Cloudy Skies in Europe
Over the last few years, Europe’s economy has been shedding the austerity and stagnation caused by the GFC. However, the tensions from within (Italy’s economic woes, UK’s Brexit, & Migration issues) and the rising geopolitical storms from without (US-China trade war) are causing growth to slow and temper sentiment. With political tensions continuing to trouble the market and Europe’s growth moderating, we believe it’s best to be more cautious and we adjust our view on Platinum European Fund to HOLD.
The latest batch of economic data from Europe shows that the pace of growth in the region has slowed to its weakest pace in the last 2 years, with a relatively weak performance in Spain and Italy. According to an IHS Markit report, the Eurozone Composite PMI has fallen to 54.1 in September, its lowest level in the last 22 months. GDP growth for the 3Q18 is also a flattish 0.5% as reflected in the graphic below:
Source: IHS Markit, Eurostat
The ongoing trade tensions between the US and China have spilled to the rest of the world with Europe dragged into it. According to IHS Markit, Exports in the Eurozone in September have dropped to their worst levels since Exports began rising again mid-2013.
Going forward, the outlook is set to remain weak with New Orders barely budging and its pace has dropped to its slowest in 2 years. As a consequence, Manufacturing Output also saw a drop to its lowest levels since May 2016 with the sector looking to reduce inventories.
The weaker recent data and rising geopolitical tensions have also caused expectations to drop. The latest forecast published by the European Commission (EC) cuts GDP for the region by 0.2% to 2.1% pace for 2019.
EU economic affairs Commissioner Pierre Moscovici noted that risks have been growing with the US-China trade war being the most concerning. Other issues include the Brexit transition which is still at an impasse with legislators still arguing about the Irish border and Italy’s populist government which is seeking to ramp up its spending against the EC’s recommendations.
The only bright side for next year is that Domestic Demand will remain robust with trade within the EU’s borders to remain healthy.
Consensus views have also moderated with growth expectations for 2019 set at a lower 1.8% growth for the region. The additional concerns stem from the difficulty on the political side with Germany facing a disunited coalition and France seeing weak household spending among the other issues mentioned.
Source: Focus Economics.
As such, we believe that investors should be cautious in the near term given the strength of the Euro as well as the aforementioned political headwinds. The Platinum European Fund will remain held in the Fat Prophets Portfolio.
The Fund
Recapping some Fund details and Platinum European has the objective of providing capital growth over the long-term by identifying undervalued investments in the European region. The Fund primarily invests in the listed securities of European companies, although it may invest in companies not listed in Europe but must conduct business predominantly in Europe.
The Fund is managed by Nikola Dvornak, who has been with Platinum for 12 years and a co-manager (50%) of the European Fund since June 2014. He took over full management of the European Fund as of 3rd February 2017.
The Fund’s Portfolio consists of 30 to 70 securities that Platinum believes to be undervalued by the market. As at 30 September, the Fund held 46 stocks in the portfolio. Platinum may short-sell securities that it considers overvalued and as at the end of September held a short position in 2 stocks. The Portfolio will typically have 50% or more net equity exposure and the manager also has the ability to hedge exposures to the AUD.
We think the holding costs of the Fund are reasonable with a management expense ratio of 1.35% for C Class shares, which includes administration and investment costs.
The P Class shares have a lower 1.10% per annum fee but also have a performance fee that is 15% of the fund’s return (currently estimated at 1.11%). There is also a buy/sell spread when entering/exiting the fund of 0.25% of NAV.
There is a minimum initial investment of A/NZ$10,000 with the option for implementing a Regular Investment Plan in A/NZ$5,000 plus A/NZ$200 on a monthly/quarterly basis.
Performance
The Fund has a long history of delivering solid returns and outperforming its benchmark (MSCI AC Europe) by generating a return of 12.2% per annum since inception as at 30 September, compared to the 3.1% per annum for the benchmark. The table below sets out the returns net of management fees as at 30 September 2018.
Source: Platinum Asset Management Fund website, 30 September
A closer look at the fund’s outperformance and we can attribute this to successful implementation of a bottom-up approach over a long time period rather than any overarching thematic (i.e. classic value investing). Historically, the fund’s best performances were in a diverse mix of industrials, financials and consumer businesses.
We do note that fund has had different portfolio managers since inception with the current one having a tenure of slightly over 4 years, while only having around 1 year and 8 months of running it solo. As such, we believe that only the most recent returns can be attributed to the portfolio manager’s stock selection skills.
Over the near-term, (<1-yr), the fund’s return was lacklustre and even fell behind its benchmark over the 1-month and 6-month period. Mr Dvornak explains that the near term weakness was the result of weak performance in Danish jeweller Pandora which fell 38% year-on-year as well as an investment loss in Vodafone which he attributes to a deterioration in Spain.
There were also other positions in Mining, Automotive and Eastern European Financials that dragged on performance. Mr Dvornak explains that the short-term bumps are a feature of a bottom-up approach to investing and stated that “We do not concern ourselves with what share prices may or may not do. We appraise businesses as a private owner would, focusing on their earnings prospects and what we pay for them. If we get this right, we believe the rest will take care of itself”.
Furthermore, Mr Dvornak assures that those exposures were mainly value picks and that patient investors should be richly rewarded once conditions improve.
Over the longer 12- and 24-month periods, legacy solid stock-picking ensured that the Fund outperformed its benchmark index by a substantial margin, notwithstanding the substantial cash holdings (average 15-20%) throughout that time period.
Source: Platinum Asset Management Fund update, 30 September
A $20,000 investment (previous minimum investment) in the Platinum European Fund at the fund’s inception date would now be edging over $200k, compared to around $37,200 if the same investment was made in the comparable index, as seen in the above chart. This point emphasises the long-term holding period appropriate for the fund with its strategy.
Platinum’s positioning
Since our last coverage of the fund back in March (reporting January) 2018, the fund manager has added a position in Provident Financial, around the March Quarter. The company is a UK-based doorstep lending and subprime credit card issuer. The company was bought after dropping 80% from its 2-year highs and has since fixed its underlying issues.
That aside, the fund has also added more exposures to existing positions in energy, healthcare and media companies as well as Eastern European banks which are all contrarian plays.
The fund has also been trimming positions in high performing picks such as Sartorius, Hypoport and TGS-NOPEC which Mr Dvornak notes as the some of the best performing investments while also removing ‘losers’ like Vodafone and Russian positions that have been affected by US sanctions like Lukoil and Yandex.
This has led to the cash position stabilising at a relatively high 14.4% level, though on the plus side this allows the fund enough liquidity for bargain hunting.
Source: Platinum Asset Management Fund update, 30 September
Looking at the positioning of the fund’s assets, we note that Germany still tops the list at 20.8%
(previously 23.7%). It’s unsurprising that the fund has a larger exposure to the German economy given that it is Europe’s powerhouse and still in good shape.
This is followed by the UK which is the second largest country allocation at a 11.2% net long position on 30 September, which was down from 12.8% in our previous review. Going forward, we expect that once the UK exits Europe, the fund may lighten the position in the country as a defensive measure and reallocate to other undervalued regions.
An interesting titbit here is that the fund has also been steadily growing its exposure in Switzerland from 9.0% to 10.9%. We do believe this reflects a defensive flavour for the portfolio due to its ‘safe-haven’ value amidst rising political tensions globally.
Top Holdings
Turning to the holdings and the Fund remains well diversified at the stock level, with no single investment exceeding 5% of the total fund value as reflected in the graphic below:
Source: Platinum European Fund update, 30 September
Looking at the industry breakdown, the Fund remains heavily weighted towards the financial services industry at 20.4% (previously 22.6%) though this has been reduced considerably since peaking at almost a third of the portfolio and likely reflects the poor price performance in Eastern European financials which have been hammered by the geopolitical tensions. Case in point, shares in Raiffeisen Bank and Sberbank have fallen 21% and 33% year-on-year respectively.
An interesting development as well is the much larger exposure to Industrials which have increased 430 basis points to 21.6% since our last coverage. This is reflecting the new positions in ‘a number of industrial businesses’ as well as strong performance in MTU Aero Engines (+41% yoy) with its geared turbo fan engine program performing well.
Summary
Over the last few years, Europe’s economy has been shedding the austerity and stagnation caused by the GFC. However, the tensions from ‘within’ and the rising geopolitical storms from ‘without’ are causing growth to slow and temper sentiments. With political tensions continuing to trouble the market and Europe’s growth moderating, we believe it’s best to take a more cautious approach.
Platinum European Fund will remain held in the Fat Prophets Portfolio.
The APIR code for the fund is PLA001AU.
