Kerr Neilson on the foundations of his investing success – and why AI is no bubble

He’s one of the titans of Australian investing, with a career stretching back more than half a century. Kerr Neilson is the co-founder and former CEO and chairman of Platinum Asset Management, one of the first local investment houses to focus on global equities markets

Though he resigned from Platinum’s board in 2022, after stepping down as CEO in 2018, Neilson maintains a major shareholding and is still hooked on investing – as clearly shown in his recent interview on Livewire’s Success and More Interesting Stuff podcast series.

Reflecting on his family background, Neilson drew important lessons from his forebears including his grandfather and father. These were Scottish entrepreneurs who made their fortunes applying innovations in steam power to the mining of coal and other minerals.

“You saw a pattern, you understood wealth came from doing, not talking, and that had a big impact on our family,” Neilson says.

The importance of being in the game

This influenced the young Kerr Neilson through an understanding of the benefits of intellectual property rights, “and the importance of being in the game, whatever the new game is.”

He notes that steam engines were the transformative technology of the industrial revolution, during the mid-1800s onward, applying the experiences of his grandfather to the present day: “Don’t go too far from where the action is.”

In this context, Neilson regards the growing uptake of artificial intelligence within multiple industries as the “third railway boom.”

“We’ve had the first two and now we’re in the third. I feel that the change we’ve seen with AI has elongated the lives of the likes of Microsoft and Google.”

Though the high valuations of the biggest AI beneficiaries so far have prompted calls of a bubble from many commentators, Neilson rejects such suggestions. “I don’t think the stock valuations are so crazy,” he says, in part because AI technology has changed the longevity of their businesses.

Neilson emphasises the massive amount of investment these firms require to build the technology applications, estimating each of the so-called magnificent 7 are committing somewhere between $35 billion and $50 billion a year on microchips alone.

“They’re now having to spend some serious loot…[and] the marginal return on capital of these businesses is starting to deteriorate. The question, then, is do these language learning models (such as OpenAI’s ChatGPT) just become a utility?” Neilson says.

That’s one of many questions he believes remains unanswered about the AI boom – what will be the main revenue drivers for companies in the space? He draws a comparison between tools such as ChatGPT and the broader software applications such as Microsoft’s Co-pilot, which has a subscription-based model.

“So far its’ all been about language learning models, now we’ve got to find those businesses that are going to benefit from the applications,” Neilson says.

An investment research coup

Investment firms such as Platinum and others, for the most part, identify such companies using detailed analysis of individual companies rather than sector-based or broader macro-economic research. That’s now the norm for professional investors but it wasn’t always the case, as Neilson explains.

Using detailed bottom-up research was one of the ways he distinguished himself in the early part of his career in the 1970s, when he worked for a well-established pensions firm in London and later for a South African stock broker. Neilson combined his detailed research on different industries and underlying companies, with the macro assessments that had previously dominated stock selection approaches.

“I started by looking at neglected companies – there was a natural inclination for me to avoid the crowds,” Neilson says.

Alongside the combination of macro views and fundamental research, these research notes also stood out because they didn’t only focus on companies that were buying opportunities. This saw the research rapidly gain favour with the heads of the various institutions to which Neilson and his team spruiked the reports and led his South African employer, Anderson Wilson Stockbrokers, to rapidly gain market share.

Hitting Australian shores: Bankers Trust

After turning down offers of a partnership with the firm, Neilson then left South Africa for Sydney, Australia where he joined Bankers Trust in 1983. Again, his investment research approach stood out against the more macro-driven focus that was common at the time.

As Neilson explains, he invested differently, developing his own views on individual businesses with a focus on what he regarded as each firm’s “engine room.” This helped him identify quality companies that weren’t necessarily in high-performing sectors or industries.

“Sometimes, it’s just a very well-run business, there’s no moat, no catalysts, it’s just a very well run company that’s going through a bit of a lull,” he says.

A modern-day example of this, where he believes investor sentiment has become separated from fundamental research, is multinational cosmetics firm Estee Lauder, whose share price is down more than 60% since the historic highs it hit at the end of 2021.

“I wonder if the business has really changed. They’ve got problems with distribution, problems with their supply chain and a big China business, so everything’s coincided to make the stock look terrible. But it’s got a huge name and several very strong brands so I don’t think it’s finished,” Neilson says.

“But because of that confluence, everyone overreacts. So [my] job is to go in and decide if this is temporary or permanent.”

Weathering the 1987 crisis

In the course of the interview, Neilson also reflects on the financial crisis of 1987 and how the BT team steered successfully through investor panic that saw markets fall profoundly.

He notes here the insights of his BT colleagues, Vasant Khilnani and Olev Rahn – experts in the use of derivatives and in macroeconomics, respectively – were critical.

“In the first week of the market selloff of 50%, we were down only 15%. That’s because we were forewarned, we didn’t panic. As you saw recently if you haven’t prepared your mind, you’re really vulnerable,” Neilson says.

“People around me were too panicky, whereas I thought ‘These companies aren’t suddenly worthless’ and so you keep going back to your valuations.”

In the end, BT came through the 1987 crash with an annual return of 27%.

Ultimately, though, Neilson’s own investment mission saw him depart BT, around the time of his 10th anniversary with the firm in 1994, to establish Platinum Asset Management.

Equities

Kerr Neilson: This opportunity will drive the next decade of growth

View