Things can change very quickly in financial markets. Platinum Asset Management has been caught out by the severity of the latest COVID outbreak in China and the Russia/Ukraine conflict in Europe. Our recommendation has reduced to Hold.
At the recent interim result, we noted several aspects had turned in PTM’s favour and the performance of its key funds was improving. But the fairytale has ended abruptly as Russia invaded Ukraine and China experienced a severe recurrence of COVID-19, particularly in Shanghai.
Asset allocation is a critical decision for a fund manager to get right and unfortunately for PTM, it has suffered a double whammy by being overweight China (currently 18% of its International Fund, compared to a 4% benchmark weighting) and overweight Europe.
The relative performance of its key flagship International Fund is now -15.5% on an annualised basis compared to its benchmark. Not only has this caused a significant mark-to-market fall in PTM’s total FUM of around $2.5 billion across February and March but has led to net outflows of about $0.5 billion at the same time. The aggregate fall is over 10% of PTM’s total FUM and will hurt the company’s earnings.
Investment view
Consensus forecasts have adjusted a little but not sufficient, in our view, to allow for the large mark-to-market fall in FUM which may not be over yet. This has been a sudden reversal of fortune for PTM but has been amplified by its unfortunate asset allocation error.
Gone too is the prospect of pinching some market share from Magellan which has also recently stumbled although for different reasons.
PTM’s balance sheet remains a point of strength and the company could still contemplate a share buyback. The net dividend yield remains attractive but on its own is not sufficient reason to retain a Buy recommendation.
We see heightened earnings risk in PTM following the recent poor fund performance and this now justifies a Hold recommendation in our view.
Risks to investment view
Fund performance, net flows and key person risk are critical indicators for a funds management business.
Recommendation
We have reduced our recommendation from Buy to Hold.
