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

Good morning, everyone, and welcome to the Platinum Asset Management Limited Analyst Briefing for the FY '24 half year result. I acknowledge that I'm hosting this briefing from the lands of the Gadigal people of the Eora nation, and I also acknowledge the traditional custodians of the various lands on which you all work today and the Aboriginal and Torres Strait islander people participating in this briefing. I pay my respects to elders past, present and emerging, and celebrate the diversity of Aboriginal peoples and their ongoing cultures and connections to the lands and waters of New South Wales. My name is Dean McLelland. And today, I have with me Jeff Peters, Platinum's new CEO; I have Andrew Stannard, Finance Director; I have Andrew Clifford, our Co-CIO; and I have Liz Norman, Investor Services and Communications Director. We'll be providing some remarks about the FY '24 half year results, and then we will be opening up for questions both from here in the room and using the Q&A function for those of you online that you'll be able to find at the bottom of your screen. So please do get those questions in. And with that, I'll hand over to CEO, Jeff Peters.

Thanks, Dean. Thank you, and let me add my welcome to all of you, and thank you for attending this briefing. I'm going to cover a few key highlights about the first half, but I'm going to spend the majority of my time outlining our priorities for the future and what's on our imminent agenda. I'll say upfront that this is my sixth week here at Platinum, and our planning process is still underway. So I will ask your forbearance as more details will be forthcoming. But we'll share a broad brush what our priorities are. Let me start with saying -- with reviewing some of the highlights on this slide that you can see for the first half. You can see our closing funds under management was $15.4 billion. Our performance lagged the index in both of our main products, not where we want it to be. But our dividend yield remains strong. Our balance sheet also has significant assets and is quite strong. And I'm in the seat. So that's not a highlight. But those are some of the key highlights of our first half from an overall perspective. We can change the slide, please. From a financial perspective, you can see -- I won't go through all of these, but you can see that our FuM has declined about 9%. Fee revenue was down commensurately less because our average fees remain strong. Our expenses were flat and, therefore, our NPAT was down but also less than the FuM decline. Our interim dividend is $0.06 per share. And those are really the financial highlights that you've already seen in our release. Andrew Stannard, our CFO, is going to be spending significant time going through more detail on that in a few minutes. So with that, let me turn the focus to our priorities. It's a challenging picture that those financials paint. We're well aware of that. And therefore, upon my arrival, I prioritized the creation of a turnaround plan that we will be working through with some urgency. I'm going to describe that plan at a high level for you now. And again, I'll apologize for the lack of detail in it, but detail is forthcoming. The plan has 2 parts. A short-term part, which will last over the next month to 4 months, substantively complete by the end of June, in terms of the work anyway. And we're terming that our reset. And following the completion of that, we'll be turning to prioritizing growth and positioning ourselves forward in the second phase of the plan, which I'll also describe. Let me walk through the major components of the first section, the first bucket of actions. The first is that we are going to be undertaking a program to align our expense base to our current revenue. This is an immediate priority. It will result in reduced costs across the business. We'll be careful in doing so to make sure we're not materially impacting our core investment proposition and our ability to serve clients. But this will be a program that will be across the business. We are finalizing our planning. And as a result, we're not able to go into significant detail here. But details will be forthcoming in the short term, and we will obviously share those with you when appropriate. The second point and sort of similar is we're reviewing our product line currently. The themes of this are both simplification and streamlining to match up with our opportunity set. This is going to be done from an onshore and an offshore perspective, and more to come on that as the work completes. Very importantly, we've also started already a proactive program to engage with our clients. It's vital for us to go out and listen to our clients, hear their concerns and needs, communicate our investment positioning, and also why we believe we're still a strong partner for them as they achieve their financial goals. That's a process, which is going to take multiple months. It's underway already, and we do look forward to meeting with our clients and getting their views. Fourth, and also very importantly, we've begun a process to examine our investment platform. We'll be looking at everything: structure, idea generation, process, product design. We anticipate doing this over the next several months and having recommendations again by the end of the fiscal year. We will not be waiting to implement. If a recommendation makes sense and we think it's the right thing to do, we will implement that on a flow basis. So again, more to come on that. And then lastly, our remuneration framework is being reviewed with the goal of simplifying it, clarifying it and making sure it aligns as well as it possibly can to clients and to our shareholders. All of this work, just to reiterate, is targeted to be over the next 4 months, and we look forward to providing more details to you as we go. We can shift to the next slide. The second part of the turnaround program is what we've termed our grow part, and the key actions are really to position us for growth over the medium to long term. Obviously, we'll be acting on the recommendations for -- on the investment platform. We'll be taking actions around our product line, including hopefully launching some new products that will be of interest to our investors in the marketplace. It's going to be very important for us to complete our back-office outsourcing project, which you've heard about before. It is underway. And as always, we'll be open to explore other options that come, organic and inorganic. Our goal for those will be -- they will be ongoing. They will position us for growth, and we'll obviously continue to report on those as they mature. I'm mindful that this is high level, and I ask your forbearance for that. As I mentioned before, I've been here 6 weeks. I've been working with the team quite hard, but we still are in the middle of our planning. So thank you for your patience, and we will be updating you in due course as the details become clear. I'm also mindful it's a comprehensive agenda. When I arrived in December for my announcement, I got some questions about why are you here? Why did you join Platinum? And my response was amongst several reasons, but the main ones were our brand strength, the talent we have at the firm, our financial strength, and the strong legacy we have for client service. Those things really stood out to me during my process and as I was announced. I'm happy to say, a few weeks in, I found all of them have held true. And I believe that they give us a very strong platform to complete this work and capitalize on the opportunity we have. I am confident that we will use that platform and that we will deliver. So with that, I'll wrap up my remarks and turn it over to Andrew Clifford to discuss investments. Andrew?

Thanks, Jeff. So if we just go to the next slide. Thanks. So very quickly, this is always part of our presentation, and what really stands out here is that performance across the strategies are well below expectations. Most importantly for the business though, the International Fund in Asia. The International Fund, as you can see, clearly well behind the market on all periods. Asia is a slightly different story. Yes, in the short term, it has been -- really, the problem for us in Asia is the whole region is out of favor as a result of low absolute returns. Next slide. Thanks, Liz. So I'm sure you're all well aware of our investment approach, identifying undervalued stocks in that part of the market that is out of favor and that we build our portfolios very literally stock-by-stock. I've often described this as being index agnostic. What this slide shows on the left is very familiar to everyone, the geographic breakdown of the MSCI World Index, which is dominated by the U.S. market at 63%. One of the problems I always have with the way indices are put together, if you think of yourself as an investor, you're running a portfolio maybe of 25 to 30 stocks. And let's say 2 of your ideas that you really are keen on, one is Microsoft and the other is Commonwealth Bank, CBA. For the record, I'm not particularly interested in either, but let's say, these are 2 stocks that you're pretty keen on. And let's say you'll assess them as a relatively similar risk-return opportunity. So depending on your process, you might have 3% in each or maybe have a bit more in one than the other. But if I take the methodology by which we build an index and apply it to that, you would have 24x as much Microsoft as you would CBA. So when we look out at the world and build portfolios, what we have on the right side here is the MSCI equally weighted index. And so literally, the stocks that qualify for this index is just a bit under 3,000 stocks, if I recall correctly. Only 23% of those are in the U.S. And interestingly, China is at -- they're at 21%. So in a sense, this is a much better representation of the universe in which we operate. Next. And this has been true for a long time. And so if you think about how does this approach reflect in our results over time, so what we've done here is an exercise where we break the market down into 3 different phases, if you like. One of those is that markets are going up, and it's led by the U.S. And in which case, over our history, we have captured only 63% of the upside in those months. An alternative phase is that the market is going up, but it's led by the rest of the world. In this case, we've captured 130% of the upside. And so like that's that -- being led by the U.S. is 1/3 of the time, being led by the rest of the world is 1/4 of the time. I think what's surprising to most people when they look at this is that in the third phase, which is the market is falling, that's actually -- and these are monthly observation. That actually happens 42% of the time, at least in the last 20-odd years. In this case, our downside capture is excellent at only 48%. Now of course, the environment we've been in the last 5 and also 10 years is dominated by that -- by a market that is rising and led by the U.S. So again, it's not an environment that really is -- somewhat disadvantages us. But I think the clear thing to know is that, that environment is not true of all time periods. If we go through the next slide, I won't dwell on this. You can look at it later, but it really just says there's nothing about what's been happening in the last 6 or 7 years that is any different to that long history in terms of the results we're producing. Now we've done another exercise on the next table, next slide. And what this very simply does is looking at our -- the long book of the Platinum International Fund and looking at, for example, our U.S. stocks that we've held over the last 5 years. And we look at those returns against the MSCI U.S. And what you can see in that period is our U.S. stocks produced 124.7% against the market that was up 109%, so a reasonably handy outperformance. And if you go through all of the geographies here with the exception of Europe, you can see some good outperformance of the individual markets in which we're picking stocks. But very clearly here, the issue is in the weightings where the U.S. has only been 20% of the portfolio. Whereas in China, we've outperformed nicely. But the actual total return there at 26% is well behind the 124% of what we achieved in the U.S. But I think really, what we take from this is that this really does give us confidence that we do have our stock-picking skills within the investment team. And that is -- that's an engine on which I think there will be opportunities to build some pretty interesting product. The next slide very simply just summarizes the long history of that long book against the equally weighted index, and it shows through time a 3% to 4% average outperformance. A final comment on the characteristics of what our funds have produced is this other dimension that's not unimportant is that we do achieve this with lower volatility. So in terms of blending of portfolios, there are benefits there. To move on, though, to the environment. And really, here, we're focusing on the last 6 years. And we think about -- and I think that's important because if you look at our performance, people will point out that 10 years, we have underperformed. But really, the underperformance is really concentrated in that last 5 to 6. And in this period over -- since 2018, the Magnificent Seven have represented an extraordinary outperformance not only of the S&P 493, but the rest of the world as well. So to put -- these are U.S. dollar numbers. Magnificent Seven have returned you 21.3% per annum. The S&P 493, 6.1%. And the rest of the world, 4.6%. This obviously really reflects why we're struggling to produce results, but it also is an extreme outcome in markets. Now as we've gone out to talk to clients about all of this, very quickly, they get to the question of when is this environment going to change? Why is it going to change? And it's not the most easily answered question. We can point to lots of things. So here, there's 2 sides of this story. It's that domination of the large growth stocks. And on this, what I would simply say is we have had previous episodes of that in recent financial history. We had it in the '70s with [ 50-50 ] stocks. We had it in 2000 with the big run-up in the tech stocks there. Both of these episodes ended badly. Of course, there is no firm rule that says the top 10 stocks can't be 50% or more. But I think pretty simply, the laws of large numbers tend to come into play. Or if you like another analogy, trees do not grow to the sky. We have lots of charts we could produce on this. We've got another one on the next slide, which is just simply the ratio of technology stock performance relative to the S&P. Clearly, the interesting thing about the last peak in February 2020 is just how long that -- the subsequent underperformance persisted for. So you really needed to wait until 2018, '19 to catch up that underperformance. Finally, there's the other side of the equation. And that is, as I said, calling them the S&P 493 and the rest of the world. We find significant pockets of value across the globe. I'm going to focus here on one in particular, which is China because it is a big position in our portfolios, but it is not the only one. So we've got here a chart of the long term since essentially the start of the Chinese stock market, the price-earnings ratio. And clearly, it's at very low levels. My problem with these charts, whether we present them for China or the U.S. or wherever we present them, they never really capture the reality of what we are seeing on a stock-by-stock level. Clearly, if the market's on a PE of 12, there are many stocks that are far cheaper. But it doesn't go to the growth and quality of some of those companies that we're finding. Nor does it tell you about the dividend yields that we're earning, which in some cases, we're getting dividend yields better than earnings growth that you will get in the Magnificent Seven. So there is extraordinary value here, but my main assessment is done on a stock-by-stock level. Where China is to date is they are clearly in the midst of a financial crisis. It's a slow-rolling one, so it differs from the GFC in that sense or the Asian financial crisis, things that -- crises that unfolded over a year to 2 years. But what we know about the history of crises, whether it was the GFC, the Asian financial crisis, savings and loans, is that these have been great times, incredible opportunities to buy assets very cheaply. But why -- what is going to end this crisis in China? And I would expect it to not be particularly different to what we've seen in other crises. There needs to be a catalyst that brings people's confidence back. And in China, in particular, what we need to see is that individual's consumer confidence rise, but particularly with respect to buying residential property. And despite what you'll read in the Western -- the headlines of the Western financial press, what we observe is ongoing concerted efforts of the government to try and turn around the situation. To date, what they've done has failed to do that clearly. We just need to observe the sale -- monthly sales of apartments, which are still weak. But it is clear the government understands the problem, and I do believe we can expect ongoing concerted efforts until this is turned around. So I do think there are reasons to be positive, but the exact timing of that, of course, one can never know. So with that, I will hand over to Andrew to take you through our financial performance.

Thanks, Andrew. Before I start on the numbers, if you haven't already, please, can I remind you to enter any questions that you might have into the system. And turning now to Page 20 and an overview of financial results. Taking the first column first, net outflows accelerated in the previous half and was the main driver of lower average funds under management and fee revenue. However, cost control helped lean into the lower revenues with underlying profit, which excludes both the effect of mark-to-market seed capital, and LTI charges was down 8% for the half. The picture for the corresponding period of last year is broadly similar, with underlying profits down 6% when compared to December 2022. However, the underlying pretax profit margin has been largely maintained at 55% versus 56% in December '22 and 54% in the June '23 half. The following slide addresses Platinum's flows over both the last 5 years and the last 5 halves. And the top chart shows that retail gross flows were $336 million for the first half to December '23. It's fair to say, I think, that general retail client caution towards equities is persistent across the industry during the half, and this was exacerbated in Platinum's particular case by some weak relative investment performance. Retail net outflows also ticked up slightly on the prior 6 months to $813 million as modestly higher gross inflows only partly offset a more meaningful increase in outflows. Institutional flows were essentially flat for the half, with the exception of just one large client who withdrew $650 million from our flagship strategy. Similar to retail, institutional satisfaction with our strong downside protection in 2022 is likely now being tempered by the more recent weak relative performance relative to the index that the flagships generated in late 2023, even as global equity markets rebounded strongly, especially in U.S. tech. The business did not lose any institutional accounts during the half. Slide 22 breaks down the main components of first half revenue. Management fee revenues were down nearly $7 million on the December '22 half, largely reflecting lower average FuM as outflows offset rising global equity markets. The business experienced a positive mix shift of 2 basis points, as that one large institutional outflow helped drive the proportion of higher fee revenue, higher fee retail funds under management hire. Performance fees were negligible as our offshore absolute return on short funds, which have a December crystallization date, did not earn fees. Higher interest on our cash balances and positive distributions from our international equity seed portfolios helped reduce the underlying revenue variance, which is stated before the mark-to-markets on our seed investments to just $4 million over December '22. As we always note, although seeding does introduce a measure of volatility to our short-term earnings on both the up and the downside, it is important to remember that these investments are strategic in nature rather than opportunistic. Turning to Slide 23, which provides a little more detail on expenses. And cost control continues to be a feature of our business with underlying expenses before those noncash LTI charges being down $1 million on a year ago, despite some strong inflationary pressures hitting both salary and external expenses as well as an $800,000 charge for one-off project expenses. As noted earlier, a natural consequence of weaker relative investment performance is a decrease in investment team incentive compensation accruals, and this helped lower estimated first half STI costs by nearly $4 million. Noncash LTI accruals, on the other hand, will tend to build over time to the extent that we increase equity awards to key staff. Although it should be remembered that the vesting of these awards are subject to the business achieving acceptable TSR outcomes with shareholders. No LTI awards have yet met their TSR test, and there has, therefore, been no cost to shareholders arising from these plans beyond the noncash accounting expense. My final slide shows the firm's balance sheet, which remains strong. Net assets attributable to owners were $325 million as of the end of December. And this was comprised mostly of cash, which totaled $209 million at the end of the half. This being stated before our final dividend of approximately $35 million. And we also had seed investments at fair value of $118 million. We continue to be careful stewards of capital with any new funds being largely seeded by recycling cash out of preexisting seed portfolios. The Board declared a fully franked interim dividend of $0.06, which reflects approximately 100% of our profit after tax for the half. And the annualized dividend yield remains attractive at around 10% before the effect of franking credits.

So thank you very much for everyone joining us, both here in the room and online today. And thank you very much for your questions. If you do have any further questions, please reach out to Liz Norman directly. But for now, it's thank you, and goodbye.