Platinum Capital : June 2022 Quarterly Investment Manager's Report

For personal use only

19 July 2022

The Manager

ASX Market Announcements

Australian Securities Exchange Limited

Sydney NSW 2000

By e-Lodgement

Quarterly Investment Manager's Report

The 30 June 2022 quarterly investment manager's report is attached to this announcement. For more information in relation to Platinum Capital Limited please refer to the website at:

www.platinum.com.au/Our-Products/All-Products/Platinum-Capital-Limited

Authorised by

Joanne Jefferies | Company Secretary

Investor contact

Elizabeth Norman | Director of Investor Services and Communications

Platinum Investment Management Limited

Tel: 61 2 9255 7500

Fax: 61 2 9254 5555

2 PLATINUM CAPITAL LIMITED (ASX CODE: PMC)

Investment Update

Performance

usePMC's returns are calculated using PMC's pre-tax net tangible asset (NTA) backing per share as released to the ASX monthly. PMC's returns are calculated after the deduction of fees and expenses, have been adjusted for taxes paid and any capital flows, and assume the reinvestment of dividends.

PMC's returns are not calculated using PMC's share price.

Portfolio inception date: 29 June 1994.

* Excluding quarterly returns.

^ Index returns are those of the MSCI All Country World Net Index in AUD. Historical performance is not a reliable indicator of future performance. Source: Platinum Investment Management Limited for PMC's returns; FactSet Research Systems for MSCI Index returns. See note 1, page 11.

Net Tangible Assets

The following net tangible asset backing per share (NTA) figures of Platinum Capital Limited (PMC) are, respectively, b fore and after provision for tax on both realised and unrealised income and capital gains.

S urce: Platinum Investment Management Limited.

In Brief:

• The US Federal Reserve's decision to sharply increase interest rates from 0.5% to 1.75% over the course of the quarter in response to the accelerating rate of inflation was the key driver of markets. This resulted in a significant setback for the popular growth stocks that have led the bull market over the last three years. Asia, particularly China, was the notable outperformer for the quarter.
• Our short positions were the strongest contributor to PMC's performance, adding 7% to returns. On the long side, many of our Chinese investments (Trip.com, ZTO Express, China Overseas Land & Investment) provided a positive return. Energy companies (Saras, Suncor Energy), global insurance player Beazley, and Japanese bathroom fixtures manufacturer Lixil also contributed positively.
• PMC's net invested position fell from 65% to 58%.
  The make-up changed significantly, with short positions reduced from 28% to 18%, and cash increased from
  7% to 24%. This cautious positioning continues to reflect our concerns regarding the impact of rising interest rates on what has been a very speculative stock market.
• The months ahead will likely remain volatile as markets transition away from the near-zero interest rate environment.
• The portfolio is positioned for this environment with investments predominantly comprising profitable businesses trading at attractive valuations. Short positions continue to be held in popular growth stocks and market indices to reduce the portfolio's exposure to further market declines. Ample cash reserves will allow PMC to take advantage of new opportunities as they arise.

PMC returned 0.1% for the quarter versus the market's decline of -7.9%.1

onlyThe key factor driving markets was the decision by the US Federal Reserve (Fed) to sharply increase interest rates from

0.5% to 1.75% over the course of the quarter in response to the accelerating rate of inflation. This resulted in a significant setback for the popular growth stocks that have led the bull market over the last three years. Notably, the US market was the weakest of the developed markets over the period (-17% in local currency terms), reflecting its heavy weighting to such companies. Asia (-6%), particularly China (+5%), was

usethe notable outperformer for the quarter.2

Our short positions were the strongest contributor to PMC's performance, adding 7% to returns. On the long side, many of our Chinese investments provided a positive return, a good o tcome given market circumstances. Online travel agent Trip.com (+19% over the quarter), parcel delivery giant ZTO

Express (+10%) and property developer China Overseas personalLand & Investment (+6%) were key contributors to

performance. Contributors outside of China included energy companies Saras (+99%) and Suncor Energy (+11%), global i surance player Beazley (+19%) and Japanese bathroom fixtures manufacturer Lixil (+11%).

Detractors from performance included Allfunds (European fund platform, -30%) and St. James's Place (UK wealth management, -24%). Both businesses have revenue streams based on assets under management, and as such, falling stock markets reduce short-term earnings. MinbeaMitsumi (industrial and electronic components, -14%) and Microchip T chnology (semiconductors, -23%) saw share price declines due to concerns around slowing global growth prospects.

Changes to the Portfolio

PMC's net invested position was reduced from 65% to 58% over the quarter. The make-up of that position changed

Forsubstantially, with short positions reduced from 28% to 18%, and cash increased from 7% to 24%. This cautious positioning c ntinues to reflect our concerns regarding the impact of rising interest rates on what has been a very speculative stock market.

1. References to returns and performance contributions (excluding individual stock returns) in this Platinum Capital Limited report are in AUD terms. Individual stock returns are quoted in local currency terms and sourced from FactSet Research Systems, unless otherwise specified.
2. MSCI USA Index, MSCI Asia ex Japan Index and MSCI China Index,

respectively, in local currency. Source: MSCI.

Disposition of Assets

Numerical figures have been subject to rounding. See note 2, page 11. Source: Platinum Investment Management Limited.

Net Sector Exposures

Numerical figures have been subject to rounding. See note 3, page 11. Source: Platinum Investment Management Limited.

Top 10 Holdings

As at 30 June 2022. See note 4, page 11.

Source: Platinum Investment Management Limited.

For further details of PMC's invested positions, including country and industry breakdowns and currency exposure, updated monthly, please visit www.platinumcapital.com.au.

The reduction in the short positions simply reflects that many positions were closed for significant gains. Indeed, the closure of short positions was greater than it appears, as a number of

onlynew short opportunities were identified and added during the period.

The increase in cash reflects both the banking of profits on shorts and the trimming of existing long positions that had performed well. These included Mosaic (fertilisers), China Overseas Land & Investment (Chinese residential property developer) and Glencore (mining, commodities trading).

useWe have been relatively cautious about putting funds to work in this environment, as we expect the market to provide a range of new opportunities in the months ahead. Having said that, we did add to existing positions in JD.com, Allfunds and Infineon Technologies (German semiconductor manufacturer).

Commentary

personalThe focus of markets over the last quarter has returned to inflation and interest rates. While there is much debate

round how many interest rate rises will be needed to suppress inflationary pressures and whether this pushes economies into recession, this misses the critical point for investors. The mechanism that created inflation is precisely the same one that created the extraordinary speculative bubble in stock prices. As discussed over the last two years in our reports, that mechanism was the rapid growth in money upply that resulted from the funding of government spending that occurred throughout 2020 and 2021 in

r sponse to the COVID-19 pandemic. As has been xperienced in the past, this excessive growth in money supply found its way into rising asset prices over the course of the next two years.

Now, as government spending has receded over the last 12 months, money supply growth has fallen. In the US, M2

Forg owth, having peaked at an annual rate of around 25% in 2020, then falling back to mid-teen levels during 2021, is now running at only 6%.3 In addition, interest rate rises will further suppress any potential bounce in money growth by discouraging private sector borrowing. Not only can one expect inflation to recede over the course of the next two years, but asset prices will also come under pressure. Additionally, we have the Fed starting to unwind its quantitative easing (QE) policy of the last decade. While QE had little discernible impact on the consumer price index (CPI) over the last decade, it almost certainly resulted in lower long-term interest rates. In doing so, it created a strong

tailwind for not only stock markets but across a range of asset prices, including property, infrastructure and private equity.

Of course, this is already apparent with stock markets falling this year, particularly in the more speculative end of the market. The question is how much further is there to go. Many commentators will observe that valuations already look far more reasonable, particularly for many of the large market cap favourites of recent years, such as the FANGs and Microsoft. While certainly, this is the case, we would debate whether they are at attractive levels. More importantly, though, once monetary conditions change and bear markets take hold, what becomes more significant are the real-world effects on company earnings.

We can already see that funding has dried up for start-ups and private companies, particularly in high-growth technology and e-commerce sectors. One can observe high-profile venture capital firms directing their investee companies to conserve cash and move toward profitability. Similarly, companies that have already listed and seen their stock price collapse will likely struggle to raise additional funds and will be under similar pressures to achieve profitability. Cost-cutting measures will see fewer software engineers writing code, cuts to advertising and promotional expenditures, and smaller sales teams. This will impact the sales and profits of a range of providers of software tools, cloud services and digital advertising. Additionally, the companies making the cuts will see their own growth rates slow, further impacting the price investors are willing to pay for their shares. Similar dynamics will play out across the broader economy, not just the technology sector, with impacts on profits across the board. Weakening profits will likely drive the next leg down in share prices.

At some point, we will see inflation subside and the central banks reverse their course on interest rates. The unanswered question is where will interest rates settle beyond this inflationary spike. We think it is unlikely they will return to near-zero levels, as investors, having suffered the inflationary consequences of very low rates, are likely to demand a positive real return on their funds. This means that even if inflation returns to pre-Covid levels of approximately 2%, interest rates of at least 2% to 3% should be expected. This would mean the strong tailwind of falling interest rates that have helped drive asset prices over the last decade will no longer be present. In this new environment, what has worked well for investors over the last 10 years, is unlikely to work in the years ahead.