Fund managers

PTM is a stock we own in our direct equity portfolios. It is a relatively recent addition, coming off the back of the weak August flows data (the stock had just dropped below $4).

We thought it cheap then, but it has fallen down to low $3s, and as such it’s worth showcasing some of our thoughts.

We compare against the MFG funds, noting MFG the headstock is the other major listed peer of scale (with Pendal a sufficiently multi-asset business, similarly the AMP suite of funds).

Fees

Platinum’s fees have come down substantially, now 1.35%, but historically a number closer to 1.8%. This reflects the ongoing conversion of active to passive, and the recognition that often fund managers over-charge and under-deliver.

Since the business model is FUM * fees that means revenues and profits have declined.

Style

It also reflects the fact that the flagship investment strategies (value, growth, quality, momentum, carry) are essentially beta first, with alpha to be made after accounting for the fund managers’ correlation coefficients to those styles. And you should pay less for beta.

The Platinum International Fund is essentially an EM + Value play. You can see the value exposure, in the above factor loadings. We place a lot of emphasis on the precision of our models, in determining if a manager is true to label.

You can also confirm the idea through an examination of the bottom up holdings, group by label.

Or by the various bottom up valuation metrics. At this stage of cycle, we are wary of high valuation multiple growth strategies, believing them vulnerable to a) irrational exuberance / unrealistic earnings extrapolation and b) higher interest rates, which affect long duration growth stocks more than value stocks.

Region

You can see the EM part below (exposure to emerging Asia).

Performance

Both value, as a style, and the emerging market region, have performed abysmally. That’s going to produce some pretty poor headline returns.

But note that the PIF has done about the same as the style adjusted benchmark. That’s really important. Funds are products, we want to own products that behave in predicable ways (e.g. we know the conditions and environments in which they are likely to perform, and as such can add to them on a dynamic asset allocation basis if the views are positive or if the diversification benefits from blending are sufficiently worthwhile), and we absolutely care if a fund manager is lagging both the asset class benchmark and the stated investment strategy benchmark.

Track record

The absolute returns are generally acceptable. They’ve made money. Why does that matter? Well, since we are trying to time an exposure to the headstock, we need some way of ensuring a “margin of safety” in our trade. There’s a margin of safety in buying on a low valuation multiple, and there’s margin of safety in buying a business where you don’t think they are going to experience operational distress.

The outcomes above are not great, but nor are they unmitigated disasters (as opposed to say investing in Squid Game themed crypto, which suffered a 99.95% drawdown).

Expectations

And whilst the historical outcomes are disappointing, to a marginal investor, the expected returns to EM + Value in a decent operator with modest expectations embedded in the price doesn’t seem like too bad a position to take.

And the earnings expectations embedded in the headstock appear very, very low. The forward estimates are in the region of $130m, and longer run expectations imply earnings 10 years out of ~$100m. So anything better than that fairly awful looking outcome should produce decent share price returns.

Valuations

Likewise the multiples, which are not especially demanding. High yields, low PEs. It’s just different frames to tell us the same thing. If it looks like a duck, quacks like a duck…

It’s a duck.

Factors (premia)

PTM screens as a lower Quality high Value stock. Now, that’s a little nuanced, because on a bottom up Quality factor calculation (e.g. ranking stocks based on their measures of Profit, Leverage, Growth, Track record etc) PTM scores very well.

Fund managers have no debt, so in an absolute (e.g. compared to everybody else in the ASX 200) space they screen well, and are high margin low capex businesses (two people, a computer and a dog).

Still, with the fund trading like Value (which here means having a strong statistical factor loading to a Value style benchmark) and a strategy that is long EM + Value (which by definition is short Quality) we can understand why the factor loadings are what they are.

Factors (macro)

PTM is a stock that does well when rates are rising. Again, like so much of this analysis, the correlation arises due to the configuration of underlying holdings. The EM region does well when global growth is robust, which is often an environment in which rates are rising reflecting the bullish GDP growth/corporate profit and expected inflation environment.

The same regression methodology and approach, at the fund level, confirms the same/similar magnitudes and direction for rates and oil coefficients. Generally speaking, the funds do well when the AUD goes down.

Conclusions

Given overall portfolio diversification benefits, low expectations, and somewhat better than expected performance of the underlying funds when compared to style, we are happy with our modest exposure.

It is entirely possible that the fund strategy doesn’t improve, the stock-picking skill is overwhelmed by macro factors (e.g. the fund is 40% underweight the US, which has been the best developed equity market year after year) and the net outflows continue. Really until the flows improve it is difficult to see a meaningful re-rate.

But, equally, to outperform, you need the occasional “hairs” on a stock to form a variance to market, and here we think we are fairly compensated.