Markets: Kerr Neilson's franchise forage

Kerr Neilson says that he and his colleagues at Platinum Asset Management ignore the short-term noise surrounding a stock. What Platinum wants to do, he says, is make investments that produce long-term returns rather being distracted by short-term events.

The Platinum International Fund managed by Neilson had made a 12.78 per cent compound annual return since 1995. A $20,000 investment in the fund then would now be worth $180,000. But the South African born 63-year-old knows, from bitter experience, that markets can humble.

“Hubris kills in this industry,” says Neilson.

Platinum was co-founded by Neilson and Andrew Clifford in 1994. The two men had formed a very successful partnership at Bankers Trust Australia. They flew around the world and invested in what were then considered the frontier markets of Asia and South America. At one stage they were responsible for a third of the turnover on the Brazilian stock market and made as much as four times their investment at the end of Latin America’s days of hyperinflation.

“The experience was when these emerging markets open up they can go berserk from foreign inflows,” says Neilson.

Such was their reputation that in 1992 George Soros agreed to meet Neilson in New York, intrigued by what “this prick at an institution such as BT had achieved”, says Neilson. Soros gave Neilson $40 million to invest on behalf of the Quantum Fund. In a year Neilson had taken that $40 million Soros had given him and made the Hungarian-born billionaire $120 million.

When Neilson and Clifford decided to set up their own firm, Soros had no advice except for “do what you’re comfortable with”, says Neilson. That reinforces Neilson's belief that investing "cannot be formulaic".

Neilson and his wife, who both migrated from South Africa in 1983, are art fans. Their White Rabbit Art Gallery in Sydney was founded in 2009. The gallery recently hosted 30,000 people who filed through its doors to see the latest Chinese contemporary art exhibition.

On the walls of a Platinum conference room that overlook Sydney’s Circular Quay, iron sculptures of what look like very fat cupids by Chinese artist Wang Zhiyuan hang on the walls.

Neilson first went to China in 1980 when “everyone wore a Mao jacket and there wasn’t a single car on the streets, only bicycles”.

He has just got back from a trip to China that was supposed to include a trip to North Korea but which was cancelled after the leasing company that owned the aircraft Neilson was scheduled to fly in refused to allow it to land in Pyongyang.

Neilson sees the excesses, speculation and the real growth and progress of Chinese society after 33 years. During the height of the construction boom China sold about four times as much earth-moving equipment as that sold in the US in any year.

“The mentality was ‘build and they will come',” says Neilson, dressed in dark blue pinstripe suit, red tie and white shirt. “Across every industry in China it was all about market share.”

Chinese banks, he says, “are straddling the barbed wire" between accessing funding in the interbank market where rates have shot up and the wealth management products they sell to fund speculative lending.

“Everyone is a winner from speculative lending in China,” says Neilson, tongue-in-cheek.

The fund manager’s understanding of China is perhaps been helped by his age and experience where vivid memories of the Cold War and the ideological struggle between capitalism and communism shaped his decision to get into finance.

“I knew the money was with those that created jobs and product,” says Neilson. “I might not have known the niceties like cash flow analysis but I instinctively knew a brand was only superior if it made superior rent, that is, a large profit over the capital it employs.”

Neilson searches for companies to invest in that make 25-35 per cent on the capital they employ compared with others that make on average 14 per cent.

“If you find a company like that it’s pretty unique,” he says. “I try to find out what is the ecosystem that allows that. Coca-Cola may have a bad summer but we’re not interested in that because it is not so interesting in the long run compared to the strength of that franchise.”