David Allen reveals the systematic playbook behind Plato’s 25 percent returns

Investors love a good story about instinct. The great stock picker who can “feel” when something is about to break higher. The seasoned operator who claims to smell risk before it hits the screens.

Plato's Dr David Allen is not that investor.

His edge comes from something far less romantic and far more scalable, a systematic process that can sift through more than 11,000 global companies, flag risks early, and uncover opportunities across growth, value and quality. The results are hard to ignore, since launching in September 2021, the Plato Global Alpha Fund has returned 25 percent per annum, placing it among the best performers in its class.

Allen’s background explains some of it, a PhD in quantitative finance from Cambridge, a global career at JP Morgan Asset Management, and an early stint in professional rugby. But the real story is the machine he and his team have built, a rules driven engine fed by 850 data sources and powered by 150 red flags, valuation models and sentiment signals.

As he puts it, “diversification is the enemy of performance… unless you can analyse thousands of stocks at scale.” That is the heart of the approach.

In this episode of The Rules of Investing, Allen explains how he is using modern technology to scale traditional investment processes, reveals his system for finding stocks likely to underperform and some of the compelling long ideas in Plato's Global Alpha Fund.

Listen by clicking on the player or read a summary below.

The systematic approach to investing

Allen’s philosophy starts with scale. While the MSCI World Index contains roughly 1,300 companies, his investable universe spans more than 11,500. The fund currently holds around 970 long positions and 470 shorts. That sounds like the opposite of traditional stock picking, but scale is an essential ingredient.

The process screens every company through fundamental metrics, behavioural indicators, and a proprietary “red flag” framework built over more than a decade. Each signal is weighted, tested and automated.

This allows the portfolio to draw from only the strongest names in each category. In practice, even though the fund holds hundreds of longs, that represents only the top 10 percent of its universe.

Allen argues this is where a systematic approach pays off. Traditional managers might deeply research 20 or 30 names, but they do not have the bandwidth to capture mispricing across thousands of companies. For systematic managers, “diversification can become your friend rather than your foe.”

It also helps defend the portfolio when markets turn. The strategy has achieved a downside capture ratio of 65 percent since inception despite being fully invested.

The most powerful way to identify stocks that will fall

Some of the fund’s best work comes on the short side, and it is anchored in one eye-catching statistic. When a company triggers eight or more of Plato’s 150 red flags, it underperforms the market by roughly 20 percent over the next year.

The red flags include:

• Unusual or low quality auditors
• Boards with poor industry experience
• Executives selling large parcels of stock 
• Financial distress indicators such as delayed payments
• Past involvement in misconduct
• Aggressive accounting
• Large language model analysis of earnings calls to identify executives avoiding questions

The last point is a recent innovation. Plato analyses around 25,000 earnings calls a year and uses language models to detect which CEOs and CFOs repeatedly sidestep questions. Those companies, on average, lag the market over the following three to six months.

This framework has helped avoid high profile blow ups in the local market and deliver strong short positions in names such as Boss Energy (ASX:BOE) and Botanix Pharmaceuticals (ASX:BOT), where red flags numbered in the mid-teens.

It has also kept the fund out of trouble in stocks that look attractive on the surface but fail basic governance or accounting tests. “Even blue chips will have one or two red flags,” Allen explained. “But when you get to eight, that is when you should really pay attention.”

Three stock ideas across growth, value and quality

Allen aims to capture the strongest opportunities across all major styles so the fund is not hostage to one factor cycle. He shared examples from each bucket.

Value: JP Morgan Chase & Co (NYSE: JPM)

Despite being arguably the best run major bank globally, JPMorgan trades on a price to earnings ratio of around 15, far lower than Commonwealth Bank of Australia (ASX:CBA) in the high 20s. With higher net interest margins and a strong deal pipeline, JPMorgan screens as one of the most attractive value opportunities.

Growth: Salesforce (NASDAQ: CRM)

Plato’s research shows that buying companies with the highest future growth expectations is a losing strategy. Allen prefers companies with demonstrated free cash flow growth. Salesforce has delivered 20 percent annualised free cash flow growth over the past decade, driven by organic performance rather than financial engineering. “That is the type of growth we want to own,” he said.

Quality: Novartis (SWX:NOVN)

Novartis offers defensive strength and long term optionality. Its targeted radiation therapies, which attack cancer cells without damaging surrounding healthy tissue, could reshape oncology treatment and deliver a multi year growth tailwind. Quality names like this also help anchor the portfolio during volatile markets.

A multiyear investment opportunity and one stock to play it

Allen keeps a mental model borrowed from Jeff Bezos. Instead of trying to predict the next big shift, he focuses on the forces that remain constant over long periods of time. Bezos famously said that Amazon’s strategy was built around what customers will always want, lower prices, wider selection, and faster delivery.

“Rather than guess what changes, focus on what never changes.”

Allen applies the same logic to markets. He looks for structural trends that have clear staying power, not fads that burn bright for a quarter and then fade. This perspective emphasises themes with durable economics and political support.

It is one of the reasons he views European defence spending as a multiyear investment case. Regardless of how markets oscillate in the short term, the strategic reality driving Europe’s rearmament is unlikely to reverse. 

Shifts in US politics, concerns around NATO’s reliability and a deteriorating geopolitical backdrop have forced European nations to lift defence budgets. The rearmament cycle could run for five to ten years. Companies central to the supply chain, such as Rheinmetall (ETR:RHM), stand to benefit.

“The rearmament of Europe will take years, and Rheinmetall is the one supplier they cannot do without.”

ETF

Plato Global Alpha Complex ETF (PGA1)

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Managed Fund

Plato Global Alpha Fund

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