Kerr Neilson on active management: ‘Platinum is nearly the last man standing’

Veteran stockpicker Kerr Neilson can’t get his head around Nvidia’s valuation and says Platinum’s big problem was its move to decouple investment performance from rewards.

Kerr Neilson, co-founder of Platinum Asset Management, says the market turmoil has thrown up some opportunities - but Nvidia’s still too pricey. Picture: Hollie Adams/The Australian

Platinum Asset Management lost its way when stockpicker rewards were untethered from investment performance, according to its co-founder and billionaire Kerr Neilson.

The global equities house which last week announced it was in merger talks with Melbourne hedge fund manager L1 Capital, has suffered years of underperformance in part due to an unrelenting bet on China at the expense of US growth stocks.

“If you’ve been waddling around for several years without any performance culture, you need outsiders to come in and enforce it. What I had been saying is the sooner we make the change, the better. And it’s dragged on a bit, so that’s the cost,” he said.

Mr Neilson, who has been publicly critical of Platinum’s management since he stepped down as CEO seven years ago, supports the merger and sold close to half of his 21 per cent shareholding to L1, pocketing $30m in the process.

The merger isn’t cheap for Platinum, he admitted, but he says it’s the price the firm has to pay for errors of strategy.

As Mr Neilson sees it, Platinum’s problem has been weak direction that left its analysts rudderless.

“We had very weak leadership. We were generating ideas, but no one was clear about how much emphasis to place on different ideas. There’s some really talented people there … They just need to work together better.”

L1 manages money privately and in ASX-listed invested companies such as the $2bn L1 Long Short Fund.

Mr Neilson holds Google and Amazon in his portfolio, but not chip-maker Nvidia, the architect of Wall Street’s 2024 gains. He struggles to see past its valuation and is waiting for a decent market sell-off before he considers buying in. Never mind that the stock is 25 per cent off its January high.

As ever for Mr Neilson, one of Australia’s best-known money managers, the China factor is front of mind.

“Nvidia’s not a flash in the pan. It’s certainly highly valued at 20 times historical sales, which seems ridiculous, but it’s difficult to appraise because the Chinese will substitute its chips over the next several years. And if you’re buying something on 20 times sales, you are actually talking about several years forward,” Mr Neilson said in an interview.

The big question is to what extent the market leader is protected from shifts in the fast-moving AI world, he said.

“It’s not beyond me buying in but it’s a challenge for me to justify it. Our arrogance is so deep that we forget we’re talking about an urban population that is greater than North America and Europe combined. China is turning out 450,000 mechanical engineers a year, in America it’s fewer than 100.”

Chipmakers aside, Mr Neilson is excited by the April market turmoil and the opportunities it has turned up.

“There’s been a big de-rating of companies that would compound at 6 to 10 per cent a year, there’s been a huge devaluation of their multiples. That’s interesting. We’ve actually had a phantom bear market among some of these great companies,” he said.

“Companies like Atlas Copco and the like, that are very used to growing very steadily, their price/earnings ratios used to be in the 20s but now they’re below that.

“Then there’s the service companies that are outside of this realm of tariffs, they’re having a good time because the discount rates in valuing stocks hasn’t shifted much yet. Companies like Flutter, Booking.com, Uber, companies that offer a service which doesn’t get interrupted.”

Stockpickers are a dying breed but for Mr Neilson, who co-founded Platinum in the active management heyday of the 1990s, it’s an exciting time for those left.

“Platinum is nearly the last man standing. And the fewer there are, the more interesting it’s going to be,” he said.

The discussions with L1 are still at a preliminary stage, and there is no guarantee that any transaction will eventuate. Both parties are now conducting due diligence, and an outcome expected in the coming weeks.

If it goes ahead, L1 shareholders will own 75 per cent of the new Platinum, leaving Platinum’s shareholders, including Mr Neilson, the remaining 25 per cent. Platinum shareholders will also receive performance fees of the first 5 per cent of absolute returns from the L1 Long Short Fund, with returns above this level going to the original L1 shareholders.

Platinum shares climbed close to 5 per cent on Friday, adding to the 11 per cent pop delivered in Thursday’s trade on the merger news.

The stock is still down 37 per cent since Phil King’s Regal Partners walked away from a potential takeover in December.

Originally published as Kerr Neilson on active management: ‘Platinum is nearly the last man standing’