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What type of global investor are you?

Glenn Freeman  |  20 Jun 2017Text size  Decrease  Increase  |  

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Kerr Neilson, managing director of Platinum Asset Management, believes there are essentially two types of investors, irrespective of all the market noise, various approaches to diversification and prevalence of market indices.


The pay-off from franking credits is often over-emphasised in the minds of Australian investors, according to Kerr Neilson, managing director and co-founder, Platinum Asset Management.

"Franking credits loom large in mind, but small in fact," says Neilson, speaking with Morningstar's director of manager of research, Tim Murphy, during an exclusive webcast. He believes there is an "overstatement of the benefit" of franking credits among equities investors, who are overly concentrated in domestic stocks, "which misses the opportunity in international shares."

"This is a very crowded market, whereas you look at global markets and there's far better value to be had," Neilson says.

While many Australian investors seem to believe that having 15 per cent of their total portfolio invested abroad provides enough diversity, he believes this is not the case. This is because if their primary incomes are derived from Australian jobs, and their investments are also primarily domestically-based, "that's a huge concentration."

In a wide-ranging discussion, Neilson also addressed other hot-button topics dear to the hearts of many Australian investors--both macro- and micro-economic in nature.
He touched on resources stocks; the China economic boom and attendant slow-down; the United States under President Donald Trump; the British election and Brexit; and the Amazon effect.

Filtering out noise

A key theme of the session revolved around the need for investors to filter out noise, with Neilson revealing how Platinum uses quantitative research to do this.

"To find companies that have in the past achieved good growth, been reasonably profitable, don't use too much debt, and for some reason are now priced at a cheaper level than they have been in the past…valuations of shares have gone up on average, so you can't use historic PE models," he says.

Among some of the investments themes Platinum follows, he says "everyone's mad about the whole technology network idea, the Amazons and the Googles…these are other themes you can use to find ideas." He says that, in general, Platinum looks for tangential opportunities, but not always. For instance, he refers to Platinum's investment in one of the most well-known technology stocks, Google--but says they got in before it was such a crowded trade, entering "when everyone was worried about the risks from internet search."

On a macro level, Neilson repeatedly emphasises the need for investors not to equate an index's performance with the true diversity of its various constituents--essentially, reminding us that the whole is more than the sum of its parts.

Responding to a viewer question about whether the extended bull run in global markets makes him nervous, he reminds investors to think about the constituents of an index.
Looking at the Morgan Stanley Capital Index (MSCI)--one of the most commonly cited global indexes--he says, "if you look at which markets go well from one year to the next, you could use a dartboard to try and forecast."

"Over the last four years, the roulette wheel has landed on red--America--which is very unusual. We suggest that the long bull market has principally been in the US, not in Japan, China…nor has it been as broad-based as the MSCI would suggest.

"If you think of Asia at the moment, one stock that's dominant is Samsung. If you run an Asian fund, you've got to have 50 per cent of your fund in one company--it creates all sorts of problems," Neilson says.

He book-ends this point by saying "the index cannot always be as reliable an indicator of the opportunity set; we think it's much more nuanced and less extended than the MSCI would suggest to you.

"It's about the constituents of the index that make one feel it's been a very long bull run," Neilson says.

America under Trump

Regarding the US, he says, "since the election of Trump, we haven't paid any attention to twitter [or his tweets], we're paying attention to what his credibility is like, in getting things through congress."

Noting his poor track record in passing meaningful business-friendly, tax-reducing legislation so far, Neilson says "the problem with that is the market has been operating on the basis of tax cuts, and then without those, then I think the market stalls."

He also touched on the returning strength of Europe; his positive outlook on residential construction in Germany; and the major trade imbalances he sees in the world today. Which all emphasise Neilson's core point, that investors should look at individual markets rather than the index.

"People need to think more broadly about an index not representing the world's activity," he says.

Further, it leads to another of Neilson's fundamental points, that there are essentially two types of investors. "This gives more context to the problem of investing: either you're index-led or you're opportunity-led."

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Glenn Freeman is a senior editor at Morningstar.

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