadly similar with overall net outflows down despite an improvement in retail outflows. Profits were likewise down meaningfully when compared to December '21, largely off the back of lower average funds. The following slide addresses Platinum slows over both 5 -- last 5 years and the last 5 halves. The top chart shows that gross flows of $498 million for the first half of December '22. As one would expect, our retail clients have remained extremely cautious about investing new money in equity markets after the significant market correction in the first half of '22. However, Platinum's strong performance in protecting clients from the worst of equity market falls adheres to have reduced outflows, which fell significantly on the prior period. This combination of retail client hesitation on the buy side and comfort with retaining their existing Platinum investment has resulted in the lowest RP net outflow for 4 years. And this positions Platinum well in the event that client confidence in equity markets reemerges. Institutional flows were essentially flat in the quarter with the exception of just 1 large client who withdrew $400 million from our outperforming Asia funds for their own internal reasons. Similar to retail, our institutional clients have been largely satisfied to see our downside protection go to work for their portfolios during calendar 2022 and the business did not lose any institutional accounts during this period. Slide 18 breaks down the main components of first half revenue. Management fee revenue was well down on December '21, largely reflecting the significant falls in Global Equity markets as well as net outflows. The business also experienced a negative mix shift with average fee revenues falling by 5 basis points due to the impact of higher fee retail outflows relative to lower fee institutional outflows. Performance fees were negligible as our offshore absolute return long/short funds, which have a December crystallization date did not earn fees despite strong relative performance. Higher interest on our cash balances and positive gains from our International Equity Seed portfolios did help other income for a $7.9 million improvement over December '21. As we always note at this stage, although seeding does introduce a measure of volatility to our short-term earnings on both the up and downside, it's important to remember that these investments are strategic in nature rather than opportunistic. Turning to Slide 19, which provides some more detail on individual expense lines. Strong cost control continues to be a feature of Platinum's business with expenses essentially flat a year ago apart from the twin impacts of the increased investment team incentive compensation and noncash long-term incentive amortization. As noted earlier, a natural consequence of very strong investment performance is a substantial increase in investment team incentive compensation. This line item, therefore, tends to meet future revenue growth. LTI accruals will also continue to build over time as we increase equity allocations to key staff. Although it's important to remember that the vesting of these awards are still subject to the business, achieving acceptable TSR outcomes for shareholders. Non-people costs were down 7% on prior year, a creditable result in an inflationary environment. Savings were concentrated in custody and registry, but there was also close control over all discretionary items. My final slide for today shows the firm's balance sheet, which remains strong. Net assets attributable to owners with $328 million as at December, 31. And this comprised mostly of cash, which totaled $196 million at the half although this is stated before our final dividend payment. We also had seed investments at fair value of $154 million. On that point, we continue to be careful stewards of our capital with new funds being largely seeded by recycling cash out of preexisting portfolios. The Board declared a fully franked interim dividend of $0.07, was same as the June half and reflecting approximately 100% of profit after tax. And the dividend yield remains attractive at 7% before the effect of banking credits. Thank you all for listening. I'll now hand over to our Chairman, Mr. Guy Strapp, to say a few words.

Thanks, Andrew, and good morning. And I appreciate the comments that have been made this week on the topic of leadership and so in the spirit of ongoing openness, I'd like to take this opportunity to address those points by providing greater color around our thinking at the Board. We are committed to ensuring that we have the right people in place and the optimal leadership structure to meet the needs of all our stakeholders. Our investment performance has been presented today and shows very healthy 1-year numbers and a rapidly improving picture over other time periods. Good investment returns ultimately drive flows and a higher share price. Over the past 2 years, the Board has worked with Andrew to increase the focus on the investment process and deepen the investment team to respond to the challenging external environment. The composition of the Board has been changed by bringing in 2 nonexecutive directors with extensive portfolio management and leadership experience. These directors provide valuable oversight, support and challenge to the CEO. In addition, as part of the Board's regular strategy reviews, we examined the investment team succession and structure and supported Andrew's recommendations to enhance the bench strength of the team. In April 2021, we promoted Clay Smolinski to join Andrew Clifford as co-CIO. At the same time, we further strengthened the global strategies team and the Asia ex Japan team with the appointment of Co-Managers, Nik Dvornak and Cameron Robertson, respectively. In early 2022, Douglas Isles assumed the new role as Head of Investment. Douglas works with Andrew and Clay across a range of critical areas within investment management, including idea-generation and challenge, people development, process adherence and performance outcomes. To facilitate governance and oversight, Douglas reports directly to the Board. With a deep and stable team, we are seeing an appropriate performance response and we continue to support Andrew as he shapes the organization for further success. Thank you.

So we will move to Q&A in a moment. So please make sure your questions are in there, but I'd just like to make a brief comment myself. Over the years, I enjoyed working with Clay, and I deeply respect his views but I will not engage in a public debate with Clay. As for my role as CEO, CIO, that is a decision for the Board, and Guy has already commented on this. And finally, I enjoy my current role. I have a great investment team that I'm working with. And I think we are positioned to do an outstanding job for our clients in the years ahead and I'll leave it there. Thank you very much, and if we can just go to questions.

Sure. Thanks very much, Andrew. Thank you for sending your questions through. The lines are still open effectively. So if you do have questions, please just submit them. We've got 2 questions from Rachel Ryan that I'll start with. There's a question, what is the rough impact per month on flows of clients in the drawdown phase of super? That's a challenging one.

Drawdown phase of super. It's -- I think that the natural answer to that would be, it depends very much on the client. I think -- I guess what you are hinting at is there a structural drawdown structure to our book. I think the answer to that is that we will be no different to every other asset manager in Australia on that point because those books are overwhelmingly weighted towards people over the age of, say, 50 unless it's just a natural consequence of when people build wealth rather than anything else.

And I might just said, our direct client base, but also this equally applies to I guess, supplies coming in via platforms. It's a combination of those with superannuation money and investment money as well.

Next question or second question from Rachel Ryan. How much was the change in wholesale pricing? And how likely do you see this change generating inflows in the near future?

Yes. So we have not announced the level of pricing yet and that was certainly in discussion -- early stage discussions with players in that market. Again, it's very hard to know how substantial that will be because there are a lot of variables, we have struck up price at the level, will outperformance be enough to get their attention. There's a lot to learn, but it is a very large and very fast-growing market and I'm optimistic we will be able to do something. But like all -- entering all new markets, there will be a period of time for us understanding it and engaging with that marketplace in order to convince clients to join us.

A question for Andrew Stannard has come through anonymously. Can you please provide more color on the compensation employee costs in the first half versus the second half expectations? How should we think about this going forward? If you continue to outperform your benchmark, can we assume this remains elevated?

So take the second half first, obviously, the answer would be yes. So as I think most analysts have figured out, if you outperform the index by, say, in the case of international one 15%. Mathematically, if you look at our rent reports from last year, you will see exactly how the plans work, but in short, those plans are starting to hit their maximum cap amounts. And the accrual for the half year is pretty much -- not quite, but pretty much at those maximum levels. It would be a surprise to the accountants that when you do an accrual for 12 months and you're at the halfway mark, you generally take around half of that at full year expected amounting to the accrual. So I would be saying keep an eye on performance and the run rate would be similar in the second half of that performance continues to come through in 1 and 3-year numbers.

Question from Elizabeth Miliatis from Jarden. Outside of historical investment performance versus flows trends. Are you seeing anything in client discussions, which give you some confidence that we might see an improvement in net flows and new flows rather in calendar year '23 and onwards?

I mean, look, certainly, performance is the key driver when it come to flows and consistent performance for a period of time is required, especially in the 2 largest strategies of international and Asia. We're positioned in a way that we have a number of access points for clients to coming to the products, certainly, that active ETF, there's the application process against, I guess, the traditional managed fund, but yes, look, it really is performance. We're about to embark on our national investor and adviser road show to clients. We're also in the process of building a new website, which again, I hope helps to -- in that journey for clients for investing, but ultimately, the performance will be the big driver.

I mean just to add a little bit of flavor into that. I mean, clearly, sort of the December through to January period is a pretty low -- is pretty low interactions with clients from certainly a portfolio manager point of view. So that will be ramping up as we said, when we go on the road in March and a lot of our performance, that big difference came through later in the year. But the impression I have is -- and it's very early stages that clients are pretty happy with the way we've come through for them. But also, we know there's very delayed reaction to improve performance. So we'll have to just wait and see. But generally, I think that in terms of that sense of providing downside protection in the first stage of the spare market we have come through for clients. And I think, look, there is a more sophisticated discussion on performance that happens -- the sort of advisory community with the consultants, and it is around the nature of quite how you got there. And if you were to look at our 3-year returns, which will pretty much market returns plus or minus a bit. But we got there in a far less exciting way than the market did. So if you prefer a very low volatility relative to the market through that period, and that is an important factor when you're building portfolios, so.

A follow-up question to Rachel Ryan earlier on the wholesale pricing. There's a question from Charlie Hall. When will the pricing changes occur? And do they relate to all funds or only some? Are we able to say what percentage of a retail fund it might apply to?

So the timing will be in -- it will become available in the first half of this year, so before June, it will be made available on both the international fund and the Asia fund, their strategies. In terms of our assessment of monies that will essentially immediately get a benefit of that is relatively small of the order of a couple of hundred million dollars currently. So in that sense, we do think it is a marginal additive to what we're doing.

A question from Kanika Sood from the AFR. Has Platinum had any takeover interest during its patch of underperformance? Further to this, has the company been open to engaging?

Yes. Thanks for the question, Kanika. So the normal approach of any corporate in this situation is not common. That's just simply good policy. For this occasion, I'll break the policy because there is such a level of speculation and it does cause some level of uncertainty, but I am unaware of any approach. So I certainly have not -- the board has not had any approach from any potential buyers at any time, certainly in my time as CEO. So there has been none whatsoever. On the question I'll open to it. Well, of course, we have to be. I mean, we have obligations to the company, the Board has obligations to the company, including the shareholders to consider anything, any proposition that comes forward and to see whether it adds value to the company or to shareholders. So of course, we have to be open to it. But I can absolutely say there have been no approaches or discussions at this point in time.

There are a number of questions that have come through. I know you have spoken about it, Chairman spoke about it a little bit just in terms of the CEO role and the CIO role perhaps. So there's a question from Chris, Elizabeth Miliatis and Kanika Sood. They've all asked about splitting the CEO and CIO roles and specifically, if there's any more color you'd like to provide on how you manage the demands of both of those roles currently?

Well, as I said my role as CEO is a decision for the Board and Guy, I think, addressed that pretty clearly, including aspects that go to those questions about what we've done in terms of. Certainly I think I've said on these calls before that, that combined role I would be open to say that he had -- it was overwhelming in the totality of it and much has been done to bring in support and delegate responsibilities that come naturally from those roles. So that has been done. And I think that has been very successful in terms of the way it impacts my work week. So as I said, I'm just reiterating what Guy has already said and reiterating what has been said in response to that question historically, there's nothing new in that.

And then one last question, is the share price now attractive enough to consider share buybacks? Guy Strapp said at the AGM in 2021, but the share price was trading in line with comparables, so it wasn't compelling at the time.

When we rolled over our buyback authority, I believe that was September last year, approximately. We made it very clear that investment management companies are not like any other or like very few others in a key variable in our outcomes are is the stock market itself. And so there's a high leverage to the stock market. And so I think rather than adding that I would -- adding to that, I would just simply direct you back to the statements we made in September, which were pretty clear on the circumstance under which we would consider the buyback.

Okay. Another question anonymously. Could you discuss what percentage of funds are below high watermarks for performance fees? If current outperformance was sustained, what's the estimated performance to be revenue for FY '23?

Probably the simplest answer to that is if I could direct you to the appendices to the analyst presentation, there is quite a significant amount of disclosure on performance fees and high watermarks. If I was to make a general comment, the Asian strategies broadly have probably got a lower-high watermark to overcome at the moment than the international. But there is quite a lot of information in the analyst pack to deal with that question.

A follow-up question from Charlie Hall, apologies. Just regarding the change in pricing for wholesale funds, are we able to confirm the funds' figure that it applies to? And why doesn't it apply to all retail funds?

Look, why not also one of all retail. But as I said, in the -- I'm not sure that the context of the question is why are we not dropping the fee on all monies is as I said at the outset, our retail fee is low, if so it's always been low. There's no mean to touch that. The question is about all the different funds or strategies. I mean clearly, I think for the wholesale market, a global long/short strategy, the international fund is the one that is of interest to that market. We're applying it to Asia as well just in the chance because ultimately, this is a set of investment memorandums et cetera, that need to be prepared and given that there's a possibility there might be interest in Asia, where we're moving there as well. The other funds are by and large niche and unlikely to appear in that market. And as niche funds, I don't believe we should be applying a discount to them.

I have maybe 1 or 2 more questions that I can see in front of me. Anonymously, have we done any estimates on what the performance fee could be in the near term? Mr. Stannard?

Of course, next question.

I can see a question just coming through, so we might just wait for it. If there's any other questions you've got, please send them through. Question from anonymous and from Elizabeth Miliatis again. Given the comments regarding lower fees, can you provide a view on how this might impact the average fee margin in the coming few years?

Yes. So maybe I'll have a crack at this and Andrew then you can dive in. But I think hopefully, we've been clear today that we see this as a new segment where Platinum hasn't played before. So we think the retail, yes, there is at the margin, some larger accounts that may well qualify for a discount we think that is small. And at the institutional level, we think we already have an extremely competitive pricing structure for what is a pretty rare performance track record globally for Global Equity Long/Short. So the answer is to whether it will drive the overall average basis points is depends how successful we are with that new segment. And it's always that tradeoff when we're talking about this sort of thing about price and volume. So to the extent it drives those basis points lower, one would assume that overall net revenues would have to be considerably higher in order to create that average outcome.

And perhaps a question to you, Andrew Clifford. Do we have any details regarding the rate of staff turnover? And are there any investment vacancies?

There's always a vacancy for great investors. So I think the long history has been around 10% if we're talking about the investment team. I won't be dissimilar this year. But the important turnover number is really at the most senior level and the team. And really, in the last 5 years, we've had a loss of one in that category. So we are always in the process of recruiting because our view is that any time an able person comes along, we're going to give them a go. We'll make the position for them. But other than that normal activity, we're not actively recruiting right now.

Okay. Thanks, Andrew. There are no more questions that I have at this stage. Are there any final comments that the executive director would like to make?

No. Thank you very much.

Thank you very much for your time today. If you do have any follow-up questions, please do get in touch. And thank you for joining us for today's briefing.