In its most recent quarterly report, Platinum Asset Management pointed to signs of speculative fervour in the US market, noting that while the positives of a Trump election victory are being priced in, the risks of higher inflation from tariffs and labour market pressures due to immigration restrictions are being overlooked.
As a result, Platinum’s co-founder and co-chief investment officer, Andrew Clifford, disclosed that one key adjustment the fund manager has recently made to its international hedge fund is in its short book.
“The Trump victory has triggered a speculative boom in long-dated technological project stocks, with a huge run-up in the market capitalisation of companies associated with crypto, quantum computing, space launches, next-gen nuclear reactors and electric flying taxis,” Clifford said.
“Outside of crypto, the common denominator of all these companies is that the commercial, technological and regulatory hurdles to bringing these concepts into profitable existence are enormous.”
Clifford pointed out a surge in capital flowing back into leveraged vehicles, with the traded value of leveraged single stock exchange-traded funds now surpassing the highs seen in 2022.
“There has also been a big spike in single stock option volumes,” he said.
“This is reminiscent of the market action seen during the 2021 bubble peak, with the difference this time that it is happening while interest rates are high! This means we lack the catalyst of rate hikes bringing an end to the party, albeit given the amount of leverage being used, a simple change in trend towards profit taking can be all you need.
“Overall, in recent weeks, we have been upping our short book directly targeting these areas but are not close to max position sizes as we finesse the catalyst/timing.”
Expanding on the situation across the pond, Clifford noted that US valuations are soaring as investors credit the Trump administration with solving geopolitical issues, cutting taxes and boosting manufacturing. This optimism has lifted cyclical industrials, pushing their valuations from high teens to the high twenties and low thirties.
In this environment, Platinum Asset Management is looking for businesses with modest starting valuations where those valuations have the potential to be higher.
“We want to see a clear case for how profits will be higher in three years and reasons why investor sentiment around the company can improve,” Clifford said.
While admitting that avoiding the US/technology bandwagon has come at a “large opportunity cost” over the past two years, with the firm reporting its international fund underperformed significantly over the past year, Clifford said Platinum feels “now is the time to stay disciplined”.
“In our portfolio, we want to be rotating into companies where the extremes are already discounted whilst building positions in companies where earnings can be higher in three years’ time. If we do this, good returns can follow.”
Platinum recently found itself at the centre of acquisition rumours, with Regal putting a bid for the firm before deciding to withdraw amid suggestions of interest from Challenger, Wilson Asset Management and Paradice Investment Management.
In December, Morningstar’s equity analyst told InvestorDaily that recent bids highlight how boutique asset managers like GQG and Platinum lack a sustainable competitive edge and are increasingly vulnerable to both stronger active managers and passive investments.
Shaun Ler noted that boutique managers face higher redemption risks compared to “moaty” asset managers like Pinnacle Investment Management, citing challenges such as inconsistent group-level performance, limited product diversification and risks tied to a concentration of key personnel. He pointed to Platinum as an example, having experienced net outflows in eight of the past 10 years, even after excluding distributions.
His comments followed Platinum’s announcement that Regal’s planned acquisition was terminated, an event Ler said was “likely” exacerbated by ongoing net outflows at Platinum.
“This dashed hopes for shareholders seeking a favourable exit,” he said.
