Following positive feedback from readers of Unconventional Wisdom, in all Monthly issues going forward we will be providing a review and outlook on each of the managed funds that form part of Wattle’s Model Portfolio.
Hopefully this gives readers an opportunity to understand what each fund is invested into, why we continue to believe it is an appropriate investment and how it has performed. The first such fund is the Platinum International Brands Fund which forms part of the Thematic Bucket of portfolios.
What’s the fund?
The Platinum International Brands Fund is one of the specialist, sector funds offered by Platinum Asset Management, one of Australia’s most successful international equity managers. Platinum has around $24bn in assets under management across its eight core funds and listed investment companies. 9 portfolio managers share ideas between the various funds and are supported by over 20 investment analysts.
The Platinum International Brands fund specifically seeks to invest into global companies with well recognised consumer brand names in both their own market and around the world. Their portfolio typically includes a combination of companies from a variety of industries from iconic luxury goods brands like Louis Vuitton, to producers of food and beverages, personal care products, household appliances or other consumer staples businesses from retailers with strong regional presence to financial service providers with global branding. The target market results in the fund offering investors exposures to some of the fastest growing companies in the fasting growing economies around the world.
Where does it fit in your portfolio?
The International Brands Fund is included into the Thematic Bucket within the Model Portfolio due to the exposure it providers to one of the most important themes of our generation. The aim of the Thematic Bucket is to seek investments and exposure to unstoppable societal, environment or economic trends that are occurring around the globe on the basis that it is these changes, like the introduction of the smart phone, that deliver the greatest compound returns over the long-term.
In the case of the International Brands Fund, it provides an exposure to the explosion in the middle class around the world, but particularly in Asia. Our view and a commonly accepted view around the world is that the increasing wealth in Asia, particularly India and China, will result in substantial changes to the order of the global economy. Take for instance the fact that of the next 1 billion people to enter the middle class around the world, according to Brookings Institute, 88% will be from Asia. Whilst China is important to this figure, 380m will come from India.
The number of people in the middle class is expected to reach 3.2bn by 2020 and 4.9bn by 2030 with figures suggesting 60% of these people will be in Asia. This provides an incredible platform for consumer brands and related businesses as consumption patterns change. We know that China and India combined are already contributing more to consumption that the US middle class, but this is expected to grow exponentially over the next 20 years to represent some 39% of global consumption.
What does this mean for investors? It means that consumption patterns will change significantly throughout Asia as the transition occurs. The many things we take for granted in Australia, like car ownership, public healthcare, social security, smart phones etc. will see substantial growth in China and India as more people have more wealth and demand better products and services. Generally when people move into the middle class their consumption patterns change with a more towards higher quality protein rich foods, like meat and fresh food, and a focus on services rather than goods. The penetration of car ownership in the China and India is still a long way behind the US offering room for substantial growth, as is the level of domestic and overseas travel.
With more people able to spend more money any number of sectors will have access to these theme from day-to-day housing products, to leisure activities, better healthcare, aged care of ailing parents, financial services as people seek to invest or save money, IT and smart phones and eventually a demand for cleaner energy like that which is occurring in the developed world. One of the major pressures will be on infrastructure as more people seek to travel internationally, more people own cars and more goods are required to be imported. The opportunities are huge. As an example, consider that Starbuck’s has 30,000 locations worldwide and already 3,000 of these are in China after only really beginning the expansion this decade. This is expected to double by 2021 as demand grows.
What does it invest in?
The International Brands Fund offers a well-diversified portfolio with a focus around consumer companies as can be seen in the chart that follows:
The portfolio is also diversified across many countries, but with a focus around China and greater Asia, which represent around 45% of the portfolio today.
What are the major holdings?
The top holdings provide an interesting insight into the approach of Platinum, combining the well-known consumer brands Facebook and Alphabet, that generate most of their revenue by offering ads on their platforms, with a range of retailing, media and consumer staples businesses. It’s important to keep in mind that this portfolio is actively managed, meaning investments may be in the portfolio for as long as several years and as short as just a few months.
Facebook and Alphabet are owned due solely to their global penetration and the fact that both have only really scratched the surface in China and India. They offer incredible value for the size and quality of the underlying businesses which meet Platinum’s focus on buying undervalued companies.
China Zhengtong Auto Services are one of the largest distributors and servicing providers of premium brands in the Middle Kingdom. Their portfolio includes the distribution of Porsche, BMW, Land Rover, Jaguar, Audi, Mercedes Benz, Volkswagen, Toyota and even Cadillac. Unfortunately, the weak performance of the Chinese economy in the December quarter impacted on the share price of Zhengtong and the performance of the fund but has since recovered strongly.
Schibsted is a Norwegian media group who own a series of newspapers but most important is one of the world’s leading online classifieds businesses reaching over 200m through their 18 countries of operation in parts of Europe and Asia. More recently they have expanded to invest into ambitious growth companies seeking to disrupt the media sector around the world.
Sina Corp is the owner of Chinese twitter-like business Weibo, which has over 50% of the micro-blogging market in the country from over 500 million users. The company is adding 20 million users per month as the growth in smart phone penetration in China continues. The company also offers a mobile network and digital sports media through ownership of the rights to a series of major global sports like the Premier League, Champions League, Tennis and PGA Tour.
Jiangsu Yanghe Brewery fits the consumer brands mould as the producer of one of China’s 8 famous spirits, with some 500 years of history. The brand targets the younger demographic through its aspirational marketing and products, not unlike the success of craft breweries in Australia. Alibaba speaks for itself being one of the largest businesses in the world, offering e-commerce, retail, internet and technology services to the Chinese population and eventually to the world. The company is like the Amazon and eBay of China, as well as offering cloud computing services, financial products and bank accounts through its subsidiary Ant Financial.
How has it performed?
The fund struggled towards the end of 2018 due to its large Chinese exposure and the significant market falls that occurred there as the US-China trade war appeared to impact export growth, delivering a return of -10% for the quarter ended December 2018 and -8% for the year.
However, it has rewarded investors patience in 2019, delivering a return of 7.7% in February, above the benchmark of 5.2% and 13.7% for the 3 months, well above the 5.7% of the index. Most importantly the fund has a track record of consistently outperforming its benchmark delivering 14.7% per annum compared to just 3.1% since 2000. This sort of consistent outperformance doesn’t come with luck, nor is it a smooth process, but we continue to have confidence in both the theme behind the fund and its investment team to deliver for investors.
What income does it provide?
The performance of managed funds is consistently misunderstood by many investors, as a result we thought it worth providing a refresher on their operations.
A managed fund is structured as a unit trust, which is similar to a typical family trust, in that all profit that is generated, including realised capital gains and dividends must be distributed to unit holders at the end of each financial year. If there is no profit, due to either investments being sold at a loss or no investments being sold at all, then the fund may not make a distribution to unit holders for any given period.
Throughout each financial year the unit price of the fund will increase and decrease in line with the value of the underlying share portfolio, priced on a daily basis. Investors are able to redeem their investment for this price at any time with funds payable in just a few days.
When it comes to distributions, Platinum generally pays these only on the 30th of June each year and they can be substantially, with around 20% of capital distributed in June 2018 after the fund had an exceptionally strong financial year. When this distribution is announced, the unit price of the fund reduces by the same amount, as the cash is no longer part of the portfolio, rather it becomes that of the unit holder. This is no different to a stock going ex-dividend and falling by the dividend amount.
The result of the fund being required to distribute all gains is that the unit price will generally stagnate around your purchase price as any positive performance is paid out in cash each year. The last few years distributions are worth noting:
- FY 2018 – 0.5999 cents per unit or 20% of the unit price;
- FY 2017 – 0.3151 cents per unit or 11% of the unit price.
As you can see, the performance has been strong but with a significant amount of capital paid out to unit holders meaning the unit price shown on Portfolio Valuation Report appears to have reduced.