Platinum Unhedged Fund (PLA0006AU) Report & Performance

The Fund (C Class) returned 9.7% over the quarter.

While contributors to performance were quite broad, the largest pockets came from our investments in:

1. Travel – European ultra-low-cost airline Wizz Air was our largest contributor, with its share price rising 56% over the quarter as air travel demand and ticket pricing continued to rise post-COVID. Gains were also seen in our positions in Booking Holdings (+32%), Trip.com (+10%) and Airbus (+11%).

2. Semiconductors – The main fear that investors have around the semiconductor industry is the current downturn in the cycle as demand for consumer goods (PCs, mobile phones, appliances) has fallen away post the COVID spending boom. Recent results indicate the current downturn may be coming to an end, and demand in auto and industrial semiconductors remains strong (driven by content growth from electrification and driver-assistance systems). In response, our investments in Infineon Technologies (+33%), Micron Technology (+21%), Microchip Technology (+19%) and NXP Semiconductors (+8% since our first entry point during the quarter) all rose.

3. China – As we mentioned last quarter, Chinese stocks had increasingly been seen as ‘untouchable’ due to geopolitical concerns; the fear of loss took over and investors fled, resulting in heavy discounting in stock prices in the process. As confidence in the economic recovery builds following the end of the zero-COVID policy and Chinese companies begin to report stronger results and outlooks, this fear is subsiding, and investors are increasingly returning to this market. This combination saw gains across a number of our Chinese holdings, in particular, Tencent (+22%) and Weichai Power (+20%).

The Fund (C Class) finished the year on a strong note, rising 11.0% over the December quarter.

The main contributors to the Fund’s quarterly return were clustered in our Chinese and European holdings. Over the year, both of these regions had become ”untouchable” for investors on account of the geopolitics for China, and access to natural gas for Europe, with stocks being heavily discounted as a result. In both cases, a more favourable outcome has occurred, with Europe showing the ability to reduce gas usage to avert the most dire energy shortage scenarios and China spectacularly throwing off its zeroCOVID policy shackles, which will drive an economic recovery far quicker than most had expected.

This more positive outlook for both regions drove large moves in our major Chinese holdings, such as Weichai Power (+41%), Trip.com (+26%), AK Medical (+27%) and Tencent (+25%). In Europe, the standout contributors were Erste Bank (+32%), Airbus (+25%), Wizz Air (+20%), Infineon Technologies (+25%) and Intesa Sanpaolo (22%).

Detractors for the quarter were relatively limited. Of the major positions, the most notable moves were seen in financial products sales/administration platform Allfunds (-14%) and precision components manufacturer MinebeaMitsumi (-8%). In each case, the driver of these falls was more market-related than stock-specific, with Minebea reacting to the recent strengthening of the Japanese yen, and Allfunds, whose revenue relies on a percentage of assets under management, gyrating with bond and equity markets.

The Fund (C Class) returned -1.0% over the quarter. The major global equity markets continued their downward trend, with the US (-5%), European (-4%), and Korean (-8%) markets all reaching new 52-week lows. China was the hardest hit, with the Hang Seng China Enterprises Index (HSCEI) and A-Share indices falling 22% and 15%, respectively. Chinese stocks are in a deep bear market, with the HSCEI now 50% below its high in February 2021. The other major factor in markets was the strength of the US dollar (USD).

The continued interest rate hikes in the US (widening the positive interest rate differential between the USD and major foreign exchange pairs) and the fact that the US is now an energy-independent/exporting nation in a high-energy price environment are driving continued USD strength.

Over the quarter, the USD appreciated another 6-10% vs. the major pairs, and for the year to date, it has appreciated 12% vs. the Chinese yuan, 13% vs. the Australian dollar, 16% vs. the euro, 21% vs. the British pound, and 26% vs. the Japanese yen. Consistent with the large fall in the Chinese market, our major detractors over the quarter tended to be our Chinese stocks, with major holdings Weichai Power and Tencent falling 40% and 25% over the quarter, respectively. Outside of this, we saw low/mid teen-style declines in tapware and bathroom fi xture manufacturer Lixil (-17%), 5G network equipment player Ciena (-12%), and testing and inspection provider Applus Services (-13%). The fall in Weichai’s share price was linked to its 45% ownership of Kion, a leading German manufacturer of warehouse automation solutions and forklifts, which issued a profit warning on its automation division.

Despite strong demand for the product (increasing labour costs plus improvements in automation capabilities are driving a wave of warehouse automation demand), profi ts in this division have been crunched due to component shortages, cost infl ation and insuffi cient pass-through mechanisms written into legacy contracts. While this is disappointing, the structural demand for automation equipment is real, and Kion should be able to restore profi tability as it works through the problem contracts over time. After the price fall, Weichai is trading on roughly 6x normalised earnings, with US$1.8 billion of net cash on the balance sheet.

The Fund (C Class) returned 3.2% over the quarter and 32.8% over the year. The global economic picture is still one of strong recovery. The pace of consumer and manufacturing activity in Europe (which had been lagging the US and China) accelerated over the quarter, while company surveys monitoring activity in retail, capital equipment, housing and automobiles point to the US economy being ‘red hot’.

Overall, we expect the global recovery to continue, albeit naturally slowing from its current pace. Investors are alert to any situations that may derail the recovery and two events received a lot of focus in this regard. The first was the Chinese government’s attempts to lower commodity prices by slowing the build-out of some of its infrastructure projects and then announcing they would sell a portion of their strategic stockpiles of copper, aluminium etc. to increase supply. The second event was the messaging from the US Federal Reserve (Fed) that due to the strength in the economy and labour market, they would bring the timing of their first interest rate increase slightly forward. These small steps toward policy normalisation generally drove profit taking in the more economically sensitive stocks and saw buying demand return for high-growth/high-priced names. This trend was evident in the portfolio, with our technology and growth holdings performing better than our cyclical holdings. The standout contributors to the Fund’s performance over the quarter were two Chinese stocks, CStone Pharmaceuticals and Li Ning.

The Fund (C Class) returned -12.1% for the quarter and -9.4% for the year.¹ The Russian invasion of Ukraine and the government and corporate-imposed sanctions that followed was the catalyst for the Fund’s return over the quarter. The first-order effect of the removal of Russian exports from global supply chains (Russia is a major exporter of oil, gas, steel, fertiliser and grains) at a time of already heightened global inflation has required investors to question their prior assumptions around the likelihood of a recession and the future level of interest rates. The invasion has also put the spotlight back on the state of US-China relations, with foreign investors selling Chinese stocks in fear of sanctions being broadened to that country. In terms of our holdings, price falls tended to be clustered in our Chinese companies, businesses with exposure to Eastern Europe, and industrials. Our commodity producers posted strong gains.

The Fund (C Class) returned -0.3% for the quarter and 32.9% for the year.’
Over the past six months the value of the Fund has effectively tracked sideways, rising close to 3%, whilst the broader market has pushed higher. There are two main factors behind this:
1. The first is, since late May, a number of our companies with cyclical exposure have seen their stock prices fall 5-15%, as the delta variant spread rapidly around the world and investors began questioning whether the economy will begin to weaken from here. These pullbacks have offset gains elsewhere in the portfolio.

2. The second is the market reaction to the regulatory wave in China, which resulted in a blanket market sell-down. Roughly 20% of the Fund is invested in China, and in aggregate those stocks fell 10%, representing a drag of 2% on performance. Whilst a 2% drag is not large in absolute terms, it meant that 20% of the portfolio did not participate in the rally seen elsewhere.