Platinum Group Metals Ltd. Annual Report 2018

FY2018 Annual Report · Platinum Group Metals Ltd.

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Annual
Report 2018
Platinum Asset
Management Limited
ABN 13 050 064 287

Directors
(as at 23 August 2018)

Michael Cole
Stephen Menzies
Anne Loveridge
Brigitte Smith
Tim Trumper
Andrew Clifford
Kerr Neilson
Elizabeth Norman
Andrew Stannard

Shareholder Liaison
Elizabeth Norman

Company Secretary
Joanne Jefferies

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 4, 60 Carrington Street
Sydney NSW 2000

Phone 1300 855 080 (Australia only)
Phone +61 3 9415 4000
+61 3 9473 2500
Fax

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 ticker: PTM)

Website
www.platinum.com.au/PTM

Platinum Asset Management Limited Annual Report 2018Contents

Chairman’s Report

Founding Managing Director’s Letter

Incoming Managing Director’s Letter

Shareholder Information

Directors’ Report

Auditor’s Independence Declaration

Statement of Profit or Loss and Other Comprehensive Income

Statement of Financial Position

Statement of Changes in Equity

Statement of Cash Flows

Notes to the Financial Statements

Directors’ Declaration

Independent Auditor’s Report

The Digital Republic
article by Nathan Heller

Big Data Meets Big Brother
article by Rachel Botsman

103

104

XXV

Platinum Asset Management Limited Annual Report 20182

Chairman’s Report 2018

The year saw a number of interesting developments for the Company (ASX ticker: PTM).

First and foremost, investment returns remained strong with most of our funds delivering
outstanding returns (both in absolute and relative terms) for the 12 months to 30 June 2018.
All of our Platinum Trust® Funds and the Platinum Global Fund (mFund) delivered double digit
returns for the 12 months to 30 June 2018, and seven of those nine funds delivered returns in
excess of 14% over the same period1. These figures highlight the depth of talent and expertise
at Platinum2 covering multiple regions and industry sectors.

It was pleasing to see the significant industry recognition of Platinum’s achievements by
Morningstar in March 2018, with Platinum receiving the much‑coveted Australian Fund Manager
of the Year 2018 award as well as the Fund Manager of the Year award for the International
…quities Category, Australia 20183. These achievements are particularly noteworthy given
the increasingly intense competition in the global equity asset management space.

Funds Under Management (“FUM”)
FUM as at 30 June 2018 was approximately $25.7 billion (post 30 June 2018 cash distributions),
an increase of 13.1% from the 30 June 2017 closing FUM of approximately $22.7 billion.

The main contributor to FUM growth was the strong investment performance of our funds, which
added approximately $3.5 billion to FUM for the financial year. Net fund inflows contributed
approximately $1 billion while net distributions reduced FUM by approximately $1.5 billion.
The distribution was the highest ever paid for the Platinum Trust® Funds and was a direct result
of the strong realised investment gains made during the financial year.

It is pleasing to note the improvement in fund flows in the 2018 financial year relative to the
previous financial year which saw net fund outflows of $1.7 billion. This can partly be attributed
to the lagged effect of the improvement in investment performance for most of our funds and
mandates over the last two years.

Operating Performance
In the current year, fee revenue for the consolidated entity increased by 5.2% to $328.7 million
(2017: $312.5 million) on account of the increase in inflows and strong investment performance.
Performance fees contributed $21.9 million to the total fee revenue.

The growth in revenue is particularly pleasing in light of Platinum’s decision to reduce its
management fees for the standard fee option for each of the Platinum Trust® Funds and the
Platinum Global Fund (mFund) from 3 July 2017. When we first announced the reduction in
management fees for these funds in April 2017, we estimated that the Company’s 2018 revenue

1. Historical performance is not a reliable indicator of future performance. The returns for the Platinum Trust Funds/
Platinum Global Fund are calculated using the relevant fund’s net asset value (NAV) unit price (i.e. excluding a buy/
sell spread) for C Class, and represent the combined income and capital returns in the specified period. All returns
are pre-tax, net of fees and costs and assume the reinvestment of distributions. All returns are sourced from
Platinum Investment Management Limited.

2. References to ‘Platinum’ are to Platinum Investment Management Limited.
3. Morningstar Awards 2018 ©. Morningstar, Inc. All Rights Reserved. Awarded to Platinum Asset Management for

Australian Fund Manager of the Year 2018, and Fund Manager of the Year: International Equities Category, Australia.

Platinum Asset Management Limited Annual Report 20183

may decrease by as much as $24 million or 9% from the 2017 financial year. The increase in
revenue achieved during the 2018 financial year was therefore a true reflection of both Platinum’s
enduring investment philosophy, which delivered strong realised gains, as well as the
continuing trust and recognition from our clients.

In terms of other investment income, the investments held by the Platinum Group® delivered
investment gains for the year of $24.6 million (2017: $21.1 million).

The headline expense figure increased materially from the previous financial year (up by
$22.0 million to $85.0 million). This was primarily due to the increase in staff remuneration
expenses (up by $15.0 million to $49.2 million), mostly paid to the investment team for the
excellent one‑ and three‑year relative and absolute investment returns to 31 March 2018.

The profit after tax attributed to owners was $189.2 million, representing an increase of
$3.2 million or 1.7% from the 2017 financial year figure of $186.0 million.

Based on this profit figure, the basic and diluted earnings per share (EPS) for the 2018 financial
year increased to 32.36 cents per share, from 31.74 cents per share for the previous financial year.

Remuneration Matters
Included in the 2018 Remuneration Report on pages 29 and 30 of this Annual Report is a
message from the Chair of the Nomination and Remuneration Committee. I encourage all
shareholders to read this message, which outlines the remuneration policy of the Platinum
Group® and the focus of Platinum on performance‑based remuneration. The alignment of
employee remuneration with investment returns generated for clients is a key underpinning
of this remuneration policy. In such a competitive environment, it is vital that Platinum is able
to attract and retain high calibre individuals.

As a result of the strong one‑ and three‑year absolute and relative investment returns,
Platinum rewarded its investment team with an increase in variable short‑term cash and
deferred incentive awards. As a result, staff expenses increased for the 2018 financial year
in recognition of the strong investment outperformance delivered.

As a member of the investment team, Andrew Clifford (as Platinum’s Chief Investment Officer)
received a variable award for the 2018 financial year. I note that Andrew Clifford received
no variable award for the 2016 or 2017 financial years. Two other executive KMPs received
variable awards for the 2018 financial year, namely, the Company’s Director of Investor Services
and Communications, Elizabeth Norman and the Finance Director, Andrew Stannard.

Dividends
The Directors have declared a 2018 final fully‑franked ordinary dividend of 16 cents per share.
This will be paid on 21 September 2018.

A 2018 interim fully‑franked ordinary dividend of 16 cents per share was paid on 19 March 2018.

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 20184

Chairman’s Report 2018 – continued

Launch of New Products
The 2018 financial year represents the third consecutive year in which Platinum has launched
new investment products that aim to broaden Platinum’s investor base, with the objective
of increasing inflows and fees over time. In addition to offering a new performance fee class
under each of the eight Platinum Trust ® Funds, Platinum also launched two ASX‑quoted
actively‑managed funds during the 2018 financial year. The Platinum International Fund
(Quoted Managed Hedge Fund) (ASX ticker: PIXX) and Platinum Asia Fund (Quoted Managed
Hedge Fund) (ASX ticker: PAXX) are feeder funds that invest primarily in the unlisted Platinum
International Fund and Platinum Asia Fund respectively, thereby providing investors with
access to the portfolio composition of these flagship funds with strong long‑term track records,
their portfolio managers and investment strategies. However, being quoted on the ASX, these
innovative products allow investors to conveniently buy and sell units through their stockbrokers
with the knowledge of a real‑time indicative net asset value before placing a trade. We have
been delighted with the level of investor support for these new funds. At 30 June 2018, total
FUM in these quoted managed funds was $312.5 million (post cash distribution).

As part of its international distribution strategy, Platinum plans to shortly launch a range of
investment vehicles targeting institutional investors in the United States and Canada. Platinum
has appointed AccessAlpha Worldwide LLC to distribute these products and promote Platinum’s
global equity capabilities in North America. We believe that the US and Canadian institutional
market should, over time, offer strong growth prospects for Platinum.

Appointment of New Chief Executive Officer/Managing Director
With full endorsement from the Board, Andrew Clifford took over from Kerr Neilson as the
Managing Director and Chief Executive Officer of the Platinum Group® from 1 July 2018. Andrew
assumed this new role in addition to his role as Platinum’s Chief Investment Officer. Andrew is a
co‑founder of Platinum and has worked alongside Kerr for more than 30 years. The transition is
part of the orderly succession planning of the Platinum Group®.

Kerr Neilson continues as an Executive Director of the Company and a full‑time member of
Platinum’s investment team. Kerr will continue to contribute investment ideas, mentor junior
members of the team, as well as provide support to further Platinum’s various offshore
distribution initiatives.

Director Renewal
As part of the Company’s director renewal programme, the Board was delighted to welcome
two additional non‑executive Board members this calendar year, Ms Brigitte Smith and
Mr Tim Trumper.

Brigitte has 20 years’ experience in venture capital, business strategy and start‑up company
operations. She co‑founded and is the Managing Director of GBS Venture Partners Ltd (GBS)
and also sits on the board of Moximed Inc, a portfolio company of GBS. Prior to founding GBS,
Brigitte worked in the US and Australia in operating roles with early stage technology based
companies, and at Bain & Company as a strategic management consultant. I am excited about
the breadth of industry and business experience that Brigitte brings to the Board.

Platinum Asset Management Limited Annual Report 20185

Tim is an experienced non‑executive director, a former CEO, and an advisor for high‑performance
global and Australian companies. His career has spanned diverse sectors including artificial
intelligence and machine learning, big data, digital transformation, mobility and transport,
financial services and media. Tim is the Chairman of NRMA, an advisor and shareholder in
Quantium, Australia’s leading data and analytics company, and a director of the Population
Health Research Network (PHRN). He also holds interests in several private high growth
innovative companies. Tim has deep experience with the utilisation of data to drive innovation
and corporate strategy. His core interest relates to how directors can guide data governance
and facilitate successful business transformation.

In accordance with good governance, the Board intends to continue to review and monitor
the skills required by the Board.

Royal Commission
With the Hayne Royal Commission into Misconduct in the Banking, Superannuation and
Financial Services Industry now well advanced, the hearings to date have highlighted the
importance of creating greater transparency between financial institutions and their end
customers, particularly with respect to the way in which fees are being charged.

Two key issues are worthy of comment:

Firstly, the Royal Commission has highlighted that diversified financial service providers have
struggled to create a common culture and value system across disparate business units within
a group. The culture of these disparate businesses often reflects, sometimes unfavourably, the
competitive behaviours of industry peers within their sector, rather than the core values of the
group itself.

As diversified financial institutions focus on restoring trust and rebuilding their brand, an
increasingly likely outcome will be that financial institutions will narrow their service offerings
to core activities and exit non‑core operations.

The extensive conflicts of interest issues, caused by combining product manufacturing and
financial advice within the vertically integrated business model, have been acutely highlighted
by the case studies before the Royal Commission. Standing in stark contrast to such conflicted
practices, Platinum maintains an independent business model and a singular focus on product
manufacturing with the emphasis on delivering the best investment outcomes for retail and
institutional investors.

Secondly, many financial institutions find it challenging to balance the competing interests of
shareholders, staff and customers. This seems most acute where financial services providers
have protections that are often the result of regulatory frameworks giving effect to public
policy priorities.

Platinum Asset Management Limited Annual Report 20186

Chairman’s Report 2018 – continued

Platinum, by contrast, participates in a highly competitive funds management marketplace.
It regularly competes against a large pool of active global investment managers based locally
and overseas, as well as passive global fund managers. Platinum’s sustainable competitive
edge is to consistently deliver superior investment returns over the medium‑ to long‑term,
aligned to Platinum’s commitment to preserve investors’ capital.

Platinum’s business model is predicated on the premise that if we continue to deliver superior
performance to investors on a risk adjusted basis, we will be successful. To achieve this outcome
Platinum employs highly talented fund managers and strives to create an environment that
attracts and retains good people who share Platinum’s values and performance driven culture.

Our core belief is that if investment outperformance is delivered, the level of FUM will grow and
profitability will follow, enhancing the returns to shareholders. Platinum’s business model of
placing superior investment performance at the forefront of everything we do has remained
unchanged since its founding over 24 years ago. We believe it is this process that best aligns
the interests of Platinum’s shareholders, employees and clients.

The Board and Its Associated Committees
The Nomination and Remuneration Committee and the Audit, Risk and Compliance Committee
have both had a busy and productive year.

The Nomination and Remuneration Committee oversaw changes to the composition of the Board
and a change of Chief Executive Officer. It also closely monitored the Company’s remuneration
framework throughout the financial year.

The Audit, Risk and Compliance Committee oversaw many recent regulatory changes as well
as provided oversight in the launch of new products.

Environmental, Social and Governance (ESG)
The Company participates in the global Carbon Disclosure Project (CDP) which enables companies,
cities, states and regions to measure their environmental impact. In addition, for over 11 years,
we have strived to make the Company “carbon neutral” by purchasing carbon credits (which
invest in rainforests) to offset the carbon emissions made by the Company (for example, our
electricity usage and air travel).

As mentioned last year, Platinum incorporates environmental, social and governance (ESG)
considerations into its investment process by employing a robust framework which it believes
can lead to more informed and holistic decision‑making and, ultimately, better investment
outcomes for investors. Platinum’s approach towards the incorporation of ESG factors is further
explained in its Responsible Investment Policy, which is available on its website3. I would also
encourage those interested in this topic to read the Platinum Trust® Funds’ Product Disclosure
Statement for more information.

3. https://www.platinum.com.au/PlatinumSite/media/About/Responsible-Investment-(ESG)-Policy.pdf

Platinum Asset Management Limited Annual Report 20187

Conclusion
No words can do justice to the contribution that Kerr Neilson has made as the founder and
Chief Executive Officer of the Platinum Group® for the last 24 years. Kerr remains an icon in the
industry and has remained true to his conviction in his determination to manage money well
for Platinum’s investors and clients. The excellent returns generated by Kerr, Andrew and their
broader team since 1994 through the various market cycles are a testament to the integrity
and robustness of Platinum’s investment process.

I encourage you to read Kerr’s final Managing Director’s letter to shareholders, as it highlights
the solid investment performance of the underlying funds, key initiatives that have been
undertaken, the investment outlook, and some reflections from Kerr on recent industry events.

Michael Cole
Chairman

23 August 2018

Platinum Asset Management Limited Annual Report 20188

Founding Managing Director’s Letter 2018

Andrew Clifford keeps reminding me how extraordinary the world’s economic system really is.
For all the unfavourable events or the media speculation about some new impending disaster,
the world economy as a whole seems to blithely trundle forward with remarkably few stops or
reversals. Consider that, in aggregate, the growth in world output in the last 118 years faltered
only during the Great War, in the early 1930s, immediately after WWII, and most recently in
2009.1 In more recent times, social transfers have acted as economic stabilisers. I think you will
concur that this underlying trend through wars, high inflation, pandemics and so forth is a very
different picture to that which resides in the minds of many of us. It is so, I suggest, because
many of us are bombarded with media reports of doom and gloom, and we instinctively derive
our assessments from the experience of working in individual companies which have faced
setbacks or from being citizens of countries that have, in fact, seen their economies shrink over
a specific period.

Making observations about countries or the world economy is, however, of limited value when
investing in real assets. There can exist a huge divergence between the prices of individual
stocks and the state of their host economies over long periods of time, and the prices of assets
can exhibit far greater volatility than is justified by the underlying health of the companies or
whole economies2. In addition, two key changes have been particularly favourable for equities
since about 1960. The first great change was the willingness of investors to accept a lower
running yield from holding equities versus bonds, the emergence of the so‑called reverse yield
gap.3 This conceptual change recognised that the greater variability of outcomes derived from
holding equities was warranted by the superior combined returns of dividends plus growth that
equities delivered in aggregate over time. It justified a lower starting yield from owning shares
relative to so‑called risk‑free assets like bonds offered by governments. This process of re-rating
has continued ever since, expedited or perhaps crowned in the post‑Lehman crisis period by the
unusually generous creation of money supplied by the world’s leading central banks. This central
bank intervention has for some time acted as a price control on the global cost of money.

The second change has been the shift of profit share from labour to capital. This has been
significant4 and may be explained in the context of the liberalisation of global markets which has
encouraged a spectacular rise in global trade5. Amongst other changes, new supplies of labour have
been harnessed and the competitive advantage of well‑managed companies has been expressed.

1. Based on global real GDP (2011 USD) since 1900. (Source: Maddison Project Database, version 2018. Bolt, Jutta,

Robert Inklaar, Herman de Jong and Jan Luiten van Zanden (2018), “Rebasing ‘Maddison’: new income comparisons
and the shape of long-run economic development”, Maddison Project Working paper 10)

2. Contrast, for example, Japan and India. Over the 15 year period from 2002 and 2017, the EPS (earnings-per-share)
of Japanese companies grew 16.4% p.a. versus 8.7% p.a. by Indian companies. Yet, the Japanese stock market rose
5% p.a. (in USD) while the Indian stock market rose 15% p.a. The variance can be far more dramatic at an individual
stock level. Japanese conglomerate Itochu was recently trading on an estimated current year price-to-earnings
(P/E) multiple of 6.6 times, while delivering a dividend yield of 3.6% and generating a return on equity of 16.5%.
By contrast, Japanese online payment company GMO Payment is on an earnings multiple of 122 times this year’s
earnings and has a dividend yield of 0.3%.

3. The idea of the equity risk premium meant that shares typically yielded more than bonds, which was the norm until
the late 1950s when the pattern reversed. Yield on US and UK government bonds rose sharply in the 1960s-70s
(driven by sky-rocketing inflation) while the dividend yields on stocks rose far more moderately and trended lower
overall compared to the first half of the century.

4. Profit share of GDP in developed markets grew from around 44-45% in the 1970s to 48% in 2015. (Source: Morgan Stanley)
5. Over the same period, world trade as a percentage of GDP grew from around 26-30% in the early 1970s to more than

55% in 2015. (Source: World Bank)

Platinum Asset Management Limited Annual Report 20189

More recently, the full flowering of the global information super‑highway has seen the great tech
firms swarm across national borders to create market opportunities that were unimaginable in
the physical asset‑heavy world of earlier times: markets that were formerly stymied by capital
and regulation are seemingly instantaneously addressable and there emerge trillion dollar
trans‑national monsters.

Why do I write about this? Firstly, to reinforce that we are often led by our feelings and pay
too little attention to the underlying facts6. Secondly, it seems so few understand the pivotal
role that share ownership plays in growing their wealth. There seems to be only a tenuous
understanding that companies, not governments or regulators, are the system. In other words,
one’s welfare is inextricably tied to the performance of companies, whether one is an investor
or not. Moreover, money will migrate to those exciting areas that are meeting expanding needs
or wants, but this can result in over‑excitement and mis‑pricing. Choosing the right areas at the
right price is hopefully what investment managers like Platinum Asset Management can deliver.
How many times have you heard the observation that the stock market is nothing more than a
gambling den? This is generally followed by a long lecture that recounts some experience of loss
in the stock market. Closer scrutiny would mostly reveal that the loss was caused by either fear
or greed. Seldom does one hear a coherent appraisal of the inherent value of the stock
purchased versus the price paid.

Lastly, I write to remind shareholders that we might be at or approaching the terminal velocity
of these two great thunderous forces. If that is the case, one needs to find sensible managers
to help navigate the years ahead. As a parting observation, there is a huge and almost
unprecedented dispersion in the valuations of dull but profitable companies from those
immaculately fashionable, profitable and fast‑growing companies.7 What should one do when
one’s instincts so favour these internet‑enabled beauties versus the dull and, by comparison,
unappealing alternatives? The former have rerated while the latter have fallen in absolute value
to historically attractive levels. By way of illustration, one might buy a company that is not
growing, on, say, a P/E of 7 times. This entity could theoretically deliver $14 in cash flow over
each of the next 10 years, a total of $140 per share. By contrast, you might prefer a fast growing
company selling on a P/E of 25 times. How fast does the latter need to grow over the next 10
years to produce the same theoretical cash flow as the first?

The figure is approximately 26% each year. There are very few companies with such a record.
Looking at the past returns across the globe, this universe comprises less than 5% of the world’s
top 1000 listed companies.8

6. In the 50 years between 1900 and 1949, there was a de-rating of -0.7% per annum in global equities. Between 1950
and 2017, we saw a re-rating of +1.5% per annum in the valuation of shares globally. This, together with real dividend
growth, gave a real return (in US$) of +6.7% p.a. between 1950-2017, versus +3.1% p.a. between 1900-1949.
(Source: Credit Suisse Research Institute)
The divergence between growth and value stocks in developed markets is at its highest level in the last twenty
years except for the dotcom bubble, as measured by the differential in price-to-book (P/B) multiples, and not far
off when measured by price-to-earnings (P/E) multiples. (Source: Bernstein)

8. Of the top 1000 global companies ranked by market capitalisation, only 5.1% have achieved net income growth for
10 years by 20-30% per annum. This record reflects the period from 1950 to 2015. (Source: Credit Suisse HOLT,
as published in The Base Rate Book dated 26 September 2016.)

Platinum Asset Management Limited Annual Report 201810

Founding Managing Director’s Letter 2018
– continued

Investment Performance
Across our suite of funds, performance has been solid. The returns slipped somewhat in the
last month of the financial year with growing concerns about trade protectionism. As you may
be aware, we use cash and shorting strategies to alleviate volatility, predominantly in our
International Fund, and unitholders have enjoyed a cumulative net return of approximately 83%
over the last five years, and 14% for the last 12 months.9 As was inferred in the paragraph above,
it is not difficult to follow the leaders but the question is how much one wants to invest in them.
With the rise of index ETFs and mandate‑driven momentum fund managers, the exciting parts
of the markets are well served.

Funds Under Management (FUM) – Retention and Growth
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 and distribution. The amount of choice is bewildering to all but the most enthusiastic
investors. Those with a casual interest may either find it all too difficult and avoid participating
in equity investment funds or, alternatively, seek simple answers that can mask complexity.
(As a general principle, we would note in such circumstances that an investor should try to
understand each manager’s investment style and to blend these and stay the course rather
than perpetually skipping from the former performance leader to the new title holder.) With this
in mind, we understand the importance of a strong brand, but equally important is our need to
serve the advisory industry by imparting deep product knowledge.

For investors with a greater 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 our process and mentality that contribute to
systematic long‑term successful investing. They also convey the authenticity of intent which,
in a world awash with pretence, is easy to identify. Old style barking, half‑truths and exaggeration
are long dead.

Our interaction with financial advisors in Australia and New Zealand has flourished. 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. In addition, we have an annual roadshow directed
at the financial intermediaries. During the year, the team addressed approximately 1500
professional advisors covering 33 cities and towns around the country.

9. Source: Platinum Investment Management Limited. Returns are C Class returns to 30 June 2018, after fees and costs,
pre-tax, and assume the reinvestment of distributions. Past performance is not a reliable indicator of future returns.

Platinum Asset Management Limited Annual Report 201811

The redesign of the website has been well received. While there is some distortion from
the waxing and waning of investor interest in global investing, we can discern a progressive
rise in usage of the website as indicated by page views per visit, returning users and so on.
The Journal, which contains topical investment subjects and video presentations from our
investment professionals, is proving very popular. We encourage you to recommend the site
to friends who want to gain more understanding about investing – the Investment Fundamentals
section provides a handy starting point.

Our biannual meeting with clients took place in March. Some 1,900 direct investors attended
this roadshow and the client feedback was very positive. Sydney and Melbourne witnessed
the biggest turnouts with respective audiences of over 700 and 500.

The UCITS funds (Irish‑domiciled) that we launched nearly three years ago are progressing well.
We have spent many weeks visiting potential investors in the principal European cities and
these three funds have now grown to A$444 million. We are planning to establish a representative
office in London. We believe that our strong investment performance and unique attributes
provide a strong base to expand this business measurably.

September 2017 saw the launch of our two quoted managed funds (QMFs) – abbreviated as
PIXX and PAXX. These are feeder funds which, through an ASX quoted entity, channel money into
the existing unlisted managed funds, Platinum International Fund and Platinum Asia Fund. Both
underlying funds have long track records of 23 years and 15 years, respectively, and each has a
history of substantial absolute and relative performance. Through the QMFs, investors are able
to gain exposure to the actively-managed and diversified portfolios of the underlying funds,
Platinum International Fund and Platinum Asia Fund. Moreover, the QMFs provide investors
with the convenience of buying and selling units via the ASX, obviating the lengthy application
form required for the unlisted funds. Furthermore, the QMFs provide investors with the added
advantage of knowing each fund’s indicative net asset value when placing a trade, whereas the
forward‑pricing method used by unlisted managed funds means that unit prices are not known
when investors make an application. The annual distributions of the QMFs also approximate to
those of their underlying funds – distributing net income and realised capital gains, rather than
a franked dividend, as is the case for our listed investment companies (Platinum Capital Limited
(ASX ticker: PMC) and Platinum Asia Investments Limited (ASX ticker: PAI)). The table on page 12
shows the split of our funds under management including these entities.

Platinum Asset Management Limited Annual Report 201812

Founding Managing Director’s Letter 2018
– continued

Funds Under Management ($mn, to 30 June 2018)

FUNDS

OPENING
BALANCE
(1 JULY
2017)

FLOWS

INVESTMENT
PERFORMANCE

DISTRIBUTION
AND OTHER *

CLOSING
BALANCE
(30 JUNE
2018)

% OF
TOTAL

Retail offerings
Platinum Trust Funds
(excluding funds fed
from PIXX and PAXX)
and Platinum Global
Fund (mFund)
Quoted Managed Funds
(PIXX and PAXX)
Listed Investment
Companies (PMC and PAI) 858
MLC Platinum
Global Fund

16,249

961

–

997

341

–

(144)

Institutional mandates
Management Fee
Mandates
UCITS (Platinum
World Portfolios PLC)
“Absolute” Performance
Fee Mandates
“Relative” Performance
Fee Mandates

263

132

474

(53)

1,819

(211)

2,089

(28)

360

2,302

(2,621)

16,927

155

153

(38)

313

(79)

934

–

970

2,421

444

498

TOTAL

22,713

1,034

442

3,548

1,142

3,192

(1,596)

25,699

100

Source: Platinum Investment Management Limited
* The ‘Distribution and Other’ figure is comprised of the cash distribution from the Platinum Trust Funds/PGF/PIXX/PAXX
(as applicable) and the transfer of clients to the “relative” performance fee mandate.

Staff
Of the company’s 98 employees, 31 are engaged in managing clients’ money. Within the
investment team, the individual sector and regional teams are well settled, and our challenge is
to balance ideas of pure value with the more exotic and higher‑priced areas of markets such as
information technology, microbiology and those service companies that have the appearance
of perpetual growth machines. To assist our judgment, we keep developing and applying robust
quantitative methods to complement detailed fundamental research.

The company’s support functions continue to perform in an exemplary manner. This is evidenced
through the pattern of good value claims, our IT system uptime, and the legal and compliance
teams’ ability to deal with our increasingly changing regulatory environment.

Platinum Asset Management Limited Annual Report 2018

Costs
Staff costs account for over half of the company’s outgoings. There tends to be a slight upward
drift in this cost over time, which reflects small increases in staff numbers and a scaling among
members of the investment team to account for growing knowledge and skill. This year, we
extended the operation of the Deferred Incentive Plan to staff members whom we believe will
carry the company over the next decade. Under the plan, stock is issued 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. We match this obligation
with on‑market purchases. Dividend equivalent payments also accrue to participants during the
vesting period. Upon vesting, employees are free to sell their holdings or hold for up to a further
five years before selling, thereby accruing deferred tax benefits until sold.

Members of the investment team were entitled to awards under the Profit Share Plan this year.
As a reminder, the Profit Share Plan is an additional pool of reward made available to members
of the investment team when the weighted return of total funds under management (FUM)
exceeds the relevant index by more than 1% for both the last one and three years. This is a cash
payment and is capped at 5% of the company’s pre‑tax fee income. An employee’s share in the
pool may vary to accommodate new members or to reflect the relative contribution of each
member through time.

Apart from staff remuneration, most costs were slightly higher than last year, predominantly
relating to our marketing and business development initiatives in North America and Europe.
Custody and administration costs have crept up with increased FUM.

Fees
In July 2017 we lowered the management fees on the standard fee option of the Platinum Trust
Funds and the Platinum Global Fund (mFund). We also took this opportunity to introduce a new
performance fee option (P Class) to the Platinum Trust Funds. This comes with a lower base fee,
set at 1.1% (inclusive of GST), plus an outperformance fee that is levied at 15% on returns above
those of the relevant index. Under the standard fee option (C Class), unitholders are now charged
1.35% per annum (inclusive of GST). To date, the performance fee option has been chosen by few.
Of the new flows of $1,127 million during the year, the new performance fee option accounted for
only $33 million. However, we feel some clients are attracted to the notion of a scalable fee that
rewards evident long-term skill. When we announced the reduction in management fees for
these funds in April 2017, it was estimated that these changes could lead to a decrease in the
company’s 2018 revenue by as much as $24 million or 9% from financial year 2017. Fee revenue
this year in fact grew by 5.2% from last financial year, achieving $328.7 million. This positive
outcome was a result of both strong investment performance and an increase in net inflows.

Reflections on Recent Industry Events
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services
Industry has been a stunning revelation to many. One of the first lessons we teach analysts is
to understand the antecedents of a company or a situation. To that extent, it would have been
somewhat predictable that some bad practices would develop, but perhaps more telling is the
predilection towards concentrated market positions within many segments of the Australian
economy. This tends to squash innovation and real competition, usually resulting in high
cost services.

Platinum Asset Management Limited Annual Report 201814

Founding Managing Director’s Letter 2018
– continued

We note with interest the hiving off of the wealth management and financial advisory divisions
of the big banks as they try to “create a simpler, better bank”10. From our point of view, whether
it is CBA’s spin‑off of Colonial First State Global Asset Management into a stand‑alone listed
company, or ANZ’s sale of its pensions and investments business and dealer groups to IOOF,
such moves are not necessarily optimal for customers. Coming under new ownership but
continuing with similar practices of conflicted advice and pushing in-house products is unlikely
to broaden or enhance the choice for investors.

Advisors face many difficulties when giving personal advice. To do it well requires great diligence,
knowledge and the need for face‑to‑face contact with clients, which hinders their ability to
scale their businesses. Many advisors utilise platforms for the administration of their clients’
investments, but the added costs, from the assorted administrative charges to grandfathered
commissions, are not always disclosed to clients in a clear and comprehensible manner.

Partly in reaction to the increased public scrutiny following the Royal Commission hearings,
platform providers have started to cut their fees, some now advertising administration fees as
low as 0.15%. However, according to analyst reports from Macquarie Research, the real reduction
is far less dramatic and the total cost for a client account of $200,000, having regard to these
advertised fee reductions, would be in the order of 0.9% once other costs likely charged by
the platform provider are tallied up. Does this cost justify what is essentially an automated
administrative service? The convenience of a smartphone app and consolidated reporting is
a form of utility, but does not ultimately contribute to the growth of one’s wealth. This cost sits
on top of the fund managers’ fees. Why should this administrative service be priced at a similar
level to that which attempts to create wealth?

Outlook
I handed over the running of the business to Andrew Clifford and our executive team from 1 July.
I do so with great confidence in Andrew’s proven ability and the fact that his support team is
unusually talented, hard‑working and wise. I shall remain an Executive Director of the company
and a member of the investment team, spending time investigating investment opportunities
as well as mentoring the younger members of the team. From time to time, I shall also assist in
conveying the Platinum investment philosophy to new potential investors.

I would like to thank all our employees for their dedication over the years and for their forbearance
in putting up with me. It has been a marvellous experience to witness their commitment to winning,
whether it was in the markets, or supporting clients with queries or technical difficulties dealing
with settlements, applications or the most confounding of all, our IT backbone. Thank you all.

Lastly, I would like to thank clients and shareholders for their support. We have tested – and will
test – you periodically, but history has shown that it has been worthwhile. Since our founding,
we have generated a net amount of approximately $27 billion for investors in our funds and
mandates, that is after keeping some for the company and passing on over $1 billion in corporate
tax to the government. The team has the ability to continue to serve investors and thereby
reward our shareholders, and I firmly believe that they will do so.

Kerr Neilson
Founder & Director

10. ANZ ASX announcement 17 October 2017; CBA ASX announcement 25 June 2018.

Platinum Asset Management Limited Annual Report 2018Incoming Managing Director’s Letter 2018

The Beginning – February 1994
Platinum was founded in 1994 on a simple and singular premise: we had an investment approach
that had proven to produce good investment returns. At the core of this approach was the belief
that the best returns could be found in companies which were either out‑of‑favour with the
market, or alternatively, where there was significant change underway, be it the competitive
landscape, technological developments, or government regulation. Using this as our initial filter
for potential investments, we would then commit to deep fundamental research, and would
buy an individual company only if it was trading at a substantial discount to its inherent value.
Following this process, we would build portfolios one company at a time, based on the value
we identified.

In addition to this clear view on how we would achieve good investment outcomes, the other
core principle that guided our business was a strong sense of responsibility towards the clients
who entrusted us with their savings. We understood that if our investments lost money, our
clients would not get back those same savings again. We believed that it was more important to
minimise the risk of loss to clients than to achieve the maximum return possible, even if at times
this meant that our investment returns would lag behind the competition. Our responsibility to
clients also required that we clearly communicate to them and their advisers where their money
was invested and why.

Finally, it was clear amongst the founders that, if we were to succeed in establishing the
investment business that we had envisaged, delivering good outcomes for our clients must
always remain our primary goal. Many asset management businesses start with similar
intentions and achieve initial success, only to give way to the imperative of gathering assets as
investment performance declines. While this approach may make ‘business sense’, it is in fact
a betrayal of those clients who have trusted the company with their savings. The limitation for
the owners of the business of maintaining our focus on investing is clear. If we cannot continue
to generate good returns for clients, then not only will the growth of our business be limited,
but one would in fact expect it to shrink over time as a result.

These key tenets of Platinum’s business, established at the very outset, provide an explanation
for many of the important business decisions that have shaped the firm over the last 24 years.
A consistent approach to the pricing of our services, and an avoidance of trail commissions
and other rebate deals, are examples of our most basic practices that set us apart from many
industry peers. While participating in these pricing negotiations and other manipulations typical
of the industry would have undoubtedly helped increase funds under management, it would
have been so at the detriment of existing clients. New investment strategies, such as our
regional funds and sector global equity funds, were not launched at times of great demand
for such products, but rather at a time when these regions or sectors were out‑of‑favour with
investors, consistent with our investment approach. The one exception was the Platinum
International Technology Fund, which was launched at the height of the tech bubble in 2000,
as we saw the impending burst of that bubble. But, instead of encouraging and taking advantage
of the euphoria, we included a very strong caution to investors in the offer document.

Platinum Asset Management Limited Annual Report 201816

Incoming Managing Director’s Letter 2018
– continued

Looking Ahead
We have persisted with our founding principles over the last 24 years, and through different
market cycles. Today, Platinum remains an investment led business. We will continue to employ
an investment approach that has not changed and which, if well‑applied, should continue to
produce good outcomes for clients.

The firm’s key business units – the investment team, client services and communications,
the functional divisions of registry, finance, portfolio accounting, legal, compliance, human
resources and technology – have each been built on solid foundations and have improved
over time. There will be ongoing efforts to improve the way we work in each of these areas.
The strengths of these teams and their people should provide us with the opportunity to
gradually grow the business through a combination of investment returns and additional fund
inflows. We will continue to seek out clients in both new and existing markets for whom our
investment philosophy, focus on absolute returns, and approach to managing our business,
make sense and are aligned with their own long‑term goals.

Ultimately, the problem our clients face is not just how to earn a good return on their funds,
but whom they should trust to look after their savings. Over 24 years, we believe we have earned
our clients’ trust through a combination of good performance and consistently putting their
interests first. The future of Platinum will depend on both our ability to deliver on investment
returns and to maintain the trust of our clients. We remain focused on achieving the former,
and we are confident that if we deliver good returns, client trust will remain strong.

Andrew Clifford
Managing Director

Platinum Asset Management Limited Annual Report 201817

Financial
Statements
2018

General information
The financial statements were authorised for issue, in accordance
with a resolution of Directors, on 23 August 2018. The Directors
have the power to amend and reissue the financial statements.

Platinum Asset Management Limited Annual Report 2018Platinum Asset Management Limited18

Shareholder Information 30 June 2018

The shareholder information set out below was applicable as at 20 August 2018.

Distribution of ordinary shares
Analysis of number of ordinary shareholders 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

6,383

14,351

3,765

2,214

26,785

325

Platinum Asset Management Limited Annual Report 2018

Ordinary shareholders
Twenty largest ordinary shareholders
The names of the 20 largest shareholders of the Company are listed below:

ORDINARY SHARES

J Neilson

K Neilson

HSBC Custody Nominees (Australia) Limited

Platinum Investment Management Limited (nominee)

Citicorp Nominees Pty Limited

JP Morgan Nominees Australia Limited

National Nominees Limited

Jilliby Pty Limited

J Clifford

Pacific Custodians Pty Limited

BNP Paribas Nominees Pty Limited

Citicorp Nominees Pty Limited

Xetrov Pty Limited

Michele Martinez

Navigator Australia Limited

HSBC Custody Nominees (Australia) Limited

Nulis Nominees (Australia) Limited

Bond Street Custodians Limited

NUMBER HELD

156,037,421

156,037,420

40,856,268

29,364,201

21,316,164

18,030,916

7,032,373

6,500,000

5,000,000

3,471,866

3,343,234

2,105,592

1,847,762

1,500,000

1,072,309

952,965

894,881

772,264

756,495

500,000

% OF TOTAL
SHARES ISSUED

26.60

6.96

5.01

3.63

3.07

1.20

1.11

0.85

0.59

0.57

0.36

0.31

0.26

0.18

0.16

0.15

0.13

0.09

457,392,131

77.96

Unquoted ordinary shares
There are no unquoted ordinary shares, however under the Deferred Remuneration Plan, a total
of 3,471,866 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 Remuneration Plan (please refer to the Remuneration Report and
Note 19 for further details).

Platinum Asset Management Limited Annual Report 2018

Shareholder Information 30 June 2018 – 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

NUMBER HELD

312,074,841

32,831,449

% OF TOTAL
SHARES ISSUED

53.2 ˆ

5.9 ˆ

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 2018

31 August 2018

21 September 2018

Notice of Annual General Meeting
The details of the Annual General Meeting (AGM) of Platinum Asset Management Limited are:

10am Thursday 15 November 2018
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 2018

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 2018.

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
Brigitte Smith
Tim Trumper
Andrew Clifford

Kerr Neilson

Chairman and Non‑Executive Director
Non‑Executive Director
Non‑Executive Director
Non‑Executive Director (from 31 March 2018)
Non‑Executive Director (from 1 August 2018)
Chief Executive Officer/Managing Director (from 1 July 2018)* and
Chief Investment Officer
Chief Executive Officer/Managing Director (until 1 July 2018)* and
Executive Director

Elizabeth Norman Executive Director and Director of Investor Services and Communications
Andrew Stannard

Executive Director and Chief Financial Officer

Effective 1 July 2018, Andrew Clifford was appointed as Platinum group’s new Chief Executive Officer/
Managing Director. Andrew Clifford has assumed this role in addition to his role as the group’s Chief
Investment Officer. Kerr Neilson will continue as a full-time Executive Director of the Company.

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.

Operating and Financial Review
FUM at 30 June 2018 was $25.7 billion and this represented an increase of 13.1% from the
30 June 2017 closing FUM of $22.7 billion. The FUM at 30 June 2018 was after the impact of the
30 June 2018 net distribution of $1.5 billion. Average FUM for the year also increased by 13.1%
to $26.4 billion from an average FUM of $23.4 billion for the previous year. The increase in FUM
was due to net fund inflows of $1 billion and the strong gains made from investment performance
of $3.5 billion. Furthermore, the consolidated entity earned investment performance fees of
$21.9 million of which $20.0 million was generated from its “absolute” performance fee mandates.

Platinum Asset Management Limited Annual Report 201822

Directors’ Report – continued

Net fund flows have been positive over the last year and 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 18.6%1 for the 12 months to
30 June 2018. Our flagship Fund, Platinum International Fund returned 14.2%1 for the 12 months
to 30 June 2018, proving that our tried and tested approach to managing money is working well.

In September 2017, Platinum Investment Management Limited (“PIML”) successfully launched
two new ASX quoted managed funds, called Platinum International Fund (Quoted Managed
Hedge Fund) (ASX ticker: PIXX) and Platinum Asia Fund (Quoted Managed Hedge Fund)
(ASX ticker: PAXX). PIXX and PAXX feed directly into PIML’s existing flagship funds, the Platinum
International Fund and the Platinum Asia Fund, respectively, thus giving investors access to the
portfolio composition of these flagship funds, its portfolio managers and investment strategies.

We have been delighted with the level of investor support for these new funds. At 30 June 2018,
total FUM in these quoted managed funds was $312.5 million.

Our European‑based UCITS funds, Platinum World Portfolios PLC, continue to perform strongly
with FUM at 30 June 2018 increasing to $444.9 million.

Out of the $1 billion in net inflows for the 12 months to 30 June 2018, some $473.2 million or
46% was derived from the UCITS funds and the ASX quoted managed funds.

The increase in average FUM from the previous year and the increase in performance fees
resulted in revenue of $328.7 million (2017: $312.5 million), which represents an increase of
5.2% from the previous year. Achieving increased revenue is particularly pleasing, considering
that effective from 3 July 2017, PIML reduced its total fees and charges for the standard fee
option for each of the Platinum Trust Funds and the Platinum Global Fund from 1.5% per annum
to 1.35% per annum. PIML reduced its fees because, since commencing business in 1994,
PIML had found that the costs associated with accessing international markets had come down
as a result of investment efficiencies. At the time of announcing the change (in April 2017),
we anticipated that 2018 revenue could decline by as much as 9%.

Other investment income increased to $24.6 million (2017: $21.1 million) which was largely
explained by the consolidated income derived from PIXX and PAXX of $8.6 million, PIML’s
investments in Platinum Asia Investments Limited of $7.2 million and Platinum World
Portfolios Plc of $3.8 million.

You should be aware that historical performance is not a reliable indicator of future performance. The returns
for Platinum International Fund and Platinum Unhedged Fund are calculated using the Fund’s Net Asset Value
(NAV) unit price (i.e. excluding a buy/sell spread) for C Class, and represent the combined income and capital
returns in the specified period. All returns are pre-tax, net of fees and costs and assume the reinvestment of
dividends. The index for the Platinum International Fund and Platinum Unhedged Fund is the MSCI All Country
World Net Index ($A).

Source: Platinum Investment Management Limited (fund returns) and FactSet (MSCI returns). All data where
MSCI is referenced is the property of MSCI. No use or distribution of this data is permitted without the written
consent of MSCI. This data is provided “as is” without any warranties by MSCI. MSCI assumes no liability for or
in connection with this data.

Platinum Asset Management Limited Annual Report 201823

The headline expense figure increased from the previous year (up $22.0 million to $85.0 million),
but this was primarily due to the increase is staff remuneration expenses (up $15.0 million or
43.8% to $49.2 million), which were primarily paid to the investment team, and rewarded the
excellent 1 and 3 year relative and absolute returns for our underlying Funds and Mandates.

Taking into account the increased staff expenses of $15.0 million and an increase in non‑staff
expenses2, primarily related to the pursuit of growth opportunities, profit after tax for the year
attributable to owners was $189.2 million (2017: $186.0 million) which represented an increase
of 1.7%.

At 30 June 2018, basic and diluted earnings per share (EPS) increased to 32.36 cents per share
(2017: 31.74 cents per share).

The consolidated entity is in a strong financial position, with a strong balance sheet. However,
the most significant driver of our sustainable future growth is, and will always be, the delivery
of superior, long‑term, investment returns for our clients.

Our FUM is well positioned to 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, increased distribution and marketing
activity targeting offshore clients and accessing the continuing growth of the self‑managed
superannuation fund (SMSF) sector.

Dividends
Since the end of the financial year, the Directors have declared a 2018 final 16 cents per share
($93,313,125) fully‑franked ordinary dividend, with a record date of 31 August 2018 and
payable to shareholders on 21 September 2018.

A 2018 interim fully‑franked ordinary dividend of 16 cents per share ($93,482,311) was paid
on 19 March 2018. A fully‑franked ordinary dividend of 15 cents per share ($87,757,931) was
paid on 22 September 2017.

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
(in July 2017) as outlined above.

Increased FUM related expenses (custody), increased business-development expenses as a result of
website enhancement and deferral of a significant amount of the advertising spend from FY17 and increased
expenses relating to the launch of PIXX, PAXX and the US/Cayman Funds.

Platinum Asset Management Limited Annual Report 201824

Directors’ Report – continued

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.

Mr Cole has over 40 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 and member of the Audit, Risk & Compliance and
Nomination & Remuneration Committees since 11 March 2015 and Chair of the Nomination
& Remuneration Committee since 19 June 2017.

Mr Menzies is currently a Director of Century Australia Investments Limited and Freedom
Insurance Group Limited and is the Chairman of Silicon Quantum Computing Pty Limited
and is a past 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 of 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), GAICD
Independent Non‑Executive Director and member of the Audit, Risk & Compliance and
Nomination & Remuneration Committees since 22 September 2016 and Chair of the Audit,
Risk & Compliance Committee since 24 February 2017.

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. Ms Loveridge has extensive senior management
and people leadership experience, knowledge of financial and regulatory reporting and
risk management.

Brigitte Smith B.CHEM ENG (HONS), MBA, MALD, FAICD
Independent Non‑Executive Director and member of the Audit, Risk & Compliance and
Nomination & Remuneration Committees since 31 March 2018.

Ms Smith has 20 years’ experience in venture capital, business strategy and fast growth
company operations. Ms Smith co‑founded and is the Managing Director of GBS Venture
Partners Ltd (GBS) and also sits on the board of GBS’s portfolio company Moximed Inc.

Prior to founding GBS, Ms Smith worked in the US and Australia in operating roles with fast growth
technology based companies, and at Bain & Company as a strategic management consultant.

Platinum Asset Management Limited Annual Report 201825

Tim Trumper MBA, UNE
Independent Non‑Executive Director and member of the Audit, Risk & Compliance and
Nomination & Remuneration Committees since 1 August 2018.

Mr Trumper is Chair of the NRMA, advisor and shareholder in Quantium, Australia’s leading data
and analytics company, director of the Population Health Research Network (PHRN) and holds
interests in several private high growth innovative companies. He is an authority on the utilisation
of data to drive innovation, and corporate strategy.

Mr Trumper is an experienced non‑executive director, former CEO, and advisor for high‑
performance global and Australian companies. His career has spanned diverse categories
including artificial intelligence and machine learning, big data, digital transformation,
mobility and transport, financial services and media.

Along with fellow directors and Chairman Hon. R J Hawke, Tim helped to establish The Bestest
Foundation. This charity has raised over $4 million for disadvantaged Australian children.

Andrew Clifford BCOM (HONS)
Managing Director since 1 July 2018 and Chief Investment Officer since 8 May 2013.

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. In May 2013,
Mr Clifford was appointed Chief Investment Officer. Effective 1 July 2018, Andrew Clifford was
appointed as the Chief Executive Officer/Managing Director of the Platinum group. Previously
he was a Vice President at Bankers Trust Australia covering Asian equities and managing the
BT Select Market Trust – Pacific Basin Fund.

Kerr Neilson BCOM, ASIP
Managing Director to 1 July 2018 and Executive Director since 12 July 1993.

Mr Neilson was the Managing Director of the Company from incorporation to 30 June 2018.
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.

Elizabeth Norman BA, GRADUATE DIPLOMA IN FINANCIAL PLANNING
Director of Investor Services and Communications since 8 May 2013.

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 Platinum’s commitment
to supporting retail and institutional clients with dedicated investment specialists.

Platinum Asset Management Limited Annual Report 201826

Directors’ Report – continued

Andrew Stannard BMS(HONS), GRADUATE DIPLOMA IN APPLIED FINANCE AND INVESTMENT, CA
Director and Chief Financial Officer since 10 August 2015.

Mr Stannard joined Platinum from AllianceBernstein where he held the position of Chief Financial
Officer for the Asia‑Pacific region. Mr Stannard has 28 years of finance experience with expertise
in audit, financial control, operations, funds management, financial services regulation and
corporate governance.

Information on Company Secretary
Joanne Jefferies BCOM, LLB
Company Secretary since 17 October 2016.

Ms Jefferies is an English law qualified solicitor with more than 21 years of legal experience in
the asset management and securities services sectors, in England and across Asia Pacific.

Ms Jefferies joined Platinum in October 2016 as General Counsel and Group Company Secretary,
having spent the previous six years at BNP Paribas Securities Services as Head of Legal Asia
Pacific, Company Secretary for all Australian subsidiaries and a member of the Asia Pacific
Executive Committee. Joanne has previously held senior legal positions with Russell Investments,
Morley Funds Management (Aviva Investors) and Lord Abbett, and served as the General
Counsel for the UK’s funds management industry association, the Investment Association.

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 2018, and the number of meetings attended by
each Director were:

BOARD

ATTENDED

HELD

NOMINATION &
REMUNERATION COMMITTEE
HELD

ATTENDED

AUDIT, RISK &
COMPLIANCE COMMITTEE
ATTENDED

HELD

Michael Cole

Stephen Menzies

Anne Loveridge

Brigitte Smith
(since 31 March 2018)

Kerr Neilson

Andrew Clifford

Elizabeth Norman

Andrew Stannard

–

Platinum Asset Management Limited Annual Report 2018

Indemnity and Insurance of Directors and 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 21 to the financial statements.

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 21 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 …thics 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 45.

Platinum Asset Management Limited Annual Report 201828

Directors’ Report – continued

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

23 August 2018
Sydney

Andrew Clifford
Director

Platinum Asset Management Limited Annual Report 2018
29

Remuneration Report
A Message From the Chair of the Nomination & Remuneration Committee
As shareholders know, the core purpose of the Company is to deliver exceptional investment
returns to clients over the medium to long‑term, consistent with a risk profile that seeks
to preserve investor’s capital. Platinum believes that long‑term investment performance
is the primary driver of fund inflows, profit growth and therefore long‑term value creation
for shareholders.

The remuneration policy is shaped around this core purpose. The Company can only achieve
exceptional investment performance by attracting and then retaining superior investment
talent, supported by a team of similarly talented client service and operational staff. The long‑term
success of our remuneration program can be evidenced by our enviable investment performance
track record, a history of high retention rates amongst key investment and operational staff,
and a history of strong shareholder returns.

Platinum’s remuneration program has two key elements, being fixed remuneration (salary and
superannuation) and variable incentive awards, which are made either in the form of cash or by
way of a deferred equity award. To ensure the alignment of the investment team with strong
client investment returns, the size of the variable remuneration pool for the investment team
varies with the extent of investment out‑performance generated for clients, measured over
both 1 and 3 year periods.

That said, there can be times when, despite Platinum’s sound stock selection process, capital
markets can work against Platinum’s investment style and our funds can underperform. This
should not surprise shareholders as Platinum’s investment approach builds portfolios from the
bottom up on an index agnostic basis, so periods of underperformance to an index are almost
inevitable. In these transitory periods, the Directors retain the right to make appropriate
discretionary awards.

The Board is also conscious of the need to align remuneration outcomes with shareholder
returns. We note the trend by some other corporates to focus on Total Shareholder Return
(“TSR”) as a basis for designing Key Management Personnel (“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 problems associated with the use of TSR as the primary factor for determining employee
remuneration. Shorter term variables, such as the macroeconomic environment or interest
rates, are factors outside of the control of employees, but these can often 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 tool, in our view, encourages 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. Given the strong alignment between employees and
shareholders that already exists at Platinum due to the majority employee shareholding,
we believe that Platinum’s shareholders are better served by a remuneration policy that
aligns remuneration with the performance that we generate for our clients.

Platinum Asset Management Limited Annual Report 201830

Directors’ Report – continued

Your Nomination & Remuneration Committee has been active in the 2018 year and up to the
date of this report. In particular, we have:

–

Continued to push forward our program of Board renewal, appointing Brigitte Smith and
Tim Trumper to the Board;

Worked to ensure the smooth transition of CEO responsibilities to Mr Andrew Clifford;

Reviewed and updated the Board skills matrix;

Reviewed and approved various revisions to the Analyst and Profit Share plans; and

Reviewed the impact of UCITS V on the remuneration policies of the firm.

We will continue to refine and review our remuneration arrangements to ensure that they align
with the firm’s core purpose and we welcome your feedback.

Stephen Menzies
Chair of Nomination & Remuneration Committee

Platinum Asset Management Limited Annual Report 201831

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 2018. 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 2018
–

As noted in the Chairman’s report, investment team remuneration is aligned with the
investment returns that are being generated for clients. It was therefore pleasing to see
a significant increase in variable remuneration awards this year due to strong investment
outperformance. This outperformance has already resulted in increased fund inflows
and should substantially enhance the long‑term value of the business to the benefit of
all shareholders.

–

The Investment Team Profit Share Plan (PSP) and Investment Team Plan (ITP) both
generated incentive pool amounts this year. This was due to the weighted average of
1 and 3 year investment outperformance across all client portfolios totalling 3.71%.
This outperformance approached each Plan’s maximum cap of 6% and 5% respectively.

The combined PSP and ITP plan pools generated cash awards of $20.7m, with discretionary
cash awards under the General Employee Plan to non‑investment staff totalling a further
$5.0m. In addition, under the Deferred Remuneration Plan, deferred remuneration awards
were made to the value of $7.5m.

In addition, following a mid‑year review, the Nomination & Remuneration Committee
elected to make a one‑off, out of cycle, additional deferred award, totalling $5.2m, to
several key investment staff. Total deferred awards for the year were therefore $12.7m,
with sufficient shares purchased on‑market, at an average price of $6.34, to fully hedge
this exposure.

The allocation of 2018 profits attributed to both shareholders and employees is outlined
in the first graph on page 32. It shows that the compensation awarded to employees was
modest relative to the returns to shareholders, with shareholders receiving a share of
profits nearly four times that of staff remuneration.

The second graph, on page 32, shows that alignment between employees and the
owners of the business also remains very strong, with several key staff being primarily
remunerated by way of dividends and capital appreciation, in exactly the same way
as other shareholders.

Platinum Asset Management Limited Annual Report 201832

Directors’ Report – continued

Graph 1: Actual Share of 2018 Profit
Graph 1: Actual Share of 2018 Profit
(pre tax and pre staff costs)
(pre tax and pre staff costs)

Graph 2: Composition of PTM
Graph 2: Composition of PTM
share ownership
share ownership

Staff costs*
Staff costs*

16%
16%

24%
24%

Tax
Tax

60%
60%

Shareholders
Shareholders

* Includes share based payments expense
* Includes share based payments expense

Non
Non
employee
employee

40%
40%

60%
60%

Directors
Directors
and staff
and staff

–

Mr Kerr Neilson once again waived his ability to receive a variable award in 2018 and this
was ratified by the Nomination & Remuneration Committee.

Due primarily to his significant contribution to the strong absolute and relative performance
over the last 1 and 3 years, Platinum’s Chief Investment Officer, Andrew Clifford, received
a variable award in 2018, as did the remaining two executive Key Management Personnel
(“KMP”), being the Director of Investment Services and Communications, Elizabeth Norman
and the Finance Director, Andrew Stannard.

Guiding Principles of KMP and Staff Remuneration
The core purpose of the Company is to deliver exceptional investment returns to clients over
the medium to long‑term consistent with a risk profile that seeks to preserve investor’s capital.
It achieves this purpose by attracting and then retaining superior investment talent, supported
by a team of similarly talented client service and operational staff.

The success of our remuneration program can be evidenced by our enviable investment
performance track record, a history of high retention rates amongst key investment and
operational staff, and a record of highly profitable growth.

Platinum’s remuneration program has two3 key elements:

Fixed Remuneration: This is set at a level sufficient to attract exceptional talent. It includes
salary, benefits and statutory entitlements. Fixed remuneration is benchmarked to market
at least annually and reflects the scope of the individual role, and the required level of skill
and experience.

Variable Remuneration: Each employee is assessed annually across a range of quantitative
and qualitative factors as well as appropriate risk management and behavioural
requirements. Variable award recommendations are generally made annually on a
discretionary basis following rigorous review by management and are approved by the
Nomination & Remuneration Committee, which comprises non‑executive Directors only.

Platinum also has two inactive long-term Remuneration Plans, being an “Options and Performance Rights
Plan” (OPRP) and an “Fund Appreciation Rights Plan” (FARP). There was no allocation under either plan in
either the current or prior year.

Platinum Asset Management Limited Annual Report 2018
33

Variable awards can be made in the form of cash or a deferred equity award which vests
over a 4 year period. This deferral element is designed to foster sustainable growth, as
well as sound financial, operational and risk management practices.

Fixed Remuneration

– Set to attract exceptional talent

– Benchmarked to market

– Rewards each employee for their skills,
attributes and role accountabilities.

1. Fixed
Remuneration

Reward
Framework

3. Variable
Remuneration
(Deferred)

2. Variable
Remuneration
(Cash)

Variable Remuneration (Deferred)

– Improves alignment of employees
and shareholders

– Significant deferral element to foster
sustainable growth and sound
financial, operational and risk
management practices

Variable Remuneration (Cash)

– Performance goals set annually at the
beginning of each performance period

– Board approves awards annually with
reference to individual performance

– Other performance conditions include
• Company performance
• Risk Management factors
• Leadership and Cultural factors

Variable Remuneration Plans
There were three variable remuneration plans in operation during FY18, which were supported
by a Deferred Remuneration Plan. Each plan is overseen by the Nomination & Remuneration
Committee. The investment team has access to the Investment Team Plan and the Profit Share
Plan. All other staff are covered by the General Employee Plan. Each variable remuneration
award is then apportioned between a cash amount, which is generally paid in June and a
deferred amount, which will vest in four years so long as the employee remains at the firm
during that time.

Platinum Asset Management Limited Annual Report 201834

Directors’ Report – continued

The table below summarises the main characteristics of each plan, each of which are then
discussed in more detail in the following section.

PLAN
SUMMARY

Investment
Team Plan

PARTICIPANTS

POOL FORMULA

CAP

HURDLE

AWARD TYPE

Investment team Weighted
average 1
and 3 year
performance4

2x salary of
investment team
(caps out at 5%
outperformance)

Profit Share
Plan

Investment team Weighted
average 1
and 3 year
performance

5% of adjusted
net profit (caps
out at 6%
outperformance)

General
Employee
Plan

Non‑investment
team staff

Discretionary
Award

n/a

Cash and/
or deferred
award

Investment Team Plan (applies to members of the investment team only)
Under this Plan, the annual investment team award pool is calculated as a percentage of the
aggregate base salary of the investment team. The percentage level relates to the weighted
average of 1 year and 3 year outperformance of all funds and mandates under management.
For each 1% increase in this average outperformance, the pool is increased by 20% and is then
capped at 2 times salary when average outperformance is 5% or more.

The pool is allocated across the investment team based on performance assessments that
are based on both quantitative and qualitative measures. In a period where there is aggregate
weighted average underperformance or where performance is uneven across different funds
or fund managers, annual awards for investment team members may then be 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 the individual
investment ideas that the person has proposed. Individual investment performance is usually
assessed over a 1 year and 3 year time‑frame and is relative to an appropriate benchmark.

The Board can elect to make discretionary awards in excess of the pool amount should it be required. In this
case, annual awards for investment team members may then be determined by an individual assessment of
each employee’s contribution.

Platinum Asset Management Limited Annual Report 201835

Profit Share Plan (“PSP”) (applies to selected members of the investment team only)
The PSP is designed to reward key members of the team for helping in the development of
Platinum’s business through strong investment performance (generally relative to benchmarks).
Individual members of the investment team are 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 management fee‑based5 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%. The profit share figure is limited to 5% of profit before tax, though the Nomination
& Remuneration Committee may elect to carry over outperformance to future periods if
investment returns indicate a profit share in excess of the 5% level.

General …mployee Plan (applies to non‑investment team staff)
Performance is assessed against pre‑determined operational performance indicators relevant
to each employee as determined by the Directors of PIML and ratified by the Nomination &
Remuneration Committee. These performance indicators take into account the responsibilities,
skill and experience of each employee and their contribution during the year.

Deferred Remuneration Plan (applies to all staff)
In June 2016, the Nomination & Remuneration Committee approved the implementation of the
Deferred Remuneration 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, generally during the annual award cycle, and
the proportion of each variable award that is deferred varies by employee. The number of
deferred rights awarded is determined by dividing the discretionary deferred award amount
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 award acceptance date. If an eligible employee remains
employed at Platinum after the four year vesting period expires, the employee then has a
further five years to exercise their deferred right. If an employee resigns from Platinum before
they have met their service condition then, in most circumstances, the deferred rights will
be forfeited.

5. Excluding investment related revenue and expenses.

Platinum Asset Management Limited Annual Report 201836

Directors’ Report – continued

In order to satisfy the obligation to the Company that arises from the granting of deferred
awards, the Company intends to, over time, purchase shares on‑market and then hold these
shares within an Employee Share Trust. Upon 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 award or on exercise. There is flexibility
within the plan for the Committee to award cash or some other instrument rather than deferred
shares, but the Committee currently envisages awarding 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.

Long-Term Remuneration Plans
Platinum has two inactive long‑term Remuneration Plans, being an “Options and Performance
Rights Plan” (OPRP) and an “Fund Appreciation Rights Plan” (FARP). There was no allocation
under either plan in either the current or prior year.

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

Brigitte Smith

Non‑Executive Director (from 31 March 2018)

Kerr Neilson

Managing Director

Andrew Clifford

Executive Director and Chief Investment Officer (CIO)

Elizabeth Norman Executive Director and Director of Investor Services and Communications

Andrew Stannard

Executive (Finance) Director

In addition, the Company recently announced the appointment of Mr Tim Trumper to the Board,
as a Non‑Executive Director, with effect from 1 August 2018.

There were no other employees that held a KMP position within the Company or consolidated
entity.

Platinum Asset Management Limited Annual Report 201837

Managing Director and other KMP Remuneration
Managing Director Remuneration
Kerr Neilson continued to waive his ability to receive variable compensation. This has been
ratified by the Nomination & Remuneration Committee.

With effect from 1 July 2018, Mr Andrew Clifford assumed the role of CEO in addition to
his existing responsibilities as Chief Investment Officer. As a consequence of this change,
Mr Clifford will, from 1 July 2018, become eligible for discretionary awards under the CEO Plan
(subject to a A$1 million cap), subject to meeting KPIs as set by the Board, in addition to any
entitlement under the pre‑existing plans.

Other KMP Remuneration
Andrew Clifford, Platinum’s Chief Investment Officer and Co‑Manager of Platinum International
Fund, received a variable award that reflected both his significant contribution to the strong
absolute and relative investment performance achieved for Platinum’s clients as well as his
leadership and development of the investment team.

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 launch of a range of new offshore funds in the
Cayman Islands (to support US business initiatives), ongoing work associated with our European
business operations, the successful growth of the new Quoted Managed Funds, the deployment
of a new website and a substantial expansion of our communications with both advisors
and investors.

The variable compensation paid to Andrew Stannard reflected the leadership and strategic
input that he provided into various business development opportunities for the business.
This included the development of the ASX Quoted Managed Funds, the creation of a new range
of Cayman registered funds and working on the operational aspects of our European business.
In addition, he led various capital management activities undertaken by the firm, including the
partial disposal of the consolidated entity’s interest in Platinum Asia Investments Limited.

Platinum Asset Management Limited Annual Report 201838

Directors’ Report – continued

Remuneration of Executive Key Management Personnel (KMP)
The table below presents the remuneration provided by the consolidated entity to Executive
KMP of the consolidated entity, in accordance with accounting standards.

CASH
SALARY
$

OTHER(1)

SUPER‑
ANNUATION
$

VARIABLE
REMUNERA‑
TION

(CASH) (2) (DEFERRED) (3)

VARIABLE
REMUNERA‑
TION AS A %
OF TOTAL
REMUNERA‑

TION (4)

TOTAL
$

2018

Kerr Neilson(5)

Andrew Clifford

450,000

(5,384)

20,049

–

464,665

450,000

4,428

20,049

2,632,000

174,000 3,280,477

Elizabeth Norman

425,000

(3,364)

20,049

1,300,000

163,645 1,905,330

Andrew Stannard

2017

Kerr Neilson(5)

Andrew Clifford

425,000

1,750,000

(4,151)

(8,471)

20,049

450,000

42,950

933,848

80,196

4,382,000

380,595 6,584,320

450,000

(18,089)

425,000

(13,206)

19,616

–

451,527

431,410

Elizabeth Norman

400,000

9,250

19,616

1,200,000

104,400

1,733,266

Andrew Stannard

400,000

11,009

19,616

400,000

17,400

848,025

1,675,000

(11,036)

78,464

1,600,000

121,800 3,464,228

86%

77%

53%

72%

75%

49%

50%

(1) “Other” 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 “Variable Remuneration Plans” section on pages 33 to 36 for further details. The cash variable
remuneration attributable to Andrew Clifford is comprised of awards under the Analyst Plan and Profit
Share Plan of $1,000,000 and $1,632,000 respectively. The cash awards made to Elizabeth Norman
and Andrew Stannard were made under the General Employee Plan.

(3) The accounting fair value attributed to each deferred award is spread over the five year service period.

The accounting valuation of $174,000 attributable to Andrew Clifford represents the current year portion
of the 2018 deferred award of $1,000,000. The accounting valuation of $163,645 attributable to Elizabeth
Norman represents the current year portion of the 2018 deferred award of $350,000, the 2017 award of
$300,000 and the 2016 award of $300,000. The accounting valuation of $42,950 attributable to Andrew
Stannard represents the current year portion of the 2018 deferred award of $150,000 and the 2017 award
of $100,000.

(4) Fixed remuneration refers to salary, superannuation and provisions or payments made for annual and long

service leave. Variable remuneration refers to both cash and deferred components.

(5) The Managing Director, Kerr Neilson, waived his right to receive variable compensation and this has been

ratified by the Nomination & Remuneration Committee.

Platinum Asset Management Limited Annual Report 2018

The table below presents supplementary disclosure of the remuneration provided by the
consolidated entity to Executive KMP’s of the consolidated entity, based of amounts awarded
to the individual during the year.

CASH
SALARY
$

SUPER‑
ANNUATION
$

VARIABLE‑
REMUNERA‑
TION

(CASH)(1) (DEFERRED)(2)

VARIABLE
REMUNERA‑
TION AS A %
OF TOTAL
REMUNERA‑

TION(3)

TOTAL
$

2018

Kerr Neilson(4)

Andrew Clifford

Elizabeth Norman

Andrew Stannard

2017

Kerr Neilson(4)

Andrew Clifford

Elizabeth Norman

Andrew Stannard

450,000

425,000

20,049

–

470,049

20,049

2,632,000

1,000,000

4,102,049

20,049

1,300,000

350,000

2,095,049

20,049

450,000

150,000

1,045,049

1,750,000

80,196

4,382,000

1,500,000

7,712,196

450,000

425,000

400,000

19,616

–

469,616

444,616

19,616

1,200,000

300,000

1,919,616

19,616

400,000

100,000

919,616

1,675,000

78,464

1,600,000

400,000

3,753,464

89%

79%

57%

76%

78%

54%

53%

(1) See the “Variable Remuneration Plans” section on pages 33 to 36 for further details. The “variable remuneration
(cash)” amount attributable to Andrew Clifford is comprised of awards under the Analyst Plan and Profit
Share Plan of $1,000,000 and $1,632,000 respectively. The cash awards made to Elizabeth Norman and
Andrew Stannard were made under the General Employee Plan.

(2) The “variable remuneration (deferred)” amount noted above reflects the award amounts attributed to each

individual in the current financial year.

(3) Fixed remuneration refers to salary and superannuation. Variable remuneration refers to both cash and

deferred components.

(4) The Managing Director, Kerr Neilson, waived his right to receive variable compensation and this has been

ratified by the Nomination & Remuneration Committee.

Platinum Asset Management Limited Annual Report 2018

Directors’ Report – continued

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 variable remuneration plans.
The Executive Directors examine the base pay of the Non‑Executive Directors annually and may
utilise the services of an external advisor to assist with this.

The Executive Directors determine 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, is $2 million per annum (including superannuation).

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 specifies that any change to the maximum
amount of remuneration that can be paid to the Non‑Executive Directors requires the approval
by shareholders.

Remuneration Structure
Below is a summary of changes within each of the Board’s sub‑committees over the last year.

NAME

Michael Cole

Anne Loveridge

AUDIT, RISK & COMPLIANCE
COMMITTEE

NOMINATION & REMUNERATION
COMMITTEE

Member for the full financial year.

Member and Chair for the full
financial year.

Member for the full financial year.

Stephen Menzies

Member for the full financial year.

Member and Chair for the full
financial year.

Brigitte Smith

Member since 31 March 2018.

Platinum Asset Management Limited Annual Report 2018

The following table displays the current Non‑Executive Directors and their roles at
30 June 2018:

Board

Audit, Risk & Compliance
Committee

Nomination & Remuneration
Committee

MICHAEL COLE

ANNE LOVERIDGE STEPHEN MENZIES

BRIGITTE SMITH

Chair

Member

Chair

Member

Chair

Member

The table below shows how the remuneration is allocated reflecting their roles at 30 June 2018.

Board

$170,000

$130,000

MICHAEL COLE

ANNE LOVERIDGE STEPHEN MENZIES

BRIGITTE SMITH

Audit, Risk & Compliance
Committee

Nomination & Remuneration
Committee

$15,000

$30,000

$15,000

$30,000

$15,000

Total

$200,000

$175,000

$160,000

Platinum Asset Management Limited Annual Report 2018

Directors’ Report – continued

Remuneration of Non-Executive Directors
The table below presents actual amounts received by the Non‑Executive Directors.

CASH
SALARY
$

SUPER‑
ANNUATION
$

VARIABLE
REMUNERATION
(CASH)
$

VARIABLE
REMUNERATION
(DEFERRED)
$

2018

Michael Cole

Stephen Menzies

Anne Loveridge

Brigitte Smith
(from 31 March 2018)

2017

Michael Cole

Stephen Menzies

Anne Loveridge
(from
22 September 2016)

Margaret Towers
(until
22 September 2016)

Bruce Coleman
(until 19 June 2017)

200,000

175,000

40,000

590,000

200,000

160,519

19,000

16,625

3,800

56,050

19,000

15,249

129,308

12,284

43,750

4,156

175,597

709,174

16,678

67,367

–

TOTAL
$

219,000

191,625

43,800

646,050

219,000

175,768

141,592

47,906

192,275

776,541

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 Euro 22,032 (equivalent to A$34,257)
(2017: Euro 20,000 (equivalent to A$28,908)).

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 2018

–

The tenure of all Directors, except for the founder, Mr Kerr Neilson, 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 variable remuneration plans,
upon termination, where an Executive resigns, variable remuneration is only paid if the
Executive is employed at the date of payment. The Board retains discretion to still make
variable remuneration 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 KMP remuneration paid by the consolidated entity
Total aggregate variable remuneration paid represents variable remuneration awards and is
predominantly based on the investment performance generated for clients. The amount paid in
2018 for aggregate variable remuneration was higher than the preceding four years, primarily
on account of the strong investment performance generated for clients over the 1 and 3 year
period and the associated allocation under the Profit Share Plan (PSP).

2018

2017

2016

2015

2014

Revenue ($’000)

353,290

333,549

344,658

360,422

319,796

Expenses ($’000)

84,966

62,971

62,464

58,872

58,751

Operating profit after
tax ($’000)

Basic earnings per share
(cents per share)

Total dividends
(cents per share)

Total aggregate fixed
remuneration
paid ($)(1)

Total aggregate
variable remuneration
paid ($)

191,594

192,647

199,870

213,499

189,867

32.36

31.74

34.24

36.66

32.79

2,510,503

2,558,913

2,518,991

2,362,901

2,346,251

4,762,595

1,721,800

1,452,200

1,125,000

2,554,650

(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 funds).

Platinum Asset Management Limited Annual Report 2018

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:

Michael Cole

Stephen Menzies

Anne Loveridge

Brigitte Smith

Kerr Neilson

Andrew Clifford(1)

Elizabeth Norman(2)

Andrew Stannard(3)

OPENING
BALANCE

200,000

30,000

6,000

–

312,074,841

32,831,449

766,748

–

ADDITIONS

DISPOSALS

40,000

10,000

16,000

41,666

–

CLOSING
BALANCE

240,000

40,000

22,000

41,666

312,074,841

32,831,449

766,748

–

(1) Andrew Clifford also has contingent rights to receive up to 165,563 shares pursuant to awards made under

the Company’s deferred remuneration plan.

(2) Elizabeth Norman also has contingent rights to receive up to 171,227 shares pursuant to awards made

under the Company’s deferred remuneration plan.

(3) Andrew Stannard also has contingent rights to receive up to 46,387 shares pursuant to awards made under

the Company’s deferred remuneration plan.

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.

Other related party payments involving KMP
In the current year, the consolidated entity paid $50,000 (2017: $200,000) to OneVue Services
Pty Limited for the provision of services associated with the build, customisation and
enhancement of the Platinum web‑site. OneVue is a related entity of the Chairman of Platinum
Asset Management Limited, Mr Michael Cole.

Shareholders’ Approval of the 2017 (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 96.85%.

Platinum Asset Management Limited Annual Report 2018

Auditor’s Independence Declaration

As lead auditor for the audit of Platinum Asset Management Limited for the year ended
30 June 2018, I declare that to the best of my knowledge and belief, the only contraventions of:

(a)

the auditor independence requirements of the Corporations Act 2001 in relation to
the audit; and

(b)

any applicable code of professional conduct in relation to the audit;

are as set out below.

A partner in the lead audit engagement office held an immaterial investment for a very short
period in one of the entities that Platinum Investment Management Limited controls, Platinum
Asia Fund (Quoted Managed Hedge Fund). The partner did not provide any services to Platinum
Investment Management Limited, the responsible entity, or the fund. The investment was
immediately disposed when the issue was identified.

I do not believe this matter has impacted the objectivity of PricewaterhouseCoopers in relation
to the audit.

This matter was identified as part of our on‑going quality control system. All reasonable steps
were undertaken to ensure that this matter was resolved as soon as possible. I report that this
matter has been resolved, and in doing so do not believe that this matter has impacted my
objectivity and impartiality for the purpose of this audit.

This declaration is in respect of Platinum Asset Management Limited and the entities it controlled
during the period.

R Balding
Partner
PricewaterhouseCoopers

Sydney, 23 August 2018

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

Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124
T: +61 2 9659 2476, 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 201846

Consolidated Statement of Profit or Loss and
Other Comprehensive Income
For the year ended 30 June 2018

NOTE

CONSOLIDATED

2018
$’000

2017
$’000

Revenue

Management fees

Performance fees

Administration fees

Other income

Interest

Distributions and dividends

Gains on equity investments in associates

(Losses)/gains on financial assets at fair value
through profit or loss

Foreign exchange gains on overseas bank accounts

Gains on forward currency contracts

Total revenue and other income

Expenses

Staff

Custody and unit registry

Business development

Share‑based payments

Legal, compliance and other professional

Research

Technology

Rent and other occupancy

Mail house, periodic reporting and share registry

Depreciation

Insurance

Audit fee

Other

Total expenses

Profit before income tax expense

Income tax expense

Profit after income tax expense for the year

2, 5

6(a)

306,803

21,878

–

296,391

1,626

14,451

328,681

312,468

3,744

23,272

9,211

(12,954)

1,296

4,341

9,736

6,779

149

353,290

333,549

49,231

13,348

34,242

11,992

7,429

3,558

2,813

2,214

1,995

1,661

990

724

460

444

4,080

1,449

2,321

2,032

1,675

1,862

1,321

895

468

425

209

84,966

268,324

76,730

191,594

62,971

270,578

77,931

192,647

Platinum Asset Management Limited Annual Report 2018

Other comprehensive income

Exchange rate translation impact of foreign subsidiaries 14

Other comprehensive income for the year, net of tax

NOTE

2018
$’000

2017
$’000

406

Total comprehensive income for the year

191,601

193,053

CONSOLIDATED

Profit after income tax expense for the year is attributable to:

Owners of Platinum Asset Management Limited

Non‑controlling interests

189,221

186,026

2,373

6,621

191,594

192,647

Basic earnings per share

Diluted earnings per share

CENTS

32.36

CENTS

31.74

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 2018

Consolidated Statement of Financial Position
As at 30 June 2018

Assets

Current assets

Cash and cash equivalents

Term deposits

Trade and other receivables

Income tax receivable

Total current assets

Non‑current assets

Equity investments in associates

Financial assets at fair value through profit or loss

Fixed assets

Total non‑current assets

Total assets

Liabilities

Current liabilities

Trade and other payables

Employee benefits

Income tax payable

Total current liabilities

Non‑current liabilities

Provisions

Net deferred tax liabilities

Total non‑current liabilities

Total liabilities

Net assets

NOTE

CONSOLIDATED

2018
$’000

2017
$’000

6(b)

164,337

154,263

27,876

52,557

3,333

74,876

30,199

–

248,103

259,338

95,920

98,796

2,986

197,702

445,805

24,082

3,249

–

27,331

1,145

6,214

7,359

34,690

411,115

91,692

107

2,829

94,628

353,966

6,255

3,261

7,866

17,382

461

1,049

1,510

18,892

335,074

Platinum Asset Management Limited Annual Report 2018

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

2018
$’000

2017
$’000

731,245

742,933

(582,006)

(585,818)

185,940

177,959

335,179

335,074

75,936

411,115

–

335,074

The above consolidated statement of financial position should be read in conjunction with the
accompanying notes.

Platinum Asset Management Limited Annual Report 2018

Consolidated Statement of Changes in Equity
For the year ended 30 June 2018

CONSOLIDATED

ISSUED
CAPITAL
$’000

RESERVES
$’000

RETAINED
PROFITS
$’000

NON‑
CONTROLLING
INTERESTS
$’000

TOTAL
EQUITY
$’000

Balance at 1 July 2016

747,717

(587,764)

175,522

28,736

364,211

–

186,026

6,621

192,647

(595)

1,001

–

(595)

1,001

406

186,026

6,621

193,053

(4,784)

–

1,540

–

(181,687)

–

(4,784)

1,540

(181,687)

Profit after income tax
expense for the year

Other comprehensive income

Exchange rate translation
impact of foreign
subsidiaries (Note 14)

Deconsolidation of Platinum
World Portfolios Plc. (Note 14)

Total comprehensive income
for the year

Transactions with owners in
the capacity as owners

Treasury shares acquired
(Note 13)

Share‑based payments
reserve (Note 14)

Dividends paid (Note 16)

Decrease in retained
earnings on
deconsolidation of
Platinum World
Portfolios Plc. (Note 4)

Decrease in equity on
deconsolidation of Platinum
World Portfolios Plc. (Note 4)

–

(1,902)

(5,604)

(7,506)

–

(29,753)

Balance at 30 June 2017

742,933

(585,818)

177,959

–

335,074

Platinum Asset Management Limited Annual Report 2018

CONSOLIDATED

ISSUED
CAPITAL
$’000

RESERVES
$’000

RETAINED
PROFITS
$’000

NON‑
CONTROLLING
INTERESTS
$’000

TOTAL
EQUITY
$’000

Balance at 1 July 2017

742,933

(585,818)

177,959

–

335,074

Profit after income tax
expense for the year

Other comprehensive income

Total comprehensive
income for the year

Transactions with owners in
the capacity as owners

Treasury shares acquired
(Note 13)

Share‑based payments
reserve (Note 14)

Dividends/Distributions
paid (Note 16 and Note 4)

Decrease in retained
earnings on deconsolidation
of PIXX (Note 4)

Transactions with
non‑controlling interests
(Note 4)

–

(11,688)

–

3,805

189,221

2,373

191,594

–

189,221

2,373

191,601

–

(11,688)

3,805

–

(181,240)

(16,845)

(198,085)

–

(1,357)

91,765

75,936

91,765

411,115

Balance at 30 June 2018

731,245

(582,006)

185,940

The above consolidated statement of changes in equity should be read in conjunction with the
accompanying notes.

Platinum Asset Management Limited Annual Report 2018

Consolidated Statement of Cash Flows
For the year ended 30 June 2018

Cash flows from operating activities

Receipts from operating activities

Payments for operating activities

Income taxes paid

Net cash from operating activities

Cash flows from investing activities

Interest received

Purchase of term deposits

Proceeds on maturity of term deposits

Receipts from sale of financial assets and
investment in associates

Payments for purchases of financial assets and
investment in associates

Purchase of units held directly by PIXX
(whilst consolidated) and PAXX

Payments for purchases of fixed assets

Dividends and distributions received

Less cash released on deconsolidation

Net cash (used in) investing activities

Cash flows from financing activities

Proceeds from units issued (net applications into
PIXX (whilst consolidated) and PAXX) and other
non‑controlling interests

Dividends paid

Net cash (used in) financing activities

Increase in cash and cash equivalents

Cash and cash equivalents at the beginning of the
financial year

Effects of exchange rate changes on cash and
cash equivalents

NOTE

CONSOLIDATED

2018
$’000

2017
$’000

328,304

(91,242)

(82,516)

154,546

311,656

(65,584)

(80,686)

165,386

3,869

4,666

(518,250)

(494,394)

565,394

558,036

36,695

37,488

(52,949)

(91,356)

(64,673)

(881)

1,700

–

(29,095)

–

(1,097)

488

(36,152)

(22,321)

64,673

(181,247)

(116,574)

8,877

73,758

(181,592)

(107,834)

35,231

154,263

119,079

1,197

(47)

Cash and cash equivalents at the end of the financial year

164,337

154,263

The above consolidated statement of cash flows should be read in conjunction with the accompanying notes.

Platinum Asset Management Limited Annual Report 2018

Notes to the Financial Statements
30 June 2018

Statement of Compliance
The consolidated financial statements are general purpose financial statements which have
been prepared in accordance with Australian Accounting Standards adopted by the Australian
Accounting Standards Board (AASB) and the Corporations Act 2001. The consolidated financial
statements comply with International Financial Reporting Standards (IFRSs) adopted by the
International Accounting Standards Board (IASB).

Basis of Preparation
The consolidated financial statements are presented in Australian Dollars, which is the
consolidated entity’s functional and presentation currency, with all values rounded to the
nearest thousand dollars (‘$000), in accordance with ASIC Corporations (Rounding in Financial/
Directors’ Reports) Instrument 2016/191, unless otherwise stated. The consolidated financial
statements have been prepared on a historical cost basis, except for the revaluation of financial
assets and liabilities at fair value through profit or loss.

Platinum Investment Management Limited (“PIML”) has seeded or invested in many of the
products it offers to investors and this has impacted on the accounting treatment adopted in
the consolidated financial statements as follows:

ENTITY

PIML OWNERSHIP INTEREST
AT 30 JUNE 2018

ACCOUNTING TREATMENT
ADOPTED IN THESE ACCOUNTS

Interest is less than 1%
in each Fund.
19.9%

Platinum Trust Fund
investments
Platinum Asia Fund
(Quoted Managed Hedge
Fund) (“PAXX”)
Platinum World Portfolios Plc 13.7%
(“PWP”)

Platinum Asia Investments
Limited (“PAI”)

8.3%

Fair value accounting applied
(see Note 8).
Subsidiary. Consolidation
accounting applied
(see Note 1).^
Investment in associate.
Equity accounting applied
(see Note 2).*
Investment in associate.
Equity accounting applied
(see Note 2).*

PIML has been assessed as exerting control over PAXX, predominantly on the basis of its ownership interest
in PAXX, and as a result, the consolidated statement of profit or loss and other comprehensive income
includes PAXX’s investment income and expenses for the period from 14 September 2017 (launch date) to
30 June 2018 and the consolidated statement of financial position includes PAXX’s assets, liabilities and
equity as at 30 June 2018. A breakdown of the external (non-PIML/non-controlling) investment in PAXX is
disclosed in Note 4. Note 4 also shows the consolidated statement of financial position excluding the impact
of the PAXX consolidation.
In September 2017, PIML seeded and exerted control over Platinum International Fund (Quoted Managed Hedge
Fund) (ASX ticker: PIXX). As a result of encouraging net fund inflows, during the year, PIML fully disposed of its
investment in PIXX and has no holding in PIXX as at 30 June 2018. The consolidated statement of profit or
loss and other comprehensive income includes PIXX’s investment income and expenses for the period that
PIML exerted control over PIXX, which was dependent on PIML’s ownership interest in PIXX.
At 30 June 2018, PIML (and the consolidated entity) was assessed as having significant influence over
Platinum Asia Investments Limited (“PAI”) and Platinum World Portfolios Plc (“PWP”) (Refer to Note 2 for
further details).

Platinum Asset Management Limited Annual Report 2018

Notes to the Financial Statements
30 June 2018

As a direct result of the different accounting treatment adopted in these consolidated accounts
(as presented in the table on the previous page), management has taken the opportunity to
re‑order the notes to the financial statements this year. Management has presented the notes
in three parts:

PART A – Notes 1 to 4: Accounting treatment of entities that form part of the Platinum
consolidated group
PART B – Notes 5 to 22: Operations – Notes that explain the operations of the
consolidated entity
PART C – Notes 23 to 27: Miscellaneous Notes that are required by the accounting standards

Significant accounting policies
The principal accounting policies have been included in the relevant notes to which the policy
relates and consistently applied to all financial years presented in these consolidated financial
statements.

Critical accounting judgements, estimates and assumptions
The preparation of the consolidated financial statements require management to make
judgements, estimates and assumptions. The areas where assumptions and estimates are
significant to the consolidated financial statements are outlined after the relevant accounting
policy in the relevant notes. The impact of the treatment of the products that PIML has seeded
or invested in, is the most critical accounting judgement, estimate or assumption within these
consolidated financial statements.

Platinum Asset Management Limited Annual Report 201855

PART A – Notes 1 to 4
Accounting treatment of entities that form part of the Platinum consolidated group
Notes 1 to 4 focus on the accounting treatment adopted in these accounts and contains key
information relating to the parent entity, subsidiaries, controlled entities and associates.

Note 1. Subsidiaries and controlled entities
At 30 June 2018 and 30 June 2017, the Company’s subsidiaries and the ownership interests
were as follows.

NAME

McRae Pty Limited

Platinum Asset Pty Limited

Platinum Investment
Management Limited

Platinum Employee Share Trust^

Platinum Investment
Management Australia (PIMA) Corp.

Platinum Asia Fund (Quoted Managed
Hedge Fund) (“PAXX”)*

Platinum GP Pty Limited**

PRINCIPAL PLACE OF BUSINESS/
COUNTRY OF INCORPORATION

OWNERSHIP INTEREST
2018
%

2017
%

Australia

100.0

United States

100.0

Australia

19.9

100.0

n/a

Platinum Employee Share Trust holds PTM shares on behalf of employees selected to participate in the
Deferred Remuneration Plan (see Note 19 for further details).
During the year, the consolidated entity launched and seeded both PIXX and PAXX and as a result of
encouraging net fund inflows in PIXX, the consolidated entity fully disposed of its investment in PIXX by
29 January 2018. At 30 June 2018, the consolidated entity’s interest in PAXX was 19.9%.
On 7 February 2018, the Company registered Platinum GP Pty Limited associated with the launch of the
US/Cayman Funds. The consolidated entity contributed $1 as capital in order to register and incorporate
the entity.

Platinum Asset Management Limited Annual Report 2018

Notes to the Financial Statements
30 June 2018

Note 1. Subsidiaries and controlled entities – continued

ACCOUNTING
POLICY

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 2018 and the results of all subsidiaries for the financial year. Platinum
Asset Management Limited and its subsidiaries together are referred to in these
consolidated 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 deconsolidated from the date that control ceases.

In preparing the consolidated financial statements, all intercompany transactions,
balances and unrealised gains arising within the consolidated entity are eliminated
in full.

Foreign currency translation
Foreign currency transactions are translated into the functional currency using
the exchange rates prevailing at the date 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 consolidated statement
of profit or loss and other comprehensive income.

The results and financial position of foreign operations that have a functional
currency different from the presentation currency are translated into the
presentation currency as follows:

–

assets and liabilities for each financial position presented are translated
at the balance date;

income and expenses included in the consolidated statement of profit or loss
and other comprehensive income are translated at average exchange rates
(unless this is not a reasonable approximation of the cumulative effect of the
rates prevailing on the transaction dates, in which case income and expenses
are translated at the dates of the transactions); and

all resulting exchange differences are recognised in other comprehensive
income in the foreign currency translation reserve.

Critical accounting judgements, estimates and assumptions
Assessment of control: At 30 June 2018, the consolidated entity was assessed as
having control over Platinum Asia Fund (Quoted Managed Hedge Fund) (“PAXX”),
primarily on the basis of its ownership interest at 30 June 2018 of 19.9% and
because PIML acts as the Investment Manager of PAXX.

Platinum Asset Management Limited Annual Report 201857

Note 2. Equity investments in associates
At 30 June 2018, the consolidated entity’s investment(s) in Platinum Asia Investments Limited
(“PAI”) and Platinum World Portfolios Plc (“PWP”) represent interests in associates which are
accounted for using the equity method of accounting. Information relating to this is shown below:

a. Interests in associates

ENTITY

EQUITY
INTEREST
%

FAIR VALUE
$’000

CARRYING AMOUNT
$’000

2018

2017

2018

2017

2018

2017

REASON FOR ASSESSMENT OF
SIGNIFICANT INFLUENCE

PAI

8.3

13.9

37,800

50,750

34,972

53,612 Level of ownership
interest was 8.3% at
30 June 2018; PIML acts
as Investment Manager
(IM) in accordance
with the Investment
Management Agreement;
PIML provides
performance and
exposure reports
to the PAI Board.

PWP

13.7

14.5

63,409

39,468

60,948

38,080 Level of ownership

interest was 13.7% at
30 June 2018; PIML acts
as Investment Manager
(IM) in accordance
with the Investment
Management Agreement;
the Company provides
performance and
exposure reports to the
PWP Board and Stephen
Menzies is a Director
of PWP and a Director
of Platinum Asset
Management Limited.

101,209

90,218

95,920

91,692

Platinum Asset Management Limited Annual Report 2018

Notes to the Financial Statements
30 June 2018

Note 2. Equity investments in associates – continued
a. Interests in associates – continued
PIML disposed of 20 million (or 40% of its) shares in PAI during the year (on 14 December 2017)
and that is the reason why the fair value and carrying amount have both decreased. PIML partly
disposed of its holding in order to invest in other vehicles, such as PWP.

The fair value of PAI reflects the 30 million shares held multiplied by the PAI closing share price
at 30 June 2018 of $1.26 (2017: $1.015).

The fair value of PWP reflects the shares held in the sub‑funds multiplied by their respective
closing unit prices at 30 June 2018. During the year, PIML purchased units to the value of
$19,149,000 in the Japan sub‑fund of PWP.

The carrying value reflects the consolidated entity’s share of each associate’s net assets
(see Note 2b for further details).

b. 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

432,464

12,788

419,676

36,038

1,066

446,975

2,098

34,972

444,877

61,235

287

60,948

30 June 2018

Total assets

Total liabilities

Net assets

Total group’s share of associates’ statement of financial position (share of PAI’s net assets of
$34,972,000 and PWP’s net assets of $60,948,000) = $95,920,000.

PLATINUM
ASIA
INVESTMENTS
LIMITED
$’000

GROUP’S SHARE
OF ASSOCIATE
$’000

PLATINUM
WORLD
PORTFOLIOS
$’000

GROUP’S SHARE
OF ASSOCIATE
$’000

397,317

12,339

384,978

55,330

1,718

265,402

2,602

53,612

262,800

38,457

377

38,080

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.

Platinum Asset Management Limited Annual Report 2018

2017
$’000

47,746

34,210

–

9,736

–

91,692

Note 2. Equity investments in associates – continued
c. Carrying amount of investment using the equity method

Opening balance

2018
$’000

91,692

Initial recognition of PWP as an equity investment on deconsolidation

–

Partial disposal of PAI

Acquisition of additional PWP units (Japan sub‑fund)

Share of associates’ profit

Dividends paid

Closing balance (see Note 2a)

d. Associate’s net income

(21,252)

19,149

8,031 *

(1,700)

95,920

PLATINUM
ASIA
INVESTMENTS
LIMITED
$’000

GROUP’S SHARE
OF ASSOCIATE
$’000

PLATINUM
WORLD
PORTFOLIOS
$’000

GROUP’S SHARE
OF ASSOCIATE
$’000

2018

Total investment income

Total expenses

Profit before tax

Income tax expense

Profit after tax

Realised equity accounting gain on
partial disposal of PAI shares,
dividends received and dilution
of unitholding throughout the
year and foreign currency
translation impact
Realised and unrealised gain on
investment in associate

79,884

(6,940)

72,944

(21,466)

51,478

6,679

(578)

6,101

(1,789)

4,312

37,276

(6,454)

30,822

–

30,822

1,180

5,492

5,107

(884)

4,223

–

4,223

(504)

3,719

Is comprised of the Group’s share of PAI and PWP profit after tax, of $4,312,000 and $4,223,000 respectively,
and the impact of the dilution of unitholding throughout the year and foreign currency translation impact
of ($504,000).

Platinum Asset Management Limited Annual Report 2018

Notes to the Financial Statements
30 June 2018

Note 2. Equity investments in associates – continued
d. Associate’s net income – continued

Total investment income

Total expenses

Profit before tax

Income tax expense

Profit after tax
Realised equity accounting gain on
partial disposal of PAI shares,
dividends received and dilution
of unitholding throughout the
year and foreign currency
translation impact
Realised and unrealised gain on
investment in associates

GROUP’S SHARE
OF ASSOCIATES
(TOTAL)
$’000

11,786

(1,462)

10,324

(1,789)

8,535

676

9,211

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

–

29,558

4,514

(232)

4,282

–

4,282

GROUP’S SHARE
OF ASSOCIATES
(TOTAL)
$’000

13,017

(999)

12,018

(2,282)

9,736

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

Platinum Asset Management Limited Annual Report 2018

Note 2. Equity investments in associates – continued

ACCOUNTING
POLICY

Investments in associates are accounted for using the equity method. The share
of profit recognised under the equity method is the consolidated entity’s share of
the investment in associate’s profit or loss based on the ownership interest held.
Associates are entities in which the consolidated entity, as a result of its voting
rights and other factors, has significant influence, but not control or joint control,
over its financial and operating policies.

Investments in associates are carried at the lower of the equity accounted carrying
amount and the recoverable amount. When the consolidated entity’s share of
losses exceeds the carrying amount of the equity accounted investment (including
assets that form part of the net investment in the associate), the carrying amount
is reduced to nil and recognition of further losses is discontinued except to the
extent that the consolidated entity has obligations in respect of the associate.

Dividends from associates represent a return on the consolidated entity’s investment
and, as such, are applied as a reduction to the carrying value of the investment.
Unrealised gains arising from transactions with equity accounted investments are
eliminated against the investment in the associate to the extent of the consolidated
entity’s interest in the associate. Unrealised losses are eliminated in the same way
as unrealised gains, but only to the extent that there is no evidence of impairment.
Other movements in associates’ reserves are recognised directly in the
consolidated entity’s consolidated reserves.

Critical accounting judgements, estimates and assumptions
Assessment of significant influence: At 30 June 2018, the consolidated entity was
assessed as having significant influence over Platinum Asia Investments Limited
(“PAI”) and Platinum World Portfolios Plc (“PWP”) as a result of its direct investment
and investment management activities and other factors outlined on page 57.

We have conducted an impairment assessment of the carrying amount of the
investment in associates, including a look‑through of each of the underlying assets
and liabilities. Our assessment is that at 30 June 2018, no impairment write‑down
is required because the carrying value of the investment, with respect to both PAI
and PWP, is less than its fair value.

Platinum Asset Management Limited Annual Report 201862

Notes to the Financial Statements
30 June 2018

Note 3. 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

2018
$’000

181,222

2018
$’000

111,272

745,095

(538)

PARENT

2017
$’000

181,770

PARENT

2017
$’000

127,117

757,605

(8,412)

744,557

749,193

731,245

742,933

11,666

1,646

4,596

1,664

744,557

749,193

Platinum Asset Management Limited Annual Report 2018

Note 4. Equity attributable to non-controlling interest(s)
As discussed in Note 1, the 30 June 2018 consolidated statement of financial position includes
the assets, liabilities and equity of Platinum Asia Fund (Quoted Managed Hedge Fund) (“PAXX”)
at 30 June 2018, including its external investment. The external (non‑related party) investment
in PAXX represents a non‑controlling interest in the Platinum consolidated entity. Non‑controlling
interests also reflect the investment in Platinum International Fund (Quoted Managed Hedge
Fund) (“PIXX”) up until the date of deconsolidation from the Platinum group, on 18 October 2017.
The comparative year discloses the non‑controlling interest relating to PWP, which was
deconsolidated in the comparative year.

Opening balance

2018
$’000

–

2017
$’000

28,736

Profit after income tax attributable to non‑controlling interests – PIXX 1,357

Profit after income tax attributable to non‑controlling interests –
PAXX/PWP

Additional external investment into PAXX

Deconsolidation of PIXX

Distribution paid to external unitholders of PAXX

Additional external investment into PWP

Deconsolidation of PWP – Equity

Deconsolidation of PWP

1,016

91,765

(1,357)

(16,845)

–

75,936

6,621

–

73,758

(103,511)

(5,604)

–

External equity – PAXX
External equity represents external investment into PAXX. During the year, net external
investment into PAXX totalled A$91,765,000.

Consolidated statement of financial position – excluding the impact of PAXX and its minority
interest share at balance date.

2018
$’000

2017
$’000

Total current assets

Total assets

Total liabilities

Net assets

Equity

Issued capital

Capital reserve

Retained profits

Total equity

226,552

353,024

(17,845)

335,179

259,338

353,966

(18,892)

335,074

731,245

742,933

(582,006)

(585,818)

185,940

335,179

177,959

335,074

Platinum Asset Management Limited Annual Report 2018

Notes to the Financial Statements
30 June 2018

PART B – Notes 5 to 22
Operations – Notes that explain the operations of the consolidated entity

Note 5. 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”); and

investments and other: through the consolidated entity’s investment (during the year) in
the (a) ASX quoted, Platinum Asia Investments Limited (“PAI”), (b) offshore European‑based
fund, PWP, (c) unlisted Platinum Trust Funds, and (d) Platinum Asia Fund (Quoted Managed
Hedge Fund) (“PAXX”) and Platinum International Fund (Quoted Managed Hedge Fund)
(“PIXX”)6. Also included in this category are Australian dollar term deposits as well as any
associated interest derived from these.

The segment financial results, segment assets and liabilities are disclosed on the following
page(s).

Seed investment by the consolidated entity in PIXX was disposed of during the year (when PIXX derived
sufficient additional external investment).

Platinum Asset Management Limited Annual Report 201865

Note 5. Operating segments – continued

2018

Revenue

FUNDS
MANAGEMENT
$’000

INVESTMENTS
AND OTHER
$’000

TOTAL
$’000

Management and performance fees

Interest

328,681

436

–

328,681

3,308

3,744

Distributions, dividends and gains on forward
currency contracts*

Net (losses) on financial assets and equity in
associates^

Net foreign exchange gains on overseas
bank accounts

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

Cash and cash equivalents

Financial assets and equity in associates

Term deposits

Receivables and other assets

Total assets

Liabilities

Payables and provisions

Tax liabilities

Total liabilities

Net assets

–

329,117

(84,681)

244,436

(69,013)

175,423

23,312

(3,743)

1,296

24,173

(285)

23,888

(7,717)

16,171

–

1,296

353,290

(84,966)

268,324

(76,730)

191,594

175,430

16,171

191,601

4,837

–

37,187

42,024

11,631

1,496

13,127

28,897

159,500

194,716

27,876

21,689

164,337

194,716

27,876

58,876

403,781

445,805

16,845

4,718

21,563

28,476

6,214

34,690

382,218

411,115

Platinum Asset Management Limited Annual Report 2018

Notes to the Financial Statements
30 June 2018

Note 5. Operating segments – continued

2017

Revenue

Management, performance and
administration fees

Interest

Distributions, dividends and gains on
forward currency contracts*

Net gains on financial assets and equity
in associates^

Net foreign exchange gains on overseas
bank accounts

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

343

–

3,998

312,468

4,341

–

312,811

(62,641)

250,170

(74,170)

176,000

–

176,000

16,515

149

20,738

(330)

20,408

(3,761)

16,647

406

17,053

149

333,549

(62,971)

270,578

(77,931)

192,647

406

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

310,394

9,977

8,915

18,892

355,074

Platinum Asset Management Limited Annual Report 2018

2017
$’000

–

11
65

2017
$’000

–
–
–
–

Note 5. Operating segments – continued
*

The amount in the tables above disclosed as “Distributions, dividends and gains on forward currency
contracts” is comprised of:

Distribution received by PAXX from Platinum Asia Fund

Dividend received by PIML from its investment in PAI
Distribution received by PIML from its investment in the

Platinum Trust Funds

Distributions and dividends (total as appears in the consolidated
statement of profit or loss and other comprehensive income)

Net gains on forward currency contracts

2018
$’000

21,551

1,700

23,272
40

23,312

The amount in the tables above disclosed as “Net (losses)/gains on financial assets and equity in
associates” is comprised of:

Unrealised losses made by PAXX (ex-distribution)
PAXXs own/direct realised income generated during the year
Realised gains made by PIML on disposal of PIXX units
Unrealised gains made by PIXX (during period of consolidation)
(Un)realised gains on Platinum Trust Fund investments/PWP whilst

consolidated

(Losses)/gains on financial assets (total as appears in the

consolidated statement of profit or loss and other
comprehensive income)

Gains on equity investment in associates

2018
$’000

(15,521)
54
1,142
1,357

6,779

(12,954)
9,211

(3,743)

6,779
9,736

16,515

The consolidated entity derived management and performance fees from Australian investment
vehicles, its “absolute” US performance fee mandates and PWP and also derived investment
income from its seed investments, as follows:

Revenue breakdown by geographic region

Australia

Offshore: United States and Ireland

2018
$’000

2017
$’000

320,719

32,571

353,290

316,366

17,183

333,549

Platinum Asset Management Limited Annual Report 2018

Notes to the Financial Statements
30 June 2018

Note 5. Operating segments – continued

ACCOUNTING
POLICY

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. Revenue as disclosed in the consolidated
statement of profit or loss and other comprehensive income is measure at the fair
value of the consideration received or receivable and is recognised if it meets the
criteria below:

–

Management fees: recognised based on the applicable investment
management agreements and recognised as they are earned. The majority
of management fees were derived from the Platinum Trust Funds C Class.
The management fee for this Class was calculated at 1.35% per annum of
each Fund’s daily Net Asset Value.

Performance fees: recognised as income at the end of the relevant period
to which the performance fee relates, when the consolidated entity’s
entitlement to the fee becomes certain.

Interest income: recognised in the consolidated statement of profit or loss
and other comprehensive income and is based on the effective interest
method.

Distributions: recognised when the consolidated entity becomes entitled
to the income.

Dividend Income: brought to account on the applicable ex‑dividend date.

Net gains on financial assets at fair value through profit or loss: relates to net
gains on seeded and other investments, and recognised as and when the fair
value of these investments change and if disposed, the proceeds less costs
on sale of investments.

Platinum Asset Management Limited Annual Report 201869

2018
$’000

71,318

5,165

247

–

2017
$’000

77,874

(88)

76,730

77,931

268,324

80,497

270,578

81,173

(3,758)

447

(551)

–

(799)

(2,830)

–

240

229

(88)

Note 6. Taxation
(a) 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

Non‑taxable losses/(gains) on investments

Other non‑deductible expenses

Franking credits received

Realised accounting loss on PAI options

Taxable gains on Controlled Foreign Corporation

Adjustment recognised for prior periods

Income tax expense

76,730

77,931

Platinum Asset Management Limited Annual Report 2018

Notes to the Financial Statements
30 June 2018

Note 6. Taxation – continued
(b) Non-current liabilities – net deferred tax liabilities:

2018
$’000

2017
$’000

Deferred tax liabilities comprises temporary differences attributable to:
Unrealised foreign exchange gains/(losses) on cash
Deferred Remuneration Plan
Employee provisions
Unrealised gains on investments
Capital expenditure not immediately deductible
Brokerage fee
Expense accruals
Net deferred tax liabilities

402
3,633
(975)
4,316
(836)
–
(326)
6,214

(17)
1,640
(978)
1,564
(814)
(94)
(252)
1,049

The net deferred tax liability figure is comprised of $2,137,000 (2017: $2,155,000) of deferred
tax assets and $8,351,000 (2017: $3,204,000) 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 $1,301,000 (2017: $1,230,000).

ACCOUNTING
POLICY

Current 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
Deferred tax is accounted for in respect of temporary differences between the
tax bases of assets and liabilities and their carrying amounts in the consolidated
financial statements. Deferred tax liabilities are recognised for all taxable
temporary differences and deferred tax assets are recognised for all deductible
temporary differences to the extent that it is probable that taxable profit will be
available against which the asset can be utilised.

Tax consolidation
The Company and its wholly‑owned Australian controlled entities are part of a tax
consolidated group under Australian tax legislation. The Company is the head entity
of the tax‑consolidated group.

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.

Critical accounting judgements, estimates and assumptions
Recovery of deferred tax assets: 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.

Platinum Asset Management Limited Annual Report 2018

Note 7. Reconciliation of profit after income tax to net cash from operating activities

2018
$’000

2017
$’000

Profit after income tax expense for the year

191,594

192,647

Adjustments for:

Prior period tax

Depreciation expense

Net (loss) on disposal of fixed assets

Purchase of shares and transaction costs associated with the
Deferred Remuneration Plan

Share‑based payments accounting expense

Foreign exchange differences

Interest income

Dividend and distribution income

Loss/(gain) on investments

Change in operating assets and liabilities:

(Increase) in trade and other receivables

(Increase) in income tax receivable

Decrease in deferred tax assets

(Increase) in prepayments

Increase/(decrease) in trade creditors and GST

(Decrease) in income tax provision and expense

Increase/(decrease) in deferred tax liabilities

Increase in employee provisions and payroll tax

–

724

–

(11,703)

3,558

(1,138)

(3,744)

(23,272)

3,703

(377)

(3,333)

(535)

989

(7,757)

5,147

672

(88)

895

(1)

(4,791)

1,449

(118)

(4,341)

–

(16,591)

(455)

–

790

(163)

(696)

(2,900)

(645)

394

Net cash from operating activities

154,546

165,386

Platinum Asset Management Limited Annual Report 2018

Notes to the Financial Statements
30 June 2018

Note 7. Reconciliation of profit after income tax to net cash from operating activities – continued

ACCOUNTING
POLICY

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.
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 and 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.

Payments and proceeds relating to the purchase and maturity of term deposits
are classified as “cash flows from investing activities”.

Receipts from operating activities include management and performance fees
receipts. Payments for operating activities include payments to suppliers
and employees.

Note 8. Non-current assets – financial assets at fair value through profit or loss

Unit trust – held directly by Platinum Asia Fund (Quoted Managed
Hedge Fund) (“PAXX”)^

Platinum Trust Fund investments

2018
$’000

2017
$’000

98,602

194

98,796

–

107

At 30 June 2018, the financial assets of PAXX have been consolidated into the Platinum consolidated entity.
As discussed in Note 1, the consolidated entity seeded PAXX and was assessed as having control over PAXX
at 30 June 2018, predominantly because PIML had an ownership interest of 19.9% and because PIML acts as
the Investment Manager of PAXX.

Platinum Asset Management Limited Annual Report 2018

Note 8. Non-current assets – financial assets at fair value through profit or loss – continued

ACCOUNTING
POLICY

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”.

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”.

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 unit last changed hands
from seller to buyer.

With respect to both investments disclosed in Note 8, the fair value includes the
impact of the 30 June distribution.

Note 9. Current assets – trade and other receivables

Management fees receivable

Performance fees receivable

Distribution receivable – PAXX investment in Platinum Asia Fund

Interest receivable

Prepayments

Sundry debtors

2018
$’000

27,959

1,180

21,551

138

1,693

52,557

2017
$’000

28,024

738

–

268

1,158

30,199

Management and performance fees receivable(s) are received between three to 30 days after
balance date.

Interest receivable comprises accrued interest on term deposits and cash accounts. Interest on
term deposits is received on maturity.

ACCOUNTING
POLICY

All receivables are measured at amortised cost, are not discounted, and are
recognised when a right to receive payment is established. Any debts that are
known to be uncollectible are written off. Trust distributions are recognised when
the consolidated entity becomes entitled to the income.

Platinum Asset Management Limited Annual Report 2018

Notes to the Financial Statements
30 June 2018

Note 10. 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

2018
$’000

1,530

(1,204)

326

5,775

(4,321)

1,454

146

(120)

2,566

(1,547)

1,019

729

(568)

161

2,986

2017
$’000

1,314

(1,097)

217

5,205

(3,997)

1,208

133

(112)

2,543

(1,293)

1,250

670

(537)

133

2,829

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

Balance at 1 July 2016

Additions

Disposals

178

142

–

Depreciation expense

(103)

Balance at 30 June 2017

Additions

Disposals

217

216

–

774

862

–

(428)

1,208

570

–

Depreciation expense

(107)

(324)

Balance at 30 June 2018

326

1,454

(1)

(14)

–

(8)

OFFICE
PREMISES
FIT OUT
$’000

1,478

–

(303)

1,250

–

(254)

1,019

FURNITURE &
EQUIPMENT
$’000

170

–

TOTAL
$’000

2,628

1,097

(1)

(47)

(895)

133

2,829

–

881

–

(31)

(724)

161

2,986

Platinum Asset Management Limited Annual Report 2018

Note 10. Non-current assets – fixed assets – continued
Reconciliations – continued
At 30 June 2018, there was software and applications in the course of construction and
development of $406,252 (2017: $530,043), which is included as part of the software &
applications additions and balance.

ACCOUNTING
POLICY

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
Communications equipment
Office fit out
Office furniture and equipment

4 years
2½ years
4 years
4 – 10 years
3 – 13 years
5 – 13 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.

Critical accounting judgements, estimates and assumptions
…stimation of useful lives of assets: Management exercises judgement in determining
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.

Note 11. Current liabilities – trade and other payables

2018
$’000

Distribution payable – PAXX to unitholders (excluding PIML’s share)

16,845

Trade payables

Unclaimed dividends payable to shareholders

GST payable

4,326

538

2,373

24,082

2017
$’000

–

3,219

545

2,491

6,255

ACCOUNTING
POLICY

Payables represent amounts owing at balance date. Trade payables relate to services
provided to the consolidated entity at balance date, 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 14 to 30 days
of being invoiced.

Platinum Asset Management Limited Annual Report 2018

Notes to the Financial Statements
30 June 2018

Note 12. Current and non-current liabilities – employee benefits

Current liabilities

Annual leave

Long service leave

Non‑current liabilities

2018
$’000

1,337

1,912

3,249

2017
$’000

1,364

1,897

3,261

Payroll tax on Deferred Remuneration Plan*

1,145

461

The payroll tax provision increased because payroll tax is payable on the additional tranches of deferred
rights granted during the year.

ACCOUNTING
POLICY

Employee benefit liabilities represents accrued wages, salaries, annual and
long‑service leave entitlements and other incentives (including any provision for
estimated staff incentive payments and related on‑costs), that are recognised in
respect of employee services up to balance date and are measured at the amounts
expected to be paid when the liabilities are settled and include related on‑costs,
such as payroll tax.

Critical accounting judgements, estimates and assumptions
With respect to the interim/half‑year financial report, in accordance with AASB 137:
Provisions, Contingent Liabilities and Contingent Assets, management may include
a provision at 31 December for staff incentive payments, if the consolidated entity
has achieved strong performance for its clients at that point in time, even though
the annual assessment period is from 1 April to 31 March.

Platinum Asset Management Limited Annual Report 2018

Note 13. Equity – Issued capital

2018
SHARES

2017
SHARES

Ordinary shares – fully paid(a) 586,678,900 586,678,900

Treasury shares(b)

Total issued capital

(3,471,866)

(1,626,026)

583,207,034

585,052,874

2018
$’000

751,355

(20,110)

731,245

2017
$’000

751,355

(8,422)

742,933

(a) Ordinary shares: entitles shareholders to participate in dividends as declared and in the event of winding
up of the Company, to participate in the proceeds in proportion to the number of and amounts paid on the
ordinary shares held. Ordinary shares entitle the shareholder to one vote per share, either in person or
by proxy, at a meeting of the Company’s shareholders. All ordinary shares issued have no par value.
On 13 September 2016, the Company announced an on-market share buy-back program, in which shares
will be bought-back if the Company’s shares trade at a discount to its underlying value. No shares have been
bought-back.

(b) Treasury shares: are shares that have been purchased by the Employee Share Trust, pursuant to the

Deferred Remuneration Plan (Refer to Note 19). Treasury shares are held by the Employee Share Trust for
future allocation to employees. Details of the balance of treasury shares at the end of the financial year
were as follows:

Opening balance
Additional shares held by
the Employee Share Trust
Shares allocated to employees

Balance at the end of the

financial year

2018
SHARES

1,626,026

1,845,840
–

2017
SHARES

591,578

1,034,448
–

2018
$’000

8,422

11,688
–

3,471,866

1,626,026

20,110

2017
$’000

3,638

4,784
–

8,422

ACCOUNTING
POLICY

Ordinary shares
Ordinary shares are recognised as the amount paid per ordinary share, net of
directly attributable issue costs.

Treasury shares
Where the consolidated entity purchase shares in the Company, the consideration
paid is deducted from total shareholders’ equity and the shares treated as treasury
shares. Treasury shares are recorded at cost and when restrictions on employee
shares are lifted which is dependent on vesting and exercise of the rights, the cost
of such shares will be adjusted to the share‑based payments reserve.

Platinum Asset Management Limited Annual Report 2018

Notes to the Financial Statements
30 June 2018

Note 14. Equity – reserves

Foreign currency translation reserve

Capital reserve

Share‑based payments reserve

2018
$’000

121

2017
$’000

114

(588,144)

6,017

2,212

(582,006)

(585,818)

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 $121,000 at 30 June 2018 (30 June 2017:
$114,000).

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 the Deferred Remuneration Plan. The amount
in the share‑based payments reserve is comprised of the amortisation of the rights granted
and any associated future tax deduction.

Please refer to Note 19 for further information.

Platinum Asset Management Limited Annual Report 2018

Note 14. 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 2016

672

(292)

(588,144)

(587,764)

Exchange rate translation
impact of foreign subsidiaries

Deconsolidation of controlled entity

Movement in share‑based
payments reserve

Balance at 30 June 2017

Exchange rate translation impact
of foreign subsidiaries

Movement in share‑based
payments reserve

Balance at 30 June 2018

–

1,540

2,212

–

3,805

6,017

Note 15. Equity – retained profits

(595)

1,001

–

114

–

(595)

1,001

1,540

(588,144)

(585,818)

–

3,805

121

(588,144)

(582,006)

2018
$’000

2017
$’000

Retained profits at the beginning of the financial year

177,959

175,522

Profit after income tax expense attributable to owners of
the Company

189,221

186,026

Deconsolidation of Platinum World Portfolios Plc. (“PWP”)

–

(1,902)

Dividends paid (Note 16)

Retained profits at the end of the financial year

(181,240)

(181,687)

185,940

177,959

Platinum Asset Management Limited Annual Report 2018

Notes to the Financial Statements
30 June 2018

Note 16. Equity – dividends
Dividends paid
Dividends paid during the financial year were as follows:

Final dividend paid for the 2017 financial year (15 cents per share)

87,758

Interim dividend paid for the 2018 financial year (16 cents per share) 93,482

Final dividend paid for the 2016 financial year (16 cents per share)

Interim dividend paid for the 2017 financial year (15 cents per share)

–

2018
$’000

2017
$’000

–

93,774

87,913

181,240

181,687

Dividends not recognised at year-end
Since 30 June 2018, the Directors declared to pay a fully‑franked dividend of 16 cents per share,
payable out of profits for the 12 months to 30 June 2018. The dividend has not been provided
for at 30 June 2018, because the dividend was declared after year‑end.

Franking credits

Franking credits available at reporting date based on a tax
rate of 30%

Franking (debits)/credits that will arise from the (refund)/payment
of the provision for income tax at the reporting date based on
a tax rate of 30%

Franking credits available for subsequent financial years based
on a tax rate of 30%

2018
$’000

2017
$’000

77,903

72,333

(3,333)

7,866

74,570

80,199

ACCOUNTING
POLICY

A provision is made for the amount of any dividend declared by the Directors before
or at the end of the financial year but not distributed at balance date.

Platinum Asset Management Limited Annual Report 2018

Note 17. 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. Material direct exposure to financial risk
occurs through the impact on profit of movements in funds under management (“FUM”) and
through its direct investments in:

–

Platinum Asia Investments Limited (“PAI”);

the offshore European‑based fund, Platinum World Portfolios Plc (“PWP”); and

its investments in Platinum Asia Fund (Quoted Managed Hedge Fund) (“PAXX”).

Indirect exposure occurs because PIML is the Investment Manager for various investment
vehicles, including:

–

investment mandates;

various unit trusts, namely the Platinum Trust Funds, Platinum Global Fund, PIXX and
PAXX;

its ASX‑listed investment companies, Platinum Capital Limited and PAI; and

PWP.

The consolidated entity does not derive any management fees or performance fees directly
from PIXX and PAXX. Management and performance fees are borne at the Platinum International
Fund/Platinum Asia Fund level and are paid directly by these Funds to the consolidated entity.

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;

Platinum Asset Management Limited Annual Report 201882

Notes to the Financial Statements
30 June 2018

Note 17. Financial risk management – continued
Market risk – continued
(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;

(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 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 or index,
a performance fee would be receivable for the financial year. As at 30 June 2018, performance
fees of $1,180,270 (2017: $738,524) 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 (2018: $21,878,000, 2017: $1,626,000).

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.

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 following section mainly 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 2018.

Platinum Asset Management Limited Annual Report 201883

Note 17. Financial risk management – continued
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, Platinum Asia Investments Limited
and PAXX.

US Dollar cash
At 30 June 2018, the consolidated entity held US$18,525,503 (equivalent to A$25,032,773) in
cash (2017: US$2,978,425 (equivalent to A$3,873,618). 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$2,277,530 lower/
A$2,783,989 higher (2017: A$352,189 lower/A$430,464 higher). The increase relative to the
prior year relates to the fact that the consolidated entity received additional US dollar cash,
because of the performance share fees derived from its US “absolute fee” mandate during the year.

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 US mandate and PWP fees, with all other variables held
constant, then net profit before tax would have been A$2,496,946 lower/A$3,051,711 higher
(2017: A$502,668 lower/A$614,288 higher). The increase relative to the prior year was mainly
attributable to the fact that the consolidated entity derived performance share fees from its
US “absolute fee” mandate during the year.

Investment in 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 2018, then the consolidated entity’s net assets would have been A$5.8m lower/
A$7.0m higher (2017: A$3.4m lower/A$4.2m 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 2018, was the Hong Kong
Dollar (2017: Japanese Yen). A 10% increase/decrease in the Australian Dollar would have
caused net profit before tax to be A$2,180,699 lower/A$2,719,894 higher, based on PIML’s
interest in PWP at 30 June 2018 (2017: A$726,765 lower/A$939,761 higher).

Platinum Asset Management Limited Annual Report 201884

Notes to the Financial Statements
30 June 2018

Note 17. Financial risk management – continued
Foreign currency risk – continued
Investment in PAI
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 2018, was the Hong Kong Dollar, which was the currency with the largest
exposure in this entity at 30 June 2018. A 10% increase/decrease in the Australian Dollar would
have caused the consolidated entity’s net profit before tax to be A$1,417,016 lower/A$1,731,890
higher (2017: A$1,579,510 lower/A$1,930,512 higher).

Investment in PAXX
PAXX is a feeder fund that invests in Platinum Asia Fund, which invests in undervalued companies
across the Asian region‑ex Japan. The foreign currency with the largest impact on profit before
tax, if there was a 10% currency movement at 30 June 2018, was the Hong Kong Dollar, which was
the currency with the largest exposure in PAXX at 30 June 2018. A 10% increase/decrease in the
Australian Dollar would have caused the Company’s net profit before tax to be A$1,774,000 lower/
A$2,168,000 higher (2017: nil).

Price risk
At 30 June 2018, the consolidated entity is exposed to indirect price risk through its
equity‑accounted investments in Platinum Asia Investments Limited and Platinum World
Portfolios and its direct investment in PAXX. The impact of price risk is summarised in the
table below:

Entity

IMPACT ON NET PROFIT BEFORE TAX OF 10%
INCREASE/(DECREASE) IN 30 JUNE NET ASSET VALUES

PAI

PWP

PAXX

2018
$’000
INCREASE/(DECREASE)

2017
$’000
INCREASE/(DECREASE)

3,497/(3,497)

6,094/(6,094)

1,964/(1,964)

5,361/(5,361)

3,808/(3,808)

–

The consolidated entity’s exposure to price risk for PAI decreased because it disposed of
20,000,000 shares or 40% of its holding during the year.

The consolidated entity’s exposure to price risk for PWP mainly increased because it acquired
units in PWP during the year.

Interest rate risk
At 30 June 2018, 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 2018 will cause the consolidated entity’s net profit before tax to be
$422,751 higher/lower, based on the impact on its interest‑bearing cash balances. An interest
rate movement at 30 June 2018 will not impact the profit earned from term deposits, as term
deposit interest rates are determined on execution.

Platinum Asset Management Limited Annual Report 2018
85

Note 17. 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 are held with licensed Australian banks that all have a AA– 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,
by counterparty, can be assessed by reference to external credit ratings. At 30 June 2018 and
30 June 2017, the relevant credit ratings were as follows:

Rating

AA–

BBB+

2018
$’000

2017
$’000

167,120

24,886

207

225,170

3,770

199

192,213

229,139

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.

Platinum Asset Management Limited Annual Report 2018

Notes to the Financial Statements
30 June 2018

Note 17. Financial risk management – continued
Liquidity risk – continued
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.

2018

Distribution payable –
PAXX to unitholders

Trade payables

GST payable

AT CALL
$’000

–

Unclaimed dividends payable

538

Employee‑related provisions

3,249

WITHIN
30 DAYS
$’000

16,845

4,326

2,373

–

3,787

23,544

Total

2017

Trade payables

GST payable

Current tax payable

AT CALL
$’000

–

WITHIN
30 DAYS
$’000

3,219

2,491

–

BETWEEN
1 AND 3
MONTHS
$’000

OVER
3 MONTHS
$’000

–

1,145

BETWEEN
1 AND 3
MONTHS
$’000

OVER
3 MONTHS
$’000

–

7,866

–

461

TOTAL
$’000

16,845

4,326

2,373

538

4,394

28,476

TOTAL
$’000

3,219

2,491

7,866

545

3,722

17,843

Unclaimed dividends payable

545

Employee‑related provisions

3,261

Total

3,806

5,710

7,866

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
2018 or 30 June 2017.

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.

Platinum Asset Management Limited Annual Report 2018

Note 17. Financial risk management – continued
Capital risk management
(i) Capital requirements
The Company has limited capital requirements and generally expects that most, if not all, future
profits will continue to be distributed by way of dividends, subject to ongoing capital requirements.

(ii) …xternal 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 201888

Notes to the Financial Statements
30 June 2018

Note 18. 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 2017):

(i)

quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1);

(ii)

(iii)

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

inputs for the assets or liabilities that are not based on observable market data
(unobservable inputs) (level 3).

The investments in PAI and PWP have not been measured at fair value because they have
been classified as equity investments in associates. If these were to be measured at fair value,
PAI would be classified as level 1, and PWP as level 2.

The following table analyses within the fair value hierarchy model the consolidated entity’s
assets and liabilities, measured or disclosed at fair value, using the three level hierarchy model
at 30 June 2018 and 30 June 2017. The consolidated entity has no assets or liabilities that are
classified as level 3.

2018

Assets

Unit trust – held directly by Platinum Asia Fund
(Quoted Managed Hedge Fund) (“PAXX”)

Platinum Trust Fund investments

2017
Assets

Platinum Trust Fund investments

LEVEL 1
$’000

LEVEL 2
$’000

TOTAL
$’000

–

98,602

194

98,796

98,602

194

98,796

107

Valuation techniques used to classify assets and liabilities as level 2
PIML’s direct investment in the unit trust investment held directly by PAXX and the Platinum
Trust Funds are valued using their respective Net Asset Values (adjusted for the buy‑sell spread)
of the underlying assets and liabilities and includes the impact of the 30 June distribution.
Accordingly, management has assessed the fair value investments as being Level 2 investments.

For the previous corresponding period, PIML’s investment in the Platinum Trust Funds were
valued based on the quoted redemption price of the Funds (ie: the daily unit price) and were
classified as Level 1. They have been re‑classified as Level 2 investments for comparative
purposes.

Platinum Asset Management Limited Annual Report 2018

Note 19. Share-based payments
Deferred Remuneration Plan (applies to all staff)
In June 2016, a “Deferred Bonus Plan” (now known as a “Deferred Remuneration Plan”) was
approved by the Nomination & Remuneration Committee of Platinum Asset Management Limited.
The main objective of the Plan is to recognise the contributions made by key employees and to
retain their skills within the firm.

VESTING CONDITION

Continuous
employment for a
period of 4 years
from the grant date.

PLAN

DESCRIPTION

Deferred
Remuneration
Plan

Upon vesting and exercise of the deferred
rights, employees will receive ordinary
shares in the Company.
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.

Platinum Asset Management Limited Annual Report 201890

Notes to the Financial Statements
30 June 2018

Note 19. Share-based payments – continued
Deferred Remuneration Plan (applies to all staff) – continued
The number of rights granted and the accounting expense for the current and comparative
year is shown below. The Employee Share Trust has purchased an equivalent number of
PTM shares and will hold these shares until the vesting date (four years from each grant)
and subsequent exercise.

Opening balance

Granted during the year

Cancelled during the year

Closing balance

Accounting expense

Deferred rights granted in 2018

Deferred rights granted in 2017

Deferred rights granted in 2016

Total share‑based payments expense

Associated payroll tax expense on additional deferred rights
granted during the year

Total

2018
NUMBER OF
DEFERRED

2017
NUMBER OF
DEFERRED
RIGHTS GRANTED RIGHTS GRANTED

1,626,026

591,578

1,878,168

1,050,656

(32,328)

(16,208)

3,471,866

1,626,026

2018
$’000

2,144

797

617

3,558

689

4,247

2017
$’000

–

848

601

1,449

262

1,711

The increase in the share‑based payments expense and the additional payroll tax is attributed to
the fact that an increased number of deferred rights were granted in FY18 to key employees as a
reward for the increased one and three year returns generated for investors and mandate clients.

Platinum Asset Management Limited Annual Report 2018

Note 19. Share-based payments – continued
Deferred Remuneration Plan (applies to all staff) – continued

ACCOUNTING
POLICY

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 as an expense for share‑based payments is derived from the fair
value of the equity instruments granted. Deferred incentives to be settled in
the Company’s 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 term of 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 financial
statements 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.

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 consolidated 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”.

Platinum Asset Management Limited Annual Report 201892

Notes to the Financial Statements
30 June 2018

Note 20. Key management personnel disclosures

2018
$’000

2017
$’000

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

6,722

3,984

Accounting expense related to the KMP allocation under the
Deferred Remuneration Plan^

Superannuation

Decrease in the consolidated entity’s annual and long service
leave provision

381

136

(8)

7,231

121

146

(11)

4,240

The increase in KMP remuneration predominantly related to the increased short‑term cash
awards paid to those Executive Directors that played a direct role in either increasing the
returns for our underlying funds and clients or increasing our product range, both of which
have translated to increased FUM.

Andrew Clifford, Elizabeth Norman and Andrew Stannard were the only members of KMP to receive an
allocation of rights under the Deferred Remuneration Plan. The accounting expense attributable to KMP
are based on the allocation of deferred rights as follows:

2018 GRANT

2017 GRANT

2016 GRANT

TOTAL

Number of rights allocated to

KMP during the year

Accounting expense attributed

to KMP

248,346

86,208

48,623

383,177

$260,998

$67,391

$52,201

$380,590

The accounting valuation of $380,590 represents the amount expensed through the income
statement in the current year, with respect to grants made in 2016, 2017 and 2018.

Platinum Asset Management Limited Annual Report 2018

Note 20. Key management personnel disclosures – continued
Interests of Non-Executive and Executive Directors in shares
The relevant interest in ordinary shares in the Company that each Director held at balance
date was:

OPENING BALANCE

ADDITIONS

DISPOSALS

Michael Cole

Stephen Menzies

Anne Loveridge

Brigitte Smith

Kerr Neilson

Andrew Clifford

Elizabeth Norman

Andrew Stannard

200,000

30,000

6,000

–

312,074,841

32,831,449

766,748

–

40,000

10,000

16,000

41,666

–

CLOSING
BALANCE

240,000

40,000

22,000

41,666

312,074,841

32,831,449

766,748

–

Platinum Asset Management Limited Annual Report 2018

Notes to the Financial Statements
30 June 2018

Note 21. 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:

Audit services – PricewaterhouseCoopers

Audit and review of the financial statements and AFSL audit

93,730

91,000

2018
$

2017
$

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

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

Compliance services

Taxation services for managed funds for which Platinum
Investment Management Limited acts as responsible entity –
PricewaterhouseCoopers

300,369

258,600

50,000

444,099

74,995

424,595

87,090

81,481

Taxation services

487,580

431,976

Taxation services – overseas PricewaterhouseCoopers firms

Foreign tax agent fees

PwC US work associated with the start‑up of the Cayman Funds

Total taxation services

Other services – PricewaterhouseCoopers

Compliance and assurance services

Remuneration services (advice on Deferred Remuneration Plan)

Total other services

17,855

3,892

21,528

–

596,417

534,985

148,083

–

148,083

114,000

52,870

166,870

Total fees paid and payable to the auditor and its related
practices

1,188,599

1,126,450

Platinum Asset Management Limited Annual Report 2018

Note 22. Earnings per share

Profit after income tax attributable to the owners of Platinum
Asset Management Limited

Weighted average number of ordinary shares used in
calculating basic and diluted earnings per share

Basic earnings per share

Diluted earnings per share

2018
$’000

2017
$’000

189,221

NUMBER

186,026

NUMBER

584,732,213

586,052,147

CENTS

32.36

CENTS

31.74

ACCOUNTING
POLICY

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.

Platinum Asset Management Limited Annual Report 2018

Notes to the Financial Statements
30 June 2018

PART C – Notes 23 to 27
Miscellaneous Notes – Miscellaneous Notes that are required by the accounting standards

Note 23. Related party transactions
Subsidiaries
Interests in subsidiaries are set out in Note 1.

Key management personnel
Disclosures relating to key management personnel are set out in Note 20 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 are disclosed in
the consolidated statement of cash flows.

Fees received
Platinum Investment Management Limited provides investment management services to:

(i)

its related party unit trusts – the Platinum Trust Funds and Platinum Global Fund;

(ii)

its European‑based offshore fund, Platinum World Portfolios Plc;

(iii)

(iv)

its two ASX‑listed investment companies (LICs), Platinum Capital Limited (PMC) and
Platinum Asia Investments Limited (PAI); and

its two ASX quoted managed funds, Platinum International Fund (Quoted Managed
Hedge Fund) (ASX ticker: PIXX) and Platinum Asia Fund (Quoted Managed Hedge Fund)
(ASX ticker: PAXX).

Platinum Investment Management Limited is entitled to receive a monthly management fee,
either directly or indirectly, from each of these entities and a performance fee based on the
relative investment performance of the Platinum Trust Funds, Platinum World Portfolios Plc,
Platinum Capital Limited (PMC) and Platinum Asia Investments Limited (PAI). The consolidated
entity does not derive any management fees or performance fees directly from PIXX and PAXX.
Management and performance fees are borne at the Platinum International Fund/Platinum Asia
Fund level and are paid directly by these funds to the consolidated entity. The total related party
fees recognised in the statement of profit or loss and other comprehensive income for the
period ended 30 June 2018 and 30 June 2017 were as follows:

Platinum Asset Management Limited Annual Report 201897

Note 23. Related party transactions – continued

Related party fees

30 JUNE 2018
$

30 JUNE 2017
$

257,492,273 260,263,536

Included in these figures, is related party fees receivable, disclosed in the statement of financial
position for the year ended 30 June 2018 and 30 June 2017 as follows:

Related party fees receivable

30 JUNE 2018
$

30 JUNE 2017
$

23,317,632

22,869,423

Investment transactions
During the year, Platinum Investment Management Limited (PIML) invested $11.4 million in
PIXX and $22.3 million in PAXX as a seed investment, but as a result of encouraging net fund
inflows, PIML redeemed its investment in PIXX during the year. The total net sale proceeds
(after brokerage) was $12,545,324.

During the year, PIML sold 20 million of its shares in PAI and generated $24.1 million in net
sale proceeds (after brokerage). PIML also received the final 2017 fully‑franked dividend of
$500,000 and the interim 2018 fully‑franked dividend of $1,200,000 from its investment in PAI.

On 3 July 2017, PIML launched performance fee classes for each of its 8 Platinum Trust Funds.
PIML seeded each of these Funds with an investment of $10,000 each (or $80,000 in total).

During the year, PIML invested additional US$15,000,000 (equivalent to A$19,160,378) in the
Japan sub‑fund of PWP.

Platinum Asset Management Limited Annual Report 2018

Notes to the Financial Statements
30 June 2018

Note 23. Related party transactions – continued
Investment transactions – continued
The amounts paid to purchase these investments and proceeds from the sale of these
investments are disclosed in the consolidated statement of cash flows and are summarised
below.

30 June 2018

ENTITY

PIMLs
INTEREST
%

FAIR VALUE
OF PIMLs
INVESTMENT
A$’000

NET
SALE PROCEEDS
ON DISPOSALS
A$’000

30 JUNE 2018
DISTRIBUTION
RECEIVABLE
A$’000

Platinum Asia Investments
Limited (ASX ticker: PAI)

Platinum World Portfolios (PWP)

Platinum Asia Fund (Quoted
Managed Hedge Fund)
(ASX ticker: PAXX)

8.3

13.7

19.9

Platinum Trust Funds

Less than 1%

37,800

63,410

24,150

n/a

19,641

194

n/a

4,816

30 June 2017

ENTITY

Platinum Asia Investments Limited (ASX ticker: PAI)

Platinum World Portfolios (PWP)

Platinum Trust Funds

PIMLs
INTEREST
%

13.9

14.5

Less than 1%

FAIR VALUE
OF PIMLs
INVESTMENT
A$’000

50,750

39,468

107

Other related party transactions
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 2018, the total amount reimbursed/
paid or payable by PIML to PWP in respect of expenses for the period was A$8,557 (30 June 2017:
$58,683).

The Company allocated additional rights, via two tranches during the year, to eligible employees
under the Deferred Remuneration Plan. In the current year, the amount transferred to the
Platinum Employee Share Trust was $11,873,050 and the Trust still retains $170,518 of this
for future allocation to employees.

On 7 February 2018, the Company registered Platinum GP Pty Limited associated with the
launch of the US/Cayman Funds. The Company contributed $1 as capital in order to register
and incorporate the entity.

Platinum Asset Management Limited Annual Report 2018

Note 23. Related party transactions – continued
Other related party transactions – continued
In the current year, the consolidated entity paid $50,000 to OneVue Services Pty Limited for
the provision of services associated with the enhancement of the Platinum website. OneVue is
a related party 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
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 2018, 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 FY18, receiving management and
performance fees for its role as investment manager.

The following table provides information in relation to this investment:

Net Asset Value attributable to all investors
Platinum Trust Funds

2018
$’000

2017
$’000

18,421,972

16,317,146

Maximum exposure (includes PIMLs interest & fees receivable)
Platinum Trust Funds

20,879

21,754

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.

ACCOUNTING
POLICY

The consolidated entity has applied AASB 12: Disclosure of Interests in Other …ntities.
AASB 12 requires disclosure about the nature of, and risks associated with,
the consolidated entity’s interest in other entities. An interest in an other entity
refers to involvement that exposes the entity to variability of returns from the
performance of another (excluding subsidiaries and associates). The consolidated
entity applies the standard to its interest in the Platinum Trust Funds.

Platinum Asset Management Limited Annual Report 2018

100

Notes to the Financial Statements
30 June 2018

Note 25. 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

2018
$’000

2017
$’000

1,768

7,796

3,422

12,986

2,057

8,924

6,404

17,385

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 consolidated entity has no commitments for significant capital expenditure.

ACCOUNTING
POLICY

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.

Note 26. Events after the reporting period
Apart from the dividend declared in August 2018, no other matter or circumstance has arisen
since 30 June 2018 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 2018

101

Note 27. 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 2018, 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 commencing 1 January 2019. The 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 has been
assessed as increasing the value of the consolidated entity’s gross assets and gross liabilities,
however the standard has been assessed as not having a material impact on the consolidated
entity’s net assets, operations or results. The consolidated entity anticipates that the adoption
of the standard for annual reporting periods commencing on 1 July 2019 will result in increased
disclosure.

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 standard provides 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 for FY19 or future periods. The consolidated entity expects to adopt this
standard for annual reporting periods commencing on 1 July 2018.

Platinum Asset Management Limited Annual Report 2018102

Notes to the Financial Statements
30 June 2018

Note 27. Accounting Standards and Interpretations not yet mandatory or
early adopted – continued
AASB 9: Financial Instruments (and applicable amendments)
AASB 9 addresses the classification, measurement and de‑recognition of financial assets
and financial liabilities. It includes revised rules around hedge accounting and impairment.
The standard is applicable for annual reporting periods beginning on or after 1 January 2018.

More specifically AASB 9 replaces the classification and measurement model in AASB 139:
Financial Instruments: recognition and measurement with a new model that classifies financial
assets based on a) the business model within which the assets are managed, and b) whether
contractual cash flows under the instrument solely represent the payment of principal and
interest. Management has assessed the classification and measurement aspects of AASB 9
on the consolidated financial statements. Management expects on adoption, that all financial
assets, will remain classified at fair value through profit or loss resulting in no material impact
to the financial performance or position of the consolidated entity.

The hedging and impairment aspects of the new standard have also been assessed as having
no material impact, as the consolidated entity does not enter into hedging arrangements and
is not impacted by the requirement that credit quality should be used as one of the factors in
determining write‑downs, because the financial assets and liabilities are carried at fair value
through profit or loss (or are classified as equity investments in associates).

The consolidated entity expects to adopt this standard for annual reporting periods
commencing on 1 July 2018.

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.

Platinum Asset Management Limited Annual Report 2018103

Directors’ Declaration
30 June 2018

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 under Basis of Preparation 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 2018 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

23 August 2018
Sydney

Andrew Clifford
Director

Platinum Asset Management Limited Annual Report 2018
104

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)

giving a true and fair view of the Group’s financial position as at 30 June 2018 and of its
financial performance for the year then ended

(b)

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 2018

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

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

Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124
T: +61 2 9659 2476, 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 2018105

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
Other than those matters set out in our Independence Declaration dated 23 August 2018,
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 …thics 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 and
administration services for the trusts that the Group manages.

Platinum Asset Management Limited Annual Report 2018106

Independent Auditor’s Report
To the members of Platinum Asset Management Limited

Materiality

Key audit
matters

Audit scope

MATERIALITY

AUDIT SCOPE

KEY AUDIT MATTERS

–

Amongst other
relevant topics, we
communicated the
following key audit
matters to the Audit
and Risk Committee:

•

Fee Revenue

Accounting for
investment vehicles.

–

These are further
described in the Key
audit matters section
of our report.

–

For the purpose of our
audit we used overall
Group materiality of $13.4
million, which represents
approximately 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
benchmark against
which the performance
of the Group is most
commonly measured.

We utlised a 5% threshold
based on our professional
judgement, noting it is
within the range of
commonly acceptable
thresholds.

Our audit focused on 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), Platinum
Asset Proprietary Limited
(PAPL) and Platinum Asia
Fund (Quoted Managed
Hedge Fund) (PAXX). This was
supplemented by additional
risk focused audit procedures
over corporate functions,
such as 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 the
component auditors operating
under instructions.

Platinum Asset Management Limited Annual Report 2018

107

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

To assess the design and operating
effectiveness 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.

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 $328.7 million
comprising the following revenue streams:

– Management fees ($306.8 million)

– Performance fees ($21.9 million).

The terms of these fees are set out in the
Group’s investment management agreements
with mandate clients and trusts.

We consider the Group’s fee revenue a key
audit matter due to the:

–

Size of the management fee balances.

Higher level of risk related to performance
fees arising from the:

•

Manual processes undertaken by the
Group 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.

Platinum Asset Management Limited Annual Report 2018

108

Independent Auditor’s Report
To the members of Platinum Asset Management Limited

KEY AUDIT MATTER

Fee Revenue – continued

HOW OUR AUDIT ADDRESSED
THE KEY AUDIT MATTER

Management fees
–

To assess the design and operating
effectiveness of the third party service
providers’ relevant controls over the
agreeing funds under management (FUM),
we inspected the assurance reports
provided to the Group by the third party
service providers’ independent auditors

–

For management fees received from
mandate clients, we tested a sample
of fee calculations by agreeing FUM and
the fee rate back to the Group’s system
reports and the relevant investment
management agreement respectively.

For management 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.

Performance fees
For a sample of performance fees we:

–

To assess the design and operating
effectiveness of the third party service
providers’ relevant controls over the FUM,
we inspected the assurance reports
provided to the Group by the third party
service providers’ independent auditors

We agreed the data used in the fee
calculations to the Group’s underlying
systems, agreed the basis of the
calculations to that set out in the relevant
client agreements, agreed the benchmark
performance to an independent third
party source, and recalculated the
calculations. We also agreed the
performance fees received to the
Group’s relevant bank statements.

Platinum Asset Management Limited Annual Report 2018109

HOW OUR AUDIT ADDRESSED
THE KEY AUDIT MATTER

To assess the classification and accounting
treatment of the investment in each vehicle
we performed the following audit procedures
amongst others:

–

Inspected the offer documents,
constitutions and the Investment
Management Agreement between PIML
and each investment vehicle to develop
an understanding of the scope of powers
and decision making authority held by
the Group

Assessed the Group’s exposure to
each investment vehicles’ returns by
multiplying the expected management
and performance fees by the ownership
percentage of the Group.

KEY AUDIT MATTER

Accounting for investment vehicles
Refer to note 1 – Significant accounting policies
During the year, PIML invested in Platinum
International Fund (Quoted Managed Hedge
Fund) (“PIXX”) and Platinum Asia Fund
(Quoted Managed Hedge Fund) (“PAXX”)
as seed investment for the two newly
created Quoted Managed Funds.

We considered this a key audit matter given
the judgement required in determining the
appropriate classification and accounting
for the Group’s investments in these entities
in accordance with Australian Accounting
Standards. This included

–

The level of influence the Group has
over each investment vehicle

The extent of exposure to returns
or rights to variable returns from the
Group’s involvement

The ability for the Group to use its
influence to affect the amount of the
return from each investment.

At 30 June 2018, the Group concluded that
it controlled PAXX but did not control or
influence PIXX.

Other information
The directors are responsible for the other information. The other information comprises the
information included in the annual report for the year ended 30 June 2018, including the
Chairman’s report; Managing Director’s Letter to Shareholders; Shareholder information and the
Directors’ Report, but does not include the financial report and our auditor’s report thereon.

Our opinion on the financial report does not cover the other information and accordingly we do not
express 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, 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.

Platinum Asset Management Limited Annual Report 2018110

Independent Auditor’s Report
To the members of Platinum Asset Management Limited

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.

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:

http://www.auasb.gov.au/auditors_responsibilities/ar1.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 44 of the directors’ report for
the year ended 30 June 2018.

In our opinion, the remuneration report of Platinum Asset Management Limited for the year
ended 30 June 2018 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

Sydney, 23 August 2018

R Balding
Partner

Platinum Asset Management Limited Annual Report 2018

Governing
Nations in
the Age of
Digitisation

Designed and produced by
3C Creative Agency, 3c.com.au

Articles
The Digital Republic
By Nathan Heller
Originally published in the print edition of the
December 18 & 25, 2017 issue of The New Yorker.
Copyright © Nathan Heller

Artwork by
Scott Listfield
astronautdinosaur.com

“Simple people suffer in the
hands of heavy bureaucracies
We must go for inclusiveness,
not high end. And we must go
for reliability, not complex. ”
Kersti Kaljulaid,
President of Estonia

Platinum Asset Management Limited Annual Report 2018

Preface

Times are challenging for governments around the
globe. Populist movements across various countries
are pushing for a new political order at home while their
heads of state jostle each other to find their place on the
world stage. There are trade wars to fight, geopolitical
tensions to sooth, and humanitarian crises to diffuse.

And then there is the day-to-day business
of running a country: how to tackle
unemployment, what infrastructure to
build, how to improve health care and
education without breaking the budget
and while handing out tax cuts... In a world
where change is accelerating and growth
has become a new creed, citizens are
demanding more from their governments,
democratically elected or otherwise.

Turning on the news channel on any night
of the week, one would without fail feel a
sense of tedium and hopelessness at the
bickering politicians and a ballooning, yet
systematically ineffectual, bureaucracy.
This is true not only of our own nation, but
also the other traditional beacons of the
representative system of government,
like the US and the UK. That’s why the story
of Estonia’s digitisation, as vividly told by
Nathan Heller from The New Yorker, reads
like a breath of fresh air.

With a population of just 1.3 million and
few big corporates and entrenched interest
groups, when Estonia gained independence
from the former Soviet Union in 1991 it had
a historical opportunity to start afresh as

a new nation and build modern institutions
almost from scratch. Today, the small Baltic
republic is hailed as “the most advanced
digital society in the world”1, a shining
exemplar of a forward-thinking government
leading a nation in and with information
technology. From voting to policing, from
health records to tax filings, 99% of public
services are now online and linked across a
robust digital platform, which also allows the
private sector, from banks to pharmacies,
to connect their own databases to it.

With the 2007 Russian cyberattack still
fresh in memory and being no stranger
to the European Union’s privacy-focused
culture, the Estonians have been both
innovative and thoughtful in the design of
their digital architecture, carefully balancing
privacy and transparency, security and
accessibility. X-Road, the data platform that
forms the backbone of e-Estonia, employs
open-source and distributed systems to
minimise the risk of centralised attacks as
well as ensuring the traceability of every
digital footprint (blockchain technology has
been in operational use in various registries
since 2012).

1 https://www.wired.co.uk/article/estonia-e-resident
2 https://e-estonia.com/
3 https://theconversation.com/what-australia-can-learn-about-e-government-from-estonia-35091

Platinum Asset Management Limited Annual Report 2018

III

Creative governance principles and concepts
have been equally important to the integrity
of e-Estonia: it backs up the entire national
database in “data embassies” that are
located on foreign soil but are afforded the
same protection status as a diplomatic
mission; individuals own all the personal
information recorded about themselves;
and a “once-only” rule that discourages
agencies from asking citizens for the same
information more than once.

X-Road is said to save more than 800 years
of working time annually for the Estonian
state and its citizens2, and going paperless
reportedly saves 2% of GDP a year3. But the
significant efficiency gains and cost savings
in both public and private services are not
the only benefits of digitisation. Greater
transparency and openness can improve
the accountability of government.

There are also the broader economic
benefits – Estonia’s investments in
technological infrastructure have created
a vibrant digital ecosystem that has done
a superb job attracting entrepreneurs
and fostering innovative start-ups.
Skype, Taxify, Transferwise... The success
stories are plentiful, and the Estonian
government is intent on seeing more
entrepreneurialism flourish on its virtual soil
through e-Residency, a “transnational digital
identity” program. Foreign nationals wishing
to take advantage of Estonia’s e-services,
like opening a European bank account or
incorporating a company with EU status,
can apply online for a digital ID for the cost
of 100 euros without ever setting foot in the
country itself.

A remarkable aspect of e-Estonia, as you will
sense from Nathan Heller’s article, is that
there seems to be a virtual cycle of trust
underlying its success: the trust that its
citizens placed in the Estonian government
allowed it to embark on such an audacious
and creative undertaking, while the benefits
it has delivered reinforced its citizens’ trust.
The government does not seek to control its
citizens with their data; it makes it easier
for its people to get on with their lives.
It does not coerce businesses to serve
the state; but tries to be facilitative and
minimise obstruction.

The contrast with China is stark, as you will
see from the second feature – an extract
from Rachel Botsman’s recent book,
Who Can You Trust?. There, the government
is also seeking to harness the power of
digital connectivity and big data, and
such a “social credit” system will have
far-reaching impacts on the trust between
the government and its citizens as well
as between businesses and citizens.
We have over the last year seen numerous
reports on the use of facial recognition
and other advanced AI technologies by the
Chinese government in surveillance and law
enforcement – the upsides and the potential
Orwellian threats seem equally striking.

One thing is clear – technology is a powerful
tool for governments. But as Marten
Kaevats, Estonia’s national digital adviser,
pointed out, it’s not about the technology,
“It’s about the mind-set. It’s about the
culture. It’s about the human relations
– what it enables us to do.”

Kerr Neilson,
Founder and Director,
Platinum Asset Management
August 2018

The Digital
Republic

By Nathan Heller

Its government is virtual, borderless, blockchained, and secure. Has this tiny post-Soviet nation found the way of the future?VI

The Digital Republic

Up the Estonian coast, a five-lane highway bends with
the path of the sea, then breaks inland, leaving cars to
follow a thin road toward the houses at the water’s edge.
There is a gated community here, but it is not the usual
kind. The gate is low – a picket fence – as if to prevent
the dunes from riding up into the street. The entrance is
blocked by a railroad-crossing arm, not so much to keep
out strangers as to make sure they come with intent.

Beyond the gate, there is a schoolhouse,
and a few homes line a narrow drive. From
Tallinn, Estonia’s capital, you arrive dazed:
trees trace the highway, and the cars go
fast, as if to get in front of something that
no one can see.

Within this gated community lives a man,
his family, and one vision of the future.
Taavi Kotka, who spent four years as
Estonia’s chief information officer, is one
of the leading public faces of a project known
as e-Estonia: a coördinated governmental
effort to transform the country from a state
into a digital society.

E-Estonia is the most ambitious
project in technological statecraft
today, for it includes all members of
the government, and alters citizens’
daily lives.

The normal services that government
is involved with – legislation, voting,
education, justice, health care, banking,
taxes, policing, and so on – have been
digitally linked across one platform, wiring
up the nation. A lawn outside Kotka’s large
house was being trimmed by a small robot,
wheeling itself forward and nibbling
the grass.

“Everything here is robots,” Kotka said.
“Robots here, robots there.” He sometimes
felt that the lawnmower had a soul.
“At parties, it gets close to people,”
he explained.

A curious wind was sucking in a thick fog
from the water, and Kotka led me inside.
His study was cluttered, with a long
table bearing a chessboard and a bowl
of foil-wrapped wafer chocolates (a mark
of hospitality at Estonian meetings).
A four-masted model ship was perched
near the window; in the corner was a pile
of robot toys.

“We had to set a goal that resonates,
large enough for the society to believe in,”
Kotka went on.

He is tall with thin blond hair that, kept
shaggy, almost conceals its recession.
He has the liberated confidence, tinged
with irony, of a cardplayer who has won
a lot of hands and can afford to lose
some chips.

It was during Kotka’s tenure that the
e-Estonian goal reached its fruition.
Today, citizens can vote from their laptops
and challenge parking tickets from home.

Platinum Asset Management Limited Annual Report 2018

VII

They do so through the “once only” policy,
which dictates that no single piece of
information should be entered twice.

Instead of having to “prepare” a loan
application, applicants have their data
– income, debt, savings – pulled from
elsewhere in the system. There’s nothing
to fill out in doctors’ waiting rooms,
because physicians can access their
patients’ medical histories.

Estonia’s system is keyed to a chip-I.D. card
that reduces typically onerous, integrative
processes – such as doing taxes – to quick
work. “If a couple in love would like to marry,
they still have to visit the government
location and express their will,” Andrus
Kaarelson, a director at the Estonian
Information Systems Authority, says.
But, apart from transfers of physical
property, such as buying a house, all
bureaucratic processes can be done online.

Estonia is a Baltic country of 1.3 million
people and four million hectares, half of
which is forest.

Its government presents this
digitization as a cost-saving
efficiency and an equalizing force.

Digitizing processes reportedly saves the
state two per cent of its G.D.P. a year in
salaries and expenses.

Since that’s the same amount it pays to
meet the NATO threshold for protection
(Estonia – which has a notably vexed
relationship with Russia – has a
comparatively small military), its former
President Toomas Hendrik Ilves liked to
joke that the country got its national
security for free.

Other benefits have followed.
“If everything is digital, and
location-independent, you can run
a borderless country,” Kotka said.

In 2014, the government launched a digital
“residency” program, which allows logged-
in foreigners to partake of some Estonian
services, such as banking, as if they were
living in the country.

Other measures encourage international
startups to put down virtual roots; Estonia
has the lowest business-tax rates in the
European Union, and has become known
for liberal regulations around tech research.
It is legal to test Level 3 driverless cars
(in which a human driver can take control)
on all Estonian roads, and the country is
planning ahead for Level 5 (cars that take
off on their own).

“We believe that innovation happens
anyway,” Viljar Lubi, Estonia’s deputy
secretary for economic development, says.
“If we close ourselves off, the innovation
happens somewhere else.”

“It makes it so that, if one country is not
performing as well as another country,
people are going to the one that is performing
better – competitive governance is what
I’m calling it,” Tim Draper, a venture capitalist
at the Silicon Valley firm Draper Fisher
Jurvetson and one of Estonia’s leading
tech boosters, says.

“We’re about to go into a very
interesting time where a lot of
governments can become virtual. ”

VIII

The Digital Republic

Previously, Estonia’s best-known industry
was logging, but Skype was built there
using mostly local engineers, and countless
other startups have sprung from its soil.
“It’s not an offshore paradise, but you can
capitalize a lot of money,” Thomas Padovani,
a Frenchman who co-founded the digital-ad
startup Adcash in Estonia, explains.

“ And the administration is light, all
the way.” A light touch does not
mean a restricted one, however,
and the guiding influence of
government is everywhere.

As an engineer, Kotka said, he found the
challenge of helping to construct a digital
nation too much to resist. “Imagine that it’s
your task to build the Golden Gate Bridge,”
he said excitedly. “You have to change the
whole way of thinking about society.” So far,
Estonia is past halfway there.

One afternoon, I met a woman named

Anna Piperal at the e-Estonia Showroom.

Piperal is the “e-Estonia ambassador”; the
showroom is a permanent exhibit on the
glories of digitized Estonia, from Skype
to Timbeter, an app designed to count big
piles of logs. (Its founder told me that she’d
struggled to win over the wary titans of Big
Log, who preferred to count the inefficient
way.) Piperal has blond hair and an air of
brisk, Northern European professionalism.
She pulled out her I.D. card; slid it into her
laptop, which, like the walls of the room,
was faced with blond wood; and typed in
her secret code, one of two that went with
her I.D. The other code issues her digital
signature – a seal that, Estonians point out,
is much harder to forge than a scribble.

“This PIN code just starts the whole
decryption process,” Piperal explained.
“I’ll start with my personal data from the
population registry.” She gestured toward
a box on the screen. “It has my document
numbers, my phone number, my e-mail
account. Then there’s real estate, the land
registry.” Elsewhere, a box included all of her
employment information; another contained
her traffic records and her car insurance.
She pointed at the tax box. “I have no tax
debts; otherwise, that would be there. And I’m
finishing a master’s at the Tallinn University
of Technology, so here” – she pointed to
the education box – “I have my student
information. If I buy a ticket, the system can
verify, automatically, that I’m a student.” She
clicked into the education box, and a detailed
view came up, listing her previous degrees.

“My cat is in the pet registry,” Piperal said
proudly, pointing again. “We are done with
the vaccines.”

Data aren’t centrally held, thus reducing
the chance of Equifax-level breaches.
Instead, the government’s data platform,
X-Road, links individual servers through
end-to-end encrypted pathways,
letting information live locally.

Your dentist’s practice holds its own data;
so does your high school and your bank.
When a user requests a piece of information,
it is delivered like a boat crossing a canal
via locks.

Although X-Road is a government platform,
it has become, owing to its ubiquity, the
network that many major private firms build
on, too. Finland, Estonia’s neighbor to the
north, recently began using X-Road, which
means that certain data – for instance,
prescriptions that you’re able to pick up at

a local pharmacy – can be linked between
the nations. It is easy to imagine a novel
internationalism taking shape in this form.

Toomas Ilves, Estonia’s former President
and a longtime driver of its digitization
efforts, is currently a distinguished visiting
fellow at Stanford, and says he was shocked
at how retrograde U.S. bureaucracy seems
even in the heart of Silicon Valley. “It’s like
the nineteen-fifties – I had to provide
an electrical bill to prove I live here!” he
exclaimed. “You can get an iPhone X, but,
if you have to register your car, forget it.”

X-Road is appealing due to its rigorous
filtering: Piperal’s teachers can enter her
grades, but they can’t access her financial
history, and even a file that’s accessible to
medical specialists can be sealed off from
other doctors if Piperal doesn’t want it seen.

“I’ll show you a digital health record,”
she said, to explain. “A doctor from here”
– a file from one clinic – “can see the
research that this doctor” – she pointed to
another – “does.” She’d locked a third record,
from a female-medicine practice, so that no
other doctor would be able to see it.

A tenet of the Estonian system is that an
individual owns all information recorded
about him or her. Every time a doctor
(or a border guard, a police officer, a banker,
or a minister) glances at any of Piperal’s
secure data online, that look is recorded
and reported.

Peeping at another person’s secure
data for no reason is a criminal
offense. “In Estonia, we don’t have
Big Brother; we have Little Brother,”
a local told me. “You can tell him
what to do and maybe also beat
him up.”

Platinum Asset Management Limited Annual Report 2018

Business and land-registry information
is considered public, so Piperal used the
system to access the profile of an Estonian
politician. “Let’s see his land registry,”
she said, pulling up a list of properties.
“You can see there are three land plots he
has, and this one is located” – she clicked,
and a satellite photograph of a sprawling
beach house appeared – “on the sea.”

The openness is startling. Finding the
business interests of the rich and powerful
– a hefty field of journalism in the United
States – takes a moment’s research,
because every business connection or
investment captured in any record in Estonia
becomes searchable public information.
(An online tool even lets citizens map webs
of connection, follow-the-money style.)
Traffic stops are illegal in the absence of a
moving violation, because officers acquire
records from a license-plate scan.

Polling-place intimidation is a non-issue
if people can vote – and then change their
votes, up to the deadline – at home, online.
And heat is taken off immigration because,
in a borderless society, a resident need not
even have visited Estonia in order to work
and pay taxes under its dominion.

Soon after becoming the C.I.O., in 2013,

Taavi Kotka was charged with an unlikely

project: expanding Estonia’s population.
The motive was predominantly economic.
“Countries are like enterprises,” he said.
“They want to increase the wealth of their
own people.”

Tallinn, a harbor city with a population just
over four hundred thousand, does not seem
to be on a path toward outsized growth.
Not far from the cobbled streets of the hilly
Old Town is a business center, where boxy
Soviet structures have been supplanted
by stylish buildings of a Scandinavian cast.
Otherwise, the capital seems pleasantly
preserved in time.

The Digital Republic

The coastal daylight is bright and thick, and,
when a breeze comes off the Baltic, silver-
birch leaves shimmer like chimes. “I came
home to a great autumn / to a luminous
landscape,” the Estonian poet Jaan Kaplinski
wrote decades ago. This much has not
changed.

Kotka, however, thought that it was possible
to increase the population just by changing
how you thought of what a population was.
Consider music, he said. Twenty years
ago, you bought a CD and played the album
through. Now you listen track by track,
on demand.

“ If countries are competing not only
on physical talent moving to their
country but also on how to get the
best virtual talent connected to their
country, it becomes a disruption like
the one we have seen in the music
industry,” he said. “And it’s basically
a zero-cost project, because we
already have this infrastructure
for our own people.”

The program that resulted is called
e-residency, and it permits citizens of
another country to become residents of
Estonia without ever visiting the place.
An e-resident has no leg up at the customs
desk, but the program allows individuals to
tap into Estonia’s digital services from afar.

I applied for Estonian e-residency one recent
morning at my apartment, and it took about
ten minutes. The application cost a hundred
euros, and the hardest part was finding a
passport photograph to upload, for my card.
After approval, I would pick up my credentials
in person, like a passport, at the Estonian
Consulate in New York.

This physical task proved to be the main
stumbling block, Ott Vatter, the deputy
director of e-residency, explained, because
consulates were reluctant to expand their
workload to include a new document. Mild
xenophobia made some Estonians at home
wary, too. “Inside Estonia, the mentality is
kind of ‘What is the gain, and where is the
money?’ ” he said.

The physical factor still imposes limitations
– only thirty-eight consulates have agreed
to issue documents, and they are distributed
unevenly. (Estonia has only one embassy
in all of Africa.) But the office has made
special accommodations for several popular
locations. Since there’s no Estonian consulate
in San Francisco, the New York consulate flies
personnel to California every three months
to batch-process Silicon Valley applicants.

“I had a deal that I did with Funderbeam, in
Estonia,” Tim Draper, who became Estonia’s
second e-resident, told me. “We decided to
use a ‘smart contract’ – the first ever in a
venture deal!”

Smart contracts are encoded on a
digital ledger and, notably, don’t require
an outside administrative authority.
It was an appealing prospect, and
Draper, with his market investor’s gaze,
recognized a new market for élite tech
brainpower and capital.

“I thought, Wow! Governments are going to
have to compete with each other for us,”
he said.

So far, twenty-eight thousand people
have applied for e-residency, mostly from
neighboring countries: Finland and Russia.
But Italy and Ukraine follow, and U.K.
applications spiked during Brexit.

XII

The Digital Republic

(Many applicants are footloose
entrepreneurs or solo venders who
want to be based in the E.U.)

Because eighty-eight per cent of
applicants are men, the United Nations
has begun seeking applications for female
entrepreneurs in India.

“There are so many companies in the
world for whom working across borders
is a big hassle and a source of expense,”
Siim Sikkut, Estonia’s current C.I.O., says.

Today, in Estonia, the weekly
e-residency application rate
exceeds the birth rate. “We tried
to make more babies, but it’s not
that easy,” he explained.

With so many businesses abroad,

Estonia’s startup-ism hardly leaves an
urban trace. I went to visit one of the places
it does show: a co-working space, Lift99, in
a complex called the Telliskivi Creative City.
The Creative City, a former industrial park,
is draped with trees and framed by buildings
whose peeling exteriors have turned the
yellows of a worn-out sponge. There are
murals, outdoor sculptures, and bills for
coming shows; the space is shaped by
communalism and by the spirit of creative
unrule. One art work consists of stacked
logs labelled with Tallinn startups: Insly,
LeapIN, Photry, and something called
3D Creationist.

The office manager, Elina Kaarneem, greeted
me near the entrance. “Please remove your
shoes,” she said. Lift99, which houses
thirty-two companies and five freelancers,
had industrial windows, with a two-floor
open-plan workspace. Both levels also
included smaller rooms named for techies
who had done business with Estonia.
There was a Zennström Room, after Niklas

Zennström, the Swedish entrepreneur who
co-founded Skype, in Tallinn. There was a
Horowitz Room, for the venture capitalist
Ben Horowitz, who has invested in Estonian
tech. There was also a Tchaikovsky Room,
because the composer had a summer house
in Estonia and once said something nice
about the place.

“This is not the usual co-working space,
because we choose every human,” Ragnar
Sass, who founded Lift99, exclaimed in the
Hemingway Room. Hemingway, too, once
said something about Estonia; a version
of his pronouncement – “No well-run yacht
basin is complete without at least two
Estonians” – had been spray-stencilled
on the wall, along with his face.

The room was extremely small, with two
cushioned benches facing each other.
Sass took one; I took the other. “Many times,
a miracle can happen if you put talented
people in one room,” he said as I tried to keep
my knees inside my space. Not far from the
Hemingway Room, Barack Obama’s face
was also on a wall.

Obama Rooms are booths for
making cell-phone calls, following
something he once said about
Estonia. (“I should have called the
Estonians when we were setting up
our health-care Web site.”) That had
been stencilled on the wall as well.

Some of the companies at Lift99 are local
startups, but others are international firms
seeking an Estonian foothold. In something
called the Draper Room, for Tim Draper, I met
an Estonian engineer, Margus Maantoa,
who was launching the Tallinn branch
of the German motion-control company
Trinamic. Maantoa shares the room with
other companies, and, to avoid disturbing

Platinum Asset Management Limited Annual Report 2018

XIII

them, we went to the Iceland Room. (Iceland
was the first country to recognize Estonian
independence.) The seats around the table
in the Iceland Room were swings.

I took a swing, and Maantoa took another.
He said, “I studied engineering and physics
in Sweden, and then, seven years ago,
I moved back to Estonia because so much is
going on.” He asked whether I wanted to talk
with his boss, Michael Randt, at the Trinamic
headquarters, in Hamburg, and I said that
I did, so he opened his laptop and set up a
conference call on Skype. Randt was sitting
at a table, peering down at us as if we were a
mug of coffee. Tallinn had a great talent pool,
he said: “Software companies are absorbing
a lot of this labor, but, when it comes to
hardware, there are only a few companies
around.” He was an e-resident, so opening
a Tallinn office was fast.

Maantoa took me upstairs, where he had a
laboratory space that looked like a janitor’s
closet. Between a water heater and two
large air ducts, he had set up a desk with
a 3-D printer and a robotic motion-control
platform. I walked him back to Draper and
looked up another startup, an Estonian
company called Ööd, which makes one-
room, two-hundred-square-foot huts that
you can order prefab.

The rooms have floor-to-ceiling
windows of one-way glass, climate
control, furniture, and lovely wood
floors. They come in a truck and are
dropped into the countryside.

“Sometimes you want something small, but
you don’t want to be in a tent,” Kaspar Kägu,
the head of Ööd sales, explained. “You want
a shower in the morning and your coffee
and a beautiful landscape. Fifty-two per
cent of Estonia is covered by forestland,

and we’re rather introverted people, so we
want to be – uh, not near everybody else.”
People of a more sociable disposition could
scatter these box homes on their property,
he explained, and rent them out on services
like Airbnb.

“We like to go to nature – but comfortably,”
Andreas Tiik, who founded Ööd with his
carpenter brother, Jaak, told me. The
company had queued preorders from people
in Silicon Valley, who also liked the idea, and
was tweaking the design for local markets.
“We’re building a sauna in it,” Kägu said.

In the U.S., it is generally assumed
that private industry leads innovation.
Many ambitious techies I met in Tallinn,
though, were leaving industry to go
work for the state.

“If someone had asked me, three years ago,
if I could imagine myself working for the
government, I would have said, ‘F--- no,’ ” Ott
Vatter, who had sold his own business, told
me. “But I decided that I could go to the U.S.
at any point, and work in an average job at a
private company. This is so much bigger.”

The bigness is partly inherent in the
government’s appetite for large problems.
In Tallinn’s courtrooms, judges’ benches
are fitted with two monitors, for consulting
information during the proceedings, and
case files are assembled according to the
once-only principle. The police make reports
directly into the system; forensic specialists
at the scene or in the lab do likewise.

Lawyers log on – as do judges, prison
wardens, plaintiffs, and defendants, each
through his or her portal. The Estonian
courts used to be notoriously backlogged,
but that is no longer the case.

Platinum Asset Management Limited Annual Report 2018

“ No one was able to say whether we
should increase the number of courts
or increase the number of judges,”
Timo Mitt, a manager at Netgroup,
which the government hired to build
the architecture, told me.

Digitizing both streamlined the process
and helped identify points of delay. Instead
of setting up prisoner transport to trial –
fraught with security risks – Estonian courts
can teleconference defendants into the
courtroom from prison.

For doctors, a remote model has been of
even greater use. One afternoon, I stopped
at the North Estonia Medical Center, a hospital
in the southwest of Tallinn, and met a doctor
named Arkadi Popov in an alleyway where
ambulances waited in line.

“Welcome to our world,” Popov, who leads
emergency medical care, said grandly,
gesturing with pride toward the chariots
of the sick and maimed. “Intensive care!”

In a garage where unused ambulances
were parked, he took an iPad Mini from
the pocket of his white coat, and opened
an “e-ambulance” app, which Estonian
paramedics began using in 2015. “This
system had some childhood diseases,”
Popov said, tapping his screen. “But now
I can say that it works well.”

E-ambulance is keyed onto X-Road, and
allows paramedics to access patients’
medical records, meaning that the team that
arrives for your chest pains will have access
to your latest cardiology report and E.C.G.

Since 2011, the hospital has also run a
telemedicine system – doctoring at a
distance – originally for three islands off
its coast. There were few medical experts

on the islands, so the E.M.S. accepted
volunteer paramedics. “Some of them are
hotel administrators, some of them are
teachers,” Popov said. At a command
center at the hospital in Tallinn, a doctor
reads data remotely.

“On the screen, she or he can see all the
data regarding the patient – physiological
parameters, E.C.G.s,” he said. “Pulse, blood
pressure, temperature. In case of C.P.R., our
doctor can see how deep the compression
of the chest is, and can give feedback.”

The e-ambulance software also allows
paramedics to pre-register a patient
en route to the hospital, so that tests,
treatments, and surgeries can be
prepared for the patient’s arrival.

To see what that process looks like,
I changed into scrubs and a hairnet and
visited the hospital’s surgery ward. Rita
Beljuskina, a nurse anesthetist, led me
through a wide hallway lined with steel doors
leading to the eighteen operating theatres.
Screens above us showed eighteen columns,
each marked out with twenty-four hours.
Surgeons book their patients into the queue,
Beljuskina explained, along with urgency
levels and any machinery or personnel they
might need. An on-call anesthesiologist
schedules them in order to optimize the
theatres and the equipment.

“Let me show you how,” Beljuskina said,
and led me into a room filled with medical
equipment and a computer in the corner.
She logged on with her own I.D. If she were to
glance at any patient’s data, she explained,
the access would be tagged to her name,
and she would get a call inquiring why it
was necessary.

XVI

The Digital Republic

The system also scans for
drug interactions, so if your
otolaryngologist prescribes
something that clashes with the pills
your cardiologist told you to take,
the computer will put up a red flag.

The putative grandfather of Estonia’s

digital platform is Tarvi Martens, an
enigmatic systems architect who today
oversees the country’s digital-voting
program from a stone building in the
center of Tallinn’s Old Town.

I went to visit him one morning, and
was shown into a stateroom with a long
conference table and French windows
that looked out on the trees. Martens was
standing at one window, with his back to me,
commander style. For a few moments, he
stayed that way; then he whirled around
and addressed a timid greeting to the
buttons of my shirt.

Martens was wearing a red flannel button-
down, baggy jeans, black socks, and the
sort of sandals that are sold at drugstores.
He had gray stubble, and his hair was stuck
down on his forehead in a manner that was
somehow both rumpled and flat. This was
the busiest time of the year, he said, with
the fall election looming. He appeared to run
largely on caffeine and nicotine; when he put
down a mug of hot coffee, his fingers shook.

For decades, he pointed out, digital
technology has been one of Estonia’s first
recourses for public ailments. A state project
in 1970 used computerized data matching
to help singles find soul mates, “for the
good of the people’s economy.” In 1997,
the government began looking into newer
forms of digital documents as a supplement.

“They were talking about chip-equipped
bar codes or something,” Martens told
me, breaking into a nerdy snicker-giggle.
“Totally ridiculous.” He had been doing work
in cybernetics and security as a private-
sector contractor, and had an idea. When
the cards were released, in 2002, Martens
became convinced that they should be both
mandatory and cheap.

“Finland started two years earlier with an
I.D. card, but it’s still a sad story,” he said.
“Nobody uses it, because they put a hefty
price tag on the card, and it’s a voluntary
document. We sold it for ten euros at first,
and what happened? Banks and application
providers would say, ‘Why should I support
this card? Nobody has it.’ It was a dead end.”

In what may have been the seminal
insight of twenty-first-century
Estonia, Martens realized that
whoever offered the most ubiquitous
and secure platform would run the
country’s digital future – and that it
should be an elected leadership, not
profit-seeking Big Tech.

“The only thing was to push this card to the
people, without them knowing what to do
with it, and then say, ‘Now people have a
card. Let’s start some applications,’ ” he said.

The first “killer application” for the I.D.-card-
based system was the one that Martens still
works on: i-voting, or casting a secure ballot
from your computer. Before the first i-voting
period, in 2005, only five thousand people
had used their card for anything. More than
nine thousand cast an i-vote in that election,
however – only two per cent of voters, but
proof that online voting was attracting
users – and the numbers rose from there.
As of 2014, a third of all votes have been
cast online.

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That year, seven Western researchers
published a study of the i-voting system
which concluded that it had “serious
architectural limitations and procedural
gaps.” Using an open-source edition of
the voting software, the researchers
approximated a version of the i-voting setup
in their lab and found that it was possible to
introduce malware. They were not convinced
that the servers were entirely secure, either.

Martens insisted that the study was
“ridiculous.” The researchers, he said,
gathered data with “a lot of assumptions,”
and misunderstood the safeguards in
Estonia’s system. You needed both the
passwords and the hardware (the chip in
your I.D. card or, in the newer “mobile I.D.”
system, the SIM card in your phone) to log in,
blocking most paths of sabotage.

Estonian trust was its own
safeguard, too, he told me.

Earlier this fall, when a Czech research team
found a vulnerability in the physical chips
used in many I.D. cards, Siim Sikkut, the
Estonian C.I.O., e-mailed me the finding. His
office announced the vulnerability, and the
cards were locked for a time. When Sikkut
held a small press conference, reporters
peppered him with questions: What did
the government gain from disclosing the
vulnerability? How disastrous was it?

Sikkut looked bemused. Many upgrades
to phones and computers resolve
vulnerabilities that have never even been
publicly acknowledged, he said – and think
how much data we entrust to those devices.

(“There is no government that knows
more about you than Google or Facebook,”
Taavi Kotka says dryly.)

In any case, the transparency seemed to
yield a return; a poll conducted after the chip
flaw was announced found that trust in the
system had fallen by just three per cent.

From time to time, Russian military jets

patrolling Estonia’s western border
switch off their G.P.S. transponders and
drift into the country’s airspace. What
follows is as practiced as a pas de deux
at the Bolshoi. NATO troops on the ground
scramble an escort. Estonia calls up the
Russian Ambassador to complain; Russia
cites an obscure error. The dance lets both
parties show that they’re alert, and have not
forgotten the history of place.

Since the eleventh century, Estonian land
has been conquered by Russia five times.
Yet the country has always been an awkward
child of empire, partly owing to its proximity
to other powers (and their airwaves) and
partly because the Estonian language, which
belongs to the same distinct Uralic family as
Hungarian and Finnish, is incomprehensible
to everyone else. Plus, the greatest threat,
these days, may not be physical at all.

In 2007, a Russian cyberattack
on Estonia sent everything from
the banks to the media into chaos.
Estonians today see it as the defining
event of their recent history.

The chief outgrowth of the attack is the
NATO Coöperative Cyber Defense Center of
Excellence, a think tank and training facility.
It’s on a military base that once housed the
Soviet Army. You enter through a gatehouse
with gray walls and a pane of mirrored one-
way glass.

XVIII

The Digital Republic

“Document, please!” the mirror boomed at
me when I arrived one morning. I slid my
passport through on a tray. The mirror was
silent for two full minutes, and I backed into
a plastic chair. “You have to wait here!” the
mirror boomed back.

Some minutes later, a friendly staffer
appeared at the inner doorway and escorted
me across a quadrangle trimmed with NATO-
member flags and birch trees just fading to
gold. Inside a gray stone building, another
mirror instructed me to stow my goods
and to don a badge. Upstairs, the center’s
director, Merle Maigre, formerly the national-
security adviser to the Estonian President,
said that the center’s goal was to guide other
NATO nations toward vigilance.

“This country is located – just where it is,”
she said, when I asked about Russia. Since
starting, in 2008, the center has done
research on digital forensics, cyber-defense
strategy, and similar topics. (It publishes
the “Tallinn Manual 2.0 on the International
Law Applicable to Cyber Operations” and
organizes a yearly research conference.)

Sandra Roosna, a member of Estonia’s
E-Governance Academy and the author of
the book “eGovernance in Practice,” says,
“I think we need to give the European Union
two years to do cross-border transactions
and to recognize each other digitally.” Even
now, though, the Estonian platform has been
adopted by nations as disparate as Moldova
and Panama. “It’s very popular in countries
that want – and not all do – transparency
against corruption,” Ilves says.

Beyond X-Road, the backbone of Estonia’s
digital security is a blockchain technology
called K.S.I.

A blockchain is like the digital version
of a scarf knitted by your grandmother.
She uses one ball of yarn, and the
result is continuous. Each stitch
depends on the one just before it.
It’s impossible to remove part of the
fabric, or to substitute a swatch,
without leaving some trace: a few
telling knots, or a change in the knit.

But it is best known for its training
simulations: an eight-hundred-person
cyber “live-fire” exercise called Locked
Shields was run this year alongside
CYBRID, an exercise for defense
ministers of the E.U. “This included
aspects such as fake news and
social media,” Maigre said.

Not all of Estonia’s digital leadership in the
region is as openly rehearsed. Its experts
have consulted on Georgia’s efforts to set
up its own digital registry. Estonia is also
building data partnerships with Finland,
and trying to export its methods elsewhere
across the E.U. “The vision is that I will go
to Greece, to a doctor, and be able to get
everything,” Toomas Ilves explains.

In a blockchain system, too, every line
is contingent on what came before it.
Any breach of the weave leaves a trace,
and trying to cover your tracks leaves a
trace, too. “Our No. 1 marketing pitch is
Mr. Snowden,” Martin Ruubel, the president
of Guardtime, the Estonian company that
developed K.S.I., told me. (The company’s
biggest customer group is now the
U.S. military.)

Popular anxiety tends to focus on data
security – who can see my information? –
but bits of personal information are rarely
truly compromising. The larger threat is
data integrity: whether what looks secure
has been changed. (It doesn’t really matter
who knows what your blood type is, but if

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XIX

someone switches it in a confidential record
your next trip to the emergency room could
be lethal.)

The average time until discovery of a data
breach is two hundred and five days, which
is a huge problem if there’s no stable point
of reference.

“In the Estonian system, you don’t have
paper originals,” Ruubel said. “The question
is: Do I know about this problem, and how
quickly can I react?”

The blockchain makes every footprint
immediately noticeable, regardless of
the source. (Ruubel says that there is no
possibility of a back door.) To guard secrets,
K.S.I. is also able to protect information
without “seeing” the information itself.
But, to deal with a full-scale cyberattack,
other safeguards now exist. Earlier this year,
the Estonian government created a server
closet in Luxembourg, with a backup of
its systems.

A “data embassy” like this one is built
on the same body of international law
as a physical embassy, so that the
servers and their data are Estonian
“soil.” If Tallinn is compromised,
whether digitally or physically,
Estonia’s locus of control will shift
to such mirror sites abroad.

“If Russia comes – not when – and if our
systems shut down, we will have copies,”
Piret Hirv, a ministerial adviser, told me.
In the event of a sudden invasion, Estonia’s
elected leaders might scatter as necessary.
Then, from cars leaving the capital, from
hotel rooms, from seat 3A at thirty thousand
feet, they will open their laptops, log into
Luxembourg, and – with digital signatures

to execute orders and a suite of tamper-
resistant services linking global citizens
to their government – continue running
their country, with no interruption, from
the cloud.

The history of nationhood is a history

of boundaries marked on land. When,
in the fourteenth century, peace arrived
after bloodshed among the peoples of
Mexico’s eastern altiplano, the first task of
the Tlaxcaltecs was to set the borders of
their territory. In 1813, Ernst Moritz Arndt,
a German nationalist poet before there
was a Germany to be nationalistic about,
embraced the idea of a “Vaterland” of shared
history: “Which is the German’s fatherland? /
So tell me now at last the land! – / As far’s the
German’s accent rings / And hymns to God in
heaven sings.”

Today, the old fatuities of the nation-state
are showing signs of crisis. Formerly
imperialist powers have withered into
nationalism (as in Brexit) and separatism
(Scotland, Catalonia). New powers, such as
the Islamic State, have redefined nationhood
by ideological acculturation.

It is possible to imagine a future
in which nationality is determined
not so much by where you live as
by what you log on to.

Estonia currently holds the presidency of
the European Union Council – a bureaucratic
role that mostly entails chairing meetings.
(The presidency rotates every six months;
in January, it will go to Bulgaria.) This meant
that the autumn’s E.U. Digital Summit was
held in Tallinn, a convergence of audience
and expertise not lost on Estonia’s leaders.
One September morning, a car pulled up in
front of the Tallinn Creative Hub, a former
power station, and Kersti Kaljulaid, the

The Digital Republic

President of Estonia, stepped out. She is
the country’s first female President, and
its youngest. Tall and lanky, with chestnut
hair in a pixie cut, she wore an asymmetrical
dress of Estonian blue and machine gray.
Kaljulaid took office last fall, after Estonia’s
Presidential election yielded no majority
winner; parliamentary representatives of all
parties plucked her out of deep government
as a consensus candidate whom they could
all support. She had previously been an
E.U. auditor.

“ I am President to a digital society,” she
declared in her address. The leaders of
Europe were arrayed in folding chairs,
with Angela Merkel, in front, slumped
wearily in a red leather jacket. “Simple
people suffer in the hands of heavy
bureaucracies,” Kaljulaid told them.
“ We must go for inclusiveness, not high
end. And we must go for reliability,
not complex.”

Kaljulaid urged the leaders to consider a
transient population. Theresa May had
told her people, after Brexit, “If you believe
you’re a citizen of the world, you’re a citizen
of nowhere.” With May in the audience,
Kaljulaid staked out the opposite view.
“Our citizens will be global soon,” she said.
“We have to fly like bees from flower to
flower to gather those taxes from citizens
working in the morning in France, in the
evening in the U.K., living half a year in
Estonia and then going to Australia.”

Citizens had to remain connected, she said,
as the French President, Emmanuel Macron,
began nodding vigorously and whispering
to an associate. When Kaljulaid finished,
Merkel came up to the podium.

“You’re so much further than we are,”
she said. Later, the E.U. member states
announced an agreement to work toward
digital government and, as the Estonian
Prime Minister put it in a statement,
“rethink our entire labor market.”

Before leaving Tallinn, I booked a meeting

with Marten Kaevats, Estonia’s national
digital adviser. We arranged to meet at a café
near the water, but it was closed for a private
event. Kaevats looked unperturbed. “Let’s
go somewhere beautiful!” he said. He led me
to an enormous terraced concrete platform
blotched with graffiti and weeds.

We climbed a staircase to the second level,
as if to a Mayan plateau. Kaevats, who is in
his thirties, wore black basketball sneakers,
navy trousers, a pin-striped jacket from a
different suit, and a white shirt, untucked.
The fancy dress was for the digital summit.
“I have to introduce the President of Estonia,”
he said merrily, crabbing a hand through
his strawberry-blond hair, which stuck out
in several directions. “I don’t know what
to say!” He fished a box of Marlboro Reds
out of his pocket and tented into himself,
twitching a lighter.

It was a cloudless morning. Rounded bits
of gravel in the concrete caught a glare.
The structure was bare and weather-beaten,
and we sat on a ledge above a drop facing
the harbor. The Soviets built this “Linnahall,”
originally as a multipurpose venue for sailing-
related sports of the Moscow Summer
Olympics. It has fallen into disrepair,
but there are plans for renovation soon.

For the past year, Kaevats’s main pursuit has
been self-driving cars. “It basically embeds
all the difficult questions of the digital age:
privacy, data, safety – everything,” he said.
It’s also an idea accessible to the man
and woman (literally) in the street, whose
involvement in regulatory standards he
wants to encourage.

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XXII

The Digital Republic

“ What’s difficult is the ethical and
emotional side,” he said. “It’s about
values. What do we want? Where
are the borders? Where are the red
lines? These cannot be decisions
made only by specialists.”

To support that future, he has plumbed the
past. Estonian folklore includes a creature
known as the kratt: an assembly of random
objects that the Devil will bring to life for you,
in exchange for a drop of blood offered at the
conjunction of five roads. The Devil gives the
kratt a soul, making it the slave of its creator.

“Each and every Estonian, even children,
understands this character,” Kaevats said.
His office now speaks of kratt instead of
robots and algorithms, and has been using
the word to define a new, important nuance
in Estonian law.

“Basically, a kratt is a robot with
representative rights,” he explained.
“The idea that an algorithm can buy and
sell services on your behalf is a
conceptual upgrade.”

In the U.S., where we lack such a distinction,
it’s a matter of dispute whether, for instance,
Facebook is responsible for algorithmic
sales to Russian forces of misinformation.

#KrattLaw – Estonia’s digital
shorthand for a new category of legal
entity comprising A.I., algorithms,
and robots – will make it possible
to hold accountable whoever gave
a drop of blood.

“In the U.S. recently, smart toasters and
Teddy bears were used to attack Web sites,”
Kaevats said. “Toasters should not be
making attacks!” He squatted and emptied
a pocket onto the ledge: cigarettes, lighter,
a phone. “Wherever there’s a smart device,
around it there are other smart devices,”
he said, arranging the items on the concrete.
“This smart street light” – he stood his
lighter up – “asks the self-driving car” – he
scooted his phone past it – “ ‘Are you O.K.? Is
everything O.K. with you?’ ” The Marlboro box
became a building whose appliances made
checks of their own, scanning one another
for physical and blockchain breaches. Such
checks, device to device, have a distributed
effect. To commandeer a self-driving car on
a street, a saboteur would, in theory, also
have to hack every street lamp and smart
toaster that it passed. This “mesh network”
of devices, Kaevats said, will roll out starting
in 2018.

Is everything O.K. with you? It’s hard to
hear about Estonians’ vision for the robots
without thinking of the people they’re blood-
sworn to serve. I stayed with Kaevats on
the Linnahall for more than an hour. He lit
several cigarettes, and talked excitedly of
“building a digital society.”

It struck me then how long it had been
since anyone in America had spoken of
society-building of any kind. It was as if,
in the nineties, Estonia and the U.S. had
approached a fork in the road to a digital
future, and the U.S. had taken one path –
personalization, anonymity, information
privatization, and competitive efficiency
– while Estonia had taken the other.
Two decades on, these roads have led to
distinct places, not just in digital culture
but in public life as well.

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Kaevats admitted that he didn’t start out
as a techie for the state. He used to be
a protester, advocating cycling rights.
It had been dispiriting work. “I felt as if I was
constantly beating my head against a big
concrete wall,” he said. After eight years,
he began to resent the person he’d become:
angry, distrustful, and negative, with few
victories to show.

“My friends and I made a conscious decision
then to say ‘Yes’ and not ‘No’ – to be proactive
rather than destructive,” he explained.
He started community organizing
(“analog, not digital”) and went to school
for architecture, with an eye to structural
change through urban planning. “I did that
for ten years,” Kaevats said. Then he found
architecture, too, frustrating and slow.
The more he learned of Estonia’s digital
endeavors, the more excited he became.
And so he did what seemed the only thing
to do: he joined his old foe, the government
of Estonia.

Kaevats told me it irked him that so many
Westerners saw his country as a tech haven.
He thought they were missing the point.
“This enthusiasm and optimism around
technology is like a value of its own,”
he complained.

Basic security was lax. “For example, I can
tell you my I.D. number – I don’t care,” he
said. “You have a Social Security number,
which is, like, a big secret.” He laughed.
“This does not work!”

The U.S. had backward notions of
protection, he said, and the result
was a bigger problem: a systemic
loss of community and trust.

“Snowden things and whatnot have done
a lot of damage. But they have also proved
that these fears are justified.

“To regain this trust takes quite a lot of time,”
he went on. “There also needs to be a vision
from the political side. It needs to be there
always – a policy, not politics. But the
politicians need to live it, because, in
today’s world, everything will be public
at some point.”

We gazed out across the blinding sea.
It was nearly midday, and the morning
shadows were shrinking to islands at
our feet. Kaevats studied his basketball
sneakers for a moment, narrowed his eyes
under his crown of spiky hair, and lifted his
burning cigarette with a smile. “You need to
constantly be who you are,” he said.

“ This gadgetry that I’ve been ranting
about? This is not important.” He
threw up his hands, scattering ash.
“ It’s about the mind-set. It’s about
the culture. It’s about the human
relations – what it enables us to do.”

Seagulls riding the surf breeze screeched.
I asked Kaevats what he saw when he looked
at the U.S. Two things, he said. First, a
technical mess. Data architecture was too
centralized. Citizens didn’t control their
own data; it was sold, instead, by brokers.

This article was first published in the
print edition of the December 18 & 25,
2017 issue of The New Yorker, with the
headline “The Digital Republic.”

Big Data Meets
Big Brother

By Rachel Botsman

The Chinese government plans to launch its Social Credit System in 2020. The aim? To judge the trustworthiness – or otherwise – of its 1.3 billion residents.XXVI

Big Data Meets Big Brother

On June 14, 2014, the State Council of China published an
ominous-sounding document called “Planning Outline for
the Construction of a Social Credit System”. In the way of
Chinese policy documents, it was a lengthy and rather dry
affair, but it contained a radical idea. What if there was a
national trust score that rated the kind of citizen you were?

Imagine a world where many of your daily
activities were constantly monitored and
evaluated: what you buy at the shops and
online; where you are at any given time; who
your friends are and how you interact with
them; how many hours you spend watching
content or playing video games; and what
bills and taxes you pay (or not).

It’s not hard to picture, because most of
that already happens, thanks to all those
data-collecting behemoths like Google,
Facebook and Instagram or health-tracking
apps such as Fitbit.

But now imagine a system where all these
behaviours are rated as either positive or
negative and distilled into a single number,
according to rules set by the government.
That would create your Citizen Score and
it would tell everyone whether or not you
were trustworthy. Plus, your rating would
be publicly ranked against that of the entire
population and used to determine your
eligibility for a mortgage or a job, where your
children can go to school – or even just your
chances of getting a date.

A futuristic vision of Big Brother out of
control? No, it’s already getting underway in
China, where the government is developing
the Social Credit System (SCS) to rate the
trustworthiness of its 1.3 billion citizens.

The Chinese government
is pitching the system as a
desirable way to measure and
enhance “trust” nationwide and
to build a culture of “sincerity ”.

As the policy states, “It will forge a public
opinion environment where keeping trust
is glorious. It will strengthen sincerity in
government affairs, commercial sincerity,
social sincerity and the construction of
judicial credibility.”

Others are less sanguine about its wider
purpose. “It is very ambitious in both depth
and scope, including scrutinising individual
behaviour and what books people are
reading. It’s Amazon’s consumer tracking
with an Orwellian political twist,” is how
Johan Lagerkvist, a Chinese internet
specialist at the Swedish Institute of
International Affairs, described the social
credit system. Rogier Creemers, a post-
doctoral scholar specialising in Chinese
law and governance at the Van Vollenhoven
Institute at Leiden University, who published
a comprehensive translation of the plan,
compared it to “Yelp reviews with the nanny
state watching over your shoulder”.

Platinum Asset Management Limited Annual Report 2018 XXVII

For now, technically, participating in China’s
Citizen Scores is voluntary. But by 2020 it
will be mandatory. The behaviour of every
single citizen and legal person (which
includes every company or other entity)
in China will be rated and ranked, whether
they like it or not.

Prior to its national roll-out in 2020, the
Chinese government is taking a watch-and-
learn approach.

In this marriage between
communist oversight and capitalist
can-do, the government has given
a licence to eight private companies
to come up with systems and
algorithms for social credit scores.
Predictably, data giants currently
run two of the best-known projects.

The first is with China Rapid Finance, a
partner of the social-network behemoth
Tencent and developer of the messaging app
WeChat with more than 850 million active
users. The other, Sesame Credit, is run by
the Ant Financial Services Group (AFSG),
an affiliate company of Alibaba. Ant Financial
sells insurance products and provides loans
to small- to medium-sized businesses.
However, the real star of Ant is AliPay, its
payments arm that people use not only to
buy things online, but also for restaurants,
taxis, school fees, cinema tickets and even
to transfer money to each other.

Sesame Credit has also teamed up with
other data-generating platforms, such as
Didi Chuxing, the ride-hailing company that
was Uber’s main competitor in China before
it acquired the American company’s Chinese
operations in 2016, and Baihe, the country’s

largest online matchmaking service. It’s not
hard to see how that all adds up to gargantuan
amounts of big data that Sesame Credit can
tap into to assess how people behave and
rate them accordingly.

So just how are people rated? Individuals
on Sesame Credit are measured by a score
ranging between 350 and 950 points.
Alibaba does not divulge the “complex
algorithm” it uses to calculate the number
but they do reveal the five factors taken
into account. The first is credit history.
For example, does the citizen pay their
electricity or phone bill on time? Next is
fulfilment capacity, which it defines in its
guidelines as “a user’s ability to fulfil his/
her contract obligations”. The third factor is
personal characteristics, verifying personal
information such as someone’s mobile
phone number and address. But the fourth
category, behaviour and preference, is where
it gets interesting.

Under this system, something
as innocuous as a person’s
shopping habits become a
measure of character. Alibaba
admits it judges people by the
types of products they buy.

“Someone who plays video games for
ten hours a day, for example, would be
considered an idle person,” says Li Yingyun,
Sesame’s Technology Director. “Someone
who frequently buys diapers would be
considered as probably a parent, who on
balance is more likely to have a sense
of responsibility.”

XXVIII

Big Data Meets Big Brother

So the system not only
investigates behaviour
– it shapes it. It “nudges”
citizens away from purchases
and behaviours the
government does not like.

Friends matter, too. The fifth category is
interpersonal relationships. What does
their choice of online friends and their
interactions say about the person being
assessed? Sharing what Sesame Credit
refers to as “positive energy” online, nice
messages about the government or how well
the country’s economy is doing, will make
your score go up.

Alibaba is adamant that, currently, anything
negative posted on social media does not
affect scores (we don’t know if this is true
or not because the algorithm is secret).
But you can see how this might play out
when the government’s own citizen score
system officially launches in 2020. Even
though there is no suggestion yet that any
of the eight private companies involved in
the ongoing pilot scheme will be ultimately
responsible for running the government’s
own system, it’s hard to believe that the
government will not want to extract the
maximum amount of data for its SCS, from
the pilots. If that happens, and continues
as the new normal under the government’s
own SCS it will result in private platforms
acting essentially as spy agencies for the
government. They may have no choice.

Posting dissenting political opinions or links
mentioning Tiananmen Square has never
been wise in China, but now it could directly
hurt a citizen’s rating.

XXX

Big Data Meets Big Brother

But here’s the real kicker:
a person’s own score will also
be affected by what their online
friends say and do, beyond their
own contact with them. If someone
they are connected to online posts a
negative comment, their own score
will also be dragged down.

So why have millions of people already
signed up to what amounts to a trial run for a
publicly endorsed government surveillance
system? There may be darker, unstated
reasons – fear of reprisals, for instance, for
those who don’t put their hand up – but there
is also a lure, in the form of rewards and
“special privileges” for those citizens who
prove themselves to be “trustworthy” on
Sesame Credit.

If their score reaches 600, they can take
out a Just Spend loan of up to 5,000 yuan
(around £565) to use to shop online, as
long as it’s on an Alibaba site. Reach 650
points, they may rent a car without leaving
a deposit. They are also entitled to faster
check-in at hotels and use of the VIP check-
in at Beijing Capital International Airport.
Those with more than 666 points can get
a cash loan of up to 50,000 yuan (£5,700),
obviously from Ant Financial Services. Get
above 700 and they can apply for Singapore
travel without supporting documents such
as an employee letter. And at 750, they get
fast-tracked application to a coveted pan-
European Schengen visa. “I think the best
way to understand the system is as a sort
of bastard love child of a loyalty scheme,”
says Creemers.

Higher scores have already become a
status symbol, with almost 100,000
people bragging about their scores on
Weibo (the Chinese equivalent of Twitter)
within months of launch.

A citizen’s score can even affect their odds
of getting a date, or a marriage partner,
because the higher their Sesame rating,
the more prominent their dating profile is
on Baihe.

Sesame Credit already offers tips to help
individuals improve their ranking, including
warning about the downsides of friending
someone who has a low score. This might
lead to the rise of score advisers, who
will share tips on how to gain points,
or reputation consultants willing to offer
expert advice on how to strategically
improve a ranking or get off the trust-
breaking blacklist.

Indeed, the government’s Social
Credit System is basically a big
data gamified version of the
Communist Party’s surveillance
methods; the disquieting dang’an.

The regime kept a dossier on every
individual that tracked political and personal
transgressions. A citizen’s dang’an followed
them for life, from schools to jobs. People
started reporting on friends and even family
members, raising suspicion and lowering
social trust in China. The same thing will
happen with digital dossiers. People will
have an incentive to say to their friends and
family, “Don’t post that. I don’t want you to
hurt your score but I also don’t want you
to hurt mine.”

Platinum Asset Management Limited Annual Report 2018

XXXI

We’re also bound to see the birth of
reputation black markets selling under-the-
counter ways to boost trustworthiness.
In the same way that Facebook Likes and
Twitter followers can be bought, individuals
will pay to manipulate their score. What
about keeping the system secure? Hackers
(some even state-backed) could change or
steal the digitally stored information.

The new system reflects a cunning
paradigm shift. As we’ve noted,
instead of trying to enforce stability
or conformity with a big stick and
a good dose of top-down fear, the
government is attempting to make
obedience feel like gaming. It is a
method of social control dressed up
in some points-reward system.
It’s gamified obedience.

In a trendy neighbourhood in downtown
Beijing, the BBC news services hit the
streets in October 2015 to ask people about
their Sesame Credit ratings. Most spoke
about the upsides. But then, who would
publicly criticise the system? Ding, your
score might go down.

Alarmingly, few people understood that
a bad score could hurt them in the future.
Even more concerning was how many people
had no idea that they were being rated.

Currently, Sesame Credit does not directly
penalise people for being “untrustworthy”
– it’s more effective to lock people in with
treats for good behaviour. But Hu Tao,
Sesame Credit’s chief manager, warns
people that the system is designed so that
“untrustworthy people can’t rent a car, can’t
borrow money or even can’t find a job”. She
has even disclosed that Sesame Credit has

approached China’s Education Bureau about
sharing a list of its students who cheated on
national examinations, in order to make them
pay into the future for their dishonesty.

Penalties are set to change dramatically
when the government system becomes
mandatory in 2020. Indeed, on September
25, 2016, the State Council General Office
updated its policy entitled “Warning and
Punishment Mechanisms for Persons
Subject to Enforcement for Trust-Breaking”.

The overriding principle is
simple: “If trust is broken in one
place, restrictions are imposed
everywhere,” the policy
document states.

For instance, people with low ratings will
have slower internet speeds; restricted
access to restaurants, nightclubs or golf
courses; and the removal of the right to
travel freely abroad with, I quote, “restrictive
control on consumption within holiday areas
or travel businesses”.

Scores will influence a person’s rental
applications, their ability to get insurance
or a loan and even social-security benefits.
Citizens with low scores will not be hired by
certain employers and will be forbidden from
obtaining some jobs, including in the civil
service, journalism and legal fields, where
of course you must be deemed trustworthy.

Low-rating citizens will also be restricted
when it comes to enrolling themselves or
their children in high-paying private schools.
I am not fabricating this list of punishments.
It’s the reality Chinese citizens will face.

XXXII

Platinum Asset Management Limited Annual Report 2018 XXXIII

As the government document states,
the social credit system will “allow
the trustworthy to roam everywhere
under heaven while making it hard for
the discredited to take a single step”.

According to Luciano Floridi, a professor
of philosophy and ethics of information at
the University of Oxford and the director of
research at the Oxford Internet Institute,
there have been three critical “de-centering
shifts” that have altered our view in self-
understanding: Copernicus’s model of the
Earth orbiting the Sun; Darwin’s theory of
natural selection; and Freud’s claim that
our daily actions are controlled by the
unconscious mind.

Floridi believes we are now entering
the fourth shift, as what we do
online and offline merge into an
onlife. He asserts that, as our
society increasingly becomes an
infosphere, a mixture of physical
and virtual experiences, we are
acquiring an onlife personality –
different from who we innately
are in the “real world” alone.

We see this writ large on Facebook, where
people present an edited or idealised
portrait of their lives.

Think about your Uber experiences. Are you
just a little bit nicer to the driver because
you know you will be rated? But Uber ratings
are nothing compared to Peeple, an app
launched in March 2016, which is like a Yelp
for humans. It allows you to assign ratings
and reviews to everyone you know – your
spouse, neighbour, boss and even your ex.

A profile displays a “Peeple Number”,
a score based on all the feedback and
recommendations you receive. Worryingly,
once your name is in the Peeple system,
it’s there for good. You can’t opt out.

Peeple has forbidden certain bad
behaviours including mentioning private
health conditions, making profanities or
being sexist (however you objectively
assess that). But there are few rules on
how people are graded or standards about
transparency.

China’s trust system might be voluntary as
yet, but it’s already having consequences.

In February 2017, the country’s
Supreme People’s Court
announced that 6.15 million of its
citizens had been banned from
taking flights over the past four
years for social misdeeds.

The ban is being pointed to as a step toward
blacklisting in the SCS. “We have signed a
memorandum... [with over] 44 government
departments in order to limit ‘discredited’
people on multiple levels,” says Meng
Xiang, head of the executive department
of the Supreme Court. Another 1.65 million
blacklisted people cannot take trains.

Where these systems really descend into
nightmarish territory is that the trust
algorithms used are unfairly reductive.
They don’t take into account context.

For instance, one person might miss paying
a bill or a fine because they were in hospital;
another may simply be a freeloader. And
therein lies the challenge facing all of us in
the digital world, and not just the Chinese.

XXXIV Big Data Meets Big Brother

If life-determining algorithms are
here to stay, we need to figure out
how they can embrace the nuances,
inconsistencies and contradictions
inherent in human beings and how
they can reflect real life.

You could see China’s so-called trust plan
as Orwell’s 1984 meets Pavlov’s dogs.
Act like a good citizen, be rewarded and be
made to think you’re having fun. It’s worth
remembering, however, that personal
scoring systems have been present in the
west for decades.

More than 70 years ago, two men called
Bill Fair and Earl Isaac invented credit
scores. Today, companies use FICO scores
to determine many financial decisions,
including the interest rate on our mortgage
or whether we should be given a loan.

For the majority of Chinese people, they
have never had credit scores and so they
can’t get credit. “Many people don’t own
houses, cars or credit cards in China, so
that kind of information isn’t available to
measure,” explains Wen Quan, an influential
blogger who writes about technology
and finance. “The central bank has the
financial data from 800 million people, but
only 320 million have a traditional credit
history.” According to the Chinese Ministry
of Commerce, the annual economic loss
caused by lack of credit information is
more than 600 billion yuan (£68bn).

China’s lack of a national credit system is
why the government is adamant that Citizen
Scores are long overdue and badly needed
to fix what they refer to as a “trust deficit”.

In a poorly regulated market, the sale of
counterfeit and substandard products is
a massive problem.

According to the Organization for Economic
Co-operation and Development (OECD),
63 per cent of all fake goods, from watches to
handbags to baby food, originate from China.

“The level of micro corruption is enormous,”
Creemers says. “So if this particular scheme
results in more effective oversight and
accountability, it will likely be warmly
welcomed.”

The government also argues that the system
is a way to bring in those people left out of
traditional credit systems, such as students
and low-income households. Professor Wang
Shuqin from the Office of Philosophy and
Social Science at Capital Normal University
in China recently won the bid to help the
government develop the system that she
refers to as “China’s Social Faithful System”.
Without such a mechanism, doing business
in China is risky, she stresses, as about half
of the signed contracts are not kept. “Given
the speed of the digital economy it’s crucial
that people can quickly verify each other’s
credit worthiness,” she says.

“The behaviour of the majority is determined
by their world of thoughts. A person who
believes in socialist core values is behaving
more decently.” She regards the “moral
standards” the system assesses, as well
as financial data, as a bonus.

Indeed, the State Council’s aim is
to raise the “honest mentality and
credit levels of the entire society ”
in order to improve “the overall
competitiveness of the country”. Is it
possible that the SCS is in fact a more
desirably transparent approach to
surveillance in a country that has a
long history of watching its citizens?

Platinum Asset Management Limited Annual Report 2018 XXXV

“As a Chinese person, knowing that
everything I do online is being tracked,
would I rather be aware of the details of what
is being monitored and use this information
to teach myself how to abide by the rules?”
says Rasul Majid, a Chinese blogger based
in Shanghai who writes about behavioural
design and gaming psychology. “Or would
I rather live in ignorance and hope/wish/
dream that personal privacy still exists and
that our ruling bodies respect us enough not
to take advantage?”

Put simply, Majid thinks the system gives
him a tiny bit more control over his data.

When I tell westerners about the Social
Credit System in China, their responses
are fervent and visceral. Yet we already
rate restaurants, movies, books and even
doctors. Facebook, meanwhile, is now
capable of identifying you in pictures
without seeing your face; it only needs
your clothes, hair and body type to tag
you in an image with 83 per cent accuracy.

In 2015, the OECD published a study
revealing that in the US there are at least
24.9 connected devices per 100 inhabitants.
All kinds of companies scrutinise the
“big data” emitted from these devices to
understand our lives and desires, and to
predict our actions in ways that we couldn’t
even predict ourselves.

Governments around the world are already
in the business of monitoring and rating. In
the US, the National Security Agency (NSA)
is not the only official digital eye following
the movements of its citizens. In 2015, the
US Transportation Security Administration
proposed the idea of expanding the
PreCheck background checks to include

social-media records, location data and
purchase history. The idea was scrapped
after heavy criticism, but that doesn’t
mean it’s dead.

We already live in a world of
predictive algorithms that
determine if we are a threat, a risk,
a good citizen and even if we are
trustworthy. We’re getting closer to
the Chinese system – the expansion
of credit scoring into life scoring –
even if we don’t know we are.

So are we heading for a future
where we will all be branded
online and data-mined?

It’s certainly trending that way. Barring
some kind of mass citizen revolt to wrench
back privacy, we are entering an age where
an individual’s actions will be judged by
standards they can’t control and where
that judgement can’t be erased.

The consequences are not only troubling;
they’re permanent. Forget the right to delete
or to be forgotten, to be young and foolish.

While it might be too late to stop this new
era, we do have choices and rights we can
exert now. For one thing, we need to be able
rate the raters.

In his book The Inevitable, Kevin Kelly
describes a future where the watchers and
the watched will transparently track each
other. “Our central choice now is whether
this surveillance is a secret, one-way
panopticon – or a mutual, transparent kind
of ‘coveillance’ that involves watching the
watchers,” he writes.

XXXVI Big Data Meets Big Brother

Our trust should start with individuals within
government (or whoever is controlling the
system). We need trustworthy mechanisms
to make sure ratings and data are used
responsibly and with our permission. To
trust the system, we need to reduce the
unknowns. That means taking steps to
reduce the opacity of the algorithms. The
argument against mandatory disclosures
is that if you know what happens under the
hood, the system could become rigged
or hacked.

But if humans are being
reduced to a rating that could
significantly impact their lives,
there must be transparency in
how the scoring works.

In China, certain citizens, such as
government officials, will likely be deemed
above the system. What will be the public
reaction when their unfavourable actions
don’t affect their score? We could see a
Panama Papers 3.0 for reputation fraud.

It is still too early to know how a culture of
constant monitoring plus rating will turn
out. What will happen when these systems,
charting the social, moral and financial
history of an entire population, come into
full force? How much further will privacy
and freedom of speech (long under siege in
China) be eroded? Who will decide which way
the system goes? These are questions we
all need to consider, and soon. Today China,
tomorrow a place near you.

The real questions about the future
of trust are not technological or
economic; they are ethical.

If we are not vigilant, distributed trust could
become networked shame. Life will become
an endless popularity contest, with us all
vying for the highest rating that only a few
can attain.

Since this piece was written, The People’s Bank of China delayed
the licences to the eight companies conducting social credit
pilots. The government’s plans to launch the Social Credit System
in 2020 remain unchanged.

Platinum Asset Management Limited Annual Report 2018 XXXVII

Disclaimer: This publication has been prepared by Platinum Investment Management Limited ABN 25 063
565 006 AFSL 221935 trading as 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
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This publication is not intended to be a recommendation or advice with respect to any of the companies,
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consult your financial adviser.