Why is Kerr Neilson paying himself half a million from Platinum Asset Management?

I was flipping through the 2015-16 Platinum Asset Management (PTM.AX) financial statements the other day and was quite surprised when I came to the remuneration section. We see there that Kerr Neilson received $488,700 in remuneration for 2015-16.

Now, under normal circumstances, that level of remuneration would be considered quite modest for the Managing Director of a company the size of Platinum. But Kerr Neilson is not your average Managing Director, he (and his wife) have an interest in just over 312 million shares in Platinum which have a market value of around $A1.8 billion.

The dividend income paid on those shares during 2015-16 was more than $A112 million! That’s equivalent to about $2.15 million per week! On 22 September 2015, Kerr received a bit over $62 million in dividends and six months later on 22 March 2016, Kerr received another $50 million.

Now, please ask yourself why someone who receives dividend income of $112 million needs to pay themselves an additional $488,700 in remuneration, which, incidentally, includes the laughable payment of $19,308 in superannuation – I don’t think he will have any problems funding his retirement!

It’s even worse in the context of Platinum’s poor performance. Platinum lost 15.5% of its funds under management during 2015-16. Of these lost funds, 43% was due to market losses, 36% was due to clients pulling funds out of Platinum and the rest was due to distributions.

The Platinum Trust Funds and Global Fund lost 7.7% of their starting value (excluding distributions). It’s hard to understand. Did they not realise that there has been a bull market in the US for a few years now?

For some unfathomable reason, Platinum has always preferred Japan and Europe over the US, despite the fact that the US is home to the vast majority of quality companies in the world and US levels of research and innovation leave most of their competitors in the dust.

I made the observation in a 2011 article (on this site) that:

The other problem is that Platinum seems to form (not always accurate) macro- economic views and then invest accordingly (and I might add somewhat stubbornly, being slow to change a view when circumstances clearly change).

This I believe is still the case as is their flawed concept of a division of funds based on geographic areas (with no US fund!) and specific industry funds.

I just don’t know how any shareholder could support Platinum’s remuneration policy (as far as Kerr is concerned).

I should say that I don’t have any shares in Platinum and have no intention of buying any.

Platinum had, for a long time, a lot of the Australian market in international shares largely to itself, but it now has a number of formidable listed competitors that will continue to make life difficult for them.

Cadence and Magellan struggle while WAM and ALF power ahead

Readers of this blog will know that I’m highly sceptical of the ability of most Australian fund managers. However, a few that I do like are Geoff Wilson of Wilson Asset Management, Justin Braitling and his team at Watermark Funds Management and Karl Siegling at Cadence Capital.

Below is a chart of the relative share price performance of WAM.AX, ALF.AX, CDM.AX and MFF.AX (the last being the Magellan Flagship Fund).

 

As can be seen the best performer was WAM, however, the performance of ALF (the Australian Leaders Fund managed by Watermark) is really the stand out performer.

The reason I say this is because unlike all the other funds mentioned, ALF has a very low net exposure to equity markets because it generally has an almost equal exposure on the long and short side (although this does fluctuate over time).

To have achieved an 11% share price increase while paying out an approximate 6.7% fully franked dividend is very impressive, it’s even more impressive when you consider the significant “insurance” ALF has in place for investors through its short exposure.

ALF has out-performed the All Ords Accumulation Index over one, three, five and seven year periods. And it has done it with far less volatility than the other funds.

Cadence Capital’s performance over the last year has been poor. However, if we were to factor in Cadence’s very high dividend, the overall performance would be better, but still negative. What is probably more worrying that the last year’s performance is the under-performance (against the All Ords) over the last three and five year periods.

Looking through Cadence’s top portfolio positions, we see a 14% exposure to Macquarie Group and also exposure to some of the more crowded American hedge fund picks – Google (Alphabet), Facebook and Gilead Sciences. (I must admit that I had an exposure to Gilead that I was very fortunate to exit with a profit, it’s a truly incredible company, but there appears to be no immediate catalyst to take its share price higher).

A 14% exposure to Macquarie is too much for me, I wouldn’t dream of putting 14% of my own funds into Macquarie.

A look at WAM Capital’s top exposures shows that the very canny Geoff Wilson tends to diversify more than Cadence, his top exposure is only 4% (to Hunter Hall Global Value Ltd).

WAM is also getting a boost on the chart above because it trades at a significant premium to its net tangible assets (NTA) whereas the share prices of CDM and ALF are much closer to their NTAs.

The Magellan Flagship Fund (MFF) has easily been the worst performer out of the four. As it only pays an approximate 1% dividend, it would still have a double digit reduction in value with the dividend factored in.

As I said in a previous article, Magellan benefitted enormously from the devaluation of the Australian dollar from above parity with the US dollar to its current level. It has also benefitted greatly from the US bull market. In the absence of these two factors pushing the share price, MFF should continue to under-perform.

I will continue to watch with interest!