Annual
Report 2017
Platinum Asset Management Limited
ABN 13 050 06 4 287
B
Directors
(as at 24 August 2017)
Michael Cole
Stephen Menzies
Anne Loveridge
Kerr Neilson
Shareholder Liaison
Elizabeth Norman
Company Secretary
Joanne Jefferies
Andrew Clifford
Elizabeth Norman
Andrew Stannard
Registered Office
Level 8, 7 Macquarie Place
Sydney NSW 2000
Phone 1300 726 700 (Australia only)
Phone 0800 700 726 (New Zealand only)
Phone +61 2 9255 7500
+61 2 9254 5555
Fax
Share Registrar
Computershare Investor Services Pty Ltd
Level 3, 60 Carrington Street
Sydney NSW 2000
Phone
Phone
Fax
1300 855 080 (Australia only)
+61 3 9415 4000
+61 3 9473 2500
Auditor and Taxation Advisor
PricewaterhouseCoopers
One International Towers
Watermans Quay
Barangaroo NSW 2000
Securities Exchange Listing
Platinum Asset Management Limited shares are listed
on the Australian Securities Exchange (ASX code: PTM)
Corporate Governance Statement
www.platinum.com.au/documents/shareholders/
ptm_corp_gov.pdf
Platinum Asset Management Limited Annual Report 2017 Platinum Asset Management Limited Annual Report 2017
1
Contents
Chairman’s Report
Managing Director’s
Letter to Shareholders
Shareholder Information
Directors’ Report
Auditor’s Independence
Declaration
Consolidated Statement
of Profit or Loss and
Other Comprehensive Income
Consolidated Statement
of Financial Position
Consolidated Statement
of Changes in Equity
Consolidated Statement
of Cash Flows
Notes to the Financial Statements
Directors’ Declaration
Independent Auditor’s Report
2
11
18
22
43
44
46
48
50
51
109
110
Visions of an Autonomous Future,
article by Curtis Cifuentes
IV
2
Chairman’s Report 2017
This year has seen a number of interesting developments at the company (ASX code:
PTM). First and foremost though, it was marked by increased returns for the
company’s investment clients. Indeed, in some cases, recent investment performance
has been nothing short of exceptional. For example Platinum’s long only global fund,
Platinum Unhedged Fund returned nearly 32% after fees and costs for the 12 months
to 30 June 2017.
These investment returns, if sustained, may pave the way for increased profits and
dividends but only after a period of time has elapsed, as investors tend to take time to
recognise and reward performance with increased funds.
The lag between improved investment performance and additional revenue was very
much on display in 2017 and best illustrated by the behaviour of the company’s share
price, which closed at $5.76 at 30 June last year, then bottomed at $4.23 in May 2017
before rebounding to around $5.72 in August 2017. I realise that this volatility of the
PTM share price may have caused some consternation amongst some shareholders,
so please allow me to take some time out to explain what I believe to be the underlying
cause of this.
During late 2016, a combination of analysts and short sellers went public with their
reasons as to why they believed PTM was a “sell”. Their arguments can be summarised
into four main categories: Platinum Investment Management Limited’s (“Platinum”)
short-term investment returns, the strong support for indexed funds, fee pressures for
active managers, and an apparently under-resourced product distribution team.
Each of these points is addressed below:
1. Platinum’s Returns
It is true that in late 2016, the investment performance of Platinum’s flagship global fund,
Platinum International Fund (“PIF”), underperformed in the short-term and there is no
denying that, following this period of underperformance, fund outflows for Platinum
were significant which heavily influenced research coverage against the stock.
However, investment performance has lifted significantly over each quarter of FY 2017
as highlighted in the table opposite. This table shows the performance of PIF and
some of the other larger Platinum Trust Funds, relative to their respective nominated
index returns.
Platinum Asset Management Limited Annual Report 2017 3
Performance relative to the nominated index (%)
FUND
1 YEAR:
30/6/16
1 YEAR:
30/6/17
5 YEAR
ANNUALISED:
30/6/16
5 YEAR
ANNUALISED:
30/6/17
Platinum International Fund
–5.7% pa
6.0% pa
–2.1% pa
Platinum Unhedged Fund
–9.2% pa
16.4% pa
–2.4% pa
0% pa
1.5% pa
Platinum International
Brands Fund
–4.2% pa
12.4% pa
–3.9% pa
–1.0% pa
Platinum Asia Fund
–1.2% pa
–3.3% pa
Platinum European Fund
Platinum Japan Fund
1.8% pa
2.0% pa
11.0% pa
8.3% pa
2.9% pa
2.3% pa
7.0% pa
1.6% pa
1.9% pa
9.3% pa
Source: Platinum Investment Management Limited. Returns of the funds are based on Class C Units (which do not
have an investment performance fee), and represent the combined income and capital returns for the specified
period. They are net of fees and costs (excluding the buy‑sell spread). All returns are pre‑tax and assume the
reinvestment of distributions. Past performance is not a reliable indicator of future results. Investment returns
are calculated relative to: the MSCI All Country World Net Index in A$ for Platinum International Fund, Platinum
Unhedged Fund and Platinum International Brands Fund; the MSCI All Country Asia ex Japan Net Index in $A for
the Platinum Asia Fund; the MSCI All Country Europe Net Index in $A for the Platinum European Fund; and the MSCI
Japan Net Index in $A for the Platinum Japan Fund.
To take one example, the very strong one-year investment returns of the flagship
Platinum International Fund contributed to its five-year annualised investment return
relative to its benchmark, which recovered from –2.1% for the year ended 30 June 2016
back to the benchmark return for the year ended 30 June 2017. It is worth noting that,
PIF’s annualised returns since inception have remained essentially unchanged,
delivering around 6% per annum above the index.
2. Support for Indexed Funds
In the United States, indexed or passive equity strategies now account for approximately
40% of funds under management (FUM).
By contrast, in Australia, passive equity investment strategies only account for 20% of
all FUM. Since January 2016, net flows to active managers for both local and global
strategies ($914 million) continue to exceed net flows to passive strategies ($804 million)1.
Active investment management still continues to be valued by Australian institutional
and retail investors but it would be remiss to ignore the strong overseas trend towards
passive equity management.
Most research into this topic indicates that the momentum to passive management
appears to be mostly driven by the recent underperformance of active managers,
especially since the GFC. The implication being drawn is that the pool of so-called
“alpha” available to active managers to deliver outperformance may have been
significantly diminished by the enhanced efficiency and lower volatility of equity markets
in recent years, perhaps best illustrated by the rise of algorithmic trading.
1 Bloomberg Business Week 1 June 2017.
Platinum Asset Management Limited Annual Report 2017
4
Chairman’s Report 2017 – continued
The theoretical construct observed by Professor William Sharpe certainly remains
unchanged. Cumulative investment performance by all active managers against the
relevant index is a zero sum game. That is, every active manager that underperforms
the index will be offset by an active manager that delivers an equivalent amount of
out-performance. This aggregate zero return then becomes negative after fees and
transaction costs. However, what is true in aggregate does not extend to every individual
manager. The key is not to lose faith in active management, but rather to pick the right
active managers. That is, pick those active investment managers with proven track
records, a strong investment process and a deep research team. I believe that this rare
group of managers should remain well placed to deliver for clients in, what is likely to
remain, a very uncertain and volatile environment.
The next question is the one perennially asked by asset consultants/rating agencies:
“Can a given active manager prove its ability to deliver regular outperformance, on a
repeatable basis, over time?”
I think the answer is a resounding yes. More specifically, with respect to Platinum,
whilst the investment management process continues to be refined over time to
accommodate market dynamics, Platinum’s commitment to value investing and capital
protection remains intact and is at the core of its investment management process.
The long-term outperformance of the Platinum Trust Funds since inception, relative
to their indices, supports this view and, I believe, demonstrates the robustness and
integrity of Platinum’s investment process.
3. Fee Pressure for Active Managers
Declining investment management fees for active investment strategies is a world-wide
phenomenon, partly driven by the low cost of index funds as well as the difficulty in
generating outperformance in a low volatility, lower return world.
This fact of life for investment managers has resulted in many competitors significantly
discounting fees in an attempt to retain their funds under management.
For all the noise about the benefits of passive investing, the truth is that for a given level
of risk, the best measure for investors remains a manager’s investment performance,
net of fees. However, this important message has been subjugated by marketing spin
into a relentless quest to seek the lowest average investment management fee, no
matter the performance achieved.
Platinum’s response has been to take a more measured approach and avoid joining the
“race to the bottom”. As mentioned previously, the firm’s ability to deliver investment
outperformance over the long-term is a very scarce commodity. Therefore, I believe
that Platinum is better placed than many of its competitors to command a fee premium
and resist the urge to heavily discount.
Platinum Asset Management Limited Annual Report 2017 5
Nonetheless, following a fee review by management, a fee reduction to 1.35% pa was
implemented for investors in the Platinum Trust Funds and Platinum Global Fund.
In addition, Platinum also introduced a performance fee class to provide investors with
the option to pay a lower base management fee, albeit at the cost of paying a 15%
performance fee should the fund outperform its index.
This is the balance that Platinum has struck between believing in its ability to deliver
out performance consistently over time, with the reality of the investment management
landscape.
Although I believe that this is the right decision for the long-term, in the short-term, it
was estimated that the fee realignment would reduce annual revenues for PTM by
around 9% in the absence of stronger fund flows, and PTM made an announcement to
this effect in April 2017. The initial impact of this fee decrease announcement placed
downward pressure on the PTM share price.
4. Under‑Resourced Product Distribution
Platinum’s primary focus is on the investment management process and delivering
strong investment returns over time. If outperformance is generated consistently and
investor’s capital is protected, then strong support should follow at both the retail and
institutional levels.
Platinum does not have a sales driven business model. Instead it focuses its resources
on investment performance and brand. Platinum will continue to concentrate on direct
interaction with retail investors, through the biannual investor road show programme
and other related initiatives. In addition Platinum has a highly capable team of technically
strong investment specialists, who are former Platinum investment analysts, servicing
the needs of the retail financial advisors and platform distribution channels for regular
communication and interaction.
However, many sell side analysts instead focus on short-term retail funds flows as the
main indicator of short-term share price movements, and have queried whether the
absence of a large sales team and sales culture is an impediment to long term success.
Platinum’s view has been consistent over the last 20 years, that the primary driver of
long-term success will always be delivering investment returns for clients and that the
costs of large sales forces, in terms of culture and distraction to the investment team,
far outweigh the short-term benefits.
Platinum Asset Management Limited Annual Report 2017 6
Chairman’s Report 2017 – continued
Consistent with a strong branding strategy, Platinum has also begun to broaden its
reach by offering new funds both domestically and internationally. The most recent
additions are the Dublin domiciled UCITS funds and the shortly to be released ASX
Quoted Managed Funds (“QMF’s”). The table below sets out the broad range of PTM
investment products that are available, or will shortly be available, across domestic
and international markets by distribution channel:
UNIT TRUST
ASX QUOTED FUNDS
DUBLIN
UCITS
FUNDS
US
FUNDS*
AUSTRALIA
RETAIL
AUSTRALIA
WHOLESALE
X
X
X
X
X
X
LISTED
INVESTMENT
COMPANY
(“LIC”)
X
(ASX code:
PMC)
X
(ASX code:
PAI)
MFUND
QMF
X
X
X
X
(ASX
code:
PIXX)
X
(ASX
code:
PAXX)
X
X
X
STRATEGY
Global
Equities
Asia Equities
Japan
Equities
*
Via a distribution arrangement with Optima Funds.
Concluding thoughts
Despite a strong marketing presence by index managers, it remains an irrefutable fact
that active investment management will continue to co-exist with indexed funds and
I believe that both have a place in the market.
PTM does not provide market guidance. However, our silence on this point does not in
any way reflect a diminishment in the Board’s belief in the business or its future.
Now turning to a re-cap for the year.
Funds under Management (“FUM”)
FUM at 30 June 2017 was $22.7 billion and this was similar to the 30 June 2016 closing
FUM of $22.7 billion. Average FUM for the year decreased by 9.6% to $23.4 billion
from an average FUM of $25.8 billion for the previous year. This fall in average FUM
was due to net fund outflows more than offsetting the gains made from investment
performance.
Platinum Asset Management Limited Annual Report 2017
7
As already highlighted, the overwhelming majority of Platinum Group’s underlying
funds and mandates delivered strong relative investment performance during the
period, thus validating Platinum’s benchmark-agnostic investment approach and
the quality of the research work undertaken by Platinum’s investment team.
Strong investment performance delivered $4.7 billion of additional FUM for the
year. Long-term performance across each and every Platinum Trust Fund remains
strong, and you would seldom find an investment manager, either in Australia or
internationally, that has managed such large sums of money and delivered such
consistent investment returns over such a long period of time.
Despite this, the Board was disappointed to report that total net investment outflows for
the year were $3.6 billion. This was in part due to a small number of large account
outflows. In addition to this, the 30 June 2017 net distribution from the Platinum Trust
Funds was very large at $1.1 billion.
Operating Performance
In the current year, fee revenue declined by 7.5% to $312.5 million (2016: $337.9 million)
on account of average Funds Under Management (“FUM”) declining by 9.6%.
The investment held by the Platinum Group in Platinum Asia Investments Limited (PAI)
and the contribution of Platinum World Portfolios PLC to the consolidated entity’s
results, together, delivered excellent investment gains of $16.6 million (2016: loss of
$2.9 million).
Costs are closely monitored and only increased marginally relative to the prior year.
The Platinum Group has chosen to defer much of its business development spend to
FY 18 in line with the launch of the new quoted managed funds and public website.
The total cost to income ratio was 18.9% with non-people costs down 12.9% from the
prior year.
Platinum’s team of investment specialists have had an extremely busy year in terms of
adviser visits, client presentations and roadshows. Platinum sets itself apart from
many of its competitors by ensuring that investment analysts accompany investment
specialists on their travels, and thus share with investors and advisers, their investment
and global market insights.
Profit before income tax expense was $270.6 million (2016: $282.2 million) representing
a decrease of 4.1% on the previous year. The profit after tax for the year was $192.6 million
(2016: $199.9 million) representing a decrease of 3.6%.
Platinum Asset Management Limited Annual Report 2017 8
Chairman’s Report 2017 – continued
Remuneration Matters
Staff costs increased in the current year by $3.8 million or 12.4%, reflecting market
pressure to retain the best, highly-qualified and investment management staff.
Extra incentives were paid to a handful of investment professionals that directly
contributed to the strong investment performance generated in the current financial
year. Outside of this handful of staff, the incentive pool was relatively flat for the year.
Increases also occurred due to new staff hires and salary increases were in line with
additional staff responsibilities.
For the investment team, short-term incentives paid are dependent on achieving strong
relative returns or outperformance of benchmark returns over a one and three year
period. Despite the strong performance over a one year period, the three year returns
generated meant that only a small group of investment professionals benefitted.
Platinum’s Chief Investment Officer, Andrew Clifford has not received any form of
short-term incentive over the last two years.
Two other members of KMP received short-term incentives in 2017, being the Director
of Investor Services and Communications, Elizabeth Norman and the Finance Director,
Andrew Stannard.
The variable compensation paid to Elizabeth Norman reflected her role as Director of
Investor Services and Communications and her leadership and involvement in the
development of several initiatives during the year, including the new Quoted Managed
Funds, new website design and expanding our communication efforts with both advisors
and investors.
The variable compensation paid to Andrew Stannard reflected the leadership and
strategic input that he provided into various development opportunities for the business,
including overseeing the launch of the Quoted Managed Funds and associated legal and
regulatory requirements.
In the current year, Platinum made an additional allocation of deferred incentives
totalling $4,875,000, under the “Deferred Incentive Plan” that was approved by the
Nomination and Remuneration Committee.
Dividends
The Directors have declared a fully-franked ordinary dividend of 15 cents per share and
this will be paid on 22 September 2017. A fully-franked ordinary interim dividend of
15 cents per share was paid on 22 March 2017. This brings the total FY 17 dividend to
30 cents per share (2016: 32 cents per share).
The Directors are confident that future dividends will be fully-franked.
Whilst the Company has a Dividend Reinvestment Plan in place, it has not been activated
and is unlikely to be activated in the near term.
Platinum Asset Management Limited Annual Report 2017 9
Launch of New Products
In late April this year, PTM announced that it intended to launch two new Quoted
Managed Funds in August 2017, which will allow investors to indirectly access the
Platinum International Fund (22+ year track record) and the Platinum Asia Fund
(14+ year track record) via the ASX.
We are pleased to report that these new products are expected to commence trading
shortly.
Investment into PTM’s UCITS and Underlying ASX Vehicles
The offshore UCITS fund (Platinum World Portfolios PLC) has continued to perform
strongly since its launch in November 2015. As at 21 August 2017, the UCITS FUM
totalled A$314 million, reflecting its strong investment performance since inception
and also the work done by our core team of investment professionals in promoting the
Platinum brand name offshore.
Further evidence in the strength of the Platinum brand name, came in the form of
capital raisings undertaken by the Platinum Group’s two LICs, Platinum Capital Limited
(ASX code: PMC) and Platinum Asia Investments Limited (ASX code: PAI). PMC raised
$70.1 million from a placement to institutional investors and a share purchase plan to
existing investors. PAI announced that it raised a total of $66.2 million as a result of the
exercise of options by PAI shareholders.
Director Renewal
In last year’s Chairman’s Report, I outlined a plan for Director renewal and additional
Board replacements at a Non-Executive Director level.
Since then, two Directors have retired under the Director renewal plan. Ms Anne
Loveridge was appointed to the PTM Board during September 2016, and succeeded
Ms Margaret Towers who retired from the Board after over nine years of service. Anne
is currently a Non-Executive Director for the National Australia Bank (NAB) Group and
NIB Holdings Limited and has over 30 years of experience as a former partner in the
Financial Services Assurance practice at PricewaterhouseCoopers (PwC).
On 19 June 2017, Mr Bruce Coleman retired from the Board after over ten years of
service. With respect to Bruce’s replacement, we are continuing to speak with a number
of highly qualified candidates and an announcement will be made in due course.
The Board of PTM would like to extend its thanks to Margaret and Bruce for their
invaluable contributions to the Board over an extended period of time.
In accordance with good governance and the ASX Corporate Governance Council’s
Principles and Recommendations, we intend to continue with our plan of Director
renewal. Additional Board replacements, at a Non-Executive Director level, will likely
be made in the future.
Platinum Asset Management Limited Annual Report 2017 10
Chairman’s Report 2017 – continued
The Board and its Associated Committees
Both the Nomination and Remuneration Committee and the Audit, Risk and Compliance
Committee had productive years. The Nomination and Remuneration Committee has
had to oversee changes to the composition of the Board and closely monitor the
Company’s remuneration framework.
The Audit, Risk and Compliance Committee has provided invaluable input into many
key areas of focus for the business including over-sight and focus on cyber security risk
for the Platinum Group, identification of key risks and risk mitigation strategies for
the Quoted Managed Funds (QMF’s) and overseeing compliance with accounting
standards including the appropriate accounting treatment with respect to the
deconsolidation of Platinum World Portfolios Plc.
Environmental, Social and Governance (ESG)
Platinum is an active participant in the global Carbon Disclosure Project (CDP) which
enables companies, cities, states and regions to measure their environmental impact.
In addition, for over 10 years, we have strived to make the firm “carbon neutral” via the
purchase of sufficient carbon credits (which invest in rainforests) to offset the carbon
emissions made by the Platinum group (for example our electricity usage and air travel).
Even more significantly, Platinum now incorporates ESG considerations into its
investment process by employing a robust framework that can lead to more informed
and holistic decision-making and, ultimately, better investment outcomes for investors.
I would encourage those interested in this topic to read our most recent Platinum Trust
Funds PDS for more information.
Conclusion
The Managing Director’s Letter to Shareholders addresses the recent strong investment
performance of the underlying funds, key initiatives that have been undertaken and the
investment outlook.
Michael Cole
Chairman
24 August 2017
Platinum Asset Management Limited Annual Report 2017 11
2017 Managing Director’s Letter to Shareholders
It is a relief that I do not have to launch into an economic treatise, as I did last year, to take
shareholders through the travails of managing money in a central bank‑obsessed world.
The concerns about economic growth have dissipated as activity spread and sped up.
Yes, there are still concerns about excessive levels of debt and the likely consequences
of central banks reducing their holdings of the assets they had purchased to prop
up liquidity.
Apart from the spreading warmth of economic expansion, the concerns around the
Chinese economy have diminished. To many observers, China is seen as the likely
source of the ‘next’ problem. However, it seems as though the policy position described
by the leadership in the first half of last year has to a degree already percolated through
the system. The most notable has been the closure of excess capacity in various
industries, both to assist in pollution abatement and, equally, to allow a recovery in
pricing power. There have been remarkable improvements in the pricing of various
basic materials, from steel, cement, float glass to PVC, which have put the remaining
players on a far healthier footing to meet their debt obligations. This in turn has softened
concerns about the likely scale and state of non‑performing loans in the banking
system. At the same time, the vitality within the Chinese economy is causing some to
recalibrate how China may be able to adjust to a world of tighter credit. Apart from
solemn declarations about the central importance of a healthy financial system, the
government has followed up with action to force aggressive private firms to reduce
their indebtedness via asset sales. The purpose here is to reduce the risk to the large
banks who may have acted as final guarantors on these entities’ foreign borrowings.
As China is indubitably the largest contributor to overall world growth, this change of
emphasis has profound consequences.
Investment Performance
As the prospects for growth have broadened, so have the opportunities across global
stock markets. After a statistically abnormal period of US stock market leadership, of
some eight years, other markets have taken up the running, most notably in Asia, much
to the benefit of the positioning of Platinum’s funds and mandates. According to
Morningstar’s global equity fund rankings, the Platinum Unhedged Fund and the
Platinum International Brands Fund ranked first and fourth in their respective
categories for the year to June 2017.1 Their respective returns were 32% and 28% for
the 12 months to 30 June 2017 (after fees and costs). Not much further down the list was
the Platinum International Fund with a return of 21%.The MSCI AC World Net Index (A$)
over this period returned 15%.
Over the last five years, our regionally‑focused funds of Asia, Europe and Japan have
each handily outperformed their respective benchmarks, after fees and expenses. The
global funds and mandates have matched or outperformed their benchmarks even
though they have carried protection of cash and, where permitted under the mandate,
short positions. The tide has turned as far as we can gauge!
1
Platinum Unhedged Fund topped the Equity World Large Value category while the Platinum International Brands
Fund ranked fourth in the Equity World Large Blend category.
Platinum Asset Management Limited Annual Report 2017 12
2017 Managing Director’s Letter to Shareholders
– continued
Staff
As a firm, we are remarkably blessed, in my view, by a team of individuals who really
believe in the value we can add to those who put their trust in our hands. As the firm’s
operation has grown in sophistication, we have been fortunate to add to the talent that
has taken up the challenge of excellence. Although there is more specialisation within
individual corporate functions, sometimes forced on us by a seemingly ever-growing
burden of regulatory compliance in many guises, there has been no loss of cohesion or
collective purpose. Shareholders may be inclined to regard these comments as
standard corporate rhetoric, but I can assure you, it is not so.
Of the 91 employees at the firm, 30 are employed in our engine room of managing
clients’ money. The team has grown by 2 this year, and will likely expand further to meet
the challenges of an ever-wider choice of listed investments available to a global
manager. Within the investment team, overall average tenure at Platinum remains high
at 6 years, with portfolio managers averaging 14 years with the firm.
The investment sub-teams are building a steady rhythm of idea generation and this
bodes well for growing clients’ wealth. The quantitative systems employed in our
investment process continue to evolve and strengthen in their capability to both assess
possible opportunities and augment managers’ judgements. The dealing desk has
continued to deepen the investment team’s market insights.
Costs
Staff costs account for about half of the firm’s outgoings. As we have described
previously, there is a slight upward drift which reflects small increases in numbers and
a scaling among members of the investment team to account for growing knowledge
and skill. Last year we introduced a Deferred Bonus Plan which is applied across the
firm for those leaders whom we believe will carry the company over the next decade.
It entails issuing stock to participants with deferred vesting four years hence. These
grants are made annually, performance permitting, to allow employees to gradually
increase their ownership in the company.
The Profit Share Plan was not activated this year. Under the Profit Share Plan, an
additional pool of reward is made available to members of the investment team when
the weighted return of funds under management (FUM) exceeds the relevant benchmark
by more than 1% for both the last one year and the last three years. Apart from staff
remuneration, most costs are largely in line with those of last year. Custody,
administration and trustee costs have actually fallen.
There is one peculiar line in the income statement which relates to the consolidation of
the rise in the value of the three UCITS (Undertakings for Collective Investment in
Transferable Securities) funds that we seeded in November 2015 under the umbrella
Platinum World Portfolios Plc. This appears under the heading of ‘Gains on financial
assets’. This is an accounting convention to acknowledge that at the launch of these
UCITS funds, we were the principal funder and hence the entities should be consolidated
in the accounts. Please note that this entry is substantially countered at the bottom of
Platinum Asset Management Limited Annual Report 2017 13
the statement by an entry “Non-controlling interests” which reflects the after-tax effect
of its earlier inclusion.
Fees
Having considered the changing nature of competition in our industry and the current
popularity of exchange-traded funds (ETFs) and the like, together with the fall in some
aspects of our costs, we decided to reset the fee base. As was announced to the ASX in
April, we have used this opportunity to introduce a new performance fee option to the
Platinum Trust Funds. This comes with a lower base fee, set at 1.1% (inclusive of GST),
with the firm participating in 15% of the outperformance. Under the standard fee option,
the previous management fee of 1.54% (inclusive of GST) has been cut to 1.35% (inclusive
of GST).
At this stage we cannot know how popular the new performance fee option will be.
In our ASX release, we suggested that based on our historic ability to outperform
benchmarks, we believe the performance option will prove no cheaper for unitholders
over time. However, we feel some clients are attracted to the notion of a scalable fee
that rewards evident long‑term skill.
The effect of the announced fee cuts, which became live at the start of the new financial
year, is estimated to reduce our revenues, on a steady state basis, by A$24 million.
However, it is very difficult to predict the full-year effect on profits as there are
countering factors such as changes in FUM and prospective performance fees.
Funds Under Management (FUM) – Retention and Growth
There is still great interest in distribution power, presumably because of the influence
that the ‘big five’ financial institutions exercise over financial advice in Australia. We are
fully aware of this argument and, without underestimating the might of these
organisations, we know that performance is the main attribute that generates FUM
over time.
In an investment world characterised by massive product proliferation, helped along by
the present enthusiasm for ETFs and ‘passive’ investing, we understand the importance
of our brand. The amount of choice is bewildering to all but the most enthusiastic
investors. Those with a passing interest crave simplicity and seemingly convenient
answers to rather complex choices. For them, name recognition and association is
important. For investors with a deeper understanding of the complexity of investing, the
attraction of our brand lies not only in past performance, but in the explicit enunciation
of our stock-picking approach which is reinforced by our quarterly reports and online
commentaries. These publications give investors an insight into the process and
mentality that contribute to systematic long-term successful investing.
While the term ‘brand’ is a much-abused concept, we know it can only have value if it is
entrenched by authenticity of intent and action. We believe this is demonstrated by the
emphasis we place on ongoing, considered communication with existing clients, rather
than an emphatic drive for FUM gathering.
Platinum Asset Management Limited Annual Report 2017 14
2017 Managing Director’s Letter to Shareholders
– continued
It is nevertheless important that we communicate clearly and broadly the attributes of
our products to prospective investors. There are apparently some 1.5 million Australian
households who pay for professional financial planning, though this number has tended
to fall over the last several years. It is therefore important that we provide these
planners with the necessary understanding of the benefits we can bring to their clients’
portfolios.
To this end, we have also enhanced the investment specialist team with an additional
member, taking the team in the field to five. Via active participation they have added
considerably to our interaction with financial advisors in Australia and New Zealand. As
noted in the past, what distinguishes Platinum’s investment specialists is that these
individuals are former investment analysts and can therefore speak authoritatively
about our investment decisions and portfolios, rather than simply following a sales
script that lacks depth and understanding.
To add further to the quality of our communication in the field, individual portfolio
managers and analysts accompany the investment specialists to visit advisory firms to
give additional insights of changes taking place in specific industries. This in turn
empowers financial advisors to speak more authoritatively to their clients. This tends to
set us apart from the competition! In addition, we have an annual roadshow directed at
the financial intermediaries. During the year, the team addressed approximately 3,000
professional advisors covering 33 cities and towns around the country as they
participated in the Financial Planning Association roadshow.
Other important aspects of communication revolve around the rising sophistication
of the firm’s website, a new version of which will launch in October. The Journal, which
contains topical investment subjects and video presentations from our investment
professionals, is proving very popular – there is no harm in telling your friends about it!
We hold a biannual meeting with clients where the emphasis is on conveying insights
rather than being image-promoting jamborees. The efficacy of this open approach is
revealed by the fact that as many as 15% of the audience are friends of unitholders who
have been invited to learn about markets.
The Irish-domiciled UCITS funds that we launched nearly two years ago are starting to
attract attention. These three funds have now grown to A$314 million.2 We are currently
exploring the establishment of a permanent representative office in Europe. Our strong
performance and unique attributes provide a strong base to expand this business
measurably.
We are also pleased that our new quoted managed funds (QMFs) will shortly be launching
in September. I made mention of this in last year’s letter. The two proposed QMFs are
feeder funds that will feed into our unlisted managed funds, the Platinum International
Fund and the Platinum Asia Fund. Both underlying funds have long track records of
2 As at 21 August 2017.
Platinum Asset Management Limited Annual Report 2017 15
22 years and 14 years respectively, and each has a history of substantial absolute and
relative performance. Through the QMFs, investors can gain exposure to the same
actively-managed, diversified portfolios as
the underlying unlisted Platinum
International Fund and the Platinum Asia Fund, but the QMFs allow investors the
convenience of buying and selling units by placing orders on the ASX. As you are aware,
the creeping hand of bureaucracy has made form-filling a national past time in the
funds management industry. Through these listed entities, prospective investors can
obviate the lengthy application form that currently confronts them. Furthermore, the
QMFs provide investors the added advantage of knowing the fund’s indicative net asset
value unit price before placing a trade, whereas the forward-pricing mechanism used
by the unlisted managed funds means that unit prices are unknown at the time investors
make their application.
Funds Under Management ($mn, to 30 June 2017)
FUNDS
OPENING
BALANCE
(1 JULY
2016)
INVESTMENT
FLOWS PERFORMANCE DISTRIBUTION
CLOSING
BALANCE
(30 JUNE
2017)
% OF
TOTAL
Platinum Funds
Platinum Trust Funds
and Platinum
Global Fund
Listed Investment
Companies PMC
and PAI
Platinum World
Portfolios
– UCITS Funds
MLC Platinum
Global Fund
Institutional mandates
Management Fee
Mandates
“Absolute”
Performance Fee
Mandates
“Relative”
Performance Fee
Mandates
16,539
(2,548)
3,330
(1,072)
16,249
72
616
103
139
63
168
918
(149)
32
192
–
–
–
858
263
961
1,849
(158)
398
–
2,089
548
(192)
118
–
474
4
1
4
9
2
8
2,155
(789)
(1)
1,819
454
4,663
(1,073)
22,713
100
TOTAL
22,688
(3,565)
Source: Platinum Investment Management Limited
Platinum Asset Management Limited Annual Report 2017
16
2017 Managing Director’s Letter to Shareholders
– continued
Outlook
It is heartening to see a reversal of flows as investors focus on the unique offer we make
regarding their longer term wealth aspirations. Australian investors are more aware
than ever about the possibilities of global investing and the need for diversification. The
launch of the UCITS puts us in a strong position to seek investors abroad and we are
pursuing this with energy. We are also following other initiatives.
As the firm’s very existence is predicated on markets being driven by fashion and
crowding, please believe that our confidence in the future is driven by this understanding
rather than complacency. The last several years of economic turmoil have been the
most aberrant in our 23 year history. Despite this, our ability to add value is undiminished
because of our rigour, discipline and mental agility.
Kerr Neilson
Managing Director
Platinum Asset Management Limited Annual Report 2017 17
Financial
Statements
2017
Platinum Asset
Management Limited
General information
The financial statements were authorised
for issue, in accordance with a resolution of
Directors, on 24 August 2017. The Directors
have the power to amend and reissue the
financial statements.
Platinum Asset Management Limited Annual Report 2017 18
Shareholder Information 30 June 2017
The shareholder information set out below was applicable as at 21 August 2017.
Distribution of Equity Securities
Analysis of number of equity security holders by size of holding:
1 to 1,000
1,001 to 5,000
5,001 to 10,000
10,001 to 100,000
100,001 and over
Holding less than a marketable parcel (less than $500)
NUMBER
OF HOLDERS
OF ORDINARY
SHARES
7,169
16,204
4,185
2,477
74
30,109
316
Platinum Asset Management Limited Annual Report 2017
19
Equity Security Holders
Twenty largest quoted equity security holders
The names of the 20 largest security holders of quoted equity securities are
listed below:
ORDINARY SHARES
% OF TOTAL
NUMBER HELD SHARES ISSUED
J Neilson
K Neilson
HSBC Custody Nominees (Australia) Limited
Platinum Investment Management Limited (nominee)
Citicorp Nominees Pty Limited
JP Morgan Nominees Australia Limited
Jilliby Pty Limited
J Clifford
National Nominees Limited
RBC Investor Services Australia Nominees Pty Limited
BNP Paribas Nominees Pty Limited
Xetrov Pty Limited
Pacific Custodians Pty Limited
BNP Paribas Nominees Pty Limited
Mrs Michele Martinez
Navigator Australia Limited
BNP Paribas Nominees Pty Limited
BNP Paribas Nominees Pty Limited
HSBC Custody Nominees (Australia) Limited
CS Third Nominees Pty Limited
156,037,421
156,037,420
31,633,453
29,364,201
22,661,452
14,031,322
6,500,000
5,000,000
4,307,744
3,298,589
2,511,326
2,000,000
1,626,027
1,254,228
1,072,309
1,058,093
916,891
910,000
890,721
886,472
26.60
26.60
5.39
5.01
3.86
2.39
1.11
0.85
0.73
0.56
0.43
0.34
0.28
0.21
0.18
0.18
0.16
0.16
0.15
0.15
441,997,669
75.34
Unquoted equity securities
There are no unquoted equity securities, however under the Deferred Incentive
Plan, a total of 1,626,026 deferred rights have been allocated to eligible employees
of Platinum, and on vesting and exercise of these rights, an equivalent number
of PTM shares (that have already been acquired on-market) will be allocated to
these employees. Therefore, no new shares will be issued under the Deferred
Incentive Plan (please refer to the Remuneration Report and Note 20 for
further details).
Platinum Asset Management Limited Annual Report 2017
20
Shareholder Information 30 June 2017 – continued
Substantial Shareholders
The following parties have notified the Company that they have a substantial
relevant interest in the ordinary shares of Platinum Asset Management Limited
in accordance with section 671B of the Corporations Act 2001:
J Neilson, K Neilson
J Clifford, Moya Pty Limited, A Clifford
^ Based on the last substantial shareholder notice lodged.
ORDINARY SHARES
% OF TOTAL
NUMBER HELD SHARES ISSUED
312,074,841
32,831,449
53.2^
5.9^
Voting Rights
On a show of hands every member present at a meeting in person or by proxy
shall have one vote and upon a poll each share shall have one vote.
There are no other classes of equity securities.
Employees that have been allocated deferred rights under the Deferred Incentive
Plan, have no entitlement to vote, attend meetings of shareholders or receive
dividends, until the deferred rights have been exercised (refer to the Remuneration
Report and Note 20 for further details).
Distribution of Annual Report to Shareholders
The Law allows for an “opt in” regime through which shareholders will receive
a printed “hard copy” version of the Annual Report only if they request one. The
Directors have decided to only mail out an Annual Report to those shareholders
who have “opted in”.
Financial Calendar
Ordinary shares trade ex-dividend
Record (books close) date for dividend
Dividend paid
These dates are indicative and may be changed.
30 August 2017
31 August 2017
22 September 2017
Platinum Asset Management Limited Annual Report 2017
21
Notice of Annual General Meeting
The details of the Annual General Meeting (AGM) of Platinum Asset Management
Limited are:
10am Thursday, 16 November 2017
Fort Macquarie Room
InterContinental Hotel Sydney
117 Macquarie Street
Sydney NSW 2000
Questions for the AGM
If you would like to submit a question prior to the AGM to be addressed at the AGM,
you may email your question to invest@platinum.com.au.
Platinum Asset Management Limited Annual Report 2017 22
Directors’ Report
The Directors present their report, together with the financial statements, on the
consolidated entity (referred to hereafter as the ‘consolidated entity’, ‘group’ or
‘Platinum’) consisting of Platinum Asset Management Limited (referred to hereafter
as the ‘Company’ or ‘parent entity’) and the entities it controlled at the end of, or
during, the year ended 30 June 2017.
Directors
The following persons were Directors of Platinum Asset Management Limited
during the whole of the financial year and up to the date of this report, unless
otherwise stated:
Michael Cole
Stephen Menzies
Anne Loveridge
Kerr Neilson
Andrew Clifford
Elizabeth Norman
Andrew Stannard
Chairman and Non-Executive Director
Non-Executive Director
Non-Executive Director (appointed 22 September 2016)
Managing Director
Executive Director and Chief Investment Officer
Executive Director and Director of Investor Services and
Communications
Executive Director and Chief Financial Officer
In accordance with the Board’s Plan for Director renewal, Margaret Towers and
Bruce Coleman were Non-Executive Directors until their respective resignations on
22 September 2016 and 19 June 2017. Both Margaret Towers and Bruce Coleman were
appointed as Directors in April 2007, on the same day that the Company became a
public company, as a precursor to the Company’s ASX listing in May 2007.
Company Secretary
Joanne Jefferies was appointed Company Secretary on 17 October 2016, replacing
Mr Andrew Stannard who was the interim Company Secretary prior to Ms Jefferies’
appointment.
Principal Activities
The Company is the non-operating holding company of Platinum Investment
Management Limited (“PIML”) and its controlled entities. Platinum Investment
Management Limited, trading as Platinum Asset Management, operates a funds
management business. The amount of money that we manage, so-called funds under
management (“FUM”) is the key variable for the business and an important
determinant of our profit.
FUM at 30 June 2017 was $22.7 billion, which was similar to the 30 June 2016 closing
FUM of $22.7 billion. Average FUM for the year decreased by 9.6% to $23.4 billion
from an average FUM of $25.8 billion for the previous year. This fall in average FUM
was due to net fund outflows more than offsetting the gains made from investment
performance.
Platinum Asset Management Limited Annual Report 2017
23
Whilst net fund flows have been negative over the last year, it is pleasing to report
that most of the Funds managed by the consolidated entity have delivered strong
investment performance over the last 12 months, with some of our Funds delivering
exceptional returns. For example, our global unhedged fund, Platinum Unhedged
Fund delivered 31.72% for the 12 months to 30 June 2017. Our flagship Fund, Platinum
International Fund returned 21.34% for the 12 months to 30 June 2017, outperforming
its benchmark by 6.03%, proving that our tried and tested approach to managing
money is working well.
The signs from our overseas clients have been encouraging. Whilst growing the Irish
offshore fund, Platinum World Portfolios Plc (“PWP”) is a long-term project, we are
starting to gain traction. A period of just over 20 months has elapsed since PWP
launched in November 2015, and total FUM for PWP is already A$314 million
(as at 21 August 2017). PWP continues to attract strong interest.
The decrease in average FUM from the previous corresponding period resulted in fee
revenue of $312.5 million (2016: $337.9 million), which represents a decrease of 7.5%.
Other investment income increased to $21.1 million (2016: $6.8 million) which was
largely explained by gains generated from the investments in PWP and Platinum
Asia Investments Limited of $16.6 million (2016: loss of $2.9 million). This was partly
offset by the drop in foreign exchange gains on overseas bank accounts to $0.1 million
from $5 million, as almost all of PIML’s foreign currency cash exposure was removed
in December 2016, with all significant US Dollar balances being repatriated into
Australian Dollar term deposits, due to the weakening US Dollar.
Expenses increased marginally by 0.8% or $0.5 million relative to the previous year,
driven mainly by increased staff costs offset by savings on custody and business
development costs. Cost control remains a key focus of the business.
Profit before income tax expense was $270.6 million (2016: $282.2 million) which
represents a decrease of 4.1% on the previous year. The profit after tax for the year
was $192.6 million (2016: $199.9 million) which represents a decrease of 3.6%.
The consolidated entity is in a strong financial position, with a strong balance sheet.
The most significant driver of sustainable future growth is, and will always be, the
delivery of superior, long-term, risk adjusted returns for our clients.
In April 2017, Platinum announced that it intended to launch two active Quoted Managed
Funds (“QMFs”) offering an International Fund (ASX code: PIXX) and an Asian regional
Fund (ASX code: PAXX), both with an active investment strategy, in response to
demand from the self-managed superannuation fund (SMSF) sector. The two Fund’s
will be feeder funds into the master Platinum International Fund and Platinum Asia
Fund and are expected to shortly commence trading. PIML has allocated $50 million
to help seed these Funds, with an investment of $25 million in each Fund.
Platinum Asset Management Limited Annual Report 2017 24
Directors’ Report – continued
Platinum remains an investment-led organisation. Provided that we can continue to
deliver strong investment performance for our clients, there is good reason to believe
that strong sustainable investment inflows will occur into our underlying Funds and we
will continue to build on the early success of PWP to expand our presence in Europe.
Our FUM will likely grow over time through the increasing trend for Australian
investors to increase their exposure to world stock markets, the strengthening of our
relationship with the professional investor community and accessing the continuing
growth of the self-managed superannuation fund (SMSF) sector.
Change in Fee Options
Effective from 3 July 2017, PIML added a new performance fee option to each of its
eight Platinum Trust Funds, whilst at the same time reducing the total fees and
charges under the standard fee option for each of the Platinum Trust Funds and
Platinum Global Fund.
Under the new fee options for the Platinum Trust Funds, investors now have the
choice between:
–
–
a performance fee option, comprising a management fee of 1.10% per annum plus
a relative outperformance fee of 15%; or
a standard fee option, comprising a management fee of 1.35% representing a
reduction from the previous management costs rate of 1.50% per annum. This
reduction benefits all new and existing investors into those products. Platinum
Global Fund unitholders also benefit from this fee reduction.
Dividends
Since the end of the financial year, the Directors have declared a 15 cents per share
($87,757,931) fully-franked ordinary dividend, with a record date of 31 August 2017
and payable to shareholders on 22 September 2017.
A fully-franked ordinary dividend of 15 cents per share ($87,913,098) was paid on
22 March 2017.
A fully-franked ordinary dividend of 16 cents per share ($93,773,971) was paid on
22 September 2016.
Significant Changes in the State of Affairs
There were no significant changes in the state of affairs of the consolidated entity
during the financial year and up to the date of this report, other than the change in
fee options as outlined above.
Matters Subsequent to the End of the Financial Year and Expected Results
of Operations
Since the end of the financial year, the Directors are not aware of any matter or
circumstance, not otherwise dealt with in this report or financial statements that has
Platinum Asset Management Limited Annual Report 2017 25
significantly affected, or may significantly affect, the operations of the consolidated
entity or the results of its operations in subsequent financial periods.
Environmental Regulation
The consolidated entity is not subject to any significant environmental regulation
under Commonwealth, State or Territory law.
Information on Directors
Michael Cole BECON, MECON, FFIN
Independent Non-Executive Director, Chairman and member of the Audit, Risk &
Compliance and Nomination & Remuneration Committees since 10 April 2007. (Age 69)
Mr Cole has over 39 years of experience in the investment banking and funds
management industry. Mr Cole was an Executive Director/Executive Vice President
at Bankers Trust Australia for over 10 years. Mr Cole is Chairman of Ironbark
Capital Limited.
Stephen Menzies BECON, LLB, LLM
Independent Non-Executive Director, Chair of the Nomination & Remuneration
Committee since 19 June 2017 and member of the Audit, Risk & Compliance
and Nomination & Remuneration Committees since 11 March 2015. (Age 61)
Mr Menzies is currently a Director of Century Australia Investments Limited and
Freedom Insurance Group Limited and Chairman of the Centre for Quantum
Computation & Communication Technology. Mr Menzies retired as a partner at
Ashurst law firm in 2015 and until his retirement was consistently ranked as one
of Australia’s leading corporate lawyers. As Head of China Practice for Ashurst,
Mr Menzies oversaw the Shanghai and Beijing offices of that firm. Previously,
Mr Menzies was National Director for Enforcement at the Australian Securities
Commission and has a long history in the funds management sector. Mr Menzies
is a Director of Platinum World Portfolios Plc.
Anne Loveridge BA (HONS), FCA (AUSTRALIA), FCA (ENGLAND AND WALES), GAICD
Independent Non-Executive Director since 22 September 2016, Chair of the Audit,
Risk & Compliance Committee since 24 February 2017 and member of the Nomination
& Remuneration Committee since 22 September 2016. (Age 55)
Ms Loveridge is currently a Non-Executive Director for the National Australia Bank
(NAB) Group and NIB Holdings Limited. Ms Loveridge retired as a partner and deputy
chairman of PricewaterhouseCoopers (PwC) in 2015. At PwC, she had over 30 years
of experience in the Financial Services Assurance practice with a range of clients in
banking, property, private equity and wealth management sectors. Ms Loveridge has
extensive knowledge of financial and regulatory reporting, risk management, controls
and compliance frameworks.
Platinum Asset Management Limited Annual Report 2017 26
Directors’ Report – continued
Kerr Neilson BCOM, ASIP
Managing Director since 12 July 1993. (Age 67)
Mr Neilson was appointed as Managing Director upon incorporation. He is the
Managing Director of Platinum Investment Management Limited. Prior to Platinum,
Mr Neilson was an Executive Vice President at Bankers Trust Australia. Previously
he worked in both the UK and South Africa in stockbroking.
Andrew Clifford BCOM (HONS)
Director and Chief Investment Officer since 8 May 2013. (Age 51)
Mr Clifford joined Platinum as a co-founding member in 1994 in the capacity of
Director of Platinum Investment Management Limited and Deputy Chief Investment
Officer. Previously he was a Vice President at Bankers Trust Australia covering Asian
equities and managing the BT Select Market Trust – Pacific Basin Fund. In May 2013,
Mr Clifford was appointed Chief Investment Officer. Mr Clifford is co-manager of
Platinum International Fund with Kerr Neilson.
Elizabeth Norman BA, GRADUATE DIPLOMA IN FINANCIAL PLANNING
Director of Investor Services and Communications since 8 May 2013. (Age 49)
Ms Norman joined Platinum in February 1994 in a role of Investor Services and
Communications Manager. Previously she worked at Bankers Trust Australia in
product development and within the retail funds management team. Ms Norman’s
role as a Director of Investor Services and Communications reflects the widening
of Platinum’s client base and the consolidated entity’s commitment to supporting
retail and institutional clients with dedicated investment specialists.
Andrew Stannard BMS(HONS), GRADUATE DIPLOMA IN APPLIED FINANCE AND
INVESTMENT, CA
Director and Chief Financial Officer since 10 August 2015. (Age 50)
Mr Stannard joined Platinum from AllianceBernstein where he held the position
of Chief Financial Officer for the Asia – Pacific region. Mr Stannard has 27 years
of finance experience with expertise in audit, financial control, operations, funds
management, financial services regulation and corporate governance.
Platinum Asset Management Limited Annual Report 2017 27
Meetings of Directors
The number of meetings of the Company’s Board of Directors (“the Board”) and of
each Board committee held during the year ended 30 June 2017, and the number
of meetings attended by each Director were:
NOMINATION &
AUDIT, RISK &
BOARD
ATTENDED
HELD
REMUNERATION COMMITTEE COMPLIANCE COMMITTEE
HELD
ATTENDED
ATTENDED
HELD
Michael Cole
Stephen Menzies
Anne Loveridge
(from 22 September
2016)
Margaret Towers
(until 22 September
2016)
Bruce Coleman
(until 19 June 2017)
Kerr Neilson
Andrew Clifford
Elizabeth Norman
Andrew Stannard
5
4
3
2
5
4
5
6
6
6
6
3
3
6
6
6
6
6
3
3
2
1
3
–
–
–
–
3
3
2
1
3
–
–
–
–
6
5
4
2
6
–
–
–
–
6
6
4
2
6
–
–
–
–
Indemnity and Insurance of Officers
During the year, the Company incurred a premium in respect of a contract for indemnity
insurance for the Directors and Officers of the Company named in this report.
Indemnity and Insurance of Auditor
The Company has not, during or since the end of the financial year, indemnified or
agreed to indemnify the auditor of the Company or any related entity against a liability
incurred by the auditor.
During the financial year, the Company has not paid a premium in respect of a contract
to insure the auditor of the Company or any related entity.
Non‑Audit Services
Details of the amounts paid or payable to the auditor for non-audit services provided
during the financial year by the auditor are outlined in Note 19 to the financial
statements.
Platinum Asset Management Limited Annual Report 2017
28
Directors’ Report – continued
The Directors are satisfied that the provision of non-audit services during the financial
year, by the auditor (or by another person or firm on the auditor’s behalf), is compatible
with the general standard of independence for auditors imposed by the Corporations
Act 2001.
The Directors are of the opinion that the services as disclosed in Note 19 to the
financial statements do not compromise the external auditor’s independence
requirements of the Corporations Act 2001 for the following reasons:
–
–
all non-audit services have been reviewed and approved to ensure that they
do not impact the integrity and objectivity of the auditor; and
none of the services undermine the general principles relating to auditor
independence as set out in APES 110: Code of Ethics for Professional Accountants
issued by the Accounting Professional and Ethical Standards Board.
Rounding of Amounts
The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/
Directors’ Reports) Instrument 2016/191, issued by the Australian Securities and
Investments Commission, relating to ‘rounding-off’. Amounts in this report have been
rounded off in accordance with that Instrument to the nearest thousand dollars,
or in certain cases, the nearest dollar.
Auditor’s Independence Declaration
A copy of the auditor’s independence declaration as required under section 307C
of the Corporations Act 2001 is set out on page 43.
Auditor
PricewaterhouseCoopers continues in office in accordance with section 327
of the Corporations Act 2001.
This report is made in accordance with a resolution of Directors, pursuant to
section 298(2)(a) of the Corporations Act 2001.
On behalf of the Directors
Michael Cole
Chairman
24 August 2017
Sydney
Kerr Neilson
Director
Platinum Asset Management Limited Annual Report 2017
29
Remuneration Report
Introduction
The Company’s Directors present the Remuneration Report prepared in accordance
with section 300A of the Corporations Act 2001 for the Company and consolidated
entity for the year ended 30 June 2017. The Remuneration Report forms part of the
Directors’ Report.
The information provided in this Remuneration Report has been audited by the
Company’s auditor, PricewaterhouseCoopers, as required by section 308 (3C)
of the Corporations Act 2001.
Summary of Remuneration Outcomes for 2017
–
–
–
–
–
–
Whilst the performance of our underlying funds has been excellent, the decline in
earnings per share and profit negatively impacted the variable compensation paid
to all Platinum employees. With the exception of a few, high performing individuals
and changes in responsibilities, variable compensation was generally flat for most
employees year on year and salary increases modest;
The Managing Director waived his ability to receive a variable award in 2017 and
this was ratified by the Nomination & Remuneration Committee;
Despite the strong absolute and relative performance over the last 12 months by
Platinum International Fund, Platinum’s Chief Investment Officer and Co-Manager
of Platinum International Fund, Andrew Clifford also did not receive a variable
award in 2017, because his incentives are based on a weighted average 1 year
and 3 year outperformance;
Only two members of Key Management Personnel (“KMP”) received a variable
award in 2017, being the Director of Investment Services and Communications,
Elizabeth Norman and the Finance Director, Andrew Stannard;
There were no payments made under the Profit Share Plan (“PSP”) or under the
Long Term Incentive Plans to any staff; and
In the current year, variable awards under the Deferred Incentive Plan were made
to 27 employees which totalled $4.875 million. In accordance with accounting
standards, the accounting impact of these awards has been expensed through the
profit and loss statement over the five year service period of the award, so the
expense impact is smoothed. PTM shares were acquired by an Employee Share
Trust on-market so the awards did not dilute existing shareholders.
Platinum Asset Management Limited Annual Report 2017 30
Directors’ Report – continued
Key Management Personnel (“KMP”)
For the purposes of this report, KMP of the consolidated entity in office at any time
during the financial year were:
NAME
POSITION
Michael Cole
Chairman and Non-Executive Director
Stephen Menzies
Non-Executive Director
Anne Loveridge
Non-Executive Director (from 22 September 2016)
Margaret Towers
Non-Executive Director (until 22 September 2016)
Bruce Coleman
Non-Executive Director (until 19 June 2017)
Kerr Neilson
Managing Director
Andrew Clifford
Executive Director and Chief Investment Officer (CIO)
Elizabeth Norman
Executive Director and Director of Investor Services and
Andrew Stannard
Executive (Finance) Director
Communications
There were no other employees that held a KMP position within the Company or
consolidated entity.
Shareholders’ Approval of the 2016 (prior year) Remuneration Report
A 25% or higher “no” vote on the Remuneration Report at an AGM triggers a reporting
obligation on a listed company to explain in its next Annual Report how concerns are
being addressed. At the last AGM, the Company’s Remuneration Report was carried
on a poll and received a vote in favour of 95.33%. Platinum takes the opportunity to
fully explain the basis and structure of the remuneration paid to KMP.
Guiding Principles of KMP and Staff Remuneration
The business of Platinum is to manage clients’ money with the goal of providing
superior investment returns over the medium to long-term. Platinum’s position is
simple: if Platinum continues to responsibly and successfully manage the money of
its clients then, over time, the Funds Under Management (“FUM”) of the firm will
increase, and so will the profits of the Platinum consolidated entity. In the last
12 months, the Investment team has delivered strong absolute returns, whilst
delivering downside protection and our portfolio managers remain comfortable with
the composition of the portfolios.
Consideration is given to overall returns earned by all clients, as well as the
contribution made by individual members of the investment team as a result of their
specific investment ideas. The performance of other essential members of the
Platinum team, such as client services and corporate and fiduciary functions, are
assessed against pre-determined operational performance indicators that are
Platinum Asset Management Limited Annual Report 2017 31
relevant to each employee. Platinum’s Remuneration Policy aims to reward staff in
line with the contribution that they have made to deliver these objectives and outcomes.
We are conscious of the need to align remuneration outcomes with shareholder returns
and indeed some firms prefer to focus on simpler performance metrics such as Total
Shareholder Return (TSR) as a basis for designing KMP and employee remuneration
structures. TSR measures share price appreciation or depreciation plus dividend
reinvestment between two points in time. Whilst, over long periods of time, TSR will
usually reflect the underlying performance of a company’s business, it is Platinum’s
view that there are a number of issues in using TSR as a variable in employee
remuneration. Shorter term variables, such as the macroeconomic environment or
interest rates, are factors outside of the control of employees, but can overwhelm
underlying developments in the business, and determine a company’s share price.
The result is that employees may be either unduly rewarded or punished by variables
outside of their control. The use of TSR as an incentive, in our view, may encourage a
focus on short-term outcomes such as current year earnings, or short-term investment
returns, potentially at the expense of longer-term business outcomes.
Structure of Remuneration for Executive Directors and all Platinum staff
Fixed remuneration consists of salary and compulsory superannuation contributions.
Salaries approximate market rates and take into account the contribution, skill and
experience of each employee.
Variable remuneration in 2017 consists of performance related short-term incentive
payments and profit share amounts. Variable awards are discretionary and are
approved after assessing individual performance against a range of qualitative and
quantitative factors specific to each employee. Variable compensation may take the
form of an annual cash payment or deferred award and are designed to reward
superior performance. Platinum has established various Short-Term Incentive Plans
(“STIP”), as the basis for rewarding staff. These are discussed below.
Short‑Term Incentive Plans
Investment Team Plan (applies to members of the investment team only)
A remuneration framework for investment team variable compensation is overseen
by the Nomination & Remuneration Committee. Under this framework, the award pool
was determined as a percentage of the aggregate base salary of the investment team.
The percentage level was related to the average of 1 year and 3 year outperformance
of all funds under management. For each 1% increase in this average outperformance,
the pool is increased by 20% and is then capped when average outperformance is 5%
or more.
Platinum Asset Management Limited Annual Report 2017 32
Directors’ Report – continued
The pool is then allocated across members of the investment team based on
performance assessments that are based on both quantitative and qualitative
measures. In a period where there is aggregate underperformance of client funds,
annual awards for investment team members are then determined by an individual
assessment of each employee’s contribution to the investment team during the period.
Quantitative measures used to assess individual performance include the performance
of any portfolios under the management of an individual and the performance of
individual investment ideas that have been proposed. Investment performance is
usually assessed over a 1 year and 3 year time frame and is relative to an appropriate
benchmark. As the weighted average 1 and 3 year investment returns were below
benchmark in the current and prior year, no amount was applied from the pool for this
2017 year and the annual performance awards for investment team members were
instead determined by an individual assessment of each employee’s contribution to the
investment team during the period. No amount from the pool was allocated or paid to
the Managing Director, Kerr Neilson or Chief Investment Officer, Andrew Clifford.
Profit Share Plan (“PSP”) (applies to members of the investment team only)
The Nomination & Remuneration Committee ratified the PSP in 2014. The PSP
was designed to reward key members of the team for helping in the development
of Platinum’s business through strong investment performance (relative to
benchmarks). Individual members of the investment team were issued notional units
in the profit share plan. The notional units have no capital value and cannot be sold
or transferred to a third party. Notional units are adjusted each year based upon the
assessment of each staff member’s long-term contribution potential to the future
development of Platinum. Each year the profit share percentage is determined based
upon the weighted average 1 year and 3 year outperformance of all funds under
management. For example, if the average of the 1 and 3 year rolling performance of
our Funds exceeds the weighted benchmark by 2.5%, then 1.5% of the Company’s
fee-based net profit before tax is made available to this pool.
There is no profit share until weighted average 1 year and 3 year outperformance is
greater than 1%, inclusive of prior year underperformance carry forward. The profit
share figure is limited to 5% of profit before tax, though the Nomination &
Remuneration Committee may elect to carry this over to future periods if investment
returns indicate a profit share in excess of the 5% level. There were no payments
made under the Profit Share Plan in the current or prior year.
General Employee Plan (applies to non-investment team staff)
Performance was assessed against pre-determined operational performance
indicators relevant to each employee as assessed by the Directors of the Platinum
consolidated entity and ratified by the Nomination & Remuneration Committee. These
performance indicators took into account the responsibilities, skill and experience of
each employee and their contribution during the year, and emphasised the fact that
the business is run extremely efficiently with a total number of employees of 91,
Platinum Asset Management Limited Annual Report 2017 33
despite total FUM at 30 June 2017 being $22.7 billion. Other than the named Executive
Directors disclosed in this Report, variable cash awards paid to employees in 2017
were generally flat and salary increases limited.
Deferred Incentive Plan (applies to all staff)
In June 2016, the Nomination & Remuneration Committee approved the implementation
of the Deferred Incentive Plan. The main objectives of the Plan are to recognise the
contributions made by key employees and to retain their skills within the firm. Eligible
employees are selected by the Nomination & Remuneration Committee during the
annual award cycle and the proportion of each short-term incentive award that is
deferred varies by employee. The number of deferred rights are determined by
dividing the discretionary deferred award amount allocated to each eligible employee
by the PTM share price, using a volume weighted average price (VWAP) of the PTM
shares over the seven (7) trading days prior to the grant acceptance date. If an eligible
employee remains employed at Platinum after the four year vesting period expires,
the employee has a further five years to exercise their deferred right. If an employee
resigns from Platinum before they have met the service condition then, in most
circumstances, the deferred rights will be forfeited.
An award of deferred rights was made in June 2016 and an additional award was made
in June 2017. It is anticipated that further grants will occur in the future, most likely in
June of each year. In order to satisfy the obligation to the Company that arises from
the granting of deferred awards, the Company intends, over time, to purchase shares
on-market and hold these shares within an Employee Share Trust. On vesting, eligible
employees will receive one ordinary share in PTM from the Employee Share Trust in
satisfaction of each of their rights. No amount is payable by any eligible employee on
either grant or on exercise. There is flexibility for the Board to pay cash to the eligible
employee on vesting, but the current plan envisages allocating PTM shares only.
Eligible employees will have no voting or dividend rights until their deferred rights
have been exercised and their shares have been allocated. However, the deferred
rights also carry an entitlement to a dividend equivalent payment. Upon the valid
exercise of a deferred right, or deemed exercise, of a deferred right, an eligible
employee will be entitled to receive an amount approximately equal to the amount
of dividends that would have been paid to the eligible employee had they held the
share from the grant date to the date that the deferred rights are exercised.
In the current year, the value of deferred incentives granted was $4,875,000 (2016:
$3,550,000). The number of rights to PTM shares allocated in the current year was
1,050,656 rights. The Employee Share Trust has purchased 1,050,656 PTM shares
and will hold these shares until the vesting date (four years from the grant date) and
subsequent exercise.
Platinum Asset Management Limited Annual Report 2017 34
Directors’ Report – continued
A summary of the grants of deferred rights made in 2017 and 2016 appears in the
table below.
2017 GRANT
2016 GRANT
TOTAL
Value of Deferred Awards converted to
deferred rights ($)
4,875,000
3,550,000
8,425,000
Total number of new deferred rights
allocated to employees
1,050,656
591,578
1,642,234
Total number of deferred rights cancelled
–
(16,208)
(16,208)
Total number of deferred rights allocated
to employees at 30 June 2017
1,050,656
575,370
1,626,026
Volume-Weighted Average Price (VWAP) of
PTM shares over the seven (7) trading
days prior to grant date ($)
4.64
6.17
n/a
Estimated number of deferred rights
expected to vest based on assessment at
balance date (%)
Grant Date
Vesting Date
Service period used to determine
accounting expense
Accounting expense ($)
Long‑Term Incentive Plans
87%
87%
20 June 2017 20 June 2016
20 June 2021 20 June 2020
87%
n/a
n/a
5 years
848,250
5 years
5 years
600,300
1,448,550
Platinum has two long-term incentive plans in place, being:
– Options and Performance Rights Plan (OPRP); and
– Fund Appreciation Rights Plan (FARP).
There was no allocation under either plan in the current or prior year, as we consider
that the Deferred Incentive Plan is a better way of advancing the business, by providing
an incentive for key employees to remain with Platinum.
Platinum Asset Management Limited Annual Report 2017
35
Managing Director and other Senior Executive Remuneration in the 2017 Year
Managing Director Remuneration
Kerr Neilson continued to waive his ability to receive variable compensation. This has
been ratified by the Nomination & Remuneration Committee.
Other Senior Executive Remuneration
Andrew Clifford’s variable compensation was based on his role as Platinum’s Chief
Investment Officer and Co-Manager of Platinum International Fund and is based on
the Investment Team Plan.
Despite strong absolute and relative performance over the last 12 months of Platinum
International Fund, Platinum’s Chief Investment Officer and Co-Manager of Platinum
International Fund, Andrew Clifford did not receive a variable award in 2017, as his
incentives are generally based on a weighted average 1 year and 3 year outperformance.
The variable compensation paid to Elizabeth Norman reflected her role as Director
of Investor Services and Communications and her leadership and involvement in the
development of several initiatives during the year, including the new Quoted Managed
Funds, new website design and expanding our communication efforts with both
advisors and investors.
The variable compensation paid to Andrew Stannard reflected the leadership and
strategic input that he provided into various development opportunities for the business,
including overseeing the launch of the Quoted Managed Funds and its legal and
regulatory requirements associated with enhancing our corporate communications
to analysts and shareholders.
Platinum Asset Management Limited Annual Report 2017 36
Directors’ Report – continued
Details of remuneration of Executive Directors
The table below presents the remuneration provided by the consolidated entity to the
Executive Directors of the consolidated entity, in accordance with accounting standards.
CASH
SALARY
$
OTHER(1)
$
SUPER-
ANNUA-
TION
$
2017
Kerr Neilson(4)
450,000
(18,089)
19,616
Andrew Clifford
425,000
(13,206)
19,616
SHORT-
TERM
INCEN-
TIVE
(CASH)(2)
SHORT-
TERM
INCEN-
TIVE
LONG-
TERM
INCEN-
(DEFERRED)(2)
TIVES(3)
$
–
–
$
–
–
TOTAL
$
451,527
431,410
1,733,266
848,025
$
–
–
–
–
Elizabeth Norman
400,000
9,250
19,616 1,200,000
104,400
Andrew Stannard
400,000
11,009
19,616 400,000
17,400
1,675,000
(11,036)
78,464 1,600,000
121,800
3,464,228
2016
Kerr Neilson(4)
450,000
19,392
19,308
Andrew Clifford
425,000
19,162
19,308
–
–
–
–
Elizabeth Norman
400,000
22,429
19,308 1,100,000
52,200
Andrew Stannard(5)
358,976
5,954
19,308
300,000
–
–
–
–
–
488,700
463,470
1,593,937
684,238
(from 10 August 2015)
1,633,976
66,937
77,232 1,400,000
52,200
–
3,230,345
(1) Represents the increase/(decrease) in the accounting provision for annual and long service leave.
These amounts were not received by the Executive Directors and represent provisions made in
the consolidated entity’s statement of financial position.
(2) See the Short‑Term Incentive Plan section for further details. The short‑term incentive
attributable to Elizabeth Norman is comprised of (i) cash incentive of $1,200,000 and (ii) the
accounting valuation of $104,400 attributable to Elizabeth Norman with respect to the aggregate
allocation of 113,279 deferred rights under the Deferred Incentive Plan, made in 2017 (award
amount: $300,000) and 2016 (award amount: $300,000). The accounting valuation of $104,400
represents the current year portion of the accounting fair value attributed to Elizabeth Norman,
which will be spread over the five year service period. The short‑term incentive attributable to
Andrew Stannard is comprised of (i) cash incentive of $400,000 and (ii) the accounting valuation
of $17,400 attributable to Andrew Stannard with respect to the allocation of 21,552 deferred rights
under the Deferred Incentive Plan, made in 2017 (award amount: $100,000). The accounting
valuation of $17,400 represents the current year portion of the accounting fair value attributed
to Andrew Stannard, which will be spread over the five year service period.
(3) There were no long‑term incentives (options or fund appreciation rights) granted in the current
or prior year.
(4) The Managing Director, Kerr Neilson, waived his right to receive variable compensation and this
has been ratified by the Nomination & Remuneration Committee.
(5) The remuneration of Andrew Stannard in the prior year covers the period from the date of his
appointment on 10 August 2015 to 30 June 2016.
Platinum Asset Management Limited Annual Report 2017
37
Components of Remuneration
The table below illustrates the relative proportions of fixed and variable remuneration
as a percentage of total remuneration extrapolated from the “Details of remuneration
of Executive Directors” table.
FIXED REMUNERATION
AS A PERCENTAGE OF
TOTAL REMUNERATION(1)
VARIABLE REMUNERATION
AS A PERCENTAGE OF
TOTAL REMUNERATION(2)
2017
Kerr Neilson
Andrew Clifford
Elizabeth Norman
Andrew Stannard
2016
Kerr Neilson
Andrew Clifford
Elizabeth Norman
Andrew Stannard
100%
100%
25%
51%
100%
100%
28%
56%
0%
0%
75%
49%
0%
0%
72%
44%
(1) Fixed remuneration refers to salary, superannuation and provisions or payments made for annual
and long service leave.
(2) Variable remuneration refers to short and long‑term incentive payments. Only short‑term incentive
payments were made in the current year (being cash incentive payments and accounting valuations
attributed to the allocation of deferred rights to Elizabeth Norman and Andrew Stannard).
Remuneration of Non‑Executive Directors
Remuneration Policy
The Company’s remuneration policy for Non-Executive Directors is designed to ensure
that the Company can attract and retain suitably-qualified and experienced directors.
It is the policy of the Board to remunerate at market rates. Non-Executive Directors
received a fixed fee and mandatory superannuation payments. Non-Executive
Directors do not receive variable compensation and are not eligible to participate in
any equity-based incentive plans. The Executive Directors examine the base pay of the
Non-Executive Directors annually and may utilise the services of an external advisor.
The Executive Directors determined the remuneration of the Non-Executive Directors
within the maximum approved shareholder limit. The aggregate amount of remuneration
that can be paid to the Non-Executive Directors, which was approved by shareholders
at a general meeting in April 2007, was $2 million per annum (including superannuation).
Platinum Asset Management Limited Annual Report 2017
38
Directors’ Report – continued
No other retirement benefits (other than mandatory superannuation) are provided
to the Non-Executive Directors. There are no termination payments payable on the
cessation of office and any Director may retire or resign from the Board, or be
removed by a resolution of shareholders. The Constitution of the Company requires
approval by shareholders at a general meeting of a maximum amount of remuneration
to be paid to the Non-Executive Directors.
Remuneration Structure
From 1 April 2015, the Nomination & Remuneration Committee recommended the
Non-Executive Director remuneration structure change to a model that aligns with the
various roles and responsibilities that the Non-Executive Directors perform in relation
to their work-load and attendance at the Board and Board Committees.
This structure is better aligned with other ASX 200 companies, where the specific role
is identified and the remuneration component is allocated to that role. This change
occurred from 1 April 2015, without an increase in the overall amount paid to the
individual Non-Executive Directors. The structure aligns the remuneration paid to
each Non-Executive Director to their responsibilities and roles.
Pursuant to the plan of Director renewal that was announced by the PTM Board on
25 August 2016, in accordance with good governance and ASX guidelines, two of the
Non-Executive Directors that were first appointed when the Company became a public
company, in April 2007, resigned during the year, being Margaret Towers (resigned on
22 September 2016) and Bruce Coleman (resigned on 19 June 2017).
Below is a consequential summary of the personnel changes within each of the
Board’s sub-committees.
NAME
AUDIT, RISK & COMPLIANCE
COMMITTEE
NOMINATION & REMUNERATION
COMMITTEE
Margaret Towers
Chair until 22 September 2016. Member until 22 September 2016.
Bruce Coleman
Interim Chair between
Chair for the financial year up
22 September 2016 and
until 19 June 2017.
24 February 2017.
Anne Loveridge
Member since the date
Member since the date of joining
of joining the Board on
the Board on 22 September 2016.
22 September 2016 until
24 February 2017 and Chair
from 24 February 2017.
Stephen Menzies
Member for the full
Member until 19 June 2017 and
financial year.
Chair from 19 June 2017.
Platinum Asset Management Limited Annual Report 2017
39
The following table displays the current Non-Executive Directors and their roles at
30 June 2017.
NON-EXECUTIVE DIRECTOR
MICHAEL COLE
ANNE LOVERIDGE
STEPHEN MENZIES
Board
Audit, Risk &
Compliance Committee
Chair
Member
Member
Chair
Member
Member
Nomination &
Member
Member
Chair
Remuneration Committee
The table below shows how the remuneration is allocated reflecting their roles at
30 June 2017.
NON-EXECUTIVE DIRECTOR
Board
Audit, Risk & Compliance Committee
Nomination & Remuneration Committee
Total
MICHAEL
COLE
ANNE
LOVERIDGE
STEPHEN
MENZIES
$170,000
$130,000
$130,000
$15,000
$15,000
$30,000
$15,000
$15,000
$30,000
$200,000
$175,000
$175,000
Platinum Asset Management Limited Annual Report 2017
40
Directors’ Report – continued
Remuneration of Non‑Executive Directors
The table below presents actual amounts received by the Non-Executive Directors.
CASH
SALARY
$
SUPER-
ANNUATION
$
SHORT-TERM
INCENTIVES
$
LONG-TERM
INCENTIVES
$
TOTAL
$
2017
Michael Cole
Stephen Menzies
200,000
160,519
19,000
15,249
Anne Loveridge (from
22 September 2016)
Margaret Towers (until
22 September 2016)
Bruce Coleman (until
19 June 2017)
2016
Michael Cole
Margaret Towers
Bruce Coleman
Stephen Menzies
129,308
12,284
43,750
4,156
175,597
709,174
16,678
67,367
200,000
175,000
175,000
160,000
710,000
19,000
16,625
16,625
15,200
67,450
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
219,000
175,768
141,592
47,906
192,275
776,541
219,000
191,625
191,625
175,200
777,450
Stephen Menzies is Platinum Investment Management Limited’s (PIMLs) nominee
on the Board of the offshore UCITS fund, Platinum World Portfolios Plc (PWP) and
payments are made directly by PWP. Amounts paid in the current year were €20,000
(equivalent to A$28,908) (2016: €10,000 (equivalent to A$14,605)). Of this amount,
€10,000 (equivalent to $14,699) was paid from 1 July 2016 to 26 January 2017
(the date of deconsolidation of PWP from the Platinum consolidated entity).
Managing Director and other Senior Executive employment agreements
The key aspects of the KMP contracts are outlined below:
–
–
Remuneration and other terms of employment for Non-Executive Directors are
formalised in letters of appointment.
All contracts (both Executive and Non-Executive) include the components of
remuneration that are to be paid to KMP and provide for annual review, but do
not prescribe how remuneration levels are to be modified from year to year.
Platinum Asset Management Limited Annual Report 2017
41
–
–
–
–
The tenure of all Directors, except for the Managing Director, is subject to approval
by shareholders at every third AGM or other general meeting convened for the
purposes of election of Directors.
In the event of termination, all KMP are entitled to receive their statutory leave
entitlements and superannuation benefits. In relation to incentive plans, upon
termination, where an Executive resigns, short-term incentives are only paid if the
Executive is employed at the date of payment. The Board retains discretion to still
make short-term incentive payments in certain exceptional circumstances, such
as bona-fide retirement.
All Executive Directors can terminate their appointment by providing three months’
notice.
Non-Executive Directors may resign by written notice to the Chairman and where
circumstances permit, it is desirable that reasonable notice of an intention to
resign is given to assist the Board in succession planning.
Link between performance and remuneration paid by the consolidated entity
2017
2016
2015
2014
2013
Revenue ($’000)
Expenses ($’000)
333,549
62,971
Operating profit after
344,658
360,422
319,796
232,152
62,464
58,872
58,751
48,983
tax ($’000)
192,647
199,870
213,499
189,867
129,112
Basic earnings per share
(cents per share)
31.74
34.24
36.66
32.79
22.92
Total dividends (cents
per share)
30
32
47
34
22
Total aggregate fixed
remuneration
paid ($)(1)
Total aggregate
2,558,913
2,518,991
2,362,901
2,346,251
1,832,625
variable remuneration
paid ($)(2)
1,721,800
1,452,200
1,125,000
2,554,650
852,500
(1) Total aggregate fixed remuneration paid represents salaries and superannuation and includes
the Director’s Fees disclosed and paid to Stephen Menzies for his Directorship of the UCITS fund.
The total aggregate fixed remuneration figure is higher in the last four financial years (2017‑2014)
because two new Directors were appointed in May 2013 and therefore the remuneration over the
last four years reflects the appointment of two additional Directors.
(2) Total aggregate variable remuneration paid represents short‑term incentive awards. The variable
remuneration figure was highest in 2014 primarily because a Profit Share Plan (PSP) incentive
allocation was made to Andrew Clifford in that year. The increase in total aggregate variable
remuneration in 2017 reflects the work done (primarily by Elizabeth Norman and Andrew Stannard)
in launching several key initiatives, including the Quoted Managed Funds, which will help the
business grow over time.
Platinum Asset Management Limited Annual Report 2017
42
Directors’ Report – continued
Interests of Non‑Executive and Executive Directors in shares
The relevant interest in ordinary shares of the Company that each Director held at
balance date was:
ADDITIONS
DISPOSALS
Michael Cole
Stephen Menzies
Anne Loveridge
Kerr Neilson
Andrew Clifford
Elizabeth Norman
Andrew Stannard
OPENING
BALANCE
200,000
30,000
6,000
312,074,841
32,831,449
766,748
–
–
–
–
–
–
–
–
CLOSING
BALANCE
200,000
30,000
6,000
–
–
–
– 312,074,841
–
–
–
32,831,449
766,748
–
There were no additions or disposals made during the year by any of the Directors.
Directors’ interests in contracts
The Directors received remuneration that is ultimately derived from net income
arising from Platinum Investment Management Limited’s investment management
contracts.
Use of external remuneration consultants
In the prior year, the consolidated entity engaged the services of PricewaterhouseCoopers
to provide the Nomination & Remuneration Committee with recommendations
associated with the implementation of the Deferred Incentive Plan. In the current
year, the Company continued to utilise the services of PricewaterhouseCoopers
to assist with implementation of the Plan. The amount paid or payable to
PricewaterhouseCoopers for the provision of these services in FY 2017 was
$52,870 (2016: $46,433).
Other related party payments involving KMP
In the current year, the consolidated entity paid $200,000 to OneVue Services Pty
Limited for the provision of services associated with the build, customisation and
enhancement of the Platinum website. OneVue is a related entity of the Chairman
of Platinum Asset Management Limited, Mr Michael Cole.
Platinum Asset Management Limited Annual Report 2017
43
Auditor’s Independence Declaration
As lead auditor for the audit of Platinum Asset Management Limited for the year ended
30 June 2017, I declare that to the best of my knowledge and belief, there have been:
1.
2.
no contraventions of the auditor independence requirements of the Corporations
Act 2001 in relation to the audit; and
no contraventions of any applicable code of professional conduct in relation to
the audit.
This declaration is in respect of Platinum Asset Management Limited and the entities
it controlled during the period.
R Balding
Partner
PricewaterhouseCoopers
Sydney, 24 August 2017
PricewaterhouseCoopers, ABN 52 780 433 757
One International Towers Sydney, Watermans Quay, Barangaroo, GPO Box 2650, Sydney, NSW 2001
T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au
Liability limited by a scheme approved under Professional Standards Legislation.
Platinum Asset Management Limited Annual Report 2017 44
Consolidated Statement of Profit or Loss and Other
Comprehensive Income
For the year ended 30 June 2017
NOTE
CONSOLIDATED
2017
$’000
2016
$’000
Revenue
Management fees
Performance fees
Administration fees
Other income
Interest
Gains/(losses) on equity investments in associates
21(b)
Gains/(losses) on financial assets at fair value
through profit or loss
Net foreign exchange gains on overseas
bank accounts
Net gains on forward currency contracts, dividends
and distributions
Total revenue and other income
Expenses
Staff
Custody, administration, trustee and unit registry
Business development
Research
Rent and other occupancy
Technology
Share-based payments
Legal and compliance
Other professional
Depreciation
Mailhouse and periodic reporting
Insurance
Share registry
Audit fee
Other
Total expenses
20
8
19
296,391
1,626
14,451
312,468
319,633
2,613
15,648
337,894
4,341
9,736
4,068
(2,254)
6,779
(661)
149
76
5,142
469
333,549
344,658
34,242
11,992
4,080
2,032
1,862
1,675
1,449
1,419
902
895
862
468
459
425
209
30,443
14,219
5,784
2,117
1,647
1,734
635
1,383
963
965
727
500
593
463
291
62,971
62,464
Platinum Asset Management Limited Annual Report 2017
45
Profit before income tax expense
Income tax expense
Profit after income tax expense for the year
Other comprehensive income
Exchange rate translation impact of foreign
subsidiaries
Other comprehensive income for the year, net of tax
NOTE
4
13
CONSOLIDATED
2017
$’000
270,578
77,931
192,647
2016
$’000
282,194
82,324
199,870
406
406
(422)
(422)
Total comprehensive income for the year
193,053
199,448
Profit after income tax expense for the year is attributable to:
Owners of Platinum Asset Management Limited
Non-controlling interests
186,026
200,887
6,621
(1,017)
192,647
199,870
Basic earnings per share
Diluted earnings per share
CENTS
31.74
31.74
CENTS
34.24
34.24
29
29
The above consolidated statement of profit or loss and other comprehensive income should be read in
conjunction with the accompanying notes.
Platinum Asset Management Limited Annual Report 2017
46
Consolidated Statement of Financial Position
As at 30 June 2017
NOTE
CONSOLIDATED
2017
$’000
2016
$’000
Assets
Current assets
Cash and cash equivalents
Equity investments in associates
21(b)
Financial assets at fair value through profit or loss
Term deposits
Trade and other receivables
Total current assets
Non‑current assets
Fixed assets
Total non-current assets
Total assets
Liabilities
Current liabilities
Trade and other payables
6
7
8
9
Financial liabilities at fair value through profit or loss
10
Income tax payable
Employee benefits
Total current liabilities
Non‑current liabilities
Provisions
Net deferred tax liabilities
Total non-current liabilities
Total liabilities
Net assets
11
11
5
154,263
91,692
107
74,876
30,199
351,137
2,829
2,829
119,079
47,746
49,452
138,518
29,900
384,695
2,628
2,628
353,966
387,323
6,255
–
7,866
3,261
17,382
461
1,049
1,510
18,892
335,074
7,841
182
10,766
3,129
21,918
199
995
1,194
23,112
364,211
Platinum Asset Management Limited Annual Report 2017
47
Equity
Issued capital
Reserves
Retained profits
Total equity attributable to the owners of
Platinum Asset Management Limited
Total equity attributable to non‑controlling
interests
Non-controlling interests
Total equity
NOTE
CONSOLIDATED
2017
$’000
2016
$’000
12
13
14
30
742,933
747,717
(585,818)
(587,764)
177,959
175,522
335,074
335,475
–
335,074
28,736
364,211
The above consolidated statement of financial position should be read in conjunction with the
accompanying notes.
Platinum Asset Management Limited Annual Report 2017
48
Consolidated Statement of Changes in Equity
For the year ended 30 June 2017
CONSOLIDATED
ISSUED
CAPITAL
$’000
RESERVES
$’000
NON-
RETAINED CONTROLLING
INTERESTS
$’000
PROFITS
$’000
TOTAL
EQUITY
$’000
Balance at 1 July 2015
751,355
(588,014)
185,839
–
349,180
Profit after income tax
expense for the year
–
–
200,887
(1,017)
199,870
Other comprehensive
income
Exchange rate translation
impact of foreign
subsidiaries (Note 13)
Total comprehensive
income for the year
Transactions with owners
in the capacity as owners
Treasury shares acquired
–
–
(422)
–
–
(422)
(422)
200,887
(1,017)
199,448
(Note 12)
(3,638)
–
Share-based payments
reserve (Note 13)
Dividends paid (Note 15)
Transactions with
non-controlling interests
(Note 30)
–
–
–
–
–
672
–
(211,204)
–
–
–
–
–
(3,638)
672
(211,204)
29,753
28,736
29,753
364,211
Balance at 30 June 2016
747,717
(587,764)
175,522
Platinum Asset Management Limited Annual Report 2017
49
CONSOLIDATED
ISSUED
CAPITAL
$’000
RESERVES
$’000
NON-
RETAINED CONTROLLING
INTERESTS
$’000
PROFITS
$’000
TOTAL
EQUITY
$’000
Balance at 1 July 2016
747,717
(587,764)
175,522
28,736
364,211
Profit after income tax
expense for the year
–
–
186,026
6,621
192,647
Other comprehensive
income
Exchange rate translation
impact of foreign
subsidiaries (Note 13)
Deconsolidation of Platinum
World Portfolios Plc
(Note 13)
Total comprehensive income
for the year
Transactions with owners
in the capacity as owners
Treasury shares acquired
–
–
–
(595)
1,001
–
–
–
–
(595)
1,001
406
186,026
6,621
193,053
(Note 12)
(4,784)
–
–
–
1,540
–
(181,687)
–
–
–
(4,784)
1,540
(181,687)
Share-based payments
reserve (Note 13)
Dividends paid (Note 15)
Decrease in retained
earnings on
deconsolidation of
Platinum World
Portfolios Plc (Note 30)
Decrease in equity on
deconsolidation (Note 30)
–
–
–
–
–
–
(1,902)
(5,604)
(7,506)
–
(29,753)
(29,753)
Balance at 30 June 2017
742,933
(585,818)
177,959
–
335,074
The above consolidated statement of changes in equity should be read in conjunction with the
accompanying notes.
Platinum Asset Management Limited Annual Report 2017
50
Consolidated Statement of Cash Flows
For the year ended 30 June 2017
NOTE
CONSOLIDATED
2017
$’000
2016
$’000
Cash flows from operating activities
Receipts from operating activities
Payments for operating activities
Income taxes paid
311,656
(65,584)
(80,686)
Net cash from operating activities
28
165,386
345,175
(60,792)
(81,922)
202,461
Cash flows from investing activities
Interest received
Purchase of term deposits
Proceeds on maturity of term deposits
Receipts from sale of financial assets
Payments for purchases of financial assets
and investments in associates
4,666
4,275
(494,394)
(464,786)
558,036
37,488
525,536
7,939
(91,356)
(105,506)
Payments for purchases of fixed assets
8
(1,097)
Dividends received
Distributions received
Less cash released on deconsolidation
Net cash (used in) investing activities
Cash flows from financing activities
Proceeds from investment by non-controlling interests 30
Dividends paid
Net cash (used in) financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the
(465)
321
11
481
7
(36,152) –
(22,321)
(32,675)
73,758
(181,592)
(107,834)
35,231
29,753
(211,225)
(181,472)
(11,686)
financial year
119,079
127,679
Effects of exchange rate changes on cash and
cash equivalents
(47)
Cash and cash equivalents at the end of the financial year
154,263
3,086
119,079
The above consolidated statement of cash flows should be read in conjunction with the accompanying
notes.
Platinum Asset Management Limited Annual Report 2017
51
Notes to the Financial Statements
30 June 2017
Note 1. Significant Accounting Policies
The principal accounting policies adopted in the preparation of the financial
statements are set out below. These policies have been consistently applied to
all the years presented, unless otherwise stated.
Basis of preparation
These general purpose financial statements have been prepared in accordance
with Australian Accounting Standards and Interpretations issued by the
Australian Accounting Standards Board (“AASB”) and the Corporations Act 2001,
as appropriate for for-profit oriented entities. These financial statements also
comply with International Financial Reporting Standards as issued by the
International Accounting Standards Board (“IASB”).
The financial statements have been prepared on the basis of fair value
measurement of assets and liabilities, except where otherwise stated.
Critical accounting estimates
The preparation of the financial statements requires the use of certain critical
accounting estimates. It also requires management to exercise its judgement in
the process of applying the consolidated entity’s accounting policies. The areas
involving a higher degree of judgement or complexity, or areas where assumptions
and estimates have been made, are disclosed in Note 2.
Parent entity information
In accordance with the Corporations Act 2001, these financial statements present
the results of the consolidated entity only and have been prepared on the same
basis as the consolidated entity financial statements. Supplementary information
about the parent entity is disclosed in Note 25.
Principles of consolidation
The consolidated financial statements incorporate the assets and liabilities of
all subsidiaries of Platinum Asset Management Limited (“Company” or “parent
entity”) as at 30 June 2017 and the results of all subsidiaries for the financial year.
Platinum Asset Management Limited and its subsidiaries together are referred to
in these financial statements as the ‘consolidated entity’ or ‘group’.
Subsidiaries are all those entities over which the consolidated entity has control.
The consolidated entity controls an entity when the consolidated entity is exposed
to, or has rights to, variable returns from its involvement with the entity and has
the ability to affect those returns through its power to direct the activities of the
entity. Subsidiaries are fully consolidated from the date on which control is
transferred to the consolidated entity. They are de-consolidated from the date
that control ceases.
Platinum Asset Management Limited Annual Report 2017 52
Notes to the Financial Statements
30 June 2017
Note 1. Significant Accounting Policies – continued
Principles of consolidation – continued
Intercompany transactions, balances and unrealised gains on transactions
between entities in the consolidated entity are eliminated. Accounting policies of
subsidiaries have been changed where necessary to ensure consistency with the
policies adopted by the consolidated entity.
Where the consolidated entity loses control over a subsidiary, it derecognises the
assets, liabilities and non-controlling interest in the subsidiary together with any
cumulative translation differences recognised in equity.
On 26 January 2017, as a result of external investment of A$129 million into
Platinum World Portfolios Plc (“PWP”), PIML’s interest reduced to a level that was
below 20%. PWP was deconsolidated from the Platinum consolidated entity from
this date and equity accounting has been applied. At 30 June 2017, PIML’s interest
in PWP was 14.49%.
With respect to the reporting of PWP, the consolidated statement of profit or loss
and other comprehensive income discloses PWP’s direct investment income and
expenses for the period 1 July 2016 to 26 January 2017 and PIML’s share of PWP’s
net assets for the period 26 January 2017 to 30 June 2017.
Equity investments in associates
An associate is an entity over which the consolidated entity exercises significant
influence but not control over its financial and operating policies. Significant
influence is the power to participate in the financial and operating policy decisions
of the investee, but does not control or jointly control those policies. Investments
in associates are accounted for using the equity method of accounting in the
financial statements. When necessary, adjustments are made to the financial
statements of associated entities to bring their accounting policies and reporting
dates into line with the consolidated entity’s accounting policies. At 30 June 2017,
the consolidated entity was assessed as having significant influence over
Platinum Asia Investments Limited and Platinum World Portfolios Plc, as a
result of its direct investment and investment management activities.
Under the equity method, the investment in an associate is carried in the statement
of financial position at cost plus post acquisition changes in the consolidated entity’s
share of net assets of the associate. Where an associate was previously a controlled
entity of the consolidated entity, the deemed cost for the purpose of applying the
equity method is the fair value on the date that the consolidated entity ceased to
have a controlling interest. After application of the equity method, the consolidated
entity determines whether it is necessary to recognise any impairment loss with
respect to the consolidated entity’s net investments in associates.
Platinum Asset Management Limited Annual Report 2017 53
Note 1. Significant Accounting Policies – continued
Equity investments in associates – continued
The consolidated entity’s share of an associate’s post-acquisition profit or loss
is recognised in the consolidated entity’s statement of profit or loss and other
comprehensive income and adjusted against the carrying amount of the
investment. Dividends or distributions received or receivable from an associate
are recognised in the consolidated entity’s statement of profit or loss and other
comprehensive income, with an associated reduction in the carrying value of
the investment.
Operating segments
Operating segments are presented using the ‘management approach’, where the
information presented is on the same basis as the internal reports provided to
the Chief Operating Decision Makers (“CODM”). The CODM refers to the Board
of the Company, who are responsible for the allocation of resources to operating
segments and assessing their performance. Refer to Note 3 for further information.
Foreign currency translation
Functional and presentation currency
Items included in the financial statements are measured using the currency of
the primary economic environment in which the consolidated entity operates
(‘the functional currency’). The consolidated financial statements are presented
in Australian dollars ($), which is the consolidated entity’s functional and
presentation currency.
Foreign currency transactions
Foreign currency transactions are translated into Australian dollars using the
exchange rates prevailing at the dates of the transactions. Foreign exchange
gains and losses resulting from the settlement of such transactions and from
the translation at balance date exchange rates of monetary assets and liabilities
denominated in foreign currencies are recognised in the statement of profit or
loss and other comprehensive income.
Other offshore companies within the consolidated entity
The results and financial position of companies in the entity that have a functional
currency different from the presentation currency are translated into the
presentation currency as follows:
– assets and liabilities for the consolidated statement of financial position
presented are translated at the closing rate at the date of the consolidated
statement of financial position;
Platinum Asset Management Limited Annual Report 2017 54
Notes to the Financial Statements
30 June 2017
Note 1. Significant Accounting Policies – continued
Foreign currency translation – continued
Other offshore companies within the consolidated entity – continued
– income and expenses for the consolidated statement of profit or loss and other
comprehensive income are translated at the date of transaction, or in certain
instances, for practical purposes, a rate that approximates the rate at
transaction date is used (for example, an average rate); and
– any exchange rate differences are recognised in other comprehensive income
and accumulated as a separate reserve in equity.
The foreign currency reserve is recognised in the consolidated statement of
profit or loss and other comprehensive income when the foreign operation or
net investment is disposed of.
Financial assets/liabilities at fair value through profit or loss
Under AASB 139: Financial Instruments: Recognition and Measurement, investments
are classified in the consolidated entity’s statement of financial position as
“financial assets/liabilities at fair value through profit or loss”. Derivatives and
forward currency contracts are classified as financial instruments “held for
trading” and equity securities are designated at fair value through profit or loss
upon initial recognition.
The consolidated entity has applied AASB 13: Fair Value Measurement. AASB 13
defines fair value as “the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market employees at
the measurement date”. AASB 13 increases transparency about fair value
measurements, including the valuation techniques and inputs used to measure
fair value.
The standard prescribes that the most representative price within the bid-ask
spread should be used for valuation purposes. With respect to the consolidated
entity, the last-sale or “last” price is the most representative price within the
bid – ask spread, because it represents the price that the security last changed
hands from seller to buyer.
The consolidated entity has applied last-sale pricing as the fair value
measurement basis for equities and derivatives it holds.
AASB 13 also requires reporting entities to disclose its valuation techniques
and inputs. This is described below.
Platinum Asset Management Limited Annual Report 2017 55
Note 1. Significant Accounting Policies – continued
Financial assets/liabilities at fair value through profit or loss – continued
Fair value in an active market
The fair value of financial assets and liabilities traded in active markets use
quoted market prices at reporting date without any deduction for estimated future
selling costs. Financial assets are valued using “last-sale” pricing. Gains and
losses arising from changes in the fair value of the financial assets/liabilities are
included in the consolidated statement of profit or loss and other comprehensive
income in the period they arise.
Fair value in an inactive market
The fair value of financial assets and liabilities that are not traded in an active
market are determined using valuation techniques. These include the use of
recent arm’s length market transactions, discounted cash flow techniques or any
other valuation techniques that provide a reliable estimate of prices obtained in
actual market transactions.
Recognition/derecognition
The consolidated entity recognises financial assets and financial liabilities on the
date it becomes party to the contractual agreement (trade date) and recognises
changes in the fair value of the financial assets or financial liabilities from this date.
Investments are derecognised when the right to receive cash flows from the
investments have ceased or have been transferred and the consolidated entity
has transferred substantially all of the risks and rewards of ownership.
In accordance with Australian Accounting Standards, derivative financial
instruments are categorised as “financial assets/liabilities held for trading” and
are accounted for at fair value with changes to such values recognised through
the consolidated statement of profit or loss and other comprehensive income in
the period in which they arise. Short futures are valued based on quoted last
prices. Gains and losses arising from changes in the fair value of the financial
assets/liabilities are included in the consolidated statement of profit or loss and
other comprehensive income in the period they arise. An assessment is made at
the end of each reporting period as to whether there is objective evidence that an
investment is impaired.
Platinum Asset Management Limited Annual Report 2017 56
Notes to the Financial Statements
30 June 2017
Note 1. Significant Accounting Policies – continued
Revenue recognition
Management, administration and performance fees
Management, administration and performance fees are included as part of
operating income and are recognised as they are earned. The majority of
management fees were derived from the Platinum Trust Funds. The management
fee was calculated at 1.40% per annum of each Fund’s daily Net Asset Value.
The administration fee was calculated at a rate of up to 0.10% per annum of each
Fund’s daily Net Asset Value. A performance fee was recognised as income at the
end of the fee period to which it relates, when the consolidated entity’s entitlement
to the fee becomes certain.
Interest income
Interest income is recognised in the consolidated statement of profit or loss
and other comprehensive income and is based on the nominated interest rate
available on the bank accounts and term deposits held.
Trust distributions
Trust distributions are recognised when the consolidated entity becomes entitled
to the income.
Dividend income
Dividend income is brought to account on the applicable ex-dividend date.
Income tax
The income tax expense or benefit for the period is the tax payable on that
period’s taxable income based on the applicable income tax rate for each
jurisdiction, adjusted by the changes in deferred tax assets and liabilities
attributable to temporary differences, unused tax losses and the adjustment
recognised for prior periods, where applicable.
Deferred tax assets are recognised for deductible temporary differences and
unused tax losses only if it is probable that future taxable amounts will be
available to utilise those temporary differences and losses.
The carrying amount of recognised and unrecognised deferred tax assets are
reviewed at each reporting date. Deferred tax assets recognised are reduced to
the extent that it is no longer probable that future taxable profits will be available
for the carrying amount to be recovered.
Platinum Asset Management Limited Annual Report 2017 57
Note 1. Significant Accounting Policies – continued
Income tax – continued
Deferred tax assets and liabilities are offset only where there is a legally
enforceable right to offset current tax assets against current tax liabilities and
deferred tax assets against deferred tax liabilities; and they relate to the same
taxable authority on either the same taxable entity or different taxable entities
which intend to settle simultaneously.
Tax Consolidation Legislation
In accordance with the (Australian) Income Tax Assessment Act 1997, Platinum
Asset Management Limited is the head entity of the tax consolidated group that
includes all of its 100 per cent wholly-owned Australian subsidiaries.
Any current tax liabilities of the consolidated group are accounted for by Platinum
Asset Management Limited. Current tax expense and deferred tax assets and
liabilities are determined on a consolidated basis and recognised by the
consolidated entity.
Offshore Banking Unit (“OBU”) Legislation
In June 2010, the Australian Taxation Office declared that the consolidated group
is an Offshore Banking Unit (OBU) under Australian Taxation Law. This allows the
consolidated group to apply a concessional tax rate of 10% to net income it derives
from its offshore mandates. The concession was applied from 1 July 2010.
Current and non‑current classification
Assets and liabilities are presented in the consolidated statement of financial
position based on current and non-current classification.
Asset/liabilities are classified as current when: it is expected or there is a legal
obligation for the asset/liability to be realised or settled within 12 months after
the reporting period. All other assets/liabilities are classified as non-current.
Deferred tax assets and liabilities are always classified as non-current.
Trade and other receivables
All receivables are measured at amortised cost, are not discounted, and are
recognised when a right to receive payment is established. Trade receivables
are predominantly comprised of management and performance fees earned,
but not received, at balance date. Any debts that are known to be uncollectible
are written off.
Platinum Asset Management Limited Annual Report 2017 58
Notes to the Financial Statements
30 June 2017
Note 1. Significant Accounting Policies – continued
Cash and cash equivalents
In accordance with AASB 107: Statement of Cash Flows, cash includes deposits at
call and cash at bank that are used to meet short-term cash requirements and
cash held in margin accounts. Cash equivalents include short-term deposits of
three months or less from the date of acquisition that are readily convertible into
cash. Cash and cash equivalents at the end of the financial year, as shown in the
consolidated statement of cash flows, are reconciled to the related item in the
consolidated statement of financial position.
Under AASB 107, term deposits that have maturities of more than three months
from the date of acquisition are not included as part of “cash and cash equivalents”
and have been disclosed separately in the consolidated statement of financial
position. All term deposits are held with licensed Australian banks.
Margin accounts comprise cash held as collateral for derivative transactions.
Payments and receipts relating to the purchase and sale of term deposits are
classified as “cash flows from investing activities”.
Receipts from operating activities include management, administration and
performance fees receipts. Payments for operating activities include payments
to suppliers and employees.
Fixed assets
Fixed assets are stated at historical cost less depreciation. Fixed assets
(other than in-house software and applications in the course of construction
and development) are depreciated over their estimated useful lives using the
diminishing balance method.
The expected useful lives are as follows:
Computer equipment
Software
In-house software and applications 4 years
Communications equipment
Office fit out
Office furniture and equipment
4–10 years
3–13 years
5–13 years
4 years
2½ years
The residual values, useful lives and depreciation methods are reviewed, and
adjusted if appropriate, at each reporting date.
A fixed asset is derecognised upon disposal or when there is no future economic
benefit to the consolidated entity. Gains and losses between the carrying amount
and the disposal proceeds are taken to profit or loss.
Platinum Asset Management Limited Annual Report 2017 59
Note 1. Significant Accounting Policies – continued
Operating leases
Platinum Investment Management Limited has entered into a lease agreement for
the premises it occupies and pays rent on a monthly basis. Payments made under
the operating lease are charged to the consolidated statement of profit or loss
and other comprehensive income. Details of the financial commitments relating
to the lease are included in Note 22.
Trade and other payables
These amounts represent liabilities for goods and services provided to the
consolidated entity prior to the end of the financial year and which are unpaid.
Due to their general short-term nature, they are measured at amortised cost
and are not discounted. The amounts are unsecured and are usually paid within
30 days of being invoiced.
Employee benefits
Short-term employee benefits
Liabilities for wages and salaries, including non-monetary benefits, annual leave
and long service leave expected to be settled within 12 months of the reporting
date are measured at the amounts expected to be paid when the liabilities
are settled.
Other long-term employee benefits
The liability for annual leave and long service leave not expected to be settled
within 12 months of the reporting date are measured as the present value of
expected future payments to be made in respect of services provided by
employees up to the reporting date. Consideration is given to expected future
wage and salary levels, experience of employee departures and periods of
service. Expected future payments are discounted using market yields at the
reporting date on corporate bonds.
Issued capital
Ordinary shares are classified as equity. When Platinum, via an Employee Share
Trust, purchases PTM shares on-market pursuant to the Deferred Incentive Plan
(see the “Share-based payments” accounting policy below for further details),
the consideration paid is deducted from total shareholders’ equity and the shares
treated as treasury shares. Treasury shares are recorded at cost and when any
restrictions on the sale of PTM shares are lifted, generally on vesting, the cost is
adjusted to the share-based payments reserve.
Dividends
Dividends are recognised when declared during the financial year.
Platinum Asset Management Limited Annual Report 2017 60
Notes to the Financial Statements
30 June 2017
Note 1. Significant Accounting Policies – continued
Earnings per share
Basic earnings per share
Basic earnings per share is calculated by dividing the profit attributable to the
owners of Platinum Asset Management Limited, excluding any costs of servicing
equity other than ordinary shares, by the weighted average number of ordinary
shares outstanding during the financial year. Treasury shares are excluded from
the weighted average number of ordinary shares used to calculate basic (and
diluted) earnings per share.
Diluted earnings per share
Diluted earnings per share adjusts the weighted average number of shares used
to determine basic earnings per share to take into account any options that are
“in the money”, but not exercised.
Disclosure of interests in other entities
The consolidated entity has applied AASB 12: Disclosure of Interests in Other
Entities. AASB 12 requires disclosure about the nature of, and risks associated
with, the consolidated entity’s interest in other entities. An interest in another
entity refers to involvement that exposes the entity to variability of returns from
the performance of another entity and includes the means by which an entity has
control, and can include the purchase of units or shares in another entity. The
consolidated entity will apply the standard to its interest in the Platinum Trust
Funds and any of its subsidiaries and associates. Please refer to Note 24 for the
relevant disclosures.
Goods and Services Tax (“GST”)
Revenues, expenses and assets are recognised net of the amount of associated
GST, unless the GST incurred is not recoverable from the tax authority. In this
case, it is recognised as part of the cost of the acquisition of the asset or as part
of the expense.
Receivables and payables are stated inclusive of the amount of GST receivable or
payable. The net amount of GST recoverable from, or payable to, the tax authority
is included in other receivables or other payables in the statement of financial
position.
Cash flows are presented on a gross basis. The GST components of cash flows
arising from investing or financing activities which are recoverable from,
or payable to the tax authority, are presented as operating cash flows.
Commitments and contingencies are disclosed net of the amount of GST
recoverable from, or payable to, the tax authority.
Platinum Asset Management Limited Annual Report 2017 61
Note 1. Significant Accounting Policies – continued
Share‑based payments
On 2 June 2016, Platinum established a Deferred Incentive Plan, in which the
Company through an Employee Share Trust, purchased shares in the Company
(PTM shares) for future allocation to key employees of Platinum Investment
Management Limited (eligible employees). Employees selected to participate in
the Deferred Incentive Plan are at the discretion of the Nomination & Remuneration
Committee.
On an annual basis, the Nomination & Remuneration Committee will select the
eligible employees that will be granted deferred rights to receive shares in the
Company. A proportion of each eligible employee’s short-term incentive will be
deferred and the amount deferred will vary. The shares will be allocated to
eligible employee(s), on the condition that the employee remains with Platinum
for a period of four years (vesting period), from the grant date of the deferred
rights. The deferred rights may be forfeited or re-allocated to another eligible
employee, if an eligible employee leaves Platinum, prior to serving their four year
service period.
Details relating to share-based payments are set out in Note 20.
AASB 2: Share-based Payments requires an organisation to recognise an expense
for equity provided for services rendered by employees. The amount that is
recognised for provision of share based payments is derived from the fair value
of the equity instruments granted. Deferred incentives settled in PTM shares are
considered to be a share-based payments award.
The fair value of the equity instruments granted and measured at grant date is
recognised over the service period. The accounting expense will commence
when there is a “shared understanding” of the terms and conditions of the offer.
The service period may commence prior to grant date. In this case, the expense
is estimated and trued-up at grant date.
The fair value of the rights granted is recognised in the consolidated accounts as
an expense with a corresponding entry to reserves. The fair value is measured at
grant date and amortised on a straight-line basis over the vesting period that the
employees become unconditionally entitled to the share. In measuring the fair
value, an allowance has been made for the risk or probability of forfeiture, which
measures the risk of selected eligible employees leaving Platinum and forfeiting
their rights.
Platinum Asset Management Limited Annual Report 2017 62
Notes to the Financial Statements
30 June 2017
Note 1. Significant Accounting Policies – continued
Share‑based payments – continued
At each balance date, the Company reviews the number of deferred rights
granted. Adjustments are made to the share–based payments expense, if the
number of deferred rights granted has changed (e.g. through forfeitures).
The impact of any revision to the original estimate will be recognised in the
statement of profit or loss and other comprehensive income with the corresponding
entry to reserves.
The purchase of shares on-market by the Company through an Employee
Share Trust for future allocation to key employees is shown in the consolidated
statement of financial position as a debit entry to the “treasury shares” account
with the corresponding credit entry to “cash”.
Rounding of amounts
The Company is of a kind referred to in ASIC Corporations “Rounding in
Financial/Directors’ Reports” Instrument 2016/191, issued by the Australian
Securities and Investments Commission, relating to ‘rounding-off’. Amounts
in these financial statements have been rounded off in accordance with that
Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar.
Accounting Standards and Interpretations not yet mandatory or early adopted
Australian Accounting Standards and Interpretations that are of relevance to the
consolidated entity but are not mandatory and have not been early adopted for the
annual reporting period ended 30 June 2017, and the consolidated entity’s
assessment of the impact of these issued or amended Accounting Standards and
Interpretations, most relevant to the consolidated entity, are set out below.
AASB 16: Leases
AASB 16 will apply for annual reporting periods beginning on or after 1 January
2019. The new standard eliminates the classification of leases as either operating
leases or finance leases for a lessee and requires lease assets and lease
liabilities to be recognised in the statement of financial position, initially
measured at present value of future lease payments. In addition, depreciation
of the lease assets and interest on lease liabilities will be recognised in the
statement of profit or loss and other comprehensive income and the statement
of cash flows will need to separate the total amount of cash paid into a principal
portion and interest. This standard was assessed as not having a material impact
on the consolidated entity, but the consolidated entity anticipates that the adoption
of the standard from 1 January 2019 will result in increased disclosure.
Platinum Asset Management Limited Annual Report 2017 63
Note 1. Significant Accounting Policies – continued
Accounting Standards and Interpretations not yet mandatory or
early adopted – continued
AASB 15: Revenue from contracts with customers and associated amendments
AASB 15 will apply for annual reporting periods beginning on or after 1 January
2018. AASB 15 will replace AASB 111 and AASB 118. The main objective of the new
standard is to provide a single revenue recognition model based on the transfer
of goods and services and the consideration expected to be received in return for
that transfer. Revenue recognised by an asset manager will only be recognised
to the extent that it is highly probable that a significant reversal in the amount of
cumulative revenue recognised will not occur in future periods. This means that
performance fees will only be recognised once the contractual measurement
period is completed. This is consistent with how performance fees are already
recognised in the consolidated entity’s accounts. The consolidated entity
anticipates that this standard will not have a material impact on the consolidated
entity, based on work done to date. The impact of this standard will be subject to
ongoing assessment.
There are no other standards that are not yet effective that are expected to have
a material impact on the consolidated entity in the current or future reporting
periods and on foreseeable future transactions.
Note 2. Critical Accounting Judgements, Estimates and Assumptions
The preparation of the financial statements requires management to make
judgements, estimates and assumptions that affect the reported amounts in
the financial statements. Management continually evaluates its judgements and
estimates in relation to assets, liabilities, contingent liabilities, revenue and
expenses. Management bases its judgements, estimates and assumptions on
historical experience and on other factors, including expectations of future
events, management believes to be reasonable under the circumstances.
Estimation of useful lives of assets (Note 8)
The consolidated entity determines the estimated useful lives and related
depreciation charges for its fixed assets. The useful lives could change significantly
as a result of technical innovations or some other event. The depreciation charge
will increase where the useful lives are less than previously estimated useful lives.
Platinum Asset Management Limited Annual Report 2017 64
Notes to the Financial Statements
30 June 2017
Note 2. Critical Accounting Judgements, Estimates and
Assumptions – continued
Recovery of deferred tax assets (Note 5)
Deferred tax assets are recognised for deductible temporary differences only if
the consolidated entity considers it is probable that future taxable amounts will
be available to utilise those temporary differences and losses.
Assessment of control and significant influence of Platinum World Portfolios
Plc (“PWP”) (Note 21)
During the year, as a result of additional external investment, an assessment
was made that Platinum World Portfolios Plc is no longer controlled by the
consolidated entity and, was therefore, deconsolidated from the consolidated
entity.
At 30 June 2017, Platinum Investment Management Limited (and the consolidated
entity) was assessed as having significant influence over Platinum Asia Investments
Limited (“PAI”) and Platinum World Portfolios Plc (“PWP”).
Impairment assessment (Note 21)
We have conducted an impairment assessment of the carrying amount of the
investments in associates, including a look – through of each of the underlying
assets and liabilities.
Note 3. Operating Segments
The consolidated entity is organised into two main operating segments being:
– funds management: through the generation of management and performance
fees from Australian investment vehicles, its US-based investment mandates
and Platinum World Portfolios Plc (“PWP”) (since the date of deconsolidation);
and
– investments and other: through the consolidated entity’s investment in the
(a) ASX quoted, Platinum Asia Investments Limited, (b) offshore fund, PWP, and
(c) unlisted Platinum Trust Funds. Also included in this category are Australian
dollar term deposits and interest-bearing cash accounts, as well as any
associated interest derived from these.
The segment financial results, segment assets and liabilities are disclosed on the
following page(s).
Platinum Asset Management Limited Annual Report 2017 65
Note 3. Operating Segments – continued
2017
Revenue
Management, performance and
administration fees
Interest
Net foreign exchange gains on overseas
bank accounts
Net gains on financial assets and equity
in associates
Net gains on forward currency contracts,
dividends and other income
Total revenue and other income
Expenses
Profit before income tax expense
Income tax expense
Profit after income tax expense
Other comprehensive income
Total comprehensive income
Assets
FUNDS
MANAGEMENT
$’000
INVESTMENTS
AND OTHER
$’000
TOTAL
$’000
312,468
–
312,468
343
3,998
4,341
–
–
–
312,811
(62,641)
250,170
(74,170)
176,000
149
149
16,515
16,515
76
76
20,738
333,549
(330)
(62,971)
20,408
270,578
(3,761)
(77,931)
16,647
192,647
–
406
406
176,000
17,053
193,053
Cash and cash equivalents
9,256
145,007
154,263
Financial assets and equity in associates
Term deposits
Receivables and other assets
Total assets
Liabilities
Payables and provisions
Tax liabilities
Total liabilities
Net assets
–
–
32,769
42,025
9,977
7,368
17,345
24,680
91,799
74,876
259
91,799
74,876
33,028
311,941
353,966
–
1,547
1,547
310,394
9,977
8,915
18,892
355,074
Platinum Asset Management Limited Annual Report 2017
66
Notes to the Financial Statements
30 June 2017
Note 3. Operating Segments – continued
2016
Revenue
Management, performance and
administration fees
Interest
Net foreign exchange gains on overseas
bank accounts
Net losses on financial assets and equity
in associates
Net gains on forward currency contracts,
dividends and other income
Total revenue and other income
Expenses
Profit before income tax expense
Income tax expense
Profit after income tax expense
Other comprehensive income/(loss)
Total comprehensive income
Assets
Cash and cash equivalents
Financial assets and equity in associate
Term deposits
Receivables and other assets
Total assets
Liabilities
Financial liabilities
Payables and provisions
Tax liabilities
Total liabilities
Net assets
FUNDS
MANAGEMENT
$’000
INVESTMENTS
AND OTHER
$’000
TOTAL
$’000
337,894
379
–
3,689
337,894
4,068
–
–
–
338,273
(61,698)
276,575
(80,671)
195,904
–
195,904
3,439
–
–
31,503
34,942
–
9,657
9,614
19,271
15,671
5,142
5,142
(2,915)
(2,915)
469
6,385
(766)
5,619
(1,653)
3,966
(422)
3,544
115,640
97,198
138,518
1,025
352,381
182
1,512
2,147
3,841
469
344,658
(62,464)
282,194
(82,324)
199,870
(422)
199,448
119,079
97,198
138,518
32,528
387,323
182
11,169
11,761
23,112
348,540
364,211
Platinum Asset Management Limited Annual Report 2017
67
Note 3. Operating Segments – continued
The consolidated entity derived management and performance fees from
Australian investment vehicles and its US-based investment mandates and also
derived investment income from its investments in PAI and PWP. The geographic
breakdown of revenue and other income is as follows:
Geographic region
Australia
Offshore: United States and Ireland
Note 4. Income Tax Expense
The income tax expense attributable to profit comprises:
Current tax payable
Deferred tax – recognition of temporary differences
Deferred tax – credited to share-based payments reserve
Adjustment recognised for prior periods
Income tax expense
Numerical reconciliation of income tax expense:
Profit before income tax expense
Tax at the statutory tax rate of 30%
Tax effect amounts which are not deductible/(taxable) in
calculating taxable income:
Tax rate differential on offshore business income
Unrealised (gains) on investments
Realised accounting loss on PAI options
2017
$’000
2016
$’000
316,366
17,183
333,549
329,766
14,892
344,658
2017
$’000
77,874
54
91
(88)
2016
$’000
83,631
(1,259)
37
(85)
77,931
82,324
270,578
81,173
282,194
84,658
(799)
(451)
240 –
(1,733)
(240)
436
(483)
(229)
(85)
Non-taxable (gain)/loss on Platinum World Portfolios Plc
(2,379)
Other non-deductible expenses
Taxable gains/(losses) on Controlled Foreign Corporation
Adjustment recognised for prior periods
6
229
(88)
Income tax expense
77,931
82,324
Platinum Asset Management Limited Annual Report 2017
68
Notes to the Financial Statements
30 June 2017
Note 5. Non‑Current Liabilities – Net Deferred Tax Liabilities
Deferred tax liabilities comprises temporary differences attributable to:
Unrealised foreign exchange (losses)/gains on cash
Deferred Incentive Plan
Long service and annual leave
Unrealised gains/(losses) on investments
Capital expenditure not immediately deductible
Unrealised losses of Controlled Foreign Corporation
Brokerage fee
Expense accruals
Net deferred tax liabilities
2017
$’000
(17)
1,640
(978)
1,564
(814)
–
(94) –
(252)
1,049
2016
$’000
3,043
806
(939)
(667)
(736)
(229)
(283)
995
The net deferred tax liability figure is comprised of $2,155,000 (2016: $2,854,000)
of deferred tax assets and $3,204,000 (2016: $3,849,000) of deferred tax liabilities.
It is estimated that most of the non-investment related deferred tax assets will
be recovered or settled within 12 months, and are estimated to be $1,230,000
(2016: $1,222,000).
Note 6. Current Assets – Financial Assets at Fair Value through
Profit or Loss
Unlisted unit trust investments
Options in Platinum Asia Investments Limited1
Equity securities – held directly by PWP2
Derivatives – held directly by PWP2
Forward currency contracts – held directly by PWP2
2017
$’000
107
–
–
–
–
2016
$’000
102
800
48,438
24
88
107
49,452
1
2
During the prior year, Platinum Investment Management Limited (“PIML”) received 50 million
options in Platinum Asia Investments Limited (PAI). During the current year, PIML exercised
21,325,000 options and transferred 19,200,000 options to sophisticated third party investors.
The remaining 9,475,000 options expired on 15 May 2017, and lapsed without being exercised.
On 26 January 2017, Platinum World Portfolios Plc (“PWP”) was deconsolidated from the
consolidated entity and PIML’s investment was treated as an investment in an associate (see
Note 21 for further details).
Platinum Asset Management Limited Annual Report 2017
Note 7. Current Assets – Trade and Other Receivables
Trade receivables
Interest receivable
Prepayments
Dividends receivable
Proceeds from sale of financial assets
Sundry debtors
69
2017
$’000
28,762
268
1,158
–
–
11 8
2016
$’000
27,858
605
995
115
319
30,199
29,900
Trade debtors are comprised of management fees, performance fees and
administration fees derived from the Platinum Trust Funds and Mandates.
Trade receivables are received between seven to 30 days after becoming
receivable.
Interest receivable comprises accrued interest on term deposits and cash
accounts. Interest on term deposits is received on maturity. There were no
dividends receivable and proceeds from sale of financial assets at 30 June 2017
because on 26 January 2017, PWP was deconsolidated from the consolidated entity.
Platinum Asset Management Limited Annual Report 2017
70
Notes to the Financial Statements
30 June 2017
Note 8. Non‑Current Assets – Fixed Assets
Computer equipment – at cost
Less: Accumulated depreciation
Software and applications – at cost
Less: Accumulated depreciation
Communications equipment – at cost
Less: Accumulated depreciation
Office premises fit out – at cost
Less: Accumulated depreciation
Furniture and equipment – at cost
Less: Accumulated depreciation
2017
$’000
1,314
(1,097)
217
5,205
(3,997)
1,208
133
(112)
21
2,543
(1,293)
1,250
670
(537)
133
2,829
2016
$’000
1,172
(994)
178
4,343
(3,569)
774
126
(98)
28
2,468
(990)
1,478
660
(490)
170
2,628
Platinum Asset Management Limited Annual Report 2017
71
Note 8. Non‑Current Assets – Fixed Assets – continued
Reconciliations
Reconciliations of the written down values at the beginning and end of the current
and previous financial year are set out below:
COMPUTER SOFTWARE &
EQUIPMENT APPLICATIONS
$’000
$’000
COMMUN-
ICATIONS
EQUIPMENT
$’000
OFFICE
PREMISES FURNITURE &
EQUIPMENT
$’000
FIT OUT
$’000
TOTAL
$’000
Balance at 1 July 2015
Additions
Disposals
149
116
–
1,156
80
–
Depreciation expense
(87)
(462)
Balance at 30 June 2016
Additions
Disposals
178
142
–
774
862
–
Depreciation expense
(103)
(428)
Balance at 30 June 2017
217
1,208
52
4
(2)
(26)
28
8
(1)
(14)
21
1,574
233
–
(329)
1,478
75
–
(303)
1,250
199
3,130
32
–
465
(2)
(61)
(965)
170
2,628
10
–
1,097
(1)
(47)
(895)
133
2,829
At 30 June 2017, there was software and applications in the course of construction
and development of $530,043 (2016: $nil), which forms part of the “additions” line
relating to “software & applications”.
Note 9. Current Liabilities – Trade and Other Payables
Trade payables
Unclaimed dividends payable to shareholders
Payable on purchase of financial assets
GST payable
2017
$’000
3,219
545
–
2,491
6,255
2016
$’000
4,019
450
985
2,387
7,841
There was no payable on purchase of financial assets at 30 June 2017, because on
26 January 2017, PWP was deconsolidated from the consolidated entity.
Platinum Asset Management Limited Annual Report 2017
72
Notes to the Financial Statements
30 June 2017
Note 10. Current Liabilities – Financial Liabilities at Fair Value through
Profit or Loss
Derivatives – held directly by PWP
Forward currency contracts – held directly by PWP
2017
$’000
–
–
–
2016
$’000
16
166
182
There were no open derivatives or forward currency contracts at 30 June 2017,
because on 26 January 2017, PWP was deconsolidated from the consolidated entity
and treated as an investment in an associate (see Note 21 for further details).
Note 11. Current and Non‑Current Liabilities – Employee Benefits
Current liabilities
Annual leave
Long service leave
Non‑current liabilities
Payroll tax on Deferred Incentive Plan*
2017
$’000
1,364
1,897
3,261
461
461
2016
$’000
1,280
1,849
3,129
199
199
*
The payroll tax provision increased because payroll tax is payable and has been calculated on the
second tranche of deferred rights granted during the year.
Platinum Asset Management Limited Annual Report 2017
73
Note 12. Equity – Issued Capital
2017
SHARES
2016
SHARES
2017
$’000
2016
$’000
Ordinary shares –
fully paid
586,678,900
586,678,900
747,717
Treasury shares purchased
–
–
(4,784)
Total issued capital
586,678,900
586,678,900
742,933
751,355
(3,638)
747,717
Ordinary shares
Ordinary shares entitle the holder to participate in dividends and the proceeds on
the winding up of the Company in proportion to the number of and amounts paid
on the shares held.
On a show of hands every member present at a meeting in person or by proxy
shall have one vote and upon a poll each share shall have one vote.
On 13 September 2016, the Company announced an on-market share buy-back
program, in which shares will be bought-back if the PTM shares trade at a
discount to its underlying value. No shares have been bought-back.
Treasury shares
In the current year, there were additional purchases of $4,783,594 (2016: $3,638,073)
worth of PTM treasury shares under the Deferred Incentive Plan. Please refer to
Note 20 for more information. The allocation of treasury shares and closing
balance was as follows:
Opening balance
Additional shares held by the
2017
SHARES
591,578
2016
SHARES
2017
$’000
2016
$’000
–
3,638 –
Employee Share Trust
1,034,448
591,578
4,784
3,638
Shares allocated to employees
–
–
– –
Balance at the end of the
financial year
1,626,026
591,578
8,422
3,638
$4,783,594 (2016: $3,638,073) represents the amount spent on purchasing PTM
shares on-market. This amount and the associated brokerage costs have been
disclosed in the consolidated statement of cash flows as part of “cash flows from
operating activities”, because the expenditure related to employee remuneration.
Platinum Asset Management Limited Annual Report 2017
74
Notes to the Financial Statements
30 June 2017
Note 13. Equity – Reserves
Foreign currency translation reserve
Capital reserve
Share-based payments reserve
2017
$’000
114
2016
$’000
(292)
(588,144)
(588,144)
2,212
672
(585,818)
(587,764)
Foreign currency translation reserve
Exchange differences arising on translation of foreign controlled entities are
recognised in other comprehensive income and accumulated as a separate
reserve within equity. The balance of the foreign currency translation reserve
was $114,000 at 30 June 2017 (30 June 2016: ($292,000)).
Capital reserve
In 2007, in preparation for listing, a restructure was undertaken in which the
Company sold or transferred all of its assets, other than its beneficial interest
in shares in Platinum Asset Pty Limited and sufficient cash to meet its year to
date income tax liability.
The Company then split its issued share capital of 100 shares into 435,181,783
ordinary shares. It then took its beneficial interests in Platinum Investment
Management Limited to 100%, through scrip for scrip offers, in consideration
for the issue of 125,818,217 ordinary shares in the Company.
As a result of the share split and takeover offers, the Company had 561,000,000
ordinary shares on issue and beneficially held 100% of the issued share capital
of Platinum Investment Management Limited. Subsequently, 140,250,000 shares
on issue representing 25% of the issued shares of the Company were sold to the
public by existing shareholders.
The amount of $588,144,000 was established on listing as a result of the
difference between the consideration paid for the purchase of non-controlling
interests and the share of net assets acquired in the minority interests.
Share‑based payments reserve
In June 2016, the consolidated entity established and allocated rights to eligible
employees under the Deferred Incentive Plan. The amount in the share-based
payments reserve is comprised of the amortisation of the rights granted in the
current (and prior year) and any associated future tax deduction.
Please refer to Note 20 for further information.
Platinum Asset Management Limited Annual Report 2017
75
Note 13. Equity – Reserves – continued
Movements in reserves
Movements in each class of reserve during the current and previous financial
year are set out below:
SHARE-BASED
PAYMENTS
$’000
FOREIGN
CURRENCY
$’000
CAPITAL
$’000
TOTAL
$’000
Balance at 30 June 2015
Exchange rate translation
impact of foreign subsidiaries
Movement in share-based
payments reserve
Balance at 30 June 2016
Exchange rate translation impact
of foreign subsidiaries
Deconsolidation of controlled entity
Movement in share-based
payments reserve
Balance at 30 June 2017
–
–
672
672
–
–
1,540
2,212
Note 14. Equity – Retained Profits
130
(588,144)
(588,014)
(422)
–
–
–
(422)
672
(292)
(588,144)
(587,764)
(595)
1,001
–
114
–
–
–
(595)
1,001
1,540
(588,144)
(585,818)
2017
$’000
2016
$’000
Retained profits at the beginning of the financial year
175,522
185,839
Profit after income tax expense attributable to owners
of the Company
186,026
200,887
Deconsolidation of Platinum World Portfolios Plc
(1,902) –
Dividends paid (Note 15)
Retained profits at the end of the financial year
(181,687)
(211,204)
177,959
175,522
Platinum Asset Management Limited Annual Report 2017
76
Notes to the Financial Statements
30 June 2017
Note 15. Equity – Dividends
Dividends
Dividends paid during the financial year were as follows:
2017
$’000
2016
$’000
Dividend paid on 22 September 2016 (2016: 22 September 2015) of
16 cents (2016: 20 cents) per ordinary share
93,774
117,336
Dividend paid on 22 March 2017 (2016: 22 March 2016) of 15 cents
(2016:16 cents) per ordinary share
87,913
181,687
93,868
211,204
Dividends not recognised at year‑end
Since 30 June 2017, the Directors declared to pay a fully-franked dividend of
15 cents per share, payable out of profits for the 12 months to 30 June 2017.
The dividend has not been provided for at 30 June 2017, because the dividend
was declared after year-end.
Franking credits
2017
$’000
2016
$’000
Franking credits available at reporting date based on a tax
rate of 30%
72,333
69,513
Franking credits that will arise from the payment of the
amount of the provision for income tax at the reporting
date based on a tax rate of 30%
7,866
10,766
Franking credits available for subsequent financial years
based on a tax rate of 30%
80,199
80,279
Platinum Asset Management Limited Annual Report 2017
77
Note 16. Financial Risk Management
Financial risk management objectives
The Company’s and consolidated entity’s activities expose it to both direct and
indirect financial risk, including: market risk, credit risk and liquidity risk. Direct
exposure to financial risk occurs through the impact on profit of movements in
funds under management (“FUM”) and through its direct investments in the
Platinum Trust Funds, Platinum Asia Investments Limited (“PAI”) and the offshore
fund, Platinum World Portfolios Plc (“PWP”).
Indirect exposure occurs because the operating subsidiary, Platinum Investment
Management Limited, is the Investment Manager for various investment vehicles
(which include investment mandates, various unit trusts: namely the Platinum
Trust Funds and Platinum Global Fund, its ASX-listed investment vehicles:
Platinum Capital Limited and Platinum Asia Investments Limited and Platinum
World Portfolios Plc).
This note mainly discusses the direct exposure to risk of the consolidated entity.
The consolidated entity’s risk management procedures focus on managing the
potential adverse effects on financial performance caused by volatility of financial
markets.
Market risk
The key direct risks associated with the consolidated entity are those driven by
investment and market volatility and the resulting impact on FUM or a reduction
in the growth of FUM. Reduced FUM will directly impact on management fee
income and profit because management fee income is calculated as a percentage
of FUM. FUM can be directly impacted by a range of factors including:
(i)
Poor investment performance: absolute negative investment performance
will reduce FUM and relative under performance to appropriate market
benchmarks could reduce the attractiveness of Platinum’s investment
products to investors, which would impact on the growth of the business.
Poor investment performance could also trigger the termination of
Investment Mandate arrangements;
(ii) Market volatility: Platinum invests in global markets. It follows that a decline
in overseas markets, adverse exchange rate or interest rate movements will
all impact on FUM;
(iii) A reduction in the ability to retain and attract investors: that could be caused
by a decline in investment performance, but also a range of other factors,
such as the high level of competition in the funds management industry;
Platinum Asset Management Limited Annual Report 2017 78
Notes to the Financial Statements
30 June 2017
Note 16. Financial Risk Management – continued
Market risk – continued
(iv) A loss of key personnel; and
(v) Investor allocation decisions: investors constantly re-assess and re-allocate
their investments on the basis of their own preferences. Investor allocation
decisions could operate independently from investment performance, such
that funds outflows occur despite positive investment performance.
A decline in investment performance will also directly impact on performance
share fees and performance fees earned by the consolidated entity. Historically,
the amount of performance share fees earned by the consolidated entity has
fluctuated significantly from year to year and can be a material source of fee
revenue.
For those Investment Mandates that pay a performance share fee, the fee is
based on a proportion of each Mandate’s investment performance, and is
calculated at the end of each calendar year and is based on absolute (and not
relative) return.
Performance fees may be earned by the consolidated entity, if the investment
return of a Platinum Trust Fund, Platinum Capital Limited, Platinum Asia
Investments Limited, Platinum World Portfolios or applicable Mandate exceeds
its specified benchmark. Should the actual performance of one or more of these
entities be higher than the applicable benchmark, a performance fee would be
receivable for the financial year. As at 30 June 2017, performance fees of $738,524
(2016: $11,927) were receivable.
If global equity markets fell 10% over the course of the year and consequently the
consolidated entity’s FUM fell in line with global equity markets, it follows that
management fees would fall by 10%. If there was a 10% decrease in performance
of Investment Mandates over the course of the year that resulted in an actual
negative performance for the Investment Mandate for the year, then no
performance fee would be earned.
The above analysis assumes a uniform 10% fall across all global equity markets.
This is extremely unlikely as there is a large degree of variation in volatility across
markets. For example, it is quite feasible for the Chinese market to grow whilst
other Asian markets fall.
Platinum Asset Management Limited Annual Report 2017 79
Note 16. Financial Risk Management – continued
Market risk – continued
To mitigate the impact of adverse investment performance on FUM, the Investment
Manager may employ hedging strategies to manage the impact of adverse market
and exchange rate movements on the funds it manages. Market risk may be
managed through derivative contracts, including futures, options and swaps.
Currency risk may be managed through the use of forward currency contracts.
The section below discusses the direct impact of foreign currency risk, price risk
and interest rate risk on the consolidated entity’s financial instruments held at
30 June 2017.
Foreign currency risk
The consolidated entity is exposed to foreign currency risk, because:
– it holds US Dollar cash, either directly or through its direct investments;
– it derives management and performance fees from its US Dollar investment
mandates; and
– it directly invests in Platinum World Portfolios and Platinum Asia Investments
Limited.
US Dollar cash
At 30 June 2017, the consolidated entity held US$2,978,425 (equivalent to
A$3,873,618) in cash (2016: US$85,457,572 equivalent to A$114,692,756). If the
Australian Dollar had been 10% higher/lower against the US Dollar than the
prevailing exchange rate used to convert the balance with all other variables
held constant, net profit before tax would have been A$352,189 lower/A$430,464
higher (2016: A$10,426,614 lower/A$12,743,639 higher). The reduction related to
the fact that, in the current year, nearly all of the consolidated entity’s US Dollar
cash balances were repatriated into Australian Dollars.
US Dollar fees
If the Australian Dollar had been 10% higher/lower against the US Dollar than
the prevailing exchange rate used to convert the Mandate and PWP fees, with
all other variables held constant, then net profit before tax would have been
A$502,668 lower/A$614,288 higher (2016: A$889,794 lower/A$1,099,768 higher).
Platinum Asset Management Limited Annual Report 2017 80
Notes to the Financial Statements
30 June 2017
Note 16. Financial Risk Management – continued
Foreign currency risk – continued
Investment in Platinum World Portfolios (“PWP”)
Platinum Investment Management Limited’s (PIML’s) investment in PWP is
denominated in US Dollars. If the Australian Dollar had been 10% higher/lower
against the prevailing exchange rate at 30 June 2017, then the consolidated
entity’s net assets would have been A$3.4 million lower/A$4.2 million higher
(2016: A$5.7 million lower/A$7.0 million higher) (exchange rate translation effect).
Platinum World Portfolios’ investments are denominated in various foreign
currencies specific to the investments held in each of the portfolios. The foreign
currency with the largest impact on profit before tax, if there was a 10% currency
movement at 30 June 2017, was the Japanese Yen. A 10% increase/decrease in the
Australian Dollar would have caused net profit before tax to be A$726,765 lower/
A$939,761 higher, based on PIML’s interest in PWP at 30 June 2017 (2016:
A$661,886 lower/A$808,972 higher).
Investment in Platinum Asia Investments Limited
Platinum Asia Investments Limited’s investments are also denominated in foreign
currencies. The foreign currency with the largest impact on profit before tax, if
there was a 10% currency movement at 30 June 2017, was the US Dollar, which
was the currency with the largest exposure in this entity at 30 June 2017. A 10%
increase/decrease in the Australian Dollar would have caused the consolidated
entity’s net profit before tax to be A$1,579,510 lower/A$1,930,512 higher (2016:
A$1,675,000 lower/A$2,047,000 higher).
Platinum Asset Management Limited Annual Report 2017 81
Note 16. Financial Risk Management – continued
Price risk
The consolidated entity is exposed to indirect price risk through its
equity-accounted investments in Platinum Asia Investments Limited and
Platinum World Portfolios.
The table below includes the effect on net profit before tax due to a reasonably
possible change in market factors, as represented by a +/–10% movement in
the key regional indices affecting the securities exchange that each of the
consolidated entity’s investments in its two equity-accounted vehicles are
exposed, with all other variables held constant.
2017
IMPACT ON PROFIT OF A +10% MOVEMENT (A$)
Index
Japanese Nikkei
Shanghai Stock Exchange
National Stock Exchange of India
Total
IMPACT ON PROFIT OF A –10% MOVEMENT (A$)
Index
Japanese Nikkei
Shanghai Stock Exchange
National Stock Exchange of India
Total
EXPOSURE TO
INDIRECT PRICE
RISK – PAI
INVESTMENT
EXPOSURE TO
INDIRECT PRICE
RISK – PWP
INVESTMENT
–
1,029,163
2,489,443
1,138,806
719,943
–
3,209,386
2,167,969
EXPOSURE TO
INDIRECT PRICE
RISK – PAI
INVESTMENT
EXPOSURE TO
INDIRECT PRICE
RISK – PWP
INVESTMENT
–
(1,029,163)
(2,489,443)
(1,138,806)
(719,943)
–
(3,209,386)
(2,167,969)
Platinum Asset Management Limited Annual Report 2017
82
Notes to the Financial Statements
30 June 2017
Note 16. Financial Risk Management – continued
Price risk – continued
2016
IMPACT ON PROFIT OF A +10% MOVEMENT (A$)
Index
ASX All Ordinaries Index
Japanese Nikkei
Shanghai Stock Exchange
National Stock Exchange of India
S and P (US)
Total
IMPACT ON PROFIT OF A –10% MOVEMENT (A$)
Index
Japanese Nikkei
Shanghai Stock Exchange
National Stock Exchange of India
S and P (US)
Total
EXPOSURE
TO DIRECT
PRICE RISK –
PAI OPTIONS
EXPOSURE TO
INDIRECT PRICE
RISK – PAI
INVESTMENT
EXPOSURE TO
INDIRECT PRICE
RISK – PWP
INVESTMENT
800,000
–
–
–
–
–
–
1,247,000
949,000
–
–
1,049,969
739,875
547,530
669,498
800,000
2,196,000
3,006,872
EXPOSURE
TO DIRECT
PRICE RISK –
PAI OPTIONS
EXPOSURE TO
INDIRECT PRICE
RISK – PAI
INVESTMENT
EXPOSURE TO
INDIRECT PRICE
RISK – PWP
INVESTMENT
–
–
–
(1,049,969)
(1,247,000)
(739,875)
(949,000)
(547,530)
–
(669,498)
–
–
–
–
(800,000)
(2,196,000)
(3,006,872)
ASX All Ordinaries Index
(800,000)
During 2017, all PAI options were either exercised, transferred or expired and
there is no longer any options held (refer to Note 23 for further information).
Interest rate risk
At 30 June 2017, cash and term deposits are the only significant assets with
potential exposure to interest rate risk held by the consolidated entity. A movement
of +/–1% in Australian interest rates occurring on 30 June 2017 will cause the
consolidated entity’s net profit before tax to be $423,807 higher/lower, based on
the impact on its interest-bearing cash balances. An interest rate movement
at 30 June 2017 will not impact the profit earned from term deposits, as term
deposit interest rates are determined on execution.
Platinum Asset Management Limited Annual Report 2017
83
Note 16. Financial Risk Management – continued
Credit risk
Credit risk relates to the risk of a counterparty defaulting on a financial obligation
resulting in a loss to the consolidated entity (typically “non-equity” financial
instruments). Credit risk arises from the financial assets of the consolidated
entity that include: cash and term deposits. All term deposits and the liquid
“at call” cash investment of $37 million held by Platinum Investment Management
Limited are held with licensed Australian banks that all have a AA– credit rating.
All current account and other cash balances are held with counterparties that
have at least an A credit rating.
The maximum exposure to direct credit risk at balance date is the carrying
amount recognised in the consolidated statement of financial position. No assets
are past due or impaired.
Any default in the value of a financial instrument held within any of the entities
that Platinum Investment Management Limited acts as Investment Manager,
will result in reduced investment performance. There is no direct loss for the
consolidated entity other than through the ensuing reduction in FUM, as noted
above in the section on “Market Risk”. The Investment Manager employs standard
market practices for managing its credit risk exposure.
The credit quality of cash and term deposits held by each entity in the consolidated
entity via a counterparty can be assessed by reference to external credit ratings.
At 30 June 2017 and 30 June 2016, the relevant credit ratings were as follows:
Rating
AA–
A
A–
BBB+
2017
$’000
2016
$’000
225,170
3,770
–
199
147,407
110,153
1,801
65
229,139
259,426
Platinum Asset Management Limited Annual Report 2017
84
Notes to the Financial Statements
30 June 2017
Note 16. Financial Risk Management – continued
Liquidity risk
Liquidity risk is the risk that the consolidated entity will encounter difficulty
in meeting obligations associated with its liabilities. The consolidated entity
manages liquidity risk by maintaining sufficient cash reserves to cover its
liabilities and receiving management fees to meet operating expenses on a
regular basis. Management monitors its cash position on a daily basis and
prepares forecasts on a weekly basis.
Remaining contractual maturities
The following table details the consolidated entity’s remaining contractual
maturity for its liabilities. The table has been drawn up based on the undiscounted
cash flows of liabilities based on the earliest date on which the liabilities are
required to be paid.
AT CALL
$’000
WITHIN
30 DAYS
$’000
BETWEEN
1 AND 3
MONTHS
$’000
OVER
3 MONTHS
$’000
TOTAL
$’000
2017
Non‑financial liabilities
at fair value through
profit or loss
Trade payables
GST payable
Current tax payable
Unclaimed dividends payable
545
Employee-related provisions 3,261
Total non-financial liabilities
at fair value through profit
–
–
–
3,219
2,491
–
–
–
–
–
7,866
–
–
–
–
–
–
461
3,219
2,491
7,866
545
3,722
or loss
3,806
5,710
7,866
461
17,843
Platinum Asset Management Limited Annual Report 2017
85
Note 16. Financial Risk Management – continued
Financial liabilities at fair value through profit or loss
The consolidated entity had no financial liabilities at fair value through profit or
loss at 30 June 2017, because on 26 January 2017, PWP was deconsolidated from
the consolidated entity.
AT CALL
$’000
WITHIN
30 DAYS
$’000
BETWEEN
1 AND 3
MONTHS
$’000
OVER
3 MONTHS
$’000
TOTAL
$’000
2016
Non‑financial liabilities
at fair value through
profit or loss
Trade payables
GST payable
Payable on purchase of
financial assets
Current tax payable
Unclaimed dividends payable
450
Employee-related provisions 3,129
–
–
–
–
4,019
2,387
985
–
–
–
–
–
–
10,766
–
–
–
–
–
–
–
199
4,019
2,387
985
10,766
450
3,328
Total non-financial
liabilities at fair value
through profit or loss
Financial liabilities at fair
value through profit or loss
Derivative contractual
outflows
Forward currency
contractual outflows
Total financial liabilities at
fair value through
profit or loss
3,579
7,391
10,766
199
21,935
–
–
–
16
–
–
164
16
164
–
2
2
16
166
182
Platinum Asset Management Limited Annual Report 2017
86
Notes to the Financial Statements
30 June 2017
Note 16. Financial Risk Management – continued
Financial liabilities at fair value through profit or loss – continued
At 30 June 2017, the consolidated entity has sufficient cash reserves of
$227,263,123 (2016: $256,078,560) and a further $29,038,690 (2016: $28,872,577)
of receivables to cover these liabilities. The current year cash reserves figure
includes $182,876,472 of term deposits. All of these term deposits have maturities
of 6 months or less from the date of acquisition.
Accordingly, the consolidated entity does not have a significant direct exposure
to liquidity risk.
Fair value of financial instruments
Unless otherwise stated, the carrying amounts of financial instruments reflect
their fair value.
Capital risk management
(i) Capital requirements
The Company has limited capital requirements. Owing to the volatility caused by
the performance share fee and performance fee component of revenue, the
Directors smooth dividend payments and have a policy of paying out 80% to 90%
of net profit after income tax expense. This is a policy, not a guarantee.
(ii) External requirements
Platinum Investment Management Limited is required to hold an Australian
Financial Services Licence (AFSL) issued by the Australian Securities and
Investments Commission (ASIC). The AFSL authorises Platinum Investment
Management Limited to provide investment management services and act as
a Responsible Entity of Registered Managed Investment Schemes.
Platinum Investment Management Limited has complied with all externally
imposed requirements to hold an AFSL during the financial year.
Platinum Asset Management Limited Annual Report 2017 87
Note 17. Fair Value Measurement
Fair value hierarchy
AASB 13: Fair Value Measurement requires the consolidated entity to classify those
assets measured at fair value using the following fair value hierarchy model
(consistent with the hierarchy model applied to financial assets and liabilities at
30 June 2016):
(i)
quoted prices (unadjusted) in active markets for identical assets or liabilities
(level 1);
(ii) inputs other than quoted prices included within level 1 that are observable
for the asset or liability either directly (as prices) or indirectly (derived from
prices) (level 2); and
(iii) inputs for the assets or liabilities that are not based on observable market
data (unobservable inputs) (level 3).
The only financial asset or liabilities held at 30 June 2017 that was measured at
fair value were unlisted unit trust investments in the Platinum Trust Funds and
its categorisation in the fair value hierarchy model is shown below.
2017
Assets
LEVEL 1
$’000
LEVEL 2
$’000
TOTAL
$’000
Unlisted unit trust investments
Total
107
107
–
–
107
107
The consolidated entity has no assets or liabilities that are classified as level 3.
The fair value hierarchy model at 30 June 2016 (the comparative year) included
PWP’s direct investments because all of these investments were consolidated
as part of the consolidated entity in the prior year. The comparative year also
included the PAI options.
Platinum Asset Management Limited Annual Report 2017
88
Notes to the Financial Statements
30 June 2017
Note 17. Fair Value Measurement – continued
Fair value hierarchy – continued
2016
Assets
Options in Platinum Asia Investments
Limited (“PAI”)
Unlisted unit trust investments
LEVEL 1
$’000
LEVEL 2
$’000
TOTAL
$’000
800
102
–
–
800
102
Equity securities – held directly by PWP
46,753
1,685
48,438
Derivatives – held directly by PWP
Forward currency contracts – held directly
by PWP
Total
Liabilities
2
–
22
88
24
88
47,657
1,795
49,452
Derivatives – held directly by PWP
Forward currency contracts – held directly
by PWP
Total
–
–
–
16
166
182
16
166
182
The consolidated entity’s policy is to recognise transfers into and transfers out
of fair value hierarchy levels as at the end of the reporting period. There were no
transfers between levels 1 and 2 for any assets or liabilities measured at fair
value during the year.
Valuation techniques used to classify assets and liabilities as level 1
As at 30 June 2017, the unlisted unit trust investments held by the consolidated
entity were valued based on arm’s length prices. All investments remain highly
liquid and are valued on a daily basis. Accordingly, these investments have been
classified as level 1 in the fair-value hierarchy model.
Platinum Asset Management Limited Annual Report 2017
89
2017
$’000
2016
$’000
Note 18. Key Management Personnel Disclosures
The aggregate remuneration that the consolidated entity
provided Executive and Non-Executive Directors was
as follows:
Cash salary, Directors’ fees and short-term incentive
cash awards
3,984
3,774
Accounting expense related to the KMP allocation under
the Deferred Incentive Plan^
Superannuation
Increase/(decrease) in the consolidated entity’s annual and
long service leave provision
121
146
(11)
4,240
52
145
67
4,038
^
Elizabeth Norman and Andrew Stannard were the only members of KMP to receive an allocation
of rights under the Deferred Incentive Plan. The accounting expense attributable to Elizabeth
Norman and Andrew Stannard based on the allocation of these deferred rights is as follows:
2017 GRANT
2016 GRANT
TOTAL
Deferred incentive entitlement award
amount ($)
400,000
300,000
700,000
Number of deferred rights allocated to
KMP as at 30 June 2017
86,208
48,623
134,831
Total number of deferred rights allocated
to all employees at 30 June 2017
1,056,656
575,370
1,626,026
Volume-Weighted Average Price (VWAP)
of PTM shares over the seven (7) trading
days prior to grant date ($)
4.64
6.17
Service period used to determine accounting
expense
Accounting expense attributable to KMP ($)
5 years
69,600
5 years
52,200
n/a
n/a
121,800
Platinum Asset Management Limited Annual Report 2017
90
Notes to the Financial Statements
30 June 2017
Note 18. Key Management Personnel Disclosures – continued
The accounting valuation of $121,800 represents the current year portion of the
accounting fair value attributed to Elizabeth Norman and Andrew Stannard’s
award, which, in accordance with accounting standards, will be spread over the
five year service period.
Elizabeth Norman will receive 48,623 PTM shares if she remains at Platinum until
20 June 2020 and a further 64,656 PTM shares (total of 113,279 PTM shares) if she
remains at Platinum until 20 June 2021.
Andrew Stannard will receive 21,552 PTM shares if he remains at Platinum until
20 June 2021.
Interests of Non‑Executive and Executive Directors in shares
The relevant interest in ordinary shares of the Company that each Director held at
balance date was:
OPENING BALANCE
ADDITIONS
DISPOSALS
Michael Cole
Stephen Menzies
Anne Loveridge
Kerr Neilson
Andrew Clifford
Elizabeth Norman
Andrew Stannard
200,000
30,000
6,000
312,074,841
32,831,449
766,748
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
CLOSING
BALANCE
200,000
30,000
6,000
312,074,841
32,831,449
766,748
–
Platinum Asset Management Limited Annual Report 2017
91
Note 19. Remuneration of Auditors
During the financial year, the following fees were paid or payable for services
provided by PricewaterhouseCoopers (the auditor of the Company) and its
overseas network firms:
2017
$ $
2016
Audit services – PricewaterhouseCoopers
Audit and review of the financial statements and AFSL audit
91,000
97,779
Audit services for managed funds that Platinum Investment
Management Limited acts as responsible entity –
PricewaterhouseCoopers
Audit and review of the financial statements and compliance
plan audit
258,600
260,704
Audit services for managed funds that Platinum Investment
Management Limited acts as responsible entity and audit
services for Platinum World Portfolios Plc – overseas
PricewaterhouseCoopers firms
Audit of financial statements
Total audit services
Taxation services – PricewaterhouseCoopers
74,995
424,595
104,701
463,184
Compliance services
81,481
67,480
Taxation services for managed funds for which Platinum
Investment Management Limited acts as responsible entity –
PricewaterhouseCoopers
Taxation services
Taxation services – overseas PricewaterhouseCoopers firms
Foreign tax agent fees
Total taxation services
Other services – PricewaterhouseCoopers
Compliance and assurance services
Remuneration services (advice on Deferred Incentive Plan)
Total other services
431,976
418,105
21,528
534,985
114,000
52,870
166,870
47,311
532,896
158,988
46,433
205,421
Total fees paid and payable to the auditor and its related
practices
1,126,450
1,201,501
Platinum Asset Management Limited Annual Report 2017
92
Notes to the Financial Statements
30 June 2017
Note 20. Share‑Based Payments
Deferred Incentive Plan (applies to all staff)
In June 2016, a “Deferred Incentive Plan” was approved by the Nomination &
Remuneration Committee. The main objective of the Plan is to recognise the
contributions made by key employees and to retain their skills within the firm.
Eligible employees are selected by the Nomination & Remuneration Committee
during the annual remuneration cycle and the proportion of each incentive award
that is deferred will vary by employee. The number of deferred rights are
determined by dividing the discretionary deferred incentive amount allocated to
each eligible employee by the PTM share price, using a volume weighted average
price (VWAP) of the PTM shares over the seven (7) trading days prior to the grant
date. If an eligible employee remains employed at Platinum after the four year
vesting period expires, the employee has a further five years to exercise their
deferred right. If an employee resigns from Platinum before they have met the
service condition then, in most circumstances, the deferred rights will be
forfeited.
Grants generally occur on an annual basis, most likely in June of each year.
In order to satisfy the obligation to the Company that arises from the granting
of deferred awards, the Company purchases shares on-market and holds these
shares within an Employee Share Trust. On vesting, eligible employees will
receive one ordinary share in PTM from the Trust in satisfaction of each of their
rights. No fee is payable by any eligible employee on either grant or on exercise.
There is flexibility for the Board to pay cash to the eligible employee on vesting,
but the current plan envisages allocating PTM shares only.
Eligible employees will have no voting or dividend rights until their rights have
been exercised and shares have been allocated. However, the deferred rights
carry an entitlement to a dividend equivalent payment. Upon the valid exercise of
a deferred right, or deemed exercise, of a deferred right, an eligible employee will
be entitled to receive an amount approximately equal to the amount of dividends
that would have been paid to the eligible employee had they held the share from
the grant date to the date that the deferred rights are exercised.
Platinum Asset Management Limited Annual Report 2017 93
Note 20. Share‑Based Payments – continued
Deferred Incentive Plan – continued
In the current year, the value of additional deferred incentives were $4,875,000
(2016: $3,550,000), which was based on the number of deferred rights of
1,050,656 that was allocated in the current year multiplied by the VWAP share
price of $4.64.
On 20 June 2017, PIML transferred $4,790,7691 to enable the Platinum Employee
Share Trust to purchase PTM shares on-market. The amount transferred was
less than the 2017 deferred incentive award grant of $4,875,000 (2016: $3,550,000)
because 16,208 PTM shares that were purchased in the prior year were cancelled
and re-allocated to another employee.
At 30 June 2017, the aggregate value of deferred incentives was $8,425,000 (2016:
$3,550,000) and the aggregate number of PTM shares purchased was 1,626,026
shares (2016: 575,370 shares). The Trust will hold these additional shares
purchased until the vesting date of 20 June 2020 and 20 June 2021 respectively
(four years from allocation) and subsequent exercise. Refer to the table on the
following page for further information.
Employees will be entitled to Company (PTM) shares only if eligible employee(s)
remain employed with Platinum Investment Management Limited for a period of
four years from the grant date.
1
Out of this amount, $4,783,594 was used to purchase PTM shares on‑market and has been
disclosed as part of “treasury shares” in Note 12, with the balance relating to associated
brokerage costs.
Platinum Asset Management Limited Annual Report 2017 94
Notes to the Financial Statements
30 June 2017
Note 20. Share‑Based Payments – continued
Deferred Incentive Plan – continued
Model inputs used to determine the accounting expense for the deferred rights is
as follows:
2017 GRANT
2016 GRANT
TOTAL
Value of Deferred Awards converted to
deferred rights ($)
4,875,000
3,550,000
8,425,000
Total number of deferred rights allocated
to employees
1,050,656
591,578
1,642,234
Total number of additional deferred rights
cancelled
–
(16,208)
(16,208)
Total number of deferred rights allocated to
all employees at 30 June 2017
1,050,656
575,370
1,626,026
Volume-Weighted Average Price (VWAP) of
PTM shares over the seven (7) trading days
prior to grant date ($)
4.64
6.17
n/a
Estimated number of deferred rights
expected to vest based on assessment at
balance date (%)
Grant Date
Vesting Date
Service period used to determine
accounting expense
Accounting expense ($)
87%
87%
20 June 2017 20 June 2016
20 June 2021 20 June 2020
87%
n/a
n/a
5 years
848,250
5 years
5 years
600,300
1,448,550
Platinum Asset Management Limited Annual Report 2017
95
2017
$’000
2016
$’000
848 –
601
1,449
262
1,711
635
–
199
834
Note 20. Share‑Based Payments – continued
Expenses arising from share‑based payment transactions
Deferred rights granted on 20 June 2017 under the
Deferred Incentive Plan
Deferred rights granted on 20 June 2016 under the
Deferred Incentive Plan
Total share-based payments expense
Associated payroll tax expense on deferred rights
(payable on vesting)
Total
The associated payroll tax expense on deferred rights is included in staff expenses
in the consolidated statement of profit or loss and other comprehensive income
and will be paid on vesting. Payroll tax has been reflected as a provision in the
consolidated statement of financial position.
At 30 June 2017, the fair value remaining to be amortised over the remainder of
the vesting period is $3,393,030 for the deferred rights granted on 20 June 2017
and $1,853,117 for the deferred rights granted on 20 June 2016.
In order to retain and motivate employees, additional options or deferred rights
may be issued under the OPRP or Deferred Incentive Plan in the future, in
compliance with the Corporations Act 2001.
Platinum Asset Management Limited Annual Report 2017
96
Notes to the Financial Statements
30 June 2017
Note 21. Equity Investments in Associates
At 30 June 2017, Platinum Investment Management Limited (and the consolidated
entity) was assessed as having significant influence over Platinum Asia Investments
Limited (“PAI”) and Platinum World Portfolios Plc (“PWP”), because of (i) its
equity interests of 13.93% and 14.49% respectively (ii) in the case of PWP,
Stephen Menzies is a Director on the Boards of both PTM and PWP (iii) the fact
that the consolidated entity operates as Investment Manager in accordance with
the respective Investment Management Agreements, and in the case of Platinum
Asia Investments Limited, provides it with key technical information, such as
performance and exposure reports.
Consequently, at 30 June 2017, the consolidated entity’s equity investments in
PAI and PWP represent interests in associates which are accounted for using the
equity method of accounting. Information relating to this is shown below and on
the following pages.
(a) Interests in associates
NAME OF ENTITY
30 June 2017
Platinum Asia Investments Limited
(ASX code: PAI)
Platinum World Portfolios Plc (“PWP”)
30 June 2016
EQUITY
OWNERSHIP
INTEREST
%
FAIR VALUE
$’000
CARRYING
AMOUNT
$’000
13.93
14.49
50,750
39,468
90,218
53,612
38,080
91,692
Platinum Asia Investments Limited (ASX code: PAI) 17.05
44,250
47,746
The fair value of PAI reflects the 50 million shares held multiplied by the PAI
closing share price at 30 June 2017 of $1.015 (2016: $0.885).
The fair value of PWP reflects the shares held in the sub-funds multiplied by their
respective closing prices at 30 June 2017.
The carrying value reflects the consolidated entity’s share of each associate’s net
assets (see Note 21(b) for further details).
We have conducted an impairment assessment of the carrying amount including
a look-through of each of the underlying assets and liabilities of PAI. Based on
this analysis, no impairment exists at 30 June 2017.
Platinum Asset Management Limited Annual Report 2017
97
Note 21. Equity Investments in Associates – continued
(b) Carrying amount of investment using the equity method
Opening balance
2017
$’000
47,746 –
2016
$’000
Acquisition of associate (investment pursuant to the PAI IPO)
–
50,000
Initial recognition of PWP as an equity investment on
deconsolidation
Share of associates’ profit/(loss) (see Note 21(d))
Share of associates’ transaction costs in relation to the
34,210 –
9,736
(1,543)
PAI IPO, net of tax
–
(711)
Amount recognised in the consolidated statement of profit
or loss and other comprehensive income
Closing balance (see Note 21(c))
9,736
91,692
(2,254)
47,746
(c) Share of associates’ statement of financial position
PLATINUM ASIA
INVESTMENTS
LIMITED
$’000
GROUP’S
SHARE OF
ASSOCIATE
$’000
PLATINUM
WORLD
PORTFOLIOS
$’000
GROUP’S
SHARE OF
ASSOCIATE
$’000
30 June 2017
Total assets
Total liabilities
Net assets
Total group’s share of associates’
statement of financial position
(share of PAI’s net assets of
$53,612,000 and PWP’s net
assets of $38,080,000
= $91,692,000)
30 June 2016
Total assets
Total liabilities
Net assets
397,317
12,339
384,978
55,330
1,718
53,612
265,402
2,602
262,800
38,457
377
38,080
282,068
(2,105)
279,963
48,105
(359)
47,746
Platinum Asset Management Limited Annual Report 2017
98
Notes to the Financial Statements
30 June 2017
Note 21. Equity Investments in Associates – continued
(d) Associate’s net income
2017
Total investment income
Total expenses
Profit before tax
Income tax expense
Profit after tax
Total investment income
Total expenses
Profit before tax
Income tax expense
Profit after tax
2016
Total investment loss
Total expenses
Loss before tax
Income tax benefit
Loss after tax
PLATINUM ASIA
INVESTMENTS
LIMITED
$’000
GROUP’S
SHARE OF
ASSOCIATE
$’000
PLATINUM
WORLD
PORTFOLIOS
$’000
GROUP’S
SHARE OF
ASSOCIATE
$’000
61,040
(5,508)
55,532
(16,381)
39,151
8,503
(767)
7,736
(2,282)
5,454
31,158
(1,600)
29,558
– –
4,514
(232)
4,282
29,558
4,282
GROUP’S SHARE OF ASSOCIATES (TOTAL)
$’000
13,017
(999)
12,018
(2,282)
9,736
PLATINUM ASIA
INVESTMENTS
LIMITED
$’000
GROUP’S
SHARE OF
ASSOCIATE
$’000
(8,466)
(4,326)
(12,792)
3,743
(9,049)
(1,444)
(737)
(2,181)
638
(1,543)
Platinum Asset Management Limited Annual Report 2017
99
Note 22. Commitments
Lease commitments – operating
Committed at the reporting date but not recognised as
liabilities, payable:
Within one year
One to five years
Greater than five years
2017
$’000
2016
$’000
2,057
8,924
6,404 –
17,385
1,440
840
2,280
On 23 June 2017, the consolidated entity entered into a new lease over the premises
it occupies. The lease is due to expire in January 2025. The comparative numbers
were significantly lower because these numbers were based on the old lease,
which at the time, was due to expire in January 2018.
The consolidated entity has no commitments for significant capital expenditure.
Note 23. Related Party Transactions
Subsidiaries
Interests in subsidiaries are set out in Note 26.
Key management personnel
Disclosures relating to key management personnel are set out in Note 18 and the
Remuneration Report in the Directors’ Report.
Tax consolidation and dividend transactions
Any tax payable on income and gains from any entity within the tax consolidated
group and dividends are sourced from the main operating subsidiary, Platinum
Investment Management Limited (“PIML”), and paid out under the Company.
Platinum Asset Management Limited is the head entity of the consolidated tax
group and is the parent entity, and consequently, is the entity that ultimately pays
out dividends to shareholders. The amounts paid to shareholders are disclosed in
the consolidated statement of cash flows.
Platinum Asset Management Limited Annual Report 2017
100
Notes to the Financial Statements
30 June 2017
Note 23. Related Party Transactions – continued
Transactions with related parties
Platinum Investment Management Limited provides investment management
services to (i) its related party unit trusts – the Platinum Trust Funds and
Platinum Global Fund (ii) the offshore fund, Platinum World Portfolios Plc and
(iii) its two ASX – listed investment companies (LICs), Platinum Capital Limited
and Platinum Asia Investments Limited.
Platinum Investment Management Limited was entitled to receive a monthly
management fee from each of these entities, a monthly administration fee from
the Platinum Trust Funds and Platinum Global Fund and a performance fee
(that is calculated annually) based on the relative investment performance of the
Platinum Trust Funds, Platinum Capital Limited and Platinum Asia Investments
Limited. The total related party fees recognised in the statement of profit or loss
and other comprehensive income for the year ended 30 June 2017 was $260,263,536
(2016: $280,579,030). The total related party fees receivable recognised in the
statement of financial position at 30 June 2017 was $22,869,423 (2016: $21,888,293).
At 30 June 2017, Platinum Investment Management Limited (“PIML”) continued
to hold its 50 million shares (2016: 50 million shares) in PAI.
During the year, PIML transferred 19,200,000 of its 50 million options to
sophisticated third party investors for nil consideration. In addition, PIML
exercised 21,325,000 of its PAI options at the exercise price of $1 per option
and on the same day sold 21,325,000 PAI shares for $1 per share pursuant to
an on-market block trade. PIML retained the remaining 9,475,000 options and
these expired on 15 May 2017.
At 30 June 2017, the PAI shares were valued at $1.015 per share (2016:
$0.885 per share). The total fair value of PIML’s investment was $50,750,000
(2016: $44,250,000) for the shares and $nil for the options (2016: $800,000).
Platinum Investment Management Limited held investments in the Platinum
Trust Funds. At 30 June 2017, the amount of this investment as disclosed in the
consolidated statement of financial position was $107,453 (2016: $101,711).
The income distribution relating to this, as disclosed in the consolidated statement
of profit or loss and other comprehensive income was $10,516 (2016: $6,819).
Platinum Asset Management Limited Annual Report 2017 101
Note 23. Related Party Transactions – continued
Transactions with related parties – continued
The fair value of Platinum Investment Management Limited’s seeding investment
of US$25 million (equivalent to A$35,231,000) in the offshore fund, Platinum
World Portfolios Plc (“PWP”) at 30 June 2017 (and 30 June 2016) is shown in the
table below.
30 June 2017
30 June 2016
INTEREST
%
FAIR VALUE
OF INTEREST
A$’000
14.49
51.90
39,468
32,780
Mr Stephen Menzies is Platinum Investment Management Limited’s nominee
on the Board of PWP. Platinum Investment Management Limited reimburses
Stephen Menzies for any incidental travel and accommodation associated with
attendance at Board meetings in Ireland. At 30 June 2017, the amount reimbursed
was $18,488 (2016: $20,639).
With respect to PWP, PIML has undertaken to limit the annual expenses of each
of PWPs sub-funds through the use of a voluntary expense cap, where total
expenses of each sub-fund does not exceed a specified limit (for example:
for the base fee class(es), the limit or cap is 1.65% of the Net Asset Value of each
sub-fund). At 30 June 2017, the total amount paid or payable by PIML to PWP in
respect of expenses for the period was A$58,683 (2016: A$337,413).
During the prior year, the Company established and allocated rights to eligible
employees under the Deferred Incentive Plan. A second tranche of rights were
allocated to eligible employees in the current year.
On 20 June 2017, PIML transferred $4,790,769 to enable the Platinum Employee
Share Trust to purchase PTM shares on-market. The amount transferred was less
than the 2017 deferred incentive award grant of $4,875,000 (2016: $3,550,000)
because 16,208 PTM shares that were purchased in the prior year were cancelled
and re-allocated to another employee.
Platinum Asset Management Limited Annual Report 2017
102
Notes to the Financial Statements
30 June 2017
Note 23. Related Party Transactions – continued
Transactions with related parties – continued
After the expiration of four years from grant date, PTM shares will be allocated to
key employees of Platinum if they remain employees of Platinum for the vesting
period of four years and exercise their entitlement to these shares. If an employee
leaves before the expiry of four years, the shares will be forfeited and may be
re-allocated to other employees. See Note 20 for further details.
In the current year, the consolidated entity paid $200,000 to OneVue Services Pty
Limited for the provision of services associated with the build, customisation and
enhancement of the Platinum website. OneVue is a related entity of the Chairman
of Platinum Asset Management Limited, Mr Michael Cole.
Loan Agreements with related parties
There were no formal loan agreements executed with related parties at the
current and previous reporting date, but there are intercompany receivables
and payables.
Note 24. Disclosure of Interests in Other Entities
(a) Structured entity disclosures (excluding subsidiaries and associates)
A structured entity is an entity that is not part of the consolidated entity, despite
one or more entities within the consolidated entity purchasing units or shares in
the other (structured) entity. The relevant activities of unconsolidated structured
entities are directed by the investment manager by means of contractual
arrangements, such as an Investment Management Agreement.
At 30 June 2017, the consolidated entity holds an investment that can be described
as a structured entity, via Platinum Investment Management Limited (“PIML”)
holding investments of less than 1% in each of the Platinum Trust Funds, and for
the FY 17 year, receiving management, administration and performance fees for
its role as investment manager.
The following table provides information in relation to this investment:
2017
$’000
2016
$’000
Net Asset Value attributable to all investors
Platinum Trust Funds
16,317,146
16,777,587
Maximum exposure (includes PIMLs interest & fees receivable)
Platinum Trust Funds
21,754
21,403
Platinum Asset Management Limited Annual Report 2017
103
Note 24. Disclosure of Interests in Other Entities – continued
(b) Subsidiary and associate disclosures
The table below discloses the Net Asset Value relating to the Company’s
subsidiaries and associates at 30 June:
ENTITY
Current period – 30 June 2017
McRae Pty Limited
Platinum Asset Pty Limited
Platinum Investment Management Limited
Platinum Asia Investments Limited
Platinum World Portfolios Plc
Platinum Employee Share Trust (market value
of PTM shares purchased on-market at
balance date plus excess cash)^
PIMA Corp (US)
NET
ASSET VALUE
ATTRIBUTABLE
TO ALL
INVESTORS
$’000
EXTENT
OF PIML’S
INTEREST
%
MAXIMUM
EXPOSURE
(PIML’S
INTEREST PLUS
AMOUNTS
RECEIVABLE)
$’000
100.00
100.00
100.00
13.93
14.49
13,677
42,362
190,512
384,978
262,800
13,677
42,362
190,512
53,973
38,474
100.00
100.00
7,531
185
7,531
185
902,045
346,714
Prior period – 30 June 2016
McRae Pty Limited
Platinum Asset Pty Limited
Platinum Investment Management Limited
Platinum Asia Investments Limited
Platinum World Portfolios Plc
Platinum Employee Share Trust (market value
of PTM shares purchased on-market at
balance date plus excess cash)^
PIMA Corp (US)
100.00
100.00
100.00
17.05
51.90
100.00
100.00
13,677
42,362
183,104
279,963
63,122
13,677
42,362
183,104
47,998
32,787
3,407
189
3,407
189
585,824
323,524
^
Platinum Employee Share Trust holds PTM shares on behalf of employees selected to participate
in the Deferred Incentive Plan (see Note 20 for further details).
There are no additional off-statement of financial position arrangements which
would expose the consolidated entity to potential loss.
Platinum Asset Management Limited Annual Report 2017
104
Notes to the Financial Statements
30 June 2017
Note 25. Parent Entity Information
Set out below is supplementary information about the parent entity.
Statement of profit or loss and other comprehensive income
Profit after income tax
Total comprehensive income
Statement of financial position
Total current assets
Total assets
Total current liabilities
Total liabilities
Net assets
Equity
Issued capital
Capital reserve
Retained profits
Total equity
PARENT
2017
$’000
181,770
181,770
2016
$’000
207,028
207,028
PARENT
2017
$’000
127,117
757,605
(8,412)
(8,412)
2016
$’000
131,101
762,224
(11,216)
(11,216)
749,193
751,008
742,933
747,717
4,596
1,664
1,710
1,581
749,193
751,008
Guarantees entered into by the parent entity in relation to the debts of
its subsidiaries
There are no guarantees entered into by the parent entity in relation to debts of its
subsidiaries, no contingent liabilities and no capital commitments.
Platinum Asset Management Limited Annual Report 2017
105
Note 26. Interests in Subsidiaries
The consolidated financial statements incorporate the assets, liabilities and
results of the following subsidiaries in accordance with the accounting policy
described in Note 1:
PRINCIPAL PLACE
OF BUSINESS/COUNTRY
OF INCORPORATION
OWNERSHIP INTEREST
2017
2016
% %
NAME
McRae Pty Limited
Platinum Asset Pty Limited
Platinum Investment Management
Limited
Platinum Employee Share Trust
Platinum Investment Management
Australia
Australia
Australia
Australia
Australia (PIMA) Corp.
United States
Platinum World Portfolios Plc
Ireland
100
100
100
100
100
n/a
100
100
100
100
100
51.9
Note 27. Events after the Reporting Period
Apart from the changes to the Platinum Trust Funds/Platinum Global Fund fee
options that were effective from 3 July 2017 and the dividend declared in August
2017, no other matter or circumstance has arisen since 30 June 2017 that has
significantly affected, or may significantly affect the consolidated entity’s
operations, the results of those operations, or the consolidated entity’s state
of affairs in future financial years.
Platinum Asset Management Limited Annual Report 2017
106
Notes to the Financial Statements
30 June 2017
Note 28. Reconciliation of Profit After Income Tax to Net Cash from
Operating Activities
Profit after income tax expense for the year
192,647
199,870
2017
$’000
2016
$’000
Adjustments for:
Prior period tax
Depreciation expense
Net loss on disposal of fixed assets
Purchase of shares and transaction costs associated with
the Deferred Incentive Plan
Share-based payments accounting expense
Foreign exchange differences
Interest income
(Gain)/loss on investments
Change in operating assets and liabilities:
(Increase)/decrease in trade and other receivables
Decrease/(increase) in deferred tax assets
(Increase)/decrease in prepayments
(Decrease) in trade creditors and GST
(Decrease)/increase in provision for income tax
(Decrease)/increase in deferred tax liabilities
Increase in employee provisions and payroll tax
(88)
895
1 2
(4,791)
1,449
(120)
(4,341)
(16,591)
(455)
790
(163)
(696)
(2,900)
(645)
394
(85)
965
(3,647)
635
(5,142)
(4,068)
2,446
11,245
(1,701)
(4)
(679)
1,624
442
558
Net cash from operating activities
165,386
202,461
Note 29. Earnings Per Share
2017
$’000
2016
$’000
Profit after income tax attributable to the owners of
Platinum Asset Management Limited
186,026
200,887
Weighted average number of ordinary shares used in
calculating basic and diluted earnings per share
586,052,147
586,661,000
NUMBER
NUMBER
Basic earnings per share
Diluted earnings per share
CENTS
31.74
31.74
CENTS
34.24
34.24
Platinum Asset Management Limited Annual Report 2017
107
Note 30. Non‑Controlling Interests
External (non-related party) investment in PWP represents a non-controlling
interest in the consolidated entity which can be broken down as follows:
30 JUNE 2017
$’000
30 JUNE 2016
$’000
Opening balance
Profit/(loss) after income tax attributable to non-controlling
interests
Additional external investment into PWP
Deconsolidation of PWP – external equity
Deconsolidation of PWP – current year profit ($6,621,000) and
prior year loss ($1,017,000)
28,736 –
6,621
73,758
(103,511) –
(5,604) –
(1,017)
29,753
–
28,736
External equity – Platinum World Portfolios Plc
External equity represents external investment into the Platinum World Portfolios
(“PWP”). During the year, net external investment into the PWP totalled
A$73,758,000 (2016: A$29,753,000).
In January 2017, an external investor invested US$97.4 million (A$129 million)
into PWP. This resulted in PIML’s interest decreasing to 16.5% on 26 January 2017.
This created the trigger point for the consolidated entity to no longer control PWP.
The results of PWP have been deconsolidated from the financial statements
and equity accounting has been applied from 26 January 2017 (see Note 21 for
further details).
Note 31. Contingent Assets and Liabilities
The new Quoted Managed Funds (QMFs) are expected to launch in September
2017, which will offer an International Fund (“PIXX”) and an Asia Fund (“PAXX”).
PIML expects to seed these Funds to a level of up to $50 million ($25 million
allocated to each Fund). There are no other contingent assets or liabilities in
existence at 30 June 2017 and 30 June 2016.
Platinum Asset Management Limited Annual Report 2017
108
Notes to the Financial Statements
30 June 2017
Note 32. Offsetting Financial Assets and Liabilities
Financial assets and liabilities are offset and the net amount reported in the
consolidated statement of financial position when there is a legally enforceable
right to offset the recognised amounts and there is an intention to settle on a net
basis or realise the asset and settle the liability simultaneously. The gross and
net positions of financial assets and liabilities that have been offset in the
consolidated statement of financial position are disclosed in the first three
columns of the table.
There were no financial assets or liabilities at fair value as at 30 June 2017,
because on 26 January 2017, PWP was deconsolidated from the consolidated
entity. The below table shows the comparative period only.
AMOUNTS OFFSET IN THE
STATEMENT OF FINANCIAL POSITION
RELATED AMOUNTS NOT
OFFSET IN THE STATEMENT
OF FINANCIAL POSITION
GROSS
AMOUNTS
NET
AMOUNTS
SET-OFF PRESENTED
IN THE
STATEMENT
GROSS OF FINANCIAL OF FINANCIAL
IN THE
STATEMENT
AMOUNTS
($’000)
POSITION
($’000)
FINANCIAL
CASH
POSITION INSTRUMENTS COLLATERAL
($’000)
($’000)(1)
($’000)
NET
AMOUNT
($’000)
30 June 2016
Financial assets
Derivatives
Forward currency
contracts
Total
Financial liabilities
Derivatives
Forward currency
contracts
Total
24
88
112
16
166
182
–
–
–
–
–
–
24
(16)
88
112
(88)
(104)
16
(16)
–
–
–
–
166
182
(88)
(104)
(78)
(78)
8
–
8
–
–
–
(1) shows the impact of arrangements between the consolidated entity and the relevant counterparty
on financial instruments that provide a right to set‑off that becomes enforceable and affects
settlement of individual financial assets and liabilities only following a specified event of default or
in other circumstances not expected to arise in the normal course of business. These arrangements
are not set‑off in the consolidated Statement of Financial Position, as they were not enforceable.
Platinum Asset Management Limited Annual Report 2017
109
Directors’ Declaration
30 June 2017
In the Directors’ opinion:
– the attached financial statements and notes comply with the Corporations Act
2001, the Accounting Standards, the Corporations Regulations 2001 and other
mandatory professional reporting requirements;
– the attached financial statements and notes comply with International
Financial Reporting Standards as issued by the International Accounting
Standards Board as described in Note 1 to the financial statements;
– the attached financial statements and notes give a true and fair view of the
consolidated entity’s financial position as at 30 June 2017 and of its
performance for the financial year ended on that date; and
– there are reasonable grounds to believe that the Company and consolidated
entity will be able to pay its debts as and when they become due and payable.
The Directors have been given the declarations required by section 295A of the
Corporations Act 2001.
Signed in accordance with a resolution of Directors made pursuant to
section 295(5)(a) of the Corporations Act 2001.
On behalf of the Directors
Michael Cole
Chairman
24 August 2017
Sydney
Kerr Neilson
Director
Platinum Asset Management Limited Annual Report 2017
110
Independent Auditor’s Report
To the members of Platinum Asset Management Limited
Report on the Audit of the Financial Report
Our opinion
In our opinion:
The accompanying financial report of Platinum Asset Management Limited (the
Company) and its controlled entities (together the Group) is in accordance with the
Corporations Act 2001, including:
(a)
(b)
giving a true and fair view of the Group’s financial position as at 30 June 2017
and of its financial performance for the year then ended; and
complying with Australian Accounting Standards and the Corporations
Regulations 2001.
What we have audited
The Group financial report comprises:
–
–
–
–
–
the Consolidated Statement of Financial Position as at 30 June 2017
the Consolidated Statement of Profit or Loss and Other Comprehensive Income
for the year then ended
the Consolidated Statement of Changes in Equity for the year then ended
the Consolidated Statement of Cash Flows for the year then ended
the notes to the Consolidated Financial Statements, which include a summary of
significant accounting policies; and
–
the Directors’ Declaration.
PricewaterhouseCoopers, ABN 52 780 433 757
One International Towers Sydney, Watermans Quay, Barangaroo, GPO Box 2650, Sydney, NSW 2001
T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au
Liability limited by a scheme approved under Professional Standards Legislation.
Platinum Asset Management Limited Annual Report 2017 111
Basis for opinion
We conducted our audit in accordance with Australian Auditing Standards.
Our responsibilities under those standards are further described in the
Auditor’s responsibilities for the audit of the financial report section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our opinion.
Independence
We are independent of the Group in accordance with the auditor independence
requirements of the Corporations Act 2001 and the ethical requirements of the
Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for
Professional Accountants (the Code) that are relevant to our audit of the financial report
in Australia. We have also fulfilled our other ethical responsibilities in accordance with
the Code.
Our audit approach
An audit is designed to provide reasonable assurance about whether the financial
report is free from material misstatement. Misstatements may arise due to fraud
or error. They are considered material if individually, or in aggregate, they could
reasonably be expected to influence the economic decisions of users taken on the
basis of the financial report.
We tailored the scope of our audit to ensure that we performed enough work to be
able to give an opinion on the financial report as a whole, taking into account the
geographic and management structure of the Group, its accounting processes and
controls, and the industry in which it operates.
Our audit approach takes into account work undertaken by key third party service
providers relevant to our audit. This includes the administrator which provides
custodian services for the trusts that the Group manages.
Platinum Asset Management Limited Annual Report 2017 112
Independent Auditor’s Report
To the members of Platinum Asset Management Limited
Materiality
Key audit
matters
Audit scope
MATERIALITY
AUDIT SCOPE
KEY AUDIT MATTERS
– For the purpose of our
audit we used overall
Group materiality of
$13.5 million, which
represents 5% of the
Group’s profit before tax.
– We applied this threshold,
together with qualitative
considerations, to
determine the scope of
our audit and the nature,
timing and extent of our
audit procedures and to
evaluate the effect of
misstatements on the
financial report as a
whole.
– We chose Group profit
before tax because,
in our view, it is the
metric against which
the performance of
the Group is most
commonly measured.
– We selected 5% based
on our professional
judgement, noting it
is within the range of
commonly acceptable
profit related thresholds.
– Our audit focused on
– Amongst other
relevant topics, we
communicated the
following key audit
matters to the Audit
and Risk Committee:
• Fee Revenue
• Offshore banking
unit taxation
• Accounting for
investment vehicles.
– These are further
described in the Key
audit matters section
of our report.
where the Group made
subjective judgements;
for example, significant
accounting estimates
involving assumptions
and inherently uncertain
future events.
– We conducted an audit
of the most financially
significant entities within
the Group being Platinum
Investment Management
Limited (PIML) and
Platinum Asset Proprietary
Limited (PAPL). This was
supplemented with risk
focused audit procedures
over corporate functions
including cash and treasury.
– In establishing the overall
approach to the Group audit,
we considered the type
of work that needed
to be performed by us,
as the Group’s auditor,
or by component auditors
operating under our
instruction.
Platinum Asset Management Limited Annual Report 2017 113
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most
significance in our audit of the financial report for the current period. The key audit
matters were addressed in the context of our audit of the financial report as a whole,
and in forming our opinion thereon, and we do not provide a separate opinion on these
matters. Further, any commentary on the outcomes of a particular audit procedure is
made in that context.
KEY AUDIT MATTER
HOW OUR AUDIT ADDRESSED
THE KEY AUDIT MATTER
Fee Revenue
Refer to note 1 – Significant accounting
policies
Revenue is the Group’s most significant
account balance in the consolidated
statement of profit or loss and other
comprehensive income. The Group
recognised revenue of $312.5 million
comprising the following revenue
streams:
– Management fees ($296.4 million);
–
Performance fees ($1.6 million); and
– Administration fees ($14.5 million).
The terms of these fees are set out in
the Group’s investment management
agreements with mandate clients
and trusts.
To assess the design and operating
effectives of relevant key controls over
recognising fee revenue, we performed
the following audit procedures amongst
others:
–
–
–
Inspected a sample of reconciliations
performed by the Group throughout
the year to determine whether the
Group’s records of assets under its
management agreed with the
administrator’s records
Read the administrator’s auditor’s
report as provided to the Group; and
Assessed our ability to place reliance
on the administrator’s auditor’s
report by considering the auditor’s
independence, experience,
competency and the results of their
procedures.
Platinum Asset Management Limited Annual Report 2017 114
Independent Auditor’s Report
To the members of Platinum Asset Management Limited
KEY AUDIT MATTER
HOW OUR AUDIT ADDRESSED
THE KEY AUDIT MATTER
Fee Revenue – continued
We considered the Group’s fee revenue
a key audit matter due to the:
–
–
Amount of the management fee
and administration fee balances.
Higher level of risk related to
performance fees arising from the:
• Manual processes involved in
calculating, reviewing and recording
the fees; and
• Complexity of performance fee
arrangements which involve the
Group assessing the performance
of relevant assets against a
specified benchmark which is
calculated using complex formulae.
These benchmarks are agreed
between the Group and its clients,
and set out in relevant investment
management agreements.
Management and administration fees
–
For management and administration
fees received from mandate clients,
we tested a sample of fee calculations
by agreeing funds under management
(FUM) and the fee rate back to the
Group’s system reports and the
relevant investment management
agreement respectively, and tracing
the fees received to bank statements.
No material exceptions were noted.
–
For management and administration
fees received from trusts managed by
the Group, we tested a sample of fees
recorded by the Group against Net
Asset Value data obtained from the
third party administrator and fee rates
obtained from the Product Disclosure
Statements and trust constitutions.
No material exceptions were noted.
Performance fees
For a sample of performance fees we:
–
Agreed the data used in the fee
calculations to the Group’s underlying
systems, agreeing the basis of the
calculations to that set out in the
relevant client agreements, agreeing
the benchmark performance to an
independent third party source, and
testing the calculations. No material
exceptions were noted
–
Agreed the performance fees
received to the Group’s relevant
bank statements.
Platinum Asset Management Limited Annual Report 2017 115
KEY AUDIT MATTER
HOW OUR AUDIT ADDRESSED
THE KEY AUDIT MATTER
Offshore banking unit taxation
Refer to note 1 - Significant accounting
policies and note 4 - Income Tax expense
The Group’s current income tax payable is
calculated in accordance with Australian
Taxation Laws in force at the balance sheet
date including those relating to Offshore
Banking Units (“OBU”).
To apply the OBU tax rates to the offshore
income tax expense calculation, the Group
must assess its OBU eligibility by
considering whether its investment
activities meet the conditions set out in the
OBU taxation laws and determine the
portion of general expenses which relate
to the OBU.
If the Group meets the OBU eligibility
requirements, a reduced tax rate of 10% is
applied to their offshore taxable income.
We considered this a key audit matter
given the judgement used by the Group to
determine and apply a methodology for
allocating general expenses to the OBU.
In assessing current income tax payable,
we performed the following audit
procedures amongst others:
–
–
–
Considered the Group’s eligibility
to apply the OBU taxation laws by
assessing its compliance with key
OBU conditions
Assessed the methodology used by
the Group to allocate expenses for
determining offshore taxable income.
We found the methodology consistent
with market practice observed by PwC
tax specialists
Agreed the key inputs (such as income
and expense balances) used in the
Group’s tax calculations to the Group’s
accounting records, noting no
material exceptions
–
Reperformed the OBU tax calculation.
Platinum Asset Management Limited Annual Report 2017 116
Independent Auditor’s Report
To the members of Platinum Asset Management Limited
KEY AUDIT MATTER
HOW OUR AUDIT ADDRESSED
THE KEY AUDIT MATTER
To assess the classification and accounting
treatment of the investment in PWP we
performed the following audit procedures
amongst others:
–
–
Obtained PWP’s offer documents,
constitution and the Investment
Management Agreement between
PIML and PWP to develop an
understanding of the scope of powers
and decision making authority held by
the Group
Assessed the Group’s exposure to
PWP’s returns by multiplying the
expected management and
performance fees of PWP by the
ownership percentage of the Group.
Accounting for investment vehicle
Refer to note 1 - Significant accounting
policies
During the year, external investors
invested $129m into Platinum World
Portfolios Plc (“PWP”) which reduced the
Group’s interest in PWP from 51.9% as at
30 June 2016 to 14.5% as at 30 June 2017.
This change required an assessment of
whether the Group continues to control
PWP or whether the Group has significant
influence over PWP.
We considered this a key audit matter
given the judgement required in
determining the appropriate classification
and accounting for the Group’s investment
in PWP in accordance with Australian
Accounting Standards. This included:
–
–
–
The level of influence the Group has
over PWP
The extent of exposure to returns or
rights to variable returns from the
Group’s involvement with PWP
The ability for the Group to use its
influence over PWP to affect the
amount of the return
At 30 June 2017, the Group concluded that
it did not control PWP but rather has
significant influence over it.
Platinum Asset Management Limited Annual Report 2017 117
Other information
The Directors are responsible for the other information. The other information
included in the Group’s annual report for the year ended 30 June 2017 comprises the
Shareholder Information and the Directors’ Report (but does not include the financial
report and our auditor’s report thereon), which we obtained prior to the date of this
auditor’s report. We also expect other information to be made available to us after the
date of this auditor’s report, including the Chairman’s Report and the Managing
Director’s Letter to Shareholders.
Our opinion on the financial report does not cover the other information and we do not,
and will not, express an opinion or any form of assurance conclusion thereon.
In connection with our audit of the financial report, our responsibility is to read the
other information identified above and, in doing so, consider whether the other
information is materially inconsistent with the financial report or our knowledge
obtained in the audit, or otherwise appears to be materially misstated.
If, based on the work we have performed on the other information that we obtained
prior to the date of this auditor’s report, we conclude that there is a material
misstatement of this other information, we are required to report that fact. We have
nothing to report in this regard.
When we read the other information not yet received as identified above, if we
conclude that there is a material misstatement therein, we are required to
communicate the matter to the directors and use our professional judgement to
determine the appropriate action to take.
Responsibilities of the directors for the financial report
The Directors of the Company are responsible for the preparation of the financial report
that gives a true and fair view in accordance with Australian Accounting Standards and
the Corporations Act 2001 and for such internal control as the directors determine is
necessary to enable the preparation of the financial report that gives a true and fair
view and is free from material misstatement, whether due to fraud or error.
In preparing the financial report, the Directors are responsible for assessing the
ability of the Group to continue as a going concern, disclosing, as applicable, matters
related to going concern and using the going concern basis of accounting unless the
directors either intend to liquidate the Group or to cease operations, or have no
realistic alternative but to do so.
Platinum Asset Management Limited Annual Report 2017 118
Independent Auditor’s Report
To the members of Platinum Asset Management Limited
Auditor’s responsibilities for the audit of the financial report
Our objectives are to obtain reasonable assurance about whether the financial report
as a whole is free from material misstatement, whether due to fraud or error, and to
issue an auditor’s report that includes our opinion. Reasonable assurance is a high
level of assurance, but is not a guarantee that an audit conducted in accordance with
the Australian Auditing Standards will always detect a material misstatement when
it exists. Misstatements can arise from fraud or error and are considered material if,
individually or in the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of the financial report.
A further description of our responsibilities for the audit of the financial report
is located at the Auditing and Assurance Standards Board website at:
www.auasb.gov.au/auditors_responsibilities/ar2.pdf. This description forms
part of our auditor’s report.
Report on the Remuneration Report
Our opinion on the Remuneration Report
We have audited the Remuneration Report included in pages 29 to 42 of the Directors’
Report for the year ended 30 June 2017.
In our opinion, the Remuneration Report of Platinum Asset Management Limited for
the year ended 30 June 2017 complies with section 300A of the Corporations Act 2001.
Responsibilities
The Directors of the Company are responsible for the preparation and presentation of
the Remuneration Report in accordance with section 300A of the Corporations Act 2001.
Our responsibility is to express an opinion on the Remuneration Report, based on our
audit conducted in accordance with Australian Auditing Standards.
PricewaterhouseCoopers
R Balding
Partner
Sydney, 24 August 2017
Platinum Asset Management Limited Annual Report 2017
Visions of an
Autonomous
Future
Designed and produced by
3C Creative Agency, 3c.com.au
Article by
Curtis Cifuentes, Investment Analyst,
Platinum Asset Management
Artwork by
Andrew McGranahan
ajmcg.com
© Platinum Asset Management Limited
In this research article,
Curtis Cifuentes, one of Platinum’s
long-time investment analysts for
the technology sector, explores
the key technological developments
that have contributed to the
gestation of self-driving cars,
the possible direct and indirect
impacts autonomous vehicles (AVs)
may have on a range of industries
as well as some of the broader
societal implications they may
bring about.
II
Preface
The history of land transportation –
and, indeed, of transportation more
generally – was shaped by a small number
of gigantic leaps.
Early on, humans learned to harness the powers of animals stronger
than ourselves, but the first real leap came with the invention of
wheels and the ability to augment biological force with mechanical
force. Then came the steam engine, and later the internal combustion
engine. This ability to turn thermal and chemical energy into
mechanical power meant that movement and transport no longer
required our physical input. Transportation did, however, still require
human cognitive input. That is now about to change, as we edge ever
closer to taking yet another monumental leap with the advent of
self-driving or “autonomous” vehicles (AVs).
Needless to say, we, at Platinum, have been following the
development of self-driving technology attentively not only for its
sheer intellectual delight, but more importantly, for its multifarious
implications for the world of business and investing. What makes
the dawn of AVs both fascinating and challenging to analyse is that
it represents the simultaneous convergence of multiple streams of
technological progress and consumer trends. The rise of electric
vehicles (EVs), enabled by improving battery technology and falling
battery prices, is coinciding with advancements in machine learning
and sensing equipment (e.g. LIDAR). Add to the mix the growing
popularity of ride-sharing services like Uber, and one can see a
powerful storm of disruption gathering.
I am pleased to share with you some of our thinking on this exciting,
yet complex, topic in Visions of an Autonomous Future. In this research
article, Curtis Cifuentes, one of Platinum’s long-time investment
analysts for the technology sector, explores the key technological
developments that have contributed to the gestation of self-driving
cars, the possible direct and indirect impacts AVs may have on
a range of industries as well as some of the broader societal
implications they may bring about.
Platinum Asset Management Limited Annual Report 2017 III
The word I wish to emphasise here is “may”. Hard as one might try
to envision the future, the truth is that it is difficult, if not impossible,
to foresee with any degree of certainty how technology with such
wide-ranging, far-reaching impact will reshape industry and society.
Most human beings are intuitively path-dependent and many resort
to extrapolation when investing in the stock market, which can lead
to missed opportunities as well as deadly traps.
There is currently no shortage of voices predicting
the imminent demise of incumbent automakers or
prophesising a new era of dominance by Silicon Valley.
However, as Curtis explains in his article, the shifting landscape of
the auto and tech industries makes this a far trickier question.
Even more difficult to gauge are the potential second-order and third-
order effects of self-driving technology, such as how it might affect
urban planning and real estate. A not-so-distant analogy is the extent
to which the ubiquity of cameras on mobile phones has changed
human interactions and the number of new products and business
models it has given rise to. One might see MMS as a logical extension
of SMS, but how many foresaw the popularity of image-sharing
platforms like Instagram? And what about Snapchat, on which some
teenagers, I’m told, conduct entire conversations by visual means?
The ability to point-and-shoot with smartphones also facilitated the
spread of QR codes and their attendant identification and payment
functions, enriched mapping and GPS technology, and is now helping
augmented reality move forward (how far did you go on PokemonGo?).
As Carl Sagan said, “It was easy to predict mass car ownership, but
hard to predict Walmart”.
We do not have all the answers. But we hope we are asking the right
questions and that this article can provide you with a few pointers
around the investment theme of autonomous vehicles.
Kerr Neilson
Managing Director
August 2017
Platinum Asset Management Limited Annual Report 2017 Visions of an
Autonomous Future
by Curtis Cifuentes
Investment Analyst, Platinum Asset Management
The speed and efficiency with which we
transport people and goods is a fundamental
driver of social and economic progress as
well as individual well-being.
Empires were built on the ability to control trade routes; fortunes
were made during the railway boom of the 19th century; railway
networks have been important nation-building exercises including
Japan with its bullet trains and, more recently, by China with its high
speed rail boom this century; cities and civilisation today have been
unmistakably shaped by the automobile, from the rise (and fall) of
Detroit to nationwide highways and even urban sprawl.
So it’s of little surprise that the tangible promise of self-driving
cars, or autonomous vehicles, has garnered such public attention,
from starry-eyed commuters enamoured by the hope of being freed
from the drudgery of the daily commute to ambitious Silicon Valley
entrepreneurs, motivated by the prospect of fortunes comparable to
those of the railway barons of a century ago.
As investors, we see exciting potential for new business models,
as well as risks to incumbent ones, in what could be characterised
as the information technology revolution disrupting the transportation
industry.
This article is loosely structured in four sections, each seeking to
answer one of the core questions that form the framework around
Platinum’s thinking on the changes autonomous vehicles may bring.
V
PART 1
Why is autonomous technology
both interesting and important?
We think that autonomous driving technology has the potential to be
more than just an expensive up-sell opportunity at car dealers.
It will reduce death and injury, change the insurance industry and
eventually, through synergies with ride-sharing services like Uber
and Lyft, change the nature of personal transport.
PART 2
Why is this happening now?
We will delve into some of the exciting technological innovations that
are bringing self-driving cars from the realm of science fiction to
reality, or, in other words, what gives us confidence that they aren’t
just a pipe-dream. Dare we suggest that an autonomous fleet of
cars is closer than most think.
PART 3
Impacts on industry.
Assuming self-driving cars do become reality, how might the
business landscape change? While many believe that incumbents
are at risk of being disrupted by new entrants, we think the outcome
might be more nuanced and there may be more turns and twists
along the way.
If, as consumers, we shift from being buyers and owners of cars
to become customers of services provided by the owners of large
autonomous fleets, it might be a pyrrhic victory for any surviving
incumbent. If the airline industry is any guide, the fleet might be
a fraction of its current size, but utilised much more efficiently.
PART 4
What might it mean for society
and civilisation?
No melodramatic exaggeration is needed to suggest that, if autonomous
fleets become widespread, there might be huge changes to the jobs
we do and even the very fabric of the cities we live in.
There will be unpredictable second and third order effects that will
surprise everyone.
Platinum Asset Management Limited Annual Report 2017 VII
PART 1
Why is autonomous
technology both
interesting and
important?
From a high level, any sign of a significant
change in the dynamics of transport is
worthy of investigation, even if some
aspects of autonomous driving are showing
signs of hype.
To illustrate one facet of the potential social and economic impact,
every year around 30,000 people die in car accidents in the United
States alone; globally the estimate is 1.2 million people. When
including car-related injuries the number rises to 3.9 million (US only,
2010) and the US Department of Transport estimates the economic
impact of these crashes to be US$242 billion or 1.6% of GDP.1
Studies show that humans are responsible, through error, alcohol or
inattention, for 94% of accidents – it’s rare that a mechanical failure
or the weather is a cause of crash. Also, to dispel any misconception
about the variability of driver skill, men behind the wheel are 50%
more likely to kill themselves than women.2 (And that’s adjusting for
distance driven – 2.1 fatalities/100m miles driven vs. 1.4/100m miles.
On fatalities alone, it’s 2.5:1).
Platinum Asset Management Limited Annual Report 2017 VIII
While the reduction in loss of life and property
alone makes the development of autonomous vehicles
a worthwhile endeavour, there are other benefits,
such as higher productivity due to less road
congestion and better use of commute time as drivers
are freed up from having to concentrate on following
that white line.
In the US, the average one-way commute was 26 minutes in 2014.
Assuming a workforce of 140 million, that works out to 30 billion
hours – or 3.5 million collective years – spent every year commuting.
The United States is unique in its car-centric culture too – the 2013
US census found that 86% of people travelled to work in a private car
(and 76% drove alone).3
One University of Texas study, which put the saving of unproductive
commute time at a much more conservative 2.7 billion hours, one-
tenth that of the previous estimate, nevertheless estimated the total
savings from productivity, fuel savings and collision costs to be
US$1.2 trillion, or 7% of GDP.4 At the very minimum, as accidents
and incidents on the road account for one-quarter of road congestion,
according to a Federal Highway Administration study,5 it’s not
unreasonable to assume that even if we all chose to sleep in our
cars on our way to work, rather than do something more productive,
commute times would be shorter.
An important reason for our excitement around autonomy comes
from its interplay with the rise in on-demand services like Uber and
Lyft. At first glance, replacing a quarter of a billion human-driven
cars with self-driven ones may not be quite as disruptive, especially
if nothing else changes. It’s hard to imagine significant reduction in
road congestion, for example, if everyone is still travelling alone in
their autonomous car. But if the kind of per-trip or per-kilometre cost
savings we envision from an autonomous fleet of electric vehicles
comes to pass, for many people car ownership will no longer be a
rational choice.
This will take cars off the road, the ones kept
on the roads will be better utilised, and everyone
will benefit from much lower cost of transport.
Platinum Asset Management Limited Annual Report 2017 IX
To draw an analogy with a change experienced in the
telecommunications industry, when voice calls just became
another stream of bits on a wide data pipe rather than a dedicated
line, it became untenable for carriers to charge dollars per minute
for international calls as a FaceTime call could be made to anywhere
in the world almost for free.
Autonomy makes getting from A to B safer, faster and a step-change
lower in cost, while also making life-changing mobility accessible to
the aged or physically or visually impaired.
There are also potential negatives, some of which we shall delve
into later in this article, and they range from the obvious impact
on employment in jobs that involve driving, such as taxis and truck
drivers, through to impacts on the insurance industry, oil demand
(we believe electric drive trains are synergistic with advances in
autonomous technology) and possibly even for the car industry as
a whole if the fleet size shrinks due to a shift away from individual
ownership to ride-sharing.
The current wave of progress in autonomous technology is taking us
into a period of upheaval and disruption, leading to the emergence of
new business models as well as the extinction of old ones, and in the
process presenting us with invaluable investment opportunities.
To put the broad market size into perspective, the smartphone
market, in which the world’s largest and most profitable company
operates, is a US$405 billion revenue market (roughly 1.5 billion
phones x US$270 in average selling price) 6.
The car market is an estimated US$1.2 trillion
market (about 100 million light vehicles are sold
globally every year), three times the size of the
smartphone market.
When one includes peripheral markets such as component suppliers,
or including services revenue such as that from ride-sharing
businesses, the revenue pool that is potentially ripe for disruption
expands significantly.
Platinum Asset Management Limited Annual Report 2017 X
Platinum Capital Limited Annual Report 2017
XI
PART 2
Why is this
happening now?
There have been premature expectations that
fully autonomous vehicles would soon be in
wide use almost since the start of the car
industry, so scepticism is well justified.
Obviously, some of the optimism is wishful thinking – the bone-
crushing tedium of long hours stuck in traffic is lost on few and let’s
not forget that the horse-drawn carriages from which we supposedly
upgraded from probably would have gotten you home safely if you fell
asleep at the wheel (or, rather, the reins).
Our optimism today stems from two key aspects of technological
innovation – one, the electric vehicle (EV), and two, machine learning,
or more specifically, advances in deep learning algorithms.
The most
incredulous
aspect of
this image is
probably the
assumption
that a family
would play
board games
together.
They might
have imagined
self-driving
cars 60 years
ago, but
smartphones
and Facebook
were clearly
beyond their
imagination.
Advertorial published by Central Power and Light between 1956 and 1957 with caption
ELECTRICITY MAY BE THE DRIVER. One day your car may speed along an electric
super-highway, its speed and steering automatically controlled by electronic devices
embedded in the road. Highways will be made safe – by electricity!
No traffic jams ... no collisions ... no driver fatigue.7
Platinum Asset Management Limited Annual Report 2017 XII
The EV is not a prerequisite to autonomous vehicles, but the inherent
simplicity of an EV (fewer moving parts, lower maintenance) is
lowering the barrier to entry for new entrants (Tesla and BYD are
two well-known examples) and we think that the influx of ambitious
new companies with fewer legacy obligations sets the stage for
accelerated development and innovation.
The horseless carriage
It may seem hard to believe today that when the first cars started appearing on the roads,
there was a huge backlash from society, with predictions ranging from obesity epidemics
(arguably a fairly accurate one) through to widespread insanity (it was feared that the
human brain couldn’t handle travelling at speed).
These early automobiles were coined “devil wagons” and it wasn’t uncommon for drivers
to have rocks or the insult “Get a horse!” hurled at them as they drove past.
In an 1896 submission to the British Association for the Advancement of Science a
scientist claimed that cars required more driver focus, “…we should not overlook the
fact that the driving of the horseless carriage calls for a larger amount of attention, if not
skill, on the part of the driver, than is necessary in regard to horse-drawn conveyances,
for he has not the advantage of the intelligence of the horse in shaping his path, and it is
consequently incumbent upon him to be ever watchful of the course his vehicle is taking.”8
It’s only taken us 100 years to get back to the level of autonomy that we gave up!
Confidence in EVs
Another reason for our excitement around autonomy stems from the
concurrent and synergistic shift from combustion engines to electric
drive trains. The reason we think cars are about to make this change
is simply because the EV is technologically superior and tantalisingly
close to being cost competitive.
While the cost of batteries is currently a significant hurdle (adding
anywhere between US$8,000 and US$30,000 to the cost of a vehicle,
depending on size), if there is any immutable rule in technology, it is
that steady innovation brings down the cost of components over time.
Lithium-ion battery packs have seen per kWh cost fall from US$1,000
to US$250 between 2010 and 2016.9 Batteries are on an experience
curve not unlike that seen in solar cells, barring any disruption in the
supply of raw materials. Apart from the obvious lithium, lithium-ion
cells contain significant amounts of cobalt, nickel and aluminium,
and electric motors contain a lot of copper.
From a technological perspective, EVs are quieter,
cleaner and more efficient, with 95% of the energy
in the batteries making it to the wheels, compared
to just 20-40% for internal combustion engines.
When looking at the total cost of ownership, that is, including the cost
of fuel and maintenance, EVs are arguably already competitive with
combustion engine cars today.
Platinum Asset Management Limited Annual Report 2017 XIII
It is for this reason that we think it is compelling
for fleet operators such as Uber and other ride-
sharing services to adopt EVs (and, concurrently,
autonomous vehicles).
It might still be hard for most individual purchasers (and the finance
companies lending to them) to get over the sticker price, but much
less so for more rational commercial operators.
Cost
EV price
premium
Higher fuel prices
Combustion
Engine
EV
Lower battery costs
Source: Curtis Cifuentes
B C
A
Time
The chart above illustrates our conceptual thinking about the
structural cost advantages of EVs. The y-axis is the total cost of
ownership of the car. Combustion engine cars have a lower sticker
price (today) and start at a lower point on the axis, but because of fuel
efficiency and maintenance costs, the running costs are higher, hence
the steeper slope. Changes in fuel prices change the slope. EVs are
more expensive up front but tend to be much cheaper to run.
As steady improvements in production technology lowers the cost of
batteries, the time it takes for an EV to ‘beat’ a traditional car moves
from point A to point B, for example. Likewise, if oil prices rise, the
crossover point moves from A to C. Conversely, falling oil prices, as
we’ve seen in recent years, lowers the slope and lengthening the
payback for EVs. One could argue that the recent resurgence of truck
and SUV popularity in the US and disappointingly low EV share has
caused in part by lower oil prices.
That crossover point depends on many factors, including the price
of the vehicle, energy prices (both gasoline and electricity), annual
driving distances and so on.
Platinum Asset Management Limited Annual Report 2017 XIV
But to give a rough example, let’s compare the Bolt EV to a Golf.
Assuming $0.10/kWh for electricity (US average retail price) and
$0.60/L gasoline prices (again, US average) the cost per 100km of
driving is $1.6 for the Chevy Bolt and $3.9 for a Golf. That’s 2.4x higher
for the Golf.10 Similarly, in a report published by UBS, they found that
annual service and maintenance requirements were also lower, at
$255 for the Bolt and $610 for the Golf. Illustrating this difference is
the maintenance schedule – apart from tyre rotation the Bolt requires
no servicing for five years or 240,000 km, compared to an oil change
every ten thousand kilometres for the Golf.
Flipping the question from ‘why now?’ to ‘why hasn’t it happened
sooner?’, and one can see more clearly what a monumental challenge
autonomous driving is.
Contrast it with the experience of flying, where the first rudimentary
autopilots were developed in the 1930s, less than 20 years after
the first commercial flights became available, and today advanced
autopilot systems have relegated human pilots to mostly monitoring
roles. (An industry joke thus describes the cockpit of the future: it will
contain one human and a dog – the human to observe the instruments
and the dog to bite the human’s hand should he try to touch anything.)
Similar shifts to autonomy have been observed in mining and
agriculture. But why not on our urban roads?
Even though driving today is 98% following the car
in front and staying between the lines, it’s the
other 2% that has hampered autonomous systems,
until recently.
Apart from a few motorways where the type of traffic is restricted,
most roads are messy, complex environments. Drivers must contend
with poor or non-existent marking, pedestrians staring at their
phones, cyclists that consider themselves above road rules, other
inattentive drivers and the occasional animal (probably that dog on
his way home from the airport). While attempts to automate the task
of driving were made on many occasions, the traditional rule-based
programming model couldn’t scale to the almost infinite variations
of situations a car might encounter on the streets, such as that
Google encountered once with their autonomous trials: a woman on
a wheelchair chasing a duck. The first sign that we might be breaking
through this impasse has come from advances made in machine
learning and in deep learning specifically.
While beyond the scope of this paper (for those interested, we urge
you to read Constance Zhang’s three-part article Infusing Machines
with Intelligence on our website), advances in deep learning have
resulted in a jump in the accuracy of image recognition algorithms
to the point where they now exceed humans’ accuracy level.
Platinum Asset Management Limited Annual Report 2017 XV
Accurately understanding the surrounding world is the first step to
building truly reliable autonomous driving systems – a self-driving
car that only recognises pedestrians on the road 80% of the time is
downright terrifying. The advances here are being driven by a diverse
range of companies that are not traditional auto makers, such as
Baidu and Google, which highlights the reason why Silicon Valley is
suddenly interested in this space.
As testament to this interest, it was during the preparation of this
paper that Intel announced the acquisition of Israeli autonomous
driving company Mobileye for US$15 billion, which is 30x Mobileye’s
2017 revenues and 60x its profits – certainly a generous price, but
potentially justified if autonomy is as transformative as we think it
might be.11
Diverging strategies
Much like the first attempts to ascend Everest tried various routes,
there are two different philosophical paths to full autonomy. The first,
favoured by incumbent carmakers, is the incremental approach: cars
have steadily added safety features through time, such as adaptive
cruise control and, more recently, emergency brake assist and lane
departure warnings.
The belief is that, by steadily increasing features
and reliability, we will eventually achieve full
autonomy. It’s a lower risk approach that leverages
existing supply chains and meshes well with the
business models of the carmakers.
The second approach, favoured by newcomers such as Google and
Baidu, is the all-or-nothing gambit – to the point where Google’s more
recent prototypes do away with the steering wheel entirely. Their view
is that, if passengers are to truly trust autonomous vehicles, they
have to be reliable 100% of the time. The challenge for the path taken
by the likes of Google, however, is that it’s a binary outcome – succeed
and it’s a winning lottery ticket; fail and you don’t have a business.
The paradox of automation
A one-leap change directly to full autonomy versus the seemingly less
risky incremental approach raise some very difficult issues that arise
in the transition period where the car is in control most of the time,
but humans might be called upon at any moment to take control when
the system decides it can no longer accurately assess the situation.
The issue is not new and NASA has been researching the impact of
autopilots on pilot skills for more than 50 years.
Platinum Asset Management Limited Annual Report 2017 XVI
The ‘paradox of automation’, simply put, is that the better the
automation, the more critical the human decisions become in the rare
times they have to take over, and yet, as humans rely more and more
on automated systems, our manual skills atrophy and we become
less and less qualified to take control in those increasingly rare
situations when we are required to.
Paradox of automation in practice – Air France Flight 447
A sobering 2014 article featured in Vanity Fair12 goes into terrifying detail on the chain
of human errors that led to the crashing of an Airbus 330 into the Atlantic Ocean and
the death of 228 people. While some might argue over the relative importance of the
various factors that resulted in the crash, the article makes compelling arguments that
reliance on automation contributed to the flight crew’s inability to assess and correct the
situation during the approximately three-minute window that they had after the autopilot
disengaged, and the otherwise perfectly functioning plane crashed into the sea.
If three experienced pilots couldn’t correctly diagnose what was going on in several
minutes, what hope does a driver, who might be dozing or deeply immersed in a movie,
have of analysing the situation and taking action within maybe as little as a few seconds?13
Studies have also shown that in the transition period, where the car is controlling itself
but the driver is still required to monitor the situation, boredom and inattentiveness
quickly sets in, regardless of the driver’s best intentions.
While the story of Air France Flight 447 is terrifying, automation has unambiguously
contributed to the improvement in overall flying safety. The same is likely to hold true
for cars, to the point where it’s not unimaginable that in the not too distant future humans
are likely to be banned from driving on public roads. For example, while there is some
contention around what exactly was being measured, the NHSTA investigation into the
death of Tesla driver Joshua Brown in 2016 found that the car’s ‘Autopilot’ feature, which
includes forward collision warning and emergency brake assist, reduced crash rates
by 40%.
Each of the two approaches has its own appeal, and it may be too
early to make a call on which will be successful. The contrast and
contest are complicated by factors such as the incumbents investing
in both strategies, of which General Motors is a good example. GM
continues to expand incrementally the advanced driver-assistance
system (ADAS) features in its current models while acquiring
autonomous start-up Cruise as well as investing in ride-sharing
company Lyft.
Similarly, it would appear that Google’s plans for its subsidiary
Waymo have over time evolved from building their own cars to
potentially licensing the technology to carmakers – not dissimilar
to the strategy of licensing Android to smartphone manufacturers.
Having observed what Microsoft did to the PC market and how
Google repeated that with the smartphone market, most carmakers
are understandably wary about ceding that much control, and,
by extension, valuable data, to a third party.
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XVIII
How do cars change?
Conceptually, the key differences between a ‘dumb’ car and an
autonomous one can be grouped into three aspects: (1) sensing, or
the range of sensors and cameras employed to see the world around
it; (2) intelligence, or the software and hardware used to comprehend
the sensory inputs and make decisions on how to respond; and (3)
actuation, the collection of motors and actuators that turn those
decisions into movement of the vehicle as well as other sensors that
provide a feedback loop so that the car knows what it is doing.
Sensing
Vision is by far the most important sense when it comes to driving
(we don’t yet possess the olfactory senses of a dog to navigate with
our noses) and therefore it’s no surprise that most autonomous
systems predominantly rely on cameras.
However, cameras are not completely reliable,
especially in adverse weather or under sunlight
glare. For this reason, many autonomous cars
also include complimentary sensing systems,
such as ultrasound, radar, and light detection
and ranging (LIDAR).
More sensors, however, add complexity and cost, not just in the
additional sensors themselves but also in the additional computing
power required to process and make sense of the extra data.
Broadly referred to as ‘sensor fusion’, it’s not a trivial task, and while it
seems intuitive that having multiple cameras and sensors should result
in safer, more reliable systems, early prototypes have struggled. As a
simple example, imagine an urban street with cars parked along one
side and a pedestrian walking between the parked cars possibly with the
intention of crossing the street. The camera might be seeing a human,
the radar might have only seen a car. How does the system decide a
course of action if it cannot be certain what it’s in fact looking at?
Mobileye and the success of simplicity
One of the most successful new entrants in the autonomous space
is Mobileye, the Israeli company recently acquired by Intel for
US$15 billion.
Many early ADAS attempts used two cameras on the assumption
that, like human vision, stereoscopic vision would improve distance
perception. But the processing systems struggled with the slightly
different images from left and right cameras, resulting in overall
lower accuracy with object recognition. So while being better in
theory, in practice stereo camera systems were both more expensive
and less reliable.
Platinum Asset Management Limited Annual Report 2017 XIX
Mobileye was unique in that it delivered accurate recognition
from a mono camera which estimated distance by the rate of
change in image size from frame to frame. This simple yet
reliable solution saw Mobileye win a majority of the early driver
assistance contracts and its systems installed on an estimated
15 million cars to date. Mobileye’s products today are far from
fully autonomous, but the company has a roadmap to autonomy
and arguably one of the most extensive – and growing – databases
of road imagery and mapping information.
While the first commercially successful system amazingly did it
with just a single camera, consensus seems to be coming to the
view that full autonomy will require a combination of different
sensing technologies to improve overall reliability.
Cameras do poorly in the dark or in foggy conditions (and lenses
can get dirty easily); LIDAR doesn’t work well in the rain; radar
has poor resolution and can only see metal objects well; and
ultrasound has poor range. Combined, however, they might be
able to cover most road conditions.
LIDAR
One of the more contentious sensing technologies, LIDAR, is a
distance sensing technology similar to radar, except that, instead
of measuring the time it takes radio waves to bounce off an object,
it emits and measures the return times and wavelengths of laser
light. The high point density of narrow beams of light enables LIDAR
to map objects with much finer resolution than radar. Current
LIDAR devices look like spinning cans of beans typically mounted on
the top of autonomous cars. Leading devices can build a 3D map of
millions of points every second with a range exceeding 100 metres.
Source: Velodyne, https://www.technologyreview.com/s/603885/autonomous-cars-lidar-sensors/
LIDAR provides unrivalled 3D mapping of the immediate environment
around the car, but it comes at a significant cost. Devices sold by
market leader Velodyne cost from several thousand dollars up to
almost US$100,000,14 depending on the specifications. They are
also prone to damage, function poorly in bad weather, and are not
particularly attractive in the way that they are conspicuously mounted
on the top of vehicles.
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XXI
There is an ongoing debate over whether autonomous cars will
require LIDAR – Tesla has claimed in the past that automation will be
achievable without LIDAR, whereas Google’s efforts seem to position
LIDAR as a pre-requisite.
In fact, there has been intense research by Google as well as others
to bring down the cost and the size of these devices, which has led
to the development of Google’s own LIDAR. (LIDAR technology is
at the centre of the brewing legal battle between Waymo (Google’s
subsidiary) and Uber, which stemmed from claims that a former
employee stole Waymo’s LIDAR designs, started a new company
(Otto) which was then acquired by Uber.) There is also promising
development happening in the field of solid-state LIDAR, which will
do away with the moving parts prone to damage and be a fraction
of the size and cost of current models.
Intelligence
Most of the intense development happening today surrounds the
fusion and interpretation of the information gathered by the sensors,
the subsequent path planning of the vehicle, and whether this
requires pre-assembled maps in excruciating detail or whether
these maps can be computed on the fly.
This battle is being played out on the streets of San Francisco and the
Bay Area, where autonomous cars from Google, Uber, Baidu, Tesla
as well as traditional carmakers such as GM, Ford, BMW and others
polish their self-driving systems and build detailed maps of cities.
Under the hood (or more often in the boot) chips from Mobileye,
Nvidia and Intel or systems from Tier 1 suppliers such as Bosch
or Delphi power the systems that drive these vehicles.
In return for permission to test these vehicles on public roads,
participants are required by the state to disclose statistics on
performance, such as ‘disengagements’, a euphemism for instances
where the human had to intervene, and observers have extrapolated
from these data who is leading in the race to full autonomy.
Based on these disclosures, it’s no surprise to see Google (Waymo)
out in front. But progress is being made at such a pace that this
information could well have become wildly inaccurate by the time this
article goes to press:
Average
distance
travelled by
autonomous
systems
without the
need for human
intervention.15
BWM
1000km
WAYMO
8000km
GM
Delphi
~100km
Bosch
UBER
Benz
Tesla
<5km
Nissan
Ford
200-300km
Platinum Asset Management Limited Annual Report 2017 XXII
While one factor in the improving reliability of autonomy has come
from the leaps in accuracy of image recognition algorithms, in turn
powered by progress made in the field of deep learning, there’s also
a split in strategy by participants when it comes to how far they’re
willing to apply deep learning to the driving problem.
At one end, the approach is somewhat more
conventional – apply deep learning trained image
recognition models to understand the environment
but more conventional rules-based programming
to drive the car.
But some, such as graphics card maker Nvidia, observing the rate
of progress achieved in machine learning, have concluded that
an ambitious end-to-end deep learning approach might be more
successful.
Oversimplifying somewhat, the idea is that if the neural network is
sufficiently complex and adequately trained, humans will not have
to think of and account for every possible road situation – rather the
black-box like neural network will just ‘know’ how to react.
We’re only just now reaching the stage where deep learning
algorithms can recognise images with decent accuracy, and even
then they can be easily fooled16.
Dachshund or bagel?
Chihuahua or muffin?
Source: unknown
It seems a huge leap of faith to assume the algorithms will improve to
that level. Most AI-driven successes to date concern relatively narrow
applications where the inputs are relatively well defined – chess, go,
image recognition. Some aspects of driving are like that, but then a lot
of it isn’t.
Platinum Asset Management Limited Annual Report 2017 XXIII
In a tangible example of where we are today, while detection
of objects such as cars is very good, current algorithms have a
problem detecting people on bicycles. Compared to cars the shape,
colours and movement are so varied that the algorithms struggle to
categorise them correctly or predict their direction of movement.17
In a hint to the massive localisation challenge developers face, the
ABC recently reported18 on how autonomous systems Volvo was
testing in Australia were being confused by kangaroos – the systems
relied on the ground as a reference point to calculate distance to the
object and not expecting things to be airborne.
In any case, a prerequisite to accurate deep learning algorithms
is a large cache of well-labelled training data. While not the sole
determinant of success, it partly explains why there is such urgency
to gather as much data with which to train the neural networks that
will drive these cars – though even this is a somewhat contentious
statement. As crazy as it sounds, some believe that a lot of the
training can be done in computer simulations – essentially training
the models in Grand Theft Auto, which is a mildly terrifying thought.
Another open question is what level of mapping data
will be required and where that is going to come
from. Similar to the data collection aspect, the
quality and accuracy of map data may be correlated to
how many cars are on the road collecting, uploading
and sharing that with the fleet.
Such a situation would tend to favour those with the largest fleet,
putting smaller volume carmakers at a disadvantage. It is for
this reason we’ve seen consortiums like HERE formed amongst
carmakers – in this case Audi, BMW and Daimler acquired Nokia’s
old mapping business with the purpose of building an independent
mapping database that isn’t hampered by a small fleet size. It’s also
why incumbent carmakers are so wary about ceding control of the
data their cars are collecting to third parties, such as Google.
Platinum Asset Management Limited Annual Report 2017 XXV
PART 3
Impact on Industry.
With enough time and space we could happily
go on and on about what we think the
business implications are of a shift to
autonomy. But with respect to our readers’
time we shall keep it to a relatively high
level overview.
Winners – incumbents or newcomers
The importance of software, and especially deep learning software
skills, is attracting a range of newcomers to the autonomous driving
space, including Google, Baidu and Uber. It’s of no surprise that
observers are looking at the software engineering skills of traditional
carmakers, concluding they pale in comparison to the likes of Google,
and deciding that they’re at significant risk of disruption.
Comparisons are made to the way Nokia and Blackberry were
disrupted by the iPhone and Android, despite significant scale and
vertical integration advantages at Nokia and efforts by both to build
competing software platforms. The disengagement data mentioned
in a previous section only seems to confirm the wide lead challengers
seem to have over the incumbents. That this transition is happening
at the same time as the transition to electric vehicles only seems
to heighten the risks – exemplified by the aura surrounding Tesla,
although China is arguably where the most exciting changes are
occurring, with huge growth in EV sales, driven mostly by car industry
newcomers such as BYD.
The concern for traditional carmakers only rises to alarm when one
observes their reluctance to embrace the future or even cheat, such
as VW famously did, than actually make low emission cars.
However, it’s too soon to write off the traditional carmakers. Looking
back through the history of the car industry it becomes apparent
that technological advances in the cars have rarely led to sustained
market share gains by any carmaker.
Rather, it has typically been innovations on the production side – such
as the first production line by Henry Ford, vertical integration in the
supply chain at GM, lean production methods at Toyota – that have
given newcomers the breathing room to build scale, which remains
the largest barrier to entry.
Platinum Asset Management Limited Annual Report 2017 XXVI
For all the bluster, Tesla can currently only manufacture fifty
thousand cars a year today, even though with a market capitalisation
of $42b it’s valued roughly the same as Nissan, which made 5.5m
cars in 2016, 100x times Tesla today. The incumbents are also aware
of the threats and are ramping investments in autonomy, through
strategic investments, such as GM into Lyft or through partnerships
with technology providers such as Mobileye or Nvidia or direct R&D –
almost all the large carmakers have facilities in the Bay Area and are
testing vehicles today.
Who will buy cars?
The outcome of 76% of Americans commuting to work alone in their
cars, is a large car fleet that is woefully under-utilised – just 4%
utilisation, or just one hour a day. The rise of ride-sharing services
such as Uber and Lyft, or even mundane taxis for that fact, give us a
glimpse of this potential future, and also explains why both Uber and
Lyft see autonomy both as an existential threat and an opportunity,
and are investing heavily in both autonomy and EVs.
While individual car ownership is unlikely to disappear soon (and as
anyone with small children will tell you how impractical ridesharing
would be) the trend could make land transport look more like the
airline industry. Looking at airline fleet utilisation, again with US data,
the entire network utilisation is just over ten hours/day or 42%, with
particularly efficient low-cost carriers exceeding twelve hours.19
Echoing this, a University of Texas study20 found that
one autonomous vehicle could replace up to twelve cars.
At the very least, if autonomy and ride sharing grow it implies greater
fleet utilisation and possibly fewer cars on the road.
When the buyer shifts from the individual to the fleet owner, it has
significant implications for the design of cars too – away from design
cues that echo the personal values of the individual to more utilitarian
and cost focused, though more reliable given the kind of distances
they’ll be expected to drive over their, possibly short, life. Most
importantly, the relationship with the end user changes – again to
use the airline analogy, a passenger’s loyalty is with the airline, not
the aircraft maker. This also explains why there’s such a land grab
on today for ride sharing services. Scale leadership at Uber or Lyft
means a better service for customers, better data and eventually
buying power with the carmakers.
Another Airline analogy – certification
What if like the airline industry autonomous cars require very
stringent certification to get on the road – will that restrict
participants to the few who can go through the process leading
to the opposite of what EVs might have led to?
But to broadly paint our current view, in the long term we are
pessimistic for car volumes but in the transition period we could
Platinum Asset Management Limited Annual Report 2017 XXVII
actually see car turnover increase, as the “smartphonification” of
the car industry encourages people to upgrade faster to get newer
safety and autonomous features. In the back of our minds however is
the risk of the popping of the US subprime auto lending bubble, which
in turn has been partly enabled by technology, namely GPS tracking
devices in cars that lenders are now installing to facilitate recovery in
the event of default.
How do cars change?
We foresee two profound changes in the how cars are made that will
impact various peripheral industries. The inclusion of sensing and
intelligence will shift the importance of sensors and software (and
the hardware it runs on) from an afterthought to centre stage. It’s no
exaggeration to say that the software will be as disruptive as iOS and
the App Store was to the phone market; a competitive autonomous
platform will become table stakes for the car industry. The second
change comes from the shift to electric drive trains, which on
one hand presents opportunities for battery makers and power
semiconductor chipmakers, while at the same time making obsolete
many technologies such as common rail diesel injection, which are
important earnings contributors to many of the carmakers’ Tier 1
suppliers such as Continental, Denso and Bosch.
Further upstream we are starting to see the impact of EVs on some
of the raw materials, with burgeoning exploration for lithium, cobalt
and graphite resources the world over, the extraction of cobalt
in particular is a pressure point, where the Democratic Republic
of Congo accounts for 60% of global production but has a poor
environmental and human rights track record on its extraction.21
What does it mean for insurance?
If human error is responsible for more than 90% of accidents and we
take humans out of the picture, the number of accidents should fall
– Tesla is already bragging about the 40% drop in crash rates from
its level 2 ADAS system. In the US around $200b of car insurance
premiums are collected by the industry every year – about one-third
of the property and casualty insurance industry.22
Looking more broadly at developed markets, Munich Re puts motor
insurance at 38%, or $500b of the broader property and casualty
market.23 For developed markets that accounts for around 1%
of GDP. It should be expected that lower claims results in lower
premiums and possibly lower margins for insurers. Again, referring
to the Munich Re report mentioned above, their modelling indicates
these technology features will shave $20b off insurance premiums
in developed markets by 2020 – from $616b to $594b, though they
don’t see premiums peaking until after 2030. The tentative signs
are there – Tesla has been experimenting with bundled insurance
and maintenance plans in Asia and there’s a (somewhat dubious)
insurance ‘app’ called Root24 that claims to offer discounts for self-
driving features.
Platinum Asset Management Limited Annual Report 2017 XXIX
PART 4
How might it
impact on
society and
civilisation?
While some of the near-term impacts on
businesses are not particularly surprising,
longer term it will be the second and third-
order effects that will be.
Followers of the autonomous space often cite Carl Sagan, who
observed, “It was easy to predict mass car ownership, but hard to
predict Walmart” – deftly illustrating that it was easy to see how
everyone might want to own a car, it wasn’t initially obvious that the
increased mobility would make big-box decentralised retail a viable
business strategy and lead to the creation of one of the world’s
largest retailers.
And retail is another industry being disrupted by technology.
By definition they will be hard to predict but also where the largest
opportunities lie. By way of example, take the invention of clear glass...
The story of glass, the printing press
and scientific discovery
A fascinating example, if a bit tortured in the context of autonomous
cars, of how difficult it can be to predict the long-term impact of chain
reactions of small innovations, is the discovery of clear glass and
its impact on the world. Human manufacture and use of glass dates
back to the Bronze Age but it was in the late thirteenth century when
a wave of innovation began in Venice, inadvertently triggered when
glass makers were concentrated, largely against their will, on the
islands of Murano. Glass was at best translucent, not transparent
until one glassmaker, Angelo Barovier, who was determined to
perfect it, discovered a method of making crystal clear glass by
adding soda ash made from saltwort plants around 1450.
This glass eventually found use in the first eyeglasses, but they were
little known outside of churches and monasteries where they were
used by aging clerics to read scripture.
Platinum Asset Management Limited Annual Report 2017 XXX
It wasn’t until Gutenberg’s printing press made the bible widely
accessible that the broader populace realised the importance of good
eyesight and demand boomed for vision correction. In another hub
of innovation, experimentation by eyeglass makers in Amsterdam in
the late sixteenth century eventually led to the invention of both the
microscope and the telescope, setting in motion an explosion
of scientific discovery.
Who could have predicted that the invention of clear glass in Venice
would ultimately be responsible for understandings as diverse as
cell theory and the bacterial cause of disease through to our
perception of the universe and optical communication?
Real estate and urban renewal
Almost invisible in its ubiquity, it can still be surprising how much
space we dedicate to cars. Again, using US data, but it is estimated
that there are around one billion parking spaces – four for every car.25
The aggregate space occupied by these parking
spaces totals almost 17,000 square kilometres -
the equivalent of paving a quarter of Tasmania
in parking lots.
In urban centres, accommodating cars for parking accounts for 30%
of land and floor space occupied. With both congestion and housing
affordability issues plaguing many large cities globally, it seems
almost perverse that we dedicate almost a third to housing cars,
and in many cases either directly fund parking or legislate minimum
parking spaces for new developments, effectively forcing non-car
owners to subsidise owners through higher housing costs. It will be
interesting to see how this space is recycled through time (and how
cities will make up for lost parking fines.)
In urban areas, we are starting to get a taste of the impact through
car sharing services such as GoGet and how they can relieve demand
for parking in cities, even though there is some evidence that some
are choosing these cars over public transport and contributing to
congestion. We’re probably getting a small glimpse of this future
through the demise of the urban petrol station.
It will be hard to predict the impact partly because the cities we live
in are so diverse – from dense cities with strong public transport
networks such as Tokyo through to sprawling car-dependent cities
such as Los Angeles. One might imagine a bigger impact on LA than
Tokyo, but we are wary of making big predictions. It could go either
way – LA streets are freed of their notorious congestion or conversely
traffic gets worse because autonomous transport is cheap and plentiful.
Platinum Asset Management Limited Annual Report 2017 XXXI
Marchetti Wall
An Italian physicist Cesare Marchetti observed that one hour was roughly the commute
limit for most people. Once it starts exceeding that, people tend to change their behaviour
to reduce it, either through moving where they live or work or changing their method of
commute. This time has supposedly remained constant since Neolithic times but faster
modes of transport have consequently had an impact on broader urban structure.
Put another way, it’s a simple observation that in order to survive, throughout our history
humans have not been able to spend more than an hour of their day travelling and not
actually doing what it is they need to survive. But the question then arises, if autonomy
frees us up to do other things during our commute, be that working or even sleeping, does
that break Marchetti’s Wall opening up the possibility of much longer commutes?
Similarly, if autonomy actually increases average travel speed, thanks to fewer accidents
and less congestion, does it allow even more distant commutes and more urban sprawl.
Millennials and cars
An interesting trend that has been occurring independent of the self-
driving car phenomenon has been falling interest in car ownership
by younger generations. While there may be economic factors at
play, on the surface it seems youth don’t see the car as the symbol of
status, independence and mobility to the same extent their parents
did. Illustrating this, the percentage of younger cohorts (16~20) with
a drivers licence has fallen around 20 percentage points over a thirty
year period.26
One could argue the smartphone has disrupted the car as a young
person’s method of staying in contact with their peer group and
the emergence of cheap, available on-demand transport will only
accelerate this.
There are tentative signs that this is not a phenomenon confined to
the United States. ABS statistics show that between 2001 and 2015,
in Victoria the number of people under the age of 25 with a drivers
licence fell from 77% to 66%. This is partly due to more onerous
learner’s licence logging requirements but reflects the falling
interest in driving seen in the US.27
Public transport
In some regions, Uber and Lyft are experimenting with pooled
ridesharing (simply put, you get a cheaper ride if you agree to share
the car with strangers with different destinations, or in the Lyft
Shuttle case, the routes and stops are predetermined).
Internet commenters joked that we already had a name for this
service – a bus. While it does resemble a bus, it’s one that comes
within minutes of you calling it and the route is optimised for all the
passengers on board. The interplay between private autonomous
fleets, public transport and regulations will be interesting to observe,
though likely to have very different regional outcomes.
Platinum Asset Management Limited Annual Report 2017 XXXII
In the United States at least, many public transport operators saw
drops in ridership in 201628 and some are already pointing the finger
at ride-hailing services such as Uber, though it seems too early to be
blaming these services solely for the drop in public transport usage.
The drop also happened during a period when oil prices have fallen
and car sales have hit a record, illustrating the complex interplay of
factors that drive usage of different modes of transport.
In March 2017, the NSW Transport Minister Andrew Constance29
speculated that technology and autonomy would make most public
transport obsolete. It’s probably a bit premature to make such
claims, and given political leanings it could be perceived as a threat
to privatise public transport services, but it’s not hard to see the
potential impact.
And while in an ideal world where there’s a smaller, yet more utilised,
fleet it should lead to less congestion and faster travel times, it remains
an open question whether an autonomous fleet can entirely replace
particularly dense forms of public transport such as trains.
One popular illustration of the impact of cars on urban environments
was this one from the City of Meunster in Germany:
Car
Bicycle
Bus
While partly satirical, a riff on this image has been circulating30 in
recent months trying to drive home the point that autonomy doesn’t
really change anything:
Car
Uber
Autonomous car
Amount of space
required to
transport the
same number of
passengers by
car, bicycle
or bus.
Amount of space
required to
transport
60 people.
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XXXIII
While there is some truth to this, it conveniently ignores the reduced
total number of cars on the road at any point in time due to higher
utilisation, the reduced need for parking, the reduced congestion
from accidents and traffic waves (those weird traffic jams that happen
on motorways for seemingly no reason).
But that idealistic future might be a while away and
in the interim it may seem to get worse, especially
if cheap autonomous transport starts supplanting
public transport at the margin.
In fact, the New York subway system (along with many other metro
transit systems in the US) reported a drop in ridership in 2016. While
it’s probably a number of factors, from the oil price, to falling service
quality in some networks due to lower investment, that hasn’t stopped
some from pointing the finger at ridesharing services like Uber. If an
autonomous EV fleet lowers the cost per trip even further, some will
reasonably consider switching from public transport.
One interesting observation made by Benedict Evans,31 a venture
capitalist at Andreesen Horowitz was the speculation that autonomous
driving could even lead to a resurgence in bicycle usage – if autonomy
made the roads safer for people on bikes, might it entice more of
us back on the roads? As just one example of second-order effects,
could autonomy lead to a renaissance in cycling, further alleviating
road congestion while reducing obesity and improving health
outcomes for millions in the process?
Employment impacts
Up until now, we focused mainly on the positive economic impacts, but
in the transition to autonomy, there are around 4 million Americans
employed in jobs that involve driving – trucks, taxis, chauffeurs and
ride-sharing drivers of which 3.5 million do it full time.32
They’re jobs predominantly done by immigrants and low-skilled
workers – groups that have already been excluded from the most of
the spoils of America’s economic growth. It would be naive to ignore
these impacts.
Conversely, truck driving has at least been one
of the few jobs that has been largely immune to
the globalisation and automation trends that have
affected Middle America. Over a 36-year period from
1978 to 2014, truck driver went from being the most
common job in just nine states to 29 states.33
Platinum Asset Management Limited Annual Report 2017 XXXIV
While the way the census groups driving jobs exaggerates the
importance somewhat,34 the trend through time is illustrative.
There are a number of jobs that have been ravaged by automation
during this period:
Machine operators – once the biggest job in eleven states, now none,
as the shifting of production overseas and automation took its toll;
Farming – the biggest employer in eight states in 1978 but now only
two, as farm equipment productivity has resulted in less employment;
Secretaries – from 21 states to just five, as the rise of the personal
computer eliminated the need for a lot of bodies.
As an aside, the decline in manufacturing hasn’t been confined to the
United States. Over a forty year period most industrialised economies
have seen manufacturing employment decline:
Employment in Manufacturing35
36%
32%
28%
24%
20%
16%
12%
8%
Italy
Germany
Japan
France
UK
US
1975
1985
1995
2005
2015
But it highlights how employment is a fluid beast
and that through time automation can cause huge
disruptions under the surface.
And lest any of us feel too comfortable in our jobs, even fund
managers are grappling with the challenges of active management
in the age of passive investing, with BlackRock announcing a shift
of some of its funds under management to quantitative strategies in
March 2017, essentially replacing analysts and fund managers with
computer models.36
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XXXV
Oil demand and exploration
Globally about 90 million barrels of oil are consumed every day and
around two-thirds of that are used in all modes of transport, including
aircraft. Looking solely at personal transport, such as passenger cars
and light trucks (which includes SUVs) it accounts for 45% of total
oil consumption.
In the short term lower oil prices and policy, such as a relaxation
of fuel efficiency targets in the US, which seem likely in a Trump
administration, may drive up oil demand, longer term we believe the
cost advantages of EVs will make them the technology of choice for
autonomous fleets. As a result, we think in the mid to long term that
45% of oil demand is probably going to zero.
While well beyond the scope of this report, the acceptance of climate
change and any attempt to keep within the 2C target implies most of
our fossil fuel reserves will have to stay in the ground. The reaction
of OPEC to non-conventional oil production in the US potentially
illustrates this changing mindset – rather than by cutting production
and raising prices, OPEC kept production, eventually pushing prices
down to $30 in early 2016. Such behaviour could be explained if one
believed in a ‘use it or lose it’ outcome for oil reserves – it makes
more sense to sell as much for $30 before it becomes worthless.
The Saudis have been especially attuned to the risks
of technological disruption to their oil industry –
Sheik Ahmed Zaki Yamani, the Saudi oil minister in
the 1970s is reported37 to have said, “The Stone Age
didn’t end for the lack of stone, and the oil age will
end long before the world runs out of oil.”
If current reserves are living on borrowed time, that also has difficult
implications for companies that benefit from the search for more
and development of those reserves, massive industries in their
own right – in 2014 the oil industry spent $650b on exploration
and development.
Platinum Asset Management Limited Annual Report 2017 XXXVI
Closing Remarks:
Dystopic Outcomes
and where we will be wrong
The biggest risk as investors is probably around timing. There are
many optimistic views on when we might see autonomous cars
plying urban streets in big cities around the world, but reasonable
expectations seem to be around the 2020-2025 timeframe. Developers
could run into intractable reliability issues due to general complexity
of most urban streets; system costs could remain stubbornly too
high, limiting adoption to a small volume of very high-end cars.
Conversely, autonomy could happen, but the outcome could be
dystopian, rather than the optimistic outcomes we’ve described so
far. For example, rather than cars occupied by single drivers driving
around looking for a place to park, roads could be eternally congested
with empty living rooms on wheels driving around waiting to pick up
their owners.
In an application of Jevons paradox, collapsing
transport costs could see demand and traffic
explode increasing congestion, vehicles
and demand for resources.
While we are excited in the long-term about the opportunities
from autonomous vehicles, we remain cognisant of the risks of
shorter-term economic cycles and any macroeconomic disruptions
in the interim could have significant impacts on investments in the
supply chain, from automakers through to component and software
suppliers. ◍
Platinum Asset Management Limited Annual Report 2017 1 https://crashstats.nhtsa.dot.gov/Api/Public/ViewPublication/812013
2 http://www.iihs.org/iihs/topics/t/general-statistics/fatalityfacts/gender
3 https://www.census.gov/hhes/commuting/files/2014/acs-32.pdf
4 http://www.caee.utexas.edu/prof/kockelman/public_html/TRB17EconomicEffectsofAVs.pdf
5 https://ops.fhwa.dot.gov/congestion_report/executive_summary.htm
6 IDC, 2016
7 Image source: https://en.wikipedia.org/wiki/History_of_autonomous_cars
8 https://twitter.com/PessimistsArc/status/844937745306980353
9 See 6 February 2017 Bloomberg New Energy Finance Report “Bottom Up Cost Scenarios For Lithium-Ion Batteries.”
10 For an Australian perspective, even with our much higher electricity prices EVs are still attractive, costing $4.7/100km
for an EV and $7.8/100km for an ICE, assuming $0.3/kWh and $1.2/L in energy costs. For a car driven 20,000km a year
the annual savings are more than $600.
11 https://www.theinformation.com/what-intel-sees-in-mobileye-is-its-data
12 http://www.vanityfair.com/news/business/2014/10/air-france-flight-447-crash;
See also https://www.theguardian.com/technology/2016/oct/11/crash-how-computers-are-setting-us-up-disaster
13 http://www.southampton.ac.uk/news/2017/01/driverless-cars.page?dom=pscau&src=syn
14 https://qz.com/924212/what-it-really-costs-to-turn-a-car-into-a-self-driving-vehicle/
15 Source: https://www.ft.com/content/77680d24-e8d7-11e6-967b-c88452263daf
16 See: http://www.evolvingai.org/fooling
17 http://spectrum.ieee.org/transportation/self-driving/selfdriving-cars-have-a-bicycle-problem
18 http://www.abc.net.au/news/2017-06-24/driverless-cars-in-australia-face-challenge-of-roo-problem/8574816
19 http://web.mit.edu/airlinedata/www/Aircraft&Related.html
20 http://www.caee.utexas.edu/prof/kockelman/public_html/TRB15SAVsinAustin.pdf
21 https://www.washingtonpost.com/graphics/business/batteries/congo-cobalt-mining-for-lithium-ion-battery/
22 https://www.wsj.com/articles/driverless-cars-threaten-to-crash-insurers-earnings-1469542958
23 http://media.swissre.com/documents/HERE_Swiss+Re_white+paper_final.pdf
24 https://electrek.co/2017/03/14/tesla-autopilot-insurance-root/
25 http://www.motherjones.com/environment/2016/01/future-parking-self-driving-cars
26 http://www.umtri.umich.edu/what-were-doing/news/more-americans-all-ages-spurning-drivers-licenses
27 http://www.smh.com.au/national/population-growth-all-thats-pushing-up-traffic-as-we-pass-point-of-peak-car-
20170104-gtlv0k.html
28 https://www.citylab.com/transportation/2017/02/whats-behind-declining-transit-ridership-nationwide/517701/
29 http://www.afr.com/technology/tech-will-end-government-supplied-transport-nsw-minister-andrew-constance-
20170315-guydph
30 http://www.treehugger.com/cars/picture-worth-space-required-transport-60-people-car-uber-and-av.html
31 https://twitter.com/BenedictEvans/status/844607598124908544
32 https://www.bls.gov/ooh/transportation-and-material-moving/heavy-and-tractor-trailer-truck-drivers.htm
https://www.bls.gov/ooh/transportation-and-material-moving/delivery-truck-drivers-and-driver-sales-workers.htm
https://www.bls.gov/ooh/transportation-and-material-moving/taxi-drivers-and-chauffeurs.htm
33 http://www.npr.org/sections/money/2015/02/05/382664837/map-the-most-common-job-in-every-state
34 http://www.marketwatch.com/story/no-truck-driver-isnt-the-most-common-job-in-your-state-2015-02-12
35 Source: http://bruegel.org/2017/02/europe-in-a-new-world-order/
36 https://www.nytimes.com/2017/03/28/business/dealbook/blackrock-actively-managed-funds-computer-models.html
37 http://www.nytimes.com/2005/08/21/magazine/the-breaking-point.html europe-in-a-new-world-order/
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Platinum Asset Management (“Platinum”). It contains general information only and is not intended to provide any person with financial
advice or to take into account any person’s (or class of persons’) investment objectives, financial situation or needs. Platinum may have
existing investments in some of the companies referred to in this article and may or may not decide to invest in such companies in the future.
This article is not intended to be a recommendation or advice with respect to any of the companies, businesses or industries mentioned.
Before making any investment decision, you are recommended to consult your financial adviser.