Clifford: Investor bias is an opportunity - so long as you're not the one harbouring it

Platinum Asset Management's C0-CIO also passes along three financials names that may not concern you even if banking concerns persist.
David Thornton

Livewire Markets

There are two sides to every trade. If one side of that trade is selling for the wrong reasons, that presents an opportunity for the buyer.

Investor bias is an example of this, where the trade disadvantages one side to the benefit of the other. 

"At Platinum we believe that opportunities in markets come about as a result of systematic biases that investors make," says Andrew Clifford, co-founder, Co-Chief Investment Officer and CEO of Platinum Asset Management.

But that's only the first half of the challenge. The other half is making sure the stock is worth having.

"What you then need to do as an investor to take advantage of that is do a very thorough assessment of a company and understand what the true value of this business is in the long term."

In this Expert Insights, Clifford pulls back the curtain to show us how Platinum is exploiting these biases to generate return, drawing on China's lockdowns and the recent banking crisis as perfect case studies.  

Note: This interview was filmed on 30 March 2023. 


LW: How does the Platinum International Fund (Quoted Managed Hedge Fund) (ASX: PIXX) find opportunities in the market?

So at Platinum we believe that opportunities in markets come about as a result of systematic biases that investors make and it's a result of the cognitive biases each of us have as humans. So a couple of examples:

Recency bias means that we tend to put far too much focus on recent events, whether they're good ones or bad ones. So as we've said for many years, the opportunities in markets are those parts of the markets that are out of favour and investors best avoid those parts of the markets that are loved. 

Another bias, anchoring, means that it's very hard for investors to imagine a world that is very different to the one we're in today. So when you see change, whether it's technology, changing competitive landscape, government regulations, investors are very slow to factor that in or price that into stocks. So these are examples of where we believe there are opportunities, it's the way markets present opportunities to us.

Now, what you then need to do as an investor to take advantage of that is do a very thorough assessment of a company and understand what the true value of this business is in the long term. And of course, we're aiming to buy companies at a significant discount to our assessed value. Having done that, we will then build our portfolios stock by stock. 

What I mean by that is we are literally making decisions about individual companies, we don't come with any predetermined idea of needing a weighting in a certain country or a sector. 

Other things that we will do in PIXX is that where we find companies that are overvalued, we will potentially short sell them. And indeed we may take further downside risk out of the portfolio by shorting indices when markets are hot, we can elect to leave funds in cash rather than invest them, and indeed we'll manage the currency exposures of the fund as well.

So what this means is that what investors will get in the Fund is a very, very different portfolio from those other managers who tend to look at momentum or the index as their starting point. I think China last year was one of the most unloved markets that we've ever seen. So many things were counting against it. We have the geopolitical situation, we had the COVID lockdowns, we had the troubles in the property sector, we had significant economic reform causing a lot of uncertainty in the business community. We've seen all of those things lifted and the market had a rally, which was a big rally, but has now started to soften off a bit. But the thing is, when something is so deeply out of favour as China is, people just don't return to it overnight. You've got to remember, many investors were labelling China as uninvestable last year. So I think what we next need to see is that the economy recover, which we're confident it will.

We've already seen mobility return to normal levels, so we can track that, we've seen property sales start to pick up, we've even had a slight pickup in property prices. All of these things will lead to a much stronger economy, and with that, much better earnings, and in time, that will drag stock prices higher. So it will take time, but we're very confident that that's what we will see over the course of 2023. 

LW: Which investment thematics are you focused on and which stocks are providing exposure?

One of the great investment thematics at the moment is the decarbonisation of the global economy. And of course, people think about the obvious. They think about Tesla, they think about solar panels, wind farms and so on. But there are just so many more interesting opportunities. And a lot of these are to be found in the industrial world where we have very high-quality businesses making componentry, semiconductors or so forth.

So a good example would be Infineon Technologies AG (ETR: IFX), a German semiconductor company. They make power semiconductors. These are used in pretty much anything electrical, but electric vehicles, charging stations, solar panels, inverters, they all need huge numbers of power semiconductors. So this is a business that, while it was already growing, the electrification of the world will underpin the growth of that company for years to come. 

There's really only three or four credible players in this area, and we've been buying that stock on a P/E of around 12 times or so. And you compare that with some of the insane valuations on the dreams of many of the other renewable energy stories like green hydrogen that we hear about. 

Another really interesting area is financials. Obviously, recently there's been a lot of concerns about financials with the problems at Silicon Valley Bank and Credit Suisse. But in fact, higher interest rates are very good for a whole range of financials, such as your deposit franchise banks, who have cheap funding from checking accounts and the like that have been unable to earn a return on it simply because of we're getting nothing for when they lent money out. So in Europe, we have banks like Erste  (VIE: EBS) in Eastern Europe or Intesa (BIT: ISP) in Italy that have an advantage from that. And then there's another group of financials that are really interesting, financials that actually where their earnings are a function of asset values. So an example of this would be Allfunds Group (AMS: ALLFG). So it's a fund, it's a network, a financial network that connects financial planners and asset managers, predominantly in Europe and few other parts of the world, they're not here in Australia. But what they do, it's similar to a Visa or Mastercard. You tap your card when you're buying your coffee, the money disappears out of your account, miraculously appears in the coffee shop's account, but there's an awful lot of work that goes on behind that.

Allfunds does essentially the same thing. But for when a financial planner wants to buy a fund, they click the button on their screen, their client's money goes across, they get the units in the fund, Allfunds handles everything in the background. So this brings great efficiencies to that whole financial planning business of financial planning. But of course, they take a few basis points based on the asset values. 

And not only have we had equities clearly fall, but bonds, which are a big part of people's portfolios in Europe, have fallen significantly as well. So their costs don't go down in that circumstances, but their revenues do. So they've been squeezed by this, but in the long run, they will continue to build assets on this platform, they will see their revenues inflect, and it's available at a very attractive valuation.

Platinum International Fund (Quoted Managed Hedge Fund)
Global Shares

Platinum Investment Management Limited ABN 25 063 565 006, AFSL 221935, trading as Platinum Asset Management (“Platinum”). This information is general in nature and does not take into account your specific needs or circumstances. You should consider your own financial position, objectives and requirements and seek professional financial advice before making any financial decisions.

You should also read the latest product disclosure statement and target market determination for the Platinum Trust® Funds and Platinum Quoted Managed Funds® before making any decision to acquire units in the fund, copies of which are available at (VIEW LINK).

Commentary reflects Platinum’s views and beliefs at the time of preparation, which are subject to change without notice.

Certain information contained in this presentation constitutes "forward-looking statements". Due to various risks and uncertainties, actual events or results, may differ materially from those reflected or contemplated in such forward-looking statements and no undue reliance should be placed on those forward-looking statements.

Past performance is not a reliable indicator of future returns .

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David Thornton
Content Editor
Livewire Markets

David is a content editor at Livewire Markets. He currently hosts The Rules of Investing, a half hour podcast where he sits down with leading experts across equities, fixed income and macro.

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