Platinum’s three predictions for the coming decade
The duo would go on to establish Platinum Asset Management in 1994, where Neilson's god-given ability to choose consistently high-flying stocks garnered him an enviable reputation as Australia's Warren Buffett.
In 2013, Clifford took over the reins as the firm's chief investment officer. Five years later, Neilson stepped down as CEO and Clifford stepped into the spotlight.
It was a tough act to follow, but Clifford has by no means disappointed.
While Value has trailed the returns of Growth for more than a decade, Platinum chose to stay disciplined in its approach of investing in companies whose true worth and prospects are yet to be fully recognised by the market.
Platinum now has more than $23.5 billion in funds under management and its flagship International Fund has delivered its investors annualised returns of 12.1% (against the benchmark's 7.6% annual return) since its inception in April 1995. Its Asia strategy, established in March 2003, has returned 14.8% per annum against the benchmark's 10.8%.
In this wire, Clifford takes a look at some of the highlights from his 27 years with Platinum (including his past three years in the drivers' seat) and shares some of the challenges the business has faced, as well as some of its best bets from nearly three decades of investment management.
He also shares his current market outlook, why we could be nearing the end of a great bubble, as well as three predictions that could change the world as we know it over the coming decade.
And, because I know our readers love to see ideas in action, I asked Clifford to share the stocks that he believes will be major beneficiaries of these themes over the years to come.
A favourable foundation
Clifford describes his childhood as "unremarkable", but learned early on the trials of business. His parents, small business owners, worked seven days a week for more than a decade running a discount cosmetics store.
But in high school, Clifford's attention was captured by the study of commerce. He recalls visiting the Sydney Stock Exchange as part of a school excursion, where he was instantly drawn to the world of investing.
"Back then you used to have an open outcry system. You had the brokers on the floor yelling up orders to the 'chalkies' up on the platform writing down the bids in the office," he says.
"The idea of investing in other people's businesses by buying and selling shares had a lot more appeal than the hard work of actually being in business, which I could observe readily day-to-day."
During his university years, the Australian market was awash with consolidation, with the country's banks coming together to become the Big Four we know today. A change in media laws saw equally extreme consolidation within Australia's TV stations and newspapers, he recalls.
"It was an exciting time in the stock market, lots of takeovers, and if you understood what those changing laws meant there was this great opportunity there," Clifford says.
He describes his first investing gig as "the perfect education", having landed a role under Kerr Neilson at Bankers Trust Australia (now Westpac's BT).
"You have to remember that most of us in this game are sitting here on the sidelines commentating on what people are doing in real businesses and the difficulties of it are much greater than the spreadsheet versions that many of us live with," Clifford says.
"So, it was a schooling in understanding the practical difficulties of great businesses, the competition they face, and a considered framework for thinking about those things."
In his second year of working under Neilson, where he had been covering the Australian market, Clifford was challenged to cover Asia.
"In 1988, China was just coming out of it the communist era. You had a few stock markets around the region; Thailand, Hong Kong, Singapore, Malaysia, Indonesia, which had only really opened up as a stock market in 1989," he recalls.
"At one stage we had visited every single listed company in Indonesia. So it was an exciting time in that part of the world."
One of the team's first investments was a Hong Kong-based business called Hopewell Holdings, which was building the first toll road in China from Hong Kong up to Guangzhou.
"They had grand plans to build roads all over China and to investigate this, we actually got in a car and drove the hundred-odd kilometres. It took us 12 hours," he says.
When Clifford first travelled that route it was surrounded by rice paddies and duck farms and comprised of two dirt lanes with a middle lane of bitumen (a negotiable lane for whoever had the biggest vehicle, he adds).
A decade later, the highway was six to eight lanes in either direction.
"You'd be lucky to see any farming on that route at all. It is now the industrial centre of the globe," he says.
The beginning of a $23.5 billion business
In his last two years at Bankers Trust, the small team had been managing money for George Soros' funds' management business. When Kerr left to start his own shop, he asked Clifford and a few others to join him, attracting Soros as Platinum's very first client and also its only external shareholder.
"There was only seven of us there from the beginning. From day one the three analysts were running around trying to buy photocopiers and fax machines and on day two Malcolm Halstead arrived, who came from Bankers Trust as well, and told us to get out of there and find some stocks," Clifford recalls.
And while the business had a "pretty good run" for a long time, Clifford says the bigger lessons came later on.
"I often say we're really good at managing money, but in those early years, we weren't ever focused on managing people. And that becomes the big challenge as you build a team," he says.
In the earlier years, there were also periods when performance wasn't where Platinum hoped it would be, Clifford says.
"In some of those early years, there were periods that weren't great. But I think we are all the personality types of not worrying too much about what the world was saying about us. We knew what needed to be done and we were going to do it," he says.
And while Platinum's flagship International Fund has outperformed its benchmark since its inception in 1995, the fund has underperformed over a one and three year period (26.1% over 1 year compared to the benchmark's 27.7%, 6.8% p.a. over 3 years compared to the benchmark's 14% p.a return).
"Our performance in recent years in absolute terms is perfectly good. But clearly, others have done better playing in some of the more speculative stocks," Clifford says.
"It is an ongoing challenge to stay disciplined and not chase the latest thing to try and catch up with the rest of the field. Because in the meantime, you're subject to plenty of commentary about your performance."
That said, Clifford is steadfast that the famed Growth stocks are extremely overvalued and argues the real opportunity is to steer clear of them and look elsewhere for value.
"Those who stay there will pay the price. And there are better opportunities elsewhere," he says.
"The second thing, which is a little harder to do, but we certainly do it, is to try to make money from shorting those extraordinarily overvalued stocks."
The best investments from 27 years of Platinum
Platinum launched its Asia Fund in March 2003, amid what Clifford describes as a "pretty desperate" time for the region, having suffered through the 2001 Tech Wreck, September 11 and then a deadly outbreak of SARS. But the best opportunities are within the parts of the market that others are trying to avoid, Clifford says.
"Some of the early investments were in India, which was deeply out of favour. It was just starting to open up and reform in the early to mid-nineties, and was really struggling," he says.
"Our biggest investments in the Fund at that point were the breweries and spirits businesses in India, like United Breweries, Shaw Wallace, and McDowell's. They dominated beer and spirits in India, and you were paying $200 to $300 million in market cap for all of them."
The returns on these investments were tenfold, Clifford says.
Other winning investments from more recent years include Alphabet (Google), which Platinum bought in 2012, as the business struggled to overcome fears that its search business would be trumped by apps on people's mobile phones.
"I think in hindsight that looks quite silly, but it was a very real fear and the stock used to trade on PEs of 15 times plus or minus and as we know now, had many, many years of growth ahead of it," Clifford says.
In 2010, the firm bought Tencent, which at the time was dismissed as the "Facebook of China" but was always "a far more powerful business than that". In 2015, when PayPal first listed, Platinum took out its chequebook.
"It was seen as a lost cause because of its ties to eBay as a payment platform. Now we all know about how amazing these businesses are, but the great opportunity was when people thought they had very serious issues in front of them" Clifford says.
"We talk about the cycle of psychology in a stock going from neglect to discovery to the eulogistic phase. Investing in this neglect stage is where the hard work has to be done, researching and understanding the businesses that you're buying into. But if you fish in that pond we believe you're going to catch a lot more big ones than if you were following the crowd."
Three major theme predictions for the next decade
Clifford believes three major themes will take the world (and markets) by storm over the coming decade, pointing to EVs, innovative renewable plastics and biotech as areas of opportunity.
"People often struggle to see how the world will be different in five to 10 years time," he says.
"Amazon and e-commerce was an obvious story for a long time. But even 10 years ago, certainly 15 years ago, if you said a huge amount of footwear and apparel would be bought online, people would have laughed at you."
Prediction 1: Widespread adoption of Electric Vehicles
Every car that we will be buying in a decade's time will have an electric engine, Clifford says, whether it be a hybrid or otherwise.
"If you tell people that now, they just don't believe that can really be the case. So you need that disbelief in the future and a discomfort with the present to uncover opportunities," he says.
Platinum has long had a position in Korea's largest chemical company LG Chem (KRX: 051910) which manufacturers battery materials, Clifford says.
"While the whole EV space is much loved at the moment, this is one of the world's leading suppliers of batteries," he says.
"So what we would say to that is the valuation here still makes sense, whereas most of the EV players don't. Today it's well understood. But, we still think it's a reasonable investment."
Prediction 2: New solutions for single-use plastics
The world is already awash with huge investments in renewables, however, Clifford believes there is an opportunity within solutions to replace single-use plastics.
"There are some pretty interesting technologies being devised around recycling or substitute products, making plastics out of basically a timber base," he says.
"These things will take a long time to come through, but certainly in a decade or so I think some of those things will be a big part of our economy."
He points to UPM Kymmene Oyj (HEL: UPM), a Finnish forestry company, as a clear winner in the sector.
"Predominantly its business is pulp and paper, but it is making significant investments into bio-plastics, making plastics out of basically timber resource," Clifford explains.
"In the shorter term, UPM's business is much more about the pulp price, and the pulp price has been strong. So like a lot of other commodities it's been on the way up, but it's certainly not loved by any means and we don't think the angle around bio-plastics is a big part of that yet."
Prediction 3: Biotech innovation
His final prediction for the coming decade is that advancements within biotech will kickstart a revolution in healthcare, not only in the way we define and treat diseases but also in the way we manufacture products.
"The great lesson of the last year was obviously the way that mRNA technology could be used to create vaccines," Clifford says.
"We had investments in both BioNTech (NASDAQ: BNTX) and Moderna (NASDAQ: MRNA) well ahead of COVID-19 and certainly stepped those up because we knew there would be an opportunity."
Clifford says Platinum's International Health Care fund manager, Dr Bianca Ogden, keeps telling the team that molecular biology and computer science are converging, with automation being applied in the lab and the "therapeutic toolbox" expanding with each new modality approved.
"Bianca tells us that neurodegenerative diseases are being deciphered more and more and will follow the path that was paved by precision oncology," Clifford says.
"She believes that in the next 10 years we will start defining neurological disorders by their molecular profile akin to what we do in oncology."
Ogden also has shared that there is ongoing investment into the analysis of genetic and molecular data, which will help improve the standard of care. Meantime, the tools we use to obtain this biological data are getting better, faster and cheaper day by day.
"The speed at which we're coming up with potential solutions in the biotech world - whether it's gene editing or mRNA - there are vast amounts of development in different areas of the sector that I think will transform the healthcare landscape," Clifford says.
Are markets greedy or fearful right now?
It was Warren Buffett who famously advised that investors should be "fearful when others are greedy and greedy only when others are fearful". But Clifford notes that we are seeing evidence of both these behaviours in the current market environment.
"With the psychology of investing, when everyone's fearful - even if they're right to be fearful - the share price is almost certainly going to be hit harder than it should be," he says.
"And if they're optimistic, it will almost certainly be bid too high. And that's deep in our cognitive biases to do that."
It's an interesting dilemma, he says, as there is current proof of investors being greedy, while bond yields and the recent revival of the FAANGs suggests otherwise.
"I covered the US and technology from '98 through to 2003, when I went back on to cover Asia and was running our tech fund in that period," Clifford says.
"For all the people who tell you that this is not like the tech boom, you know, you're right. This is much, much worse. The valuations are much higher. Yes, the companies might be more real, but we're talking about trillions of dollars of market cap tied up in some pretty extraordinary valuations."
So it's a "slightly odd market" where people are fearful of much, and yet, low-interest rates have forced them to take on risk and invest in equities, Clifford says.
Bubble - or no Bubble?
Like investing great Jeremy Grantham, Clifford believes we are nearing the end of a great bubble. However, it’s the timing of the bubble's burst which is the problem, he says.
"History gives you a roadmap, but it's not to scale," he says.
Take one great area of excitement within the market, for example, anything to do with payments, he says.
"There's Visa and MasterCard at the dull end of the spectrum, but there's also PayPal, Afterpay. It's becoming incredibly competitive and everyone will tell you about why their position is better or different," Clifford says.
"But in the end, when all that money is chasing the same outcome, the outcomes tend not to be what you want them to be."
However, Clifford doesn't believe it is likely that these crowded areas of the equity market will cause a cataclysmic crash.
"It's probably in fixed interest markets, private equity, or some of the unlisted areas where a lot of leverage is being used - where we can't see it - where the big accidents are more likely to happen," he says.
"So I think it's right to be relatively cautious as an investor right now."
Andrew Clifford has spent a career perfecting the craft of uncovering overlooked gems in the stock market. You can get all his latest insights by clicking on his profile page below.
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Ally Selby is a content editor at Livewire Markets, joining the team at the end of 2020. She loves all things investing, financial literacy and content creation, having previously worked for the likes of Financial Standard, Pedestrian Group, Your...