Platinum International Brands Fund (PLA0100AU) Report & Performance

The Fund (C Class) delivered a solid 6.6% return for the quarter, lagging the broader market indices due to very defensive positioning (average net long exposure of 60% during the quarter).1

Over the year, the Fund gained 22.8%, which is considerably better than the general market. Of course, this performance was in part a rebound from a very weak prior year, but the three-year return of 15.5% p.a. is also quite satisfactory.

Interestingly, the first week of the quarter generated approximately 75% of the Fund’s total return, as the rally in our Chinese holdings continued. This dynamic then reversed with rising geopolitical tensions leading to a steady sell-off in China through most of the rest of the quarter, reinforced by weaker-than-hoped-for economic data as post-lockdown activity was impacted by a major wave of COVID infections.

The weakness in our Chinese holdings and the headwind from our short positions (-2.8% contribution to performance) were mostly off set by strength in some of our larger US and European positions. In particular, social media giant Meta Platforms rose 76% in the quarter as management demonstrated a firm commitment to reining in expenditures to shore up profitability. Leading low-cost European gym chain Basic-Fit rose 48% as market concerns around a potential need to raise capital proved unfounded, helped by European energy prices falling from extreme levels, thus improving the overall consumer demand outlook. This general improvement in sentiment in Europe also buoyed our positions in jeweller Pandora (+34%), apparel brand owner SMCP (+26%), car manufacturer BMW (+21%) and discount general merchandise retailer B&M European Value Retail (+17%).

Major detractors from performance included Chinese e-commerce player JD.com (-22%) and food delivery network Meituan (-18%), both falling on fears of increased competition from Bytedance-owned Douyin (China’s TikTok). Leading Vietnamese electronics retail chain Mobile World Investment fell 10% as a post-pandemic pullback in sales magnified the impact of general economic weakness stemming from falling export orders, coupled with issues in the property and banking sectors.

A dramatic rally in Chinese stocks from their intra-quarter lows helped the Fund (C Class) deliver a pleasing 10.7% return over the quarter.

The stocks rallied as deeply negative investor sentiment on China’s government leadership and economic policies began to reverse as the likelihood of a near-term exit from zero-COVID policies increased. The solid quarter-end performance result, however, understates the extent of the rebound following a very rocky start through the end of October, as the Fund fell 6% due to increasing investor fears around China’s economy, even as global markets rose almost 7%, boosted by strong performance in the US and Europe.

From its intra-quarter lows, the Fund rose 16.7%. Despite the strength in global markets, our short book provided a positive contribution, assisted by the continued dismal performance of speculative former high-flyers. Of the ten stocks in which the Fund held positions that registered the largest declines in price during the quarter, eight were short positions for the Fund. This was a particularly pleasing result and contributed solidly to the Fund’s overall returns. Finally, the Fund benefited from our relatively large yen exposure and action taken in October to shift some US dollar (USD) exposure back into the Australian dollar.

The USD reversed dramatically over the quarter, falling against all major currencies from considerably overbought levels. The yen was particularly strong as the Bank of Japan signalled it may be moving toward the end of its ultra-easy monetary policy via its action to increase the target yield range for the 10-year Japan Government Bond. While the strength of the AUD and the global nature of the Fund meant that currency provided a slight negative contribution overall, our active currency management mitigated this significantly.

It was a quarter of two halves for global equity markets, with a wild intra-quarter ride that resulted in a round-trip roughly back to where we started. The Fund (C Class) returned -1.5%. Stocks rallied strongly through to mid-August, led by many of the weakest performers from the June quarter. Through this period, the Fund gave up all of the positive relative performance it had enjoyed in the three months to June, largely due to losses in our Chinese stock holdings and our short positions in strongly rebounding US consumer discretionary stocks. In the second half of the quarter, our view of the rally being a brief positioning-driven event proved correct, as the market sold off through to the end of the quarter on further strong US infl ation prints and another hawkish rate increase by the US Federal Reserve (Fed).

The rapid increase in interest rates has caused market turmoil, leading central banks, such as the Bank of Japan and the Bank of England, to intervene in the currency and government bond markets, respectively, to ensure orderly pricing. Rising interest rates in the second half of the quarter benefi ted our short positions, both in relation to “bondproxy” consumer staples and economically sensitive consumer discretionary stocks. Soaring European energy prices compounded this effect, leaving consumers in that region with less in their pockets to spend on daily needs, let alone splurge on occasional wants. Indeed, investment bank Jefferies estimates income available for discretionary expenditure in the UK could fall 6%, even with increased government subsidies for household energy bills.

Global markets experienced a great deal of turmoil in the quarter as rampant inflation inspired new levels of central bank hawkishness, which withdrew liquidity from markets, compressed valuation multiples, and raised fears of a forthcoming recession and thus deterioration in corporate earnings. In this context, it is pleasing that the Fund (C Class) returned a positive 5.6% for the quarter. The US bore the brunt of the selling in local currency terms. Especially hard hit were the more speculative growth stocks, as well as major benefi ciaries of the pandemic and/or related stimulus.

European markets fared somewhat better, but consumer businesses exposed to discretionary spending were sold off aggressively as their customers faced surging energy prices as a result of the ongoing Russian invasion of Ukraine, leaving less money for discretionary purchases. In stark contrast to recent experience, our Chinese holdings boosted returns signifi cantly (+5.1% contribution), as major cities emerged from harsh lockdowns and the government acted to stimulate the economy while delivering more favourable messaging around the policy outlook in relation to digital platforms. The hangover from consumer stimulus in the US and risks to valuations from infl ation and rising rates are factors we have been discussing for some time,² particularly in relation to spending on consumer durables that was pulled forward due to pandemic lockdowns. Our short positions against individual stocks exposed to these dynamics, as well as broader indices, contributed 8.6% to the Fund’s return for the quarter.

We experienced a particularly difficult period for performance in the March quarter, with the Fund (C Class) buffeted by multiple negative market currents that resulted in a decline of -20.5%.

While the general market was also weak, Fund performance was particularly affected due to our sector and geographical positioning, which overrode the benefits of our low net market exposure and gains on our short positions (+1.6% contribution). Rapidly increasing interest rates led market instability earlier in the quarter, but it was the Russian invasion of Ukraine and its consequences that was at the core of the Fund’s losses – and not just in relation to our direct Russian exposure.

The ramifications of the invasion echoed through global markets, particularly businesses directly exposed to Central and Eastern Europe, and those reliant on commodity inputs or supply chains disrupted by the conflict and the related sanctions and fears of further sanctions.

The Fund held a position of 6.1% in two Russian stocks immediately prior to the Russia-Ukraine invasion. These were in TCS Group (3.2%) and Sberbank Russia (2.9%). Our assessment was that these would prove attractive investments should an invasion not occur, or should there be a speedy resolution to a conflict with a stern but ultimately manageable Western response. We viewed these two scenarios together as more likely than what has in fact eventuated – a bloody and drawn out conflict with a severe Western response and financial market reaction.

Global stock markets extended their upward trajectory over the June quarter, buoying the Fund (C Class) to a 5.1% return. Unfortunately, we did not fully participate in the market upside, as we maintained a relatively low net invested position due to our view that many pockets of the market are heavily overvalued.

We observed interesting changes in stock correlations, with returns on individual stocks beginning to diverge greatly from their typical peer groups, as investors reappraised differences in business quality and growth outlook. This contrasts with recent times, where stocks that have similar high-level characteristics have often moved in lockstep. This dynamic was particularly pronounced in the ‘hot’ or speculative areas, but extended to previous beneficiaries of the ‘reopening’ trade, as it has become clearer which companies are benefiting the most from government stimulus spending and a return of customers to stores.