How Platinum is positioned for “when the music stops”

Glenn Freeman

Livewire Markets

In his latest investor update, Platinum Asset Management’s Andrew Clifford was quick to acknowledge his firm’s flagship Platinum International Fund had marginally lagged the benchmark during the first seven years of the bull market, but it was the “extraordinary blow off in the growth stock bull market” in the past three years or so that had really caused returns to fall behind.

Speaking as part of Platinum’s live investor and adviser webinar on 31 March, the CEO, co-CIO, and portfolio manager discussed:

  • Why the tough times for Chinese and European markets are likely to be short-lived
  • The sectors where stocks should re-rate strongly over the next three years
  • Why commodity plays are no longer “outstanding investments”
  • “Quality growth” safe havens that won’t remain so for long.

“But still, the Platinum International Fund (C Class) has returned over 11% per annum after fees and costs in the 10 years to February 2022, which is a reasonable absolute return,” Clifford said.

And with the fund up just 1.5% in the 12 months to the end of February, “the biggest factor in our performance during this period was in what we did not own – the large popular growth names that powered the stock market indices.”

Regarding such stocks as overvalued, Clifford and his team substantially scaled back or exited their exposures.

“Because this is at the core of what we do, to move away from the exuberance in markets. When the music stops after an exciting bull run, the downside can be substantial,” he said.

The recent performance struggles have been more pronounced within the Platinum Asia Fund (C Class), which is down around 11% after fees and costs over the 12 months to February 2022. March was another difficult month, given the collapse of the China market on the back of the nation’s COVID outbreak and associated mitigation measures, and concerns around its alliance with Russia.

How is Platinum positioned now?

Clifford regards the selloff of Chinese stocks as indiscriminate, which has caught up many companies held in Platinum portfolios, despite his team’s unwavering belief in their quality and value.

“And we have actively repositioned to take advantage of some of the extraordinary value that has resulted from this selloff and remain optimistic about the prospect of future returns from this dynamic region,” he said.

While conceding the frustration that many investors undoubtedly feel amid a market cycle that ranks among the longest in history, Clifford sought to provide assurances: “I believe we’re on the cusp of our approach paying dividends. And in times of difficult markets, I think we can play an important role in portfolios.”

An unloved sector

Nikola Dvornak, portfolio manager of the Platinum European Fund and co-manager of the Platinum International Fund, delved into his specific sector and stock exposures, beginning with a quote from famed investor Peter Lynch:

“It takes remarkable patience to hold onto a stock in a company that excited you but which everybody else seems to ignore.”

Using the analogy of two potential house purchases, Dvornak summarised Platinum’s approach to stock selection. Rather than buying the best house in a highly desirable location, his team seeks out the properties in rundown neighbourhoods where they see evidence of change for the better.

Currently, the healthcare sector exhibits many of the traits Platinum looks for. Though the space is commonly regarded as expensive, he believes US biotech stocks are currently at their cheapest level in 30 years – with the exception of during the GFC and the 2003 downturn.

“The opportunity today isn’t quite as good as it was then, but it isn’t far off…we’ve found a part of the market that is neglected, out of favour, and unloved,” Dvornak said.

Source: Platinum Asset Management

Why are the prospects so good for healthcare?

  • The ageing population – Dvornak refers to the staggering fact that, in the last 10 years of our lives, we incur around 90% of our total lifetime healthcare costs.
  • The “tremendous wealth” of the over 50s demographic, especially on the back of the 40-year bull market across all asset classes we’ve seen in the developed world.
  • Continued improvement in the quality of healthcare products, as drugs and treatments become safer, cheaper, and more effective.

But for all the positive aspects, Dvornak singled out high costs as a core problem, particularly in the pharmaceutical sector. In the last 10 years, the cost of bringing a new drug to market has doubled to an average of US$2.5 billion.

To address this problem, he discussed a four-pronged approach:

  1. Produce better drugs – For every successful drug, there are between 20 and 100 unsuccessful drugs.
  2. Learn how to “fail sooner” – Dvornak explained the worst drugs are those that initially look very good, then have a lot of time and money invested in them. “If you can find those sooner, a lot of money can be saved, he said.
  3. Reduce labour intensity – The medical professionals and scientists, many highly qualified, are expensive to employ.
  4. Patents – Medical patents generally only last 12 years and given the time it takes for new drug approvals, companies usually only get around five years of on-patent sales before generic manufacturers are able to move in – which emphasises the importance of improving the pace of drug development.

Machine learning, AI in drug development

Recursion Pharmaceuticals is a NASDAQ-listed firm, with a market cap of around US$1 billion, that is using data to help improve the above systems and processes. Dvornak described it as trying to build an “atlas of human biology.”

The traditional methods of gathering data in the pharmaceuticals industry are via experiments, involving highly-skilled, specialised scientists in slow, precise, and painstaking processes. “A lot of money is spent to produce only a small amount of data output, it’s prohibitively expensive,” said Dvornak.

But using artificial intelligence and robotics technology, Recursion enables some 2.5 million experiments to be conducted weekly, enabling the creation of a large database far more cheaply than was previously possible.

Recursion’s technology is able to create up to 13 petabytes of data – which amounts to around 13.6 trillion A4 pages of printed text.

“Thanks to advances in machine learning and neural networks, computers can translate those pages and formulate models of human biology. As more data becomes available, the machine’s understanding of human biology will expand,” said Dvornak.

This enables quicker estimations of the probability of failure for new drugs, to help them “fail earlier,” limiting the resources and time expended. 

One of Australia’s most trusted international investment managers

For further insights from Andrew Clifford and the team at Platinum Asset Management, please visit their website.

Platinum International Fund (Quoted Managed Hedge Fund)
Global Shares
Platinum Asia Fund (Quoted Managed Hedge Fund)
Global Shares
This article has been prepared by Platinum Investment Management Limited ABN 25 063 565 006, AFSL 221935, trading as Platinum Asset Management (“Platinum”). While the information in this article has been prepared in good faith and with reasonable care, no representation or warranty, express or implied, is made as to the accuracy, adequacy or reliability of any statements, estimates, opinions or other information contained in the articles, and to the extent permitted by law, no liability is accepted by any company of the Platinum Group® or their directors, officers or employees for any loss or damage as a result of any reliance on this information. Commentary reflects Platinum’s views and beliefs at the time of preparation, which are subject to change without notice. Commentary may also contain forward-looking statements. These forward-looking statements have been made based upon Platinum’s expectations and beliefs. No assurance is given that future developments will be in accordance with Platinum’s expectations. Actual outcomes could differ materially from those expected by Platinum. The information presented in this article is general information only and not intended to be financial product advice. It has not been prepared taking into account any particular investor’s or class of investors’ investment objectives, financial situation or needs, and should not be used as the basis for making investment, financial or other decisions. You should obtain professional advice prior to making any investment decision. Livewire gives readers access to information and educational content provided by financial services professionals and companies ("Livewire Contributors"). Livewire does not operate under an Australian financial services licence and relies on the exemption available under section 911A(2)(eb) of the Corporations Act 2001 (Cth) in respect of any advice given. Any advice on this site is general in nature and does not take into consideration your objectives, financial situation or needs. Before making a decision please consider these and any relevant Product Disclosure Statement. Livewire has commercial relationships with some Livewire Contributors.

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Glenn Freeman
Content Editor
Livewire Markets

Glenn Freeman is a content editor at Livewire Markets. He has almost 20 years’ experience in financial services writing and editing. Glenn’s journalistic experience also spans energy and automotive, in both Australia and abroad – including the...

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