How Platinum is positioned for “when the music stops”

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. 

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

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