The only Aussie name in Platinum's global stocks fund

Select parts of the AI theme, including Platinum’s preferred companies among the “Magnificent 7” cohort, were key topics in our recent interview with Clay Smolinski, who co-heads the firm’s global stock selection and runs the Platinum Global Fund (Long Only).

During a wide-ranging conversation, he details his team’s investment process, the critical attributes companies must satisfy before making it into the portfolio, and some of the team’s preferred sectors outside of technology. 

Finally, Smolinski reveals the sole Australian company among the 50 names in the portfolio currently.

How are you positioned for “higher for longer” inflation and interest rates – particularly in the US?

Smolinski notes the shift in the consensus view on rate cuts, which brought back much of the same investor risk appetite we saw during the 2021 bubble.

“We saw a huge rebound in a number of those very hot growth names, like Carvana (NYSE: CVNA) and Snowflake (NYSE: SNOW). And that consensus around rate cuts I think also just saw a general lift in valuations for most of the growth stocks.”

“Post the hotter CPI numbers, you're now starting to see those gains reversing. Our main way of positioning and preparing is simply avoiding those very hot areas, which we have avoided for a while, so that's not hard for us to do,” Smolinski says.

He also draws inspiration by considering the “good reasons” why inflation is running higher – namely full employment alongside strong activity and consistent wage growth of beyond 4% in both the US and Europe

“That's a broadly supportive environment for Value in general, but also for some of our more cyclical exposures,” he says.

Smolinski cites energy services firms Valaris (NYSE: VAL) and Schlumberger (NYSE: SLB) and Finnish forestry firm UPM Kymmene Oyj as examples from his portfolio.

What does your portfolio tell investors about your market view?

Smolinski emphasises Platinum’s neutral view on the global economy.

“We don't really see any strong reasons to be super worried about the economic picture, nor do we see strong reasons to be particularly excited,” he says.

“Sentiment was high as the market believed they were getting strong growth and rate cuts and now we've just taken one of those positives potentially off the table. And that's what's driving this bit of a market correction that's been happening over the past week.”

He says the fund’s holdings and sector exposures indicate where his team sees mispriced opportunities among its global universe of around 2000 companies.

“Where are the pockets where investors could be getting things wrong? Either they're too focused on a current problem that can be resolved in the future, or there's a lot of positive change around these businesses and the profits can be significantly larger if we look out three to five years,” says Smolinski.

Four key areas where investors are making mistakes are reflected in the portfolio's largest allocations, which are:

• 14% - companies that will benefit from greater investment in AI.
• 13% - companies that will do well if we see a recovery in the Chinese consumer.
• 10% - companies benefiting from the growth in travel in emerging markets, and
• 10% - commodities benefiting from a capital cycle.

Smolinski says the fund’s 6% cash balance also highlights the neutral view on the market: “It's business as usual, there's good valuation dispersion, and it's time to pick stocks.”

Is there more scope to boost your 14% allocation to the Technology sector?

A key point here is that for Platinum to invest, firms leveraged to the rise in AI must also have business models that are resilient even if the mega-theme doesn’t play out as everyone hopes.

“Our holdings are companies like Taiwan Semiconductor (TSMC), Broadcom (NASDAQ: AVGO) and Micron (NASDAQ: MU), these are all companies that make a critical part of the infrastructure manufacturing the AI supercomputers.

“All have very strong ‘base businesses’ that are going to underpin the value of the company should these AI use cases, or AI software, take longer to develop or if we get bumps in the roads, which we will get."

Among other areas it is considering in the years ahead are beneficiaries of the AI theme, including within the financial industry – where Smolinski considered how businesses such as Platinum will be impacted.

“If you can provide me with a more efficient interface to search all that data, collate it, present it, that's certainly something as a business we would pay up for, because it's a big time-saving effort.”

“We're looking at companies in this space,” he says, citing an interesting partnership between the London Stock Exchange and Microsoft (NASDAQ: MSFT), which is looking to use AI tools to power data for the financial industry.

What are your key “Magnificent 7” holdings and how do they square with your view of the cohort as overvalued?

Noting there are “exceptions to the rule,” Smolinski says Google’s parent company Alphabet (NASDAQ: GOOGL) is a standout because of the ongoing debate around its investment case.

He explains how the company staved off earlier threats in its corporate history, including the platform shift from desktop to mobile, and emphasises Google search engine’s “incredible customer habit. We all have that habitual use of Google”.

“Out of all those stocks, I think that's one where the narrative and perception around the company could look far more positive in 18 months to two-years-time. So that's why we're particularly interested in that one.”

Which the other mega-cap US tech stocks look most attractive?

The fund also owns Facebook parent Meta Platforms (NASDAQ: META), which has been a consistent holding since the Cambridge Analytica incident in 2018, when the stock became very cheap.

“We still own Meta and it certainly helps when the US government is in the process of killing your main competitor in TikTok," Smolinski says.

Lawmakers in the US are currently considering a ban on the popular social media app, owned by Chinese company Bytedance, due to data security concerns.

“There's a lot of interesting things happening at Amazon (NASDAQ: AMZN) at the moment, both on the advertising side of the business, but also what they're doing with the retail side –but we would like the risk-reward to be more in our favour,” Smolinski says.

“We've also looked at Microsoft (NASDAQ: MSFT) but the rest of them are just not quite there on either the business case or the pricing.”

Outside of technology, other sectors looming larger on Platinum’s radar are in the consumer staples and consumer-branded spaces.

“A lot of these companies did quite well with COVID, with a pull-forward of demand. You saw them raise their prices and now many are going through a ‘digestion phase’. A couple of names he calls out are beverage brands Heineken and Pernod Ricard,” Smolinski says.

“We’ve also seen falls in some of the luxury goods players, so that's a space that we are looking at quite deeply, and we've started to up our allocation there as well.”

How do you identify investment opportunities?

Smolinski’s unorthodox response focuses on the need to understand the underlying investor sentiment.

“A great opportunity in the stock market requires another investor to be making a decision error in selling you that stock. You've got to understand why they're doing that – what are they thinking, what are they reacting to, and why may they be right and your case might be wrong?”

The other big one to consider is your conviction on whether the company has scope to be larger in three- to five years’ time.

“Whether that's in terms of revenue and profit – you can make money in companies that are not growing particularly, it doesn’t all have to be growth stocks – but you need a clear case of why those are going to be a lot better in those three years,” Smolinski says.

Taiwanese microchip manufacturer TSMC is one portfolio holding he believes ticks both boxes.

“The base business of making chips for smartphones and PCs was suppressed [mid-COVID] and is now recovering. And you've got a new growth driver being the chips they’re making for these AI applications,” he says.

How do you explain your equal weighting toward the US and China – two markets that are often mutually exclusive?

On Platinum’s 19% allocation to China, Smolinski says its focus here is primarily on companies that serve the domestic economy. He points to parcel logistics firm ZTO Express as a standout holding in this market.

ZTO Express (NYSE: ZTO and HKEX: 2057)

In a rapidly growing space, the firm emerged as one of two market leaders from a pool of around 15 competing players. “These companies then battled hard, and they are true champions, they've gone through the fire,” Smolinski says.

“You look at ZTO today, they've got the largest market share, they deliver 30 billion parcels per year, which is more than FedEx, DHL and UPS combined.”

He points to automotive company BYD as a similar case of a winner emerging from a period of ruthless competition within China’s auto manufacturing sector.

TransUnion (NYSE: TRU)

On Platinum’s US exposure, Smolinski says TransUnion is an opportunity created by heightened economic fears, which saw US mortgage applications fall around 75% and knocked TRU’s revenue.

While the market reacted to this, Smolinski focused on its key competitive advantage of owning unique datasets that help in making high value decisions. . These are critical as the firm expands into new vertical markets including insurance and government, these businesses growing at 8% to 10% a year.

He also points to TransUnion’s strong and growing position in India, where it owns the nation’s biggest credit bureau and controls 70% of national credit data.

“I think this business does well if rates stabilise, but if we're looking a few years out and rates are actually cut, it'll be another tailwind,” he says.

“This is your classic high-quality database business, your classic growth compounder, where the market's giving you a really interesting entry point.”

Which Australian company do you hold and why?

AGL Energy (ASX: AGL)

A company pummelled by “the perfect storm,” energy provider AGL saw its share price decline more than 60% on the back of several challenges between 2021 and early 2023. This included unplanned, highly publicised outages at some of its power generation plants, and the effects of the lower power prices we saw during COVID.

“A company that went through the perfect storm, you had all of the high-profile activists and take over push and noise by both Brookfield Grok [Ventures],” says Smolinski.

His team concluded that each of the issues looked “very resolvable,” taking a view they would be in the rearview mirror within three years.

The energy transition toward renewables is a large part of the thesis behind AGL, Smolinski noting the large role gas-fired power providers will play in solving intermittency challenges in renewable power sources.

“This might be ‘gas peakers’ [that can respond to rapidly rising power demand], this might be battery storage to really add high-value solutions to those problems. We've put all that together, AGL is a pretty interesting opportunity.”

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