Platinum Asset Mgmt: Result 2015

Platinum Asset Management managing director Kerr Neilson is perplexed: when the Aussie dollar was high people didn't seem to want to buy cheap overseas assets, and now the Aussie dollar is weakening, they still don't.

'This reluctance was understandable,' suggests Neilson, 'when the country and currency were still enjoying the flattening glide that characterised the end of the resouces boom, but now that our terms of trade are clearly heading downwards and the A$ is weakening, we are surprised by [Australian investors'] seeming unwillingness to lay off their exposure and have more investment in assets abroad.'

He's got a point – and it's something we've been banging on about for a while – but it doesn't seem to tally with the experience of Magellan Financial Group, which has had no trouble attracting investors' money for overseas investment whatever the level of the dollar.

While Platinum's funds under management (FUM) have risen from $18bn to $28bn over the past five years, broadly in line with rising markets, Magellan's FUM has soared from around $1bn to almost $40bn.

Now this comparison isn't entirely fair. Magellan has achieved much of its success by attracting institutional funds, which account for around three-quarters of its FUM and on which it charges much lower fees. Platinum, meanwhile, has been reluctant to lower its fees for large investors: although it does offer the option of an annual management fee of only 0.79% (compared to 1.44%) for investments over $500,000, this is in return for a chunky 16.5% performance fee.

Which is to say that the funds are not created equal – with Magellan's delivering average fees of about 0.83% (or 0.69% excluding performance fees) in the 2015 financial year, for example, compared to 1.31% for Platinum. As a result, Platinum earned much higher operating revenues in 2015 despite its lower FUM: $341m compared to $256m.

Tough conditions

Magellan has also had a favourable wind from some excellent short-term performance, with its flagship Global Fund returning 21.5% a year over the past five years, 5% ahead of the MSCI Index. The Platinum International Fund, by contrast, is behind the index at 12.3% a year.

In this year's letter to shareholders, Neilson bemoans the lack of 'dispersion in stock price behaviour', with fewer opportunities for picking winners due to a much narrower than usual 'gap between the strongest performing and the weakest performing shares'.

There's probably something in this, and it has affected Magellan less due to its preference for large, high-quality companies. But even when Platinum's five-year record included its spectacular outperformance in the global financial crisis, the money didn't come flooding in. Platinum has been working hard to improve its engagement with investors, with roadshows around the country and a new Journal section on its website, which should be regular reading for all investors.

There are some other specific opportunities for FUM growth, most notably through three funds (a global fund, an Asia ex Japan fund and a Japan fund) launched in Ireland, with a view to targeting European and Asian investors, after the Government recently removed various tax impediments to Australian fund managers offering products to foreign investors. Other initiatives include the listing of the Platinum Global Fund through the ASX's mFund service, and the recent launch of Platinum Asia Investments. It remains to be seen whether any of this can make a major difference to fund flows, though, without Platinum being more flexible on its pricing (which looks unlikely).

Not expensive

Still Platinum's FUM has enjoyed a steady march upwards over the past few years due to rising markets and 2015 was no exception. Average FUM rose 17% to $26.1bn, from $22bn in 2014. Even in the absence of performance fees, which contributed 9% of revenue in 2014, total revenue rose 13% to $360m.

Lower staff costs (due to the absence of performance incentives) meant that overall costs were flat, giving a 16% rise in pre-tax profit to $302m. After a higher tax charge and a 1% increase in the number of shares on issue due to the exercise of staff options, earnings per share rose 13% to 36.6 cents, comfortably ahead of the 34-35 cents we were expecting at the time of the interim result.

With Platinum down 14% since then, and 23% since Time to Sell Platinum on 4 Feb 15 (Sell – $9.06), it's trading at about 19 times earnings. That's not expensive, but we're mindful of the pressure on margins, and/or FUM growth, as outlined above, as well as the impact of Kerr Neilson eventually moving on. HOLD.