Last week, I bought shares in Platinum Asset Management Ltd (ASX: PTM). I paid around $4.47 for my parcel, meaning I'm currently down around 2.5% on my Platinum investment.
If I was a day-trader I'd probably be running for the hills, buying a shotgun and baked beans.
But I'm not.
And if it continues to go lower I may even buy more.
Why buy Platinum shares?
On May 11, I said that I thought Platinum shares were cheap. I even put the title in CAPS!
So, I have put my money where my mouth (pen?) is (was?). Whatever the case, I think Platinum is a higher-risk investment yet it offers a high potential return over the next three to five years. It's around 2% of my portfolio.
As I wrote previously, here's why I like Platinum at today's prices:
- Management. Platinum's management and investment team are high quality. This is important in any business but vital when your business is to invest other people's money and earn a fee.
- Markets are cyclical. Platinum's investment performance has been underwhelming because it did not expose its portfolio to US markets as much as its peers did. However, markets have a way of bouncing back. So long as Platinum stays true to its label as a 'value' investor, I think its time will come.
- Dividends. Platinum cut its management fees to remain competitive with the industry. However, if it maintains its funds under management I think it will pay a decent dividend. Even conservative analyst forecasts suggest a dividend north of 5%.
- Economics. Funds management is a great business. Where else are you paid exorbitant amounts to invest other people's' money — even if you are not that good. From my experience, it can cost as little as $150,000 to run a managed fund. Of course, there are other costs. But it should be no surprise to know that Platinum has a profit margin over 50% — after tax.
Here are the reasons I think it is a higher risk:
- Profit follows FUM which follows the performance. In the funds management industry, if your performance stinks then investors will quickly pull their cash from your coffers. If that happens, your funds under management (FUM) will fall and the amount of fees you earn will collapse.
- Team changes. Kerr Neilson has transitioned some responsibility to his team. As the key man, playing a big part in the company's investing and holding a meaningful chunk of Platinum shares, further changes to his position or the team would not be welcomed.
- Structural headwinds. Every cat and his dog are investing in exchange traded funds (ETFs) and index funds. These are dirt cheap (some cost 0.03% or less!) and it's having an effect on 'professional' fund managers like Platinum. However, I think there is a place for active management — especially those that perform well — in the long term. Nonetheless, there is a risk that Platinum is continually forced to lower its fees.
On the balance of the potential reward and risks, I'm a happy Platinum shareholder.
I'll keep you updated if that changes.
