Investing - What Matters!

17 Dec 2014

After years of great domestic returns, Australian investors should surely now be asking have things changed and whether they have enough foreign share exposure.

The more one travels, the more one’s perspective changes; one discovers locally generated myths that to an outsider are clearly aberrant and yet locals treat them as a certainty.  When discussing investments with Australians, how often does one hear about the benefits of owning property or the dangers of investing abroad on account of exchange rate (movements)?  Fortunately, there are periodic reality checks and importantly, following the GFC, there is now greater circumspection as to the merits of negative gearing.  Hitherto it was all about the positive attributes of leveraging an investment but now the cost of the bet going the other way is better understood.

So often it has been our experience that imperfections in the pricing of share investments arise from two human behavioural biases. They are interlinked and relate to over-emphasising the recent experience and extrapolating the current into the distant future. These short cuts are a way many of us try to deal with the overload of information and they give us a simple method for dealing with seemingly complex systems.

Why they are so damaging is that the narrative can carry huge conviction but if not married to the appropriate price, it has no worth.  When assessing risk one is evaluating potential gain/loss weighted against its likelihood.  A way of saying this is that a low probability of an event encourages us to either ignore it or to see it as being cancelled out by the potential gain.  Remember though that a total wipe out is just that, and to define outcomes without a view of the very worst case will be to underestimate risk.  This leads us to the essence of this article.

Australian investors seem to have a predilection for Australian property and Australian-based listed companies.  This faith has built over the years on account of a protracted period of population growth and prosperity: 21 years without any annual contractions of the economy.  It has been further reinforced by the falling cost and freer access to borrowings.   A relatively strong labour market which has contributed to annual rises in real wages has further enhanced this feeling of well-being and Australians have responded by taking on progressively more debt.  In the late 1970s, debt to personal income was 40%, by 2013 it had risen to 150%.  As Mr George Soros will tell you, the notion of reflexivity is built on participants mutually reinforcing a trend, until they don’t.  Disturbance at the point of self-organised criticality can be triggered by a surprise event that invariably seems trivial in relation to the damage done.

Far from gaining comfort from a long-established trend, it is wise to progressively raise one’s scepticism as the trend ages and matures.  How does one know a trend is ageing?  Simply by observing crowd behaviour to identify when the crowd no longer expresses doubt about the trend despite changing momentum of its underlying drivers.

In the residential property market the experience has been delightful for those well-entrenched.  We all know the case for property but seldom are the gains expressed in compound returns and seldom are holding costs and repairs/embellishments fully accounted for.  Most point to the gains in tens of thousands of dollars, which in most cases has been augmented by considerable mortgage leverage which they would never dream of applying to a long-term portfolio of shares. 

This same comfort seems to apply to Australian-based listed companies.  It is well-founded and perhaps a lot more justifiable than their faith in residential property.  However, the listed sector has become increasingly skewed to the major banks/insurers and the big two miners.  These now account respectively for 45% and 17% of the entire market’s capitalisation.

When we look at valuations on the cyclical adjusted profits, the case is perhaps justifiable but against similar opportunities abroad, in most cases, valuations here look uninteresting.

Looking at the Australian banks separately, relative valuations are at a 30 year high and typically 80% more expensive than a portfolio of world banks!  What would happen to their profitability if the government asked them to hold more capital?

Lastly, after a great innings that has been fuelled by the Chinese miracle, surely now is the time to be questioning the underlying drivers of the Australian dollar.  The terms of trade have in all probability completed a huge bull market and in a world with less reserve intervention, there are perhaps fewer Central Banks looking to place their surplus funds in the Australian currency.

It is a fact that the function of markets is to ration the allocation of money.  For the majority of participants, precedent rules their thinking but the smart money systematically analyses what is changing rather than simply relying on the historic trend.

Over the last 20 years to December 2013, Australian equities have been superb, giving an aggregate compound gross return of 8.7% pa, according to the 2014 long-term investment report (ASX, Russell Investments). Residential property across the country has averaged 9.9% pa over the same period while international shares have delivered 8% pa.  The Platinum International Fund has outperformed all these markers… but that is not the message.

The key take-away is that after years of great domestic returns, Australian investors should surely now be asking, have things changed and whether they have enough foreign share exposure.

DISCLAIMER: The above information is commentary only (i.e. our general thoughts). It is not intended to be, nor should it be construed as, investment advice. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. Before making any investment decision you need to consider (with your financial adviser) your particular investment needs, objectives and circumstances. The above material may not be reproduced, in whole or in part, without the prior written consent of Platinum Investment Management Limited.

You may find interesting

Terms and Conditions

Dated: 1 March 2019
IMPORTANT NOTICE – Please read this important notice before proceeding.

This website,, is operated by Platinum World Portfolios PLC, a variable capital investment company incorporated under the laws of Ireland under Registered Number 546481 ("the Company", “we” or “us”).

By proceeding to access, view or download information from this website, you acknowledge that you have read, and agree to be bound by, the following terms and conditions. If you do not agree to these terms and conditions, you must not use this website.

  • Distribution of the information contained on this website in certain jurisdictions may be restricted by law. The information contained on this website is intended only for persons and entities in those jurisdictions where access to such information and use thereof is not contrary to local laws or regulations. Accordingly, all persons who access this website are required to inform themselves and to comply with such restrictions. In addition, this website and its contents have not been prepared for and are not intended for access by US persons as defined in the Securities Act of 1933.
  • For UK persons only: You are about to enter a website which contains information aimed at professional clients within the meaning of Article 4.1(10) of the Markets in Financial Services Directive 2014/65/EU (MiFID II) (“Professional Client”). If you are a UK person, by entering this website you confirm that you are a Professional Client. No UK person other than a Professional Client should act or rely on this website. Platinum UK Asset Management Limited (“PAM UK”), 20 North Audley Street, London W1K 6LX is an appointed representative of Mirabella Advisers LLP, which is authorised and regulated by the Financial Conduct Authority - number 606792.
  • When using this website, you are responsible for complying with all applicable local, national and international laws and regulations, including those related to data privacy and intellectual property. It may be illegal to access or download the information contained on this website in certain jurisdictions and we disclaim all responsibility if you access or download any information from this website in breach of any law or regulation of the jurisdiction in which you reside or from which you are accessing this website.
  • The investment funds, strategies and financial products and services described in this website may not be available in all jurisdictions and may not be available to some or all investors in a certain jurisdiction. Nothing contained on this website constitutes or is intended to constitute an offer or a solicitation to subscribe for, redeem or convert shares in the Company or any of its sub-funds in any jurisdiction in which such an offer or solicitation is not authorised or to any person to whom it is unlawful to make such an offer or solicitation. Investments into any fund or sub-fund referred to on this website or any other Platinum product or strategy can only be made through and in accordance with information contained in the relevant offering and subscription documents.
  • The content on this website is provided for general information only. Nothing contained on this website is intended to constitute investment, legal, tax, accounting or other advice. We strongly suggest that investors consult financial and other professional advisers prior to taking, or refraining from, any action on the basis of the content on this website and that you carefully consider your particular investment needs, objectives and financial circumstances. This website does not take into account the investment objectives, financial situation or particular needs of any person and should not be used as the basis for making investment, financial or other decisions. The information is selective and may not be complete or accurate for your particular purposes and should not be construed as a recommendation to invest in any particular investment strategy, security, fund, sub-fund or product, whether or not offered by the Company.
  • The information provided on this website is given in good faith and is believed to be accurate at the time of compilation. The Company may, without notice, amend or remove any information on or from this website at any time. Neither the Company nor any of its directors, officers or agents (including, without limitation, the Company’s investment manager, administrator or custodian) make any representation or warranty as to the accuracy, reliability, timeliness or completeness of the information. To the extent permissible by law, the Company and its directors, officer and agents (including, without limitation, the Company’s investment manager, administrator or custodian) disclaim all liability (whether arising in contract, tort, negligence or otherwise) for any error, omission, loss or damage (whether direct, indirect, consequential or otherwise). To the extent permitted by law, we exclude all conditions, warranties, representations or other terms which may apply to our website or any content on it, whether express or implied.
  • Opinions expressed on this website reflects our views only at the time at which such opinions are expressed and may depend on assumptions or projections that may not prove to be correct or are subject to change.
  • This website may provide information, articles and material, or links to such, that are written or prepared by people who are not associated with the Company. This material is only provided for your interest and convenience. The Company is not responsible for the content or accuracy of this material and any opinion expressed in the material should not be taken as an endorsement, recommendation or opinion of the Company.
  • We do not guarantee that this website, or any content on it, will always be available or be uninterrupted. Access to this website is permitted on a temporary basis. We may suspend, withdraw, discontinue or change all or any part of this website without notice. We will not be liable to you if for any reason this website is unavailable at any time or for any period. You are responsible for making all arrangements necessary for you to have access to this website. You are also responsible for ensuring that all persons who access this website through your internet connection are aware of these terms of use and other applicable terms and conditions, and that they comply with them.
  • Performance figures quoted on this website are past performance. Past performance is not an indicator of future performance. Neither the Company nor any of its directors, officers or agents (including, without limitation, the Company’s investment manager, administrator or custodian) or any associate guarantee or make any representation as to the performance of any of the sub-funds offered by the Company, the maintenance or repayment of capital, the price at which shares in the Company or any of its sub-funds may trade or any particular rate of return.
  • Your acknowledge that neither MSCI Inc. nor any other party involved in or related to compiling, computing or creating any of the MSCI index data referred to on this website makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI Inc., any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI index data is permitted without express written consent of MSCI Inc.
  • You acknowledge and agree that the collection, disclosure or use of information about you from accessing this website is subject to the terms of the Company's Privacy Policy.
  • The Company may from time to time amend the terms and conditions of accessing this website by posting an amended version of this notice on this website. You agree to continue to be bound by any amended terms and conditions and that the Company has no obligation to notify you of such amendments other than by posting an amended version of this notice on this website.
  • The Company owns the copyright in the content contained in this website (other than materials that have been included with the permission of others who own the applicable copyright). You may print a copy of any page for personal or non-commercial purposes provided that you do not remove any copyright notices or any trademarks or logos of the Company or persons or entities associated with it. Except for a purpose or a use permitted by statute, or the prior written consent of the Company, you must not copy, modify, sell, distribute, adapt, publish, frame, reproduce or otherwise use any of the material on this website or trademarks or logos of the Company or persons or entities associated with it.
  • These terms and conditions of use are be governed by and construed in accordance with the laws of Ireland, and you agree to the non-exclusive jurisdiction of the Courts of Ireland.