Keys to investing - Kerr Neilson

Kerr Neilson, consistently one of the best Australian fund managers, provides his recipe for investment success:

  • Think about how the world is likely to be

  • It is the competitor's response that matters most

  • Learn to deal with media overload

  • Anchor decisions on fact, not momentum

  • Be aware of limitations of financial modelling

  • Great investors continually build their knowledge

  • Humility

The full article is here:

https://en.wikipedia.org/wiki/Kerr_Neilson

So where do those principals take Kerr Neilson's portfolio now? This is the current (31/7/2018) geographical asset allocation of the Platinum International Share Fund. https://www.platinum.com.au/PlatinumSite/media/Reports/pif_m_update_201807.pdf Comparison with MSCI ACWI Index (All Countries World Index) https://www.msci.com/acwi

In case it is not immediately obvious, this is a very clearly statement about the best investment opportunities and the highest risk markets, specifically:-

  • Platinum's broad-based international fund has only 1.5% nett exposure to US stocks compared with 54% US exposure in the MSCI ACWI Index. This reflect how expensive (not good investment) Platinum thinks US shares are on broad average.

  • Platinum International's exposure to Japan is 12.8% compared with 7.4% in the MSCI ACWI Index, reflecting the view that Japan is an attractive market to be invested in.

  • Platinum International's exposure to China is 22.2% compared with the 3.6% in the MSCI ACWI Index. This reflects:

  • the view that Kerr Neilson sees Asia as " one of the great paths of wealth creation over the coming 10 to 20 years." http://puzzlefinancialadvice.com.au/2017/Core/Asia__Kerr_Neilson_on_the_rise_of_Asia_171017.pdf

  • This is also why in the Platinum International Fund there is a lot of other exposure to Asia including:

  • India Nett 5.6%

  • Korea Nett 6.3%

  • the realtity that

  • China has, on a purchasing power parity (PPP) basis, a significantly larger economy the USA (having passed USA in late 2014) and China is growing much quicker than USA.

  • That Asia more generally is growing very fast compared to the developed world and

  • that the "emerging world" is already about 60% on a purchasing parity power basis - "emerging world" will become an increasingly dominant part of the world economy (and this "emerging world" is dominated by Asia) and

  • if you travel to places like China, you will notice that in many ways, their cities are more modern and more advanced that what we see in Australia. This is partly why Platinum Asset Management increasingly regard the term "emerging world" as not be useful term any more, from an investors perspective.

  • You will also note that in China in paricular (but Asia more broadly), increasingly you will find companies that are global technology leaders in their field.

  • Given these factors, it does seem somewhat strange (and backward looking) that MSCI still classifies China as an "emerging" country. So if we go back to Kerr Neilson's 7 investor pointers at the very top of this blog, "Think about how the world is likely to be". The future will have economic power centred squarely in Asia.

Country weights for the MSCI ACWI index is as follows:

MSCI ACWI Index Fact Sheet.

https://www.msci.com/documents/10199/a71b65b5-d0ea-4b5c-a709-24b1213bc3c5

The chart above is projected GDP sizes on a PPP basis, as per PwC Forecasts. https://www.puzzlefinancialadvice.com/largest-emergence-event

You might say, that Platinum's geographic allocation is very radical compared with the MSCI ACWI Index and therefore very radical compared with most other fund managers? Why does Platinum Asset Management have any credibility in this?

  • The simply answer to that is that is that Platinum Asset Management has a very strong track record over a very long period on getting these big calls right.

  • This is illustrated by the performance of the Platinum International Fund since inception. See chart immediately below from the July 2018 monthly report. https://www.platinum.com.au/PlatinumSite/media/Reports/pif_m_update_201807.pdf

  • But goes back further to, for example, the 1987 share market crash where Kerr Neilson's team at BT had in place alot of portfolio "insurance" an das a result their fund lost far far less thant most managers during that crash.

  • But also keep in mind that:

  • Asia-ex Japan markets are significantly cheaper (on CAPE terms) than US or European markets

  • and they have far greater growth prospects.

  • It actually is quite unusual to have this combination of factors coming together. One might argue that this is the bext possible mix of qualities for an investment that medium-to-long-term investors could ask for.

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