Platinum buyback plan takes the fight to short sellers

The fund manager’s shares have rocketed as much as 14pc as it proposed a large on-market buyback.

Mr Neilson’s annual letter to shareholders, plead with customers to maintain their faith. picture: Hollie Adams/The Australian.

Plans unveiled by Kerr Neilson, the billionaire founder of Platinum Asset Management, to launch an on-market buyback of up to 10 per cent of the listed fund manager’s stock has lit a rocket under the group’s share price, squeezing out short sellers who had ramped up bets against the company.

Shares in the $3 billion fund manager surged as much as 14 per cent today, after Platinum said it would buy back up to nearly 60 million of its own shares over the next 12 months, should the stock trade at a “significant” discount to its underlying value.

Platinum shares have slid more than 20 per cent since it revealed a fall in annual profit and revenue in late August. Along with many hedge funds across the globe, Platinum has been under intense pressure to find investment returns in the low interest rate and high volatility financial environment. Short sellers ramped up bets against the company in the lead-up to its full-year results, when Mr Neilson announced funds under management plunged 15.5 per cent to $22.7 billion over the year.

Short interest in the stock hit a peak ahead of the August results, at 23 per cent of all shares. Although the number of shorters betting against the company has since moderated to 9 per cent, that remains elevated compared to the rest of the market, and well above Platinum’s recent low of a short ratio of less than 1 per cent in April.

Wednesday’s sharp price lift in Platinum shares is likely to force many short sellers to close out their bets against the group at a loss and join in on the rally.

The stock, trading at $5.54 at midday on Wednesday, is still far below its peak of $9.15 hit in February this year.

Mr Neilson, who ranked 22 in this year’s BRW Rich List with personal wealth of $1.94bn, founded the fund manager in 1994. But last year was particularly tough, despite the group’s extremely profitable business model.

The group was hit by market falls worth $1.8bn, capital outflows of $1.5bn and one large US institution’s decision to pull up stumps and withdraw more than $1bn from the company as it closed its account. Outflows also re-accelerated in August from July levels.

The high level of redemptions prompted Mr Neilson, in his annual letter to shareholders, to plead with customers to maintain their faith in his company. Over the last five years the Platinum International Fund has cumulatively risen by 81 per cent, underperforming the broader global market which has returned 99 per cent.

While Platinum said it would fund the buyback from its existing cash flows, Morgan Stanley analyst Andrei Stadnik said buying the full 10 per cent at the share price before the announcement ($4.88 a share) would have exceeded the group’s available funding.

Mr Stadnik also suggested the buyback “likely constrains future growth opportunities” such as supporting the distribution of its recently launched European fund range.

Credit Suisse, which is acting as Platinum’s broker on the buyback, upgraded the stock but said it “conservatively” assumed only a 5 per cent buyback rather than the 10 per cent announced.

“Fund performance remains weak over the medium term and we expect outflows to continue, however we note that the buyback is likely to cap further downside,” Credit Suisse said.

It’s not just Platinum that is feeling the strain in the difficult investment market. Active fund managers and hedge funds around the world are having a tough time holding on to investor mandates with returns proving harder to come by in a low interest rate environment.

Savage market swings are hampering returns and the outlook for fund managers is growing dimmer as global central banks up-end value signals with ultra-low interest rates.

Funds across the globe have been privy to an investor exodus this year as customers pull funds amid poor performance numbers and high fees — the biggest withdrawal of money since the height of the global financial crisis.