Ann: 2023.07.11 Funds Under Management - June 2023 PTM, page-113

Sorry, there were a few typos and ommisions there, that in some cases changed the message (!!!). Here is a revised spiel.
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Early this month I had a fresh, long and hard look at my PTM position. In the past I felt that the business had a sufficiently fat margin, and liquid assets on the balance sheet, that it could be expected to ride out several years of lacklustre performance without any real risk to the core business. That has rapidly changed. As the company’s funds have continued to trail the benchmarks, customer disappointment has intensified and the pace of fund redemptions have become brutal.

Funds management is a strange business. One of the key reasons Berkshire has performed as well as they have for as long as they have, is that no clients can sack Munger or Buffett. The cruel truth is that PTM continues to generate adequate returns of circa 8%pa whilst having the fortitude to continue to avoid hot sectors. The problem is that those hot sectors continue to outperform, and clients don’t care whether you are a fundamentally good investor or not, the vast majority are just not willing to pay a fee for the benefit of trailing an index that they feel(#) they can invest in themselves at minimal cost.

Almost no manager, even the few that are well intentioned, can avoid having their actions influenced by the fear of losing clients, or the desire to gain new ones. And no matter how rigorous their process, they know that clients only want outperformance. And that means their incentives are compromised. I believe PTM has managed to navigate this dichotomy better than most, and I still have considerable faith in their process, method & mindset. If they were not managing client’s money, but were rather managing their own, I would have faith that 5 to10 years from now, their fortitude will have paid off.

The problem is that client redemptions are reaching such a pace that continued under-performance on current trends could kill the core business in a matter of just a few short years. Of course, it is possible that its funds start outperforming the indices soon. After all, hot sectors do not remain hot for ever. But there is no certainty as to when this might happen, and we are now in a situation where things have become precarious, and the best we can reasonably hope for, is a stabilisation of fund outflows. Valuing the business now, on the basis of a turnaround in fund flows, given the momentum in place, is a little like betting on the Titanic turning.

So in terms of valuation, I'm willing to contemplate roughly three scenarios:

• The funds continue to provide unexciting but adequate returns, but continue to underperform the benchmarks. The current brutal pace of outflows continue, and the business needs to be wound up in a matter of a few short years.
• The funds soon start matching or somewhat exceeding the benchmarks, and fund outflows start to stabilise (not immediately).
• The funds start to substantially beat the benchmarks, the Titanic slowly starts turning.

It is quite possible that the last scenario will materialise and will at some point make my decision rather a bad one, in hindsight. The most likely market scenario that I can see, is that we soon march on to broad-based euphoria. This may mean that the laggards that PTM is backing may start beating the current hot sectors. On the other hand, it may also mean that the hot sectors continue to outperform. The bottom line is that I do NOT see the development of market euphoria (and I don't think markets are there yet) as a positive for PTM, in the main. The problem is that market euphoria can typically be expected to last maybe up to 3 years. I think it's line ball as to whether PTM can survive that. The truth is that even if PTM does start turning things around within the next bout of market euphoria, the ensuing correction (or dare I say crash, which is after all how euphoria ends) can be expected to hit PTM as hard as anyone - and then it will likely offer an atractive entry point (if it's still listed), and what's more will possibly have a long runway that suits its investing style.

Sure, PTM has subtsantial liquid, financial assets. But I, personally, do not see these as providing sufficient margin at current prices. The bottom line is that I see the downside, in terms of the operating business, as being quite brutal, but the upside (mainly just stabilisation of flows) as being relatively muted, at current prices. That's not the sort of assymetry I want to be sitting on. If management do delist the business, I can't imagine them viewing things enourmously differently (as things stand).

What's more, PTM has now delivered me very substantial, and currently very valuable to me, capital tax losses. Faced with this one certainty, and the extreme uncertainty I see in the value of PTM, I feel it has become a no-brainer for me.

If the price were to drop substantially further I may contemplate buying back in. But by my assessment, it would have to fall a long way - something that I see as being on the cards. It's sad to see the once Platinum Asset Management become an asset play.

So what lessons can I take? I’m not convinced that I made a mistake in owning PTM, or in buying when I did (my entry was after the GFC, after the float euphoria had settled). After all, I don’t think anyone can have anticipated the length of the run that hot sectors have had. The irony is that the same hot sectors that were in full swing prior to covid, were simply magnified by covid. Normally a crisis punctures the hottest sectors most. The covid crises was however very unique. I cannot hold PTM accountable for that. The one lesson I have taken is that I committed too much capital into a business whose operations are subject to market risk. As the stock fell in price, I took the opportunity to buy more, on the basis that it had become a reasonable proportion of my portfolio market value (ie, it became a “value trap”). One should not only constrain their position based on current market value, but also based on total past commitment (“sunk cost”) relative to current portfolio market value. I should have known this. In fact, I did. So my two most important lessons, which I already knew, but did not give enough attention to, I believe: (a) constrain position by sunk cost, as well as by current market value, and (b) a fund manager's fundamental value is more speculative than other businesses because it is contingent on the market gods and the nsiders are conflicted by that reality.

That said, whilst my commitment was greater than it should have been, over the entire journey, it did generate healthy dividends which very substantially softeend the blow. So whilst I do consider it my worst investment outcome ever, in terms of my portfolio impact, it hasn’t been disastrous either.

(#): Of course, the truth is that the vast majority of those "investors" will not match the indices, for they will jump from them at the wrong time, just as they are currently jumping from their PTM trust funds.