Platinum Group Metals Ltd.
Annual Report 2019

Plain-text annual report

A Annual Report 2019 Platinum Asset Management Limited ABN 13 050 064 287 PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019B Directors (as at 30 June 2019) 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 3, 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 code: PTM) Website www.platinum.com.au/About-Platinum/ptm-shareholders Corporate Governance Statement https://www.platinum.com.au/PlatinumSite/media/About/ ptm_corp_gov.pdf PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 20191 Contents Chairman’s Report 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 2 5 14 17 43 44 46 48 50 51 98 99 PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 20192 Chairman’s Report 2019 Funds Under Management (“FUM”) It has been a challenging year for Platinum Investment Management Limited (“Platinum”) with investment returns for most of our managed funds and portfolios lagging the broader market returns for the 12 months to 30 June 2019. This underperformance translated into lower fund flows, lower investment performance fees and a consequent decline in earnings per share, and dividends for Platinum Asset Management Limited (“the Company” or “PTM”). FUM at 30 June 2019 was approximately $24.8 billion, a decrease of 4% from the 30 June 2018 closing FUM of approximately $25.7 billion. The reduction in FUM was driven by net fund outflows of $0.2 billion and the year-end net cash distribution and other capital outflows of $0.9 billion, which was only partly offset by positive market returns of $0.2 billion. Average FUM for the financial year decreased by 4% to $25.3 billion from an average FUM of $26.4 billion for the previous year. The ongoing uncertainty in relation to the US-China trade war and the bleaker prospects for future economic growth caused investors in global equity markets to remain nervous, even as markets continued to appreciate in value. Investors generally reacted to these fears by favouring companies perceived to be immune from external events, such as the US-China trade war. In contrast, value stocks and/or those with a degree of earnings cyclicality were avoided by the majority of investors, and those stocks generally became cheaper. Platinum has always believed that attractive valuations should be the starting point for any investment decision. This growing divergence between growth and perceived safety on one hand and attractive valuation on the other, led to some short-term investment underperformance for Platinum. Operating Performance For the 12 months to 30 June 2019, total revenue and other income for PTM decreased by 15% to $299.3 million (2018: $353.3 million). Profit after tax attributed to members decreased by 17% to $157.7 million (2018: $189.2 million). Earnings per share for the financial year were 27 cents per share. This decline in total revenue and other income were mainly due to a $22 million drop in the investment performance fees received by Platinum and a $21 million decline in gains from Platinum’s seed investments. The Directors’ Report contains a detailed explanation of the important role seeding investments has in product innovation, even though it can produce distortions to underlying profitability from year to year. The decline in investment management fees (excluding performance fees) was 4%, broadly consistent with the decline in average FUM. Average fee margins were maintained. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 20193 Remuneration Included in the 2019 Remuneration Report on page 25 of the Company’s 2019 Annual Report is a letter from the Chair of the Nomination and Remuneration Committee. I encourage all shareholders to read this letter, which outlines the remuneration policy of the Company and also its focus on investment performance based remuneration. As a result of negative weighted average 1 and 3 year investment performance and also lower revenue and profit for the 2019 financial year, the aggregate variable remuneration across PTM was well down from that of the prior financial year. Specifically, no member of the investment team received any variable awards under the Profit Share Plan and the Chief Executive Officer (CEO)/Chief Investment Officer, Andrew Clifford, elected not to receive any variable awards for the 2019 financial year, either under the CEO Plan or the Investment Team Plan. The two other executive key management personnel (KMPs), Elizabeth Norman (Director of Investor Services and Communications) and Andrew Stannard (Finance Director), both received reduced variable awards under the General Employee Plan for the 2019 financial year when compared to their awards for the prior financial year. Dividends The Directors have declared a 2019 final fully-franked ordinary dividend of 14 cents per share. This will be paid on 20 September 2019. A 2019 interim fully-franked ordinary dividend of 13 cents per share was also declared during the year. Whilst the Company has a Dividend Reinvestment Plan in place, it has not been activated. Business Development During the 2019 financial year, Platinum established a distribution office in London. A team of three new staff members is now in place. This initiative will strengthen our efforts in establishing a European business. In addition, we continued to leverage our distribution relationship with AccessAlpha Worldwide in the US, with quarterly trips to the US being conducted by our investment specialists and members of our investment team, which included meetings with a number of institutional prospects. Sell-down of shares by Kerr Neilson In March 2019, the Company’s founder and former CEO, Kerr Neilson together with Judith Neilson, disposed of 60 million ordinary PTM shares by way of a fully underwritten private placement to institutional and professional investors, thus deepening the Company’s institutional shareholder base. Following the sale, Kerr Neilson together with Judith Neilson retain voting control of approximately 43% of the Company’s issued share capital. Kerr Neilson also remains on the Board and is an active member of the investment team. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 20194 Chairman’s Report 2019 – continued Hayne Royal Commission With the Hayne Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry completed, it was gratifying to note that issues raised by Commissioner Hayne in relation to grandfathered commissions and conflicts of interest within vertically integrated advice businesses, were not applicable to Platinum. Platinum was vocal in advocating for change in the wealth management sector, and made three separate written submissions to the Royal Commission in 2018. The Board and its Associated Committees The Nomination and Remuneration Committee, and the Audit, Risk and Compliance Committee both had a busy and productive year. The Nomination and Remuneration Committee set the new CEO’s remuneration plan and KPIs, oversaw the smooth transition of the CEO responsibilities from Kerr Neilson to Andrew Clifford, recommended the aggregate 2019 variable remuneration pool and awards for the CEO, Executive Directors and other senior managers within Platinum, and continued with the Company’s program of succession planning. The Audit, Risk and Compliance Committee approved Platinum’s risk management framework and internal audit plan, received regular reporting on risk management matters and the results of internal audits, considered the independence of the external auditor, recommended the appointment of the external auditor and monitored the impact of changes to the legal and regulatory environment affecting Platinum. Finally This has been a challenging period for value investors like Platinum but it retains a strong share of the Australian retail investor market, a highly differentiated product and a strong 25-year track record. I encourage you to read the Managing Director’s letter to shareholders by Andrew Clifford, which explains the basis of our investment philosophy and why Platinum may at times experience periods of investment underperformance. Andrew also discusses the investment outlook and some broader industry observations. Michael Cole Chairman 20 August 2019 PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019Managing Director’s Letter 2019 5 Investment Performance Our flagship Platinum International Fund (the Fund) delivered a compound return of 9.5% p.a. over the five years to 30 June 2019 and a cumulative return of 57.3% for the same period, which on face value was a reasonable outcome. However, this outcome lagged the broader market, which delivered a compound return of 12.6% p.a. and a cumulative return of 81.4% over the same period. In the last 12 months, the Fund returned 0.7% against a market return of 11.3%.1 This last year represents approximately three quarters of the Fund’s underperformance over the last five years. The Fund’s performance is representative of the performance of all our global equity mandates, which in total account for 65% of our funds under management (FUM).2 The reason for commencing an analysis of our business with a discussion of recent investment performance is straightforward. As I wrote in my letter to shareholders last year, Platinum was established on the premise that “we had an investment approach that had proven to produce good investment returns”. While it has most certainly done that over our 25 years in business, it is certainly fair to question whether this has been the case in recent years. To answer this question requires some context around the composition of market returns and how we have positioned the portfolios in response to those returns. The other reason to discuss recent investment performance is that it is the best lead indicator of short-term fund flows and thus near-term business performance. The defining characteristic of global equity markets in recent years has been the outperformance of the so-called growth stocks over value stocks. The investment industry terminology here refers to stocks that have high (for growth) or low (for value) valuations relative to earnings or net assets. We would not define value in this fashion, but nevertheless it serves the purpose for examination of the source of returns for equity markets over long periods of time. Chart 1 shows the performance of value over growth since 1926. When the line is rising, value is outperforming growth. Value, having outperformed growth for much of the period since the 1930s, has now trailed growth for 12 years, the longest period in history. Indeed, it is worth noting that the last period of significant outperformance of growth over value ended with the ‘tech wreck’ of 2001. 1. Source: Platinum Investment Management Limited and FactSet. Fund returns are C Class returns to 30 June 2019, after fees and costs, pre-tax, and assume the reinvestment of distributions. Market returns are the MSCI All Country World Net Index to 30 June 2019. Past performance is not a reliable indicator of future returns. 2. Source: Platinum Investment Management Limited. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 20196 Managing Director’s Letter 2019 – continued Chart 1 – Value Factor 5000 4000 3000 2000 1000 0 1926 1931 1936 1941 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 Source: https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html and Platinum Investment Management Limited. Calculated as the return on the 30% of stocks with the lowest price-to-book less the return on the 30% of stocks with the highest price-to-book for each period. Low interest rates are the typical explanation offered for this unusual period. Undoubtedly, lower interest rates justify higher valuations of equities and indeed higher relative valuations of growth over value. What we see in the market at an aggregate level and an individual stock level is not in line with this expected outcome. While growth stocks have seen their valuation multiples rise significantly, value stocks have at best held their valuations or declined (see Chart 2). Interest rates account for part of the phenomenon but not all of it. Chart 2 – US Valuation Dispersion Top Quintile Bottom Quintile 60 50 40 30 20 10 0 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 Source: Platinum Investment Management Limited. Top and bottom quintiles for listed US company price-to-earnings ratios. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 20197 We think the changing risk preferences of investors is a better explanation of the performance differential. Today, investors face a range of risks and variables that were, for the main part, not present prior to 2007. Negative or near zero interest rates are prevalent across much of the developed world, with over US$16 trillion3 in fixed interest investments providing a return of less than zero to their owners. This certainly provides an incentive for investors to find alternative investments. However, the business landscape has become considerably more complex with many traditional businesses impacted by new business models due to the internet and growth in e-commerce. In addition, the political environment across the globe has deteriorated significantly. The most notable outcome has been the trade war initiated by the US, not only on China, but on many of its trading partners. Beyond this, there is also Brexit, the fall-out over the Iranian nuclear deal, ongoing protests in Hong Kong, and India’s recent actions in Kashmir, just to name a few. The intuitive response of investors in this environment is to seek out businesses they perceive to be immune to well-known risks and avoid those that are susceptible. As such, investors have strongly favoured defensive businesses (e.g. consumer staples, real estate, utilities, and infrastructure) and high-growth businesses, and avoided businesses directly exposed to the trade war or those with any degree of cyclicality. It is our assessment that this intuitive and fearful approach of the crowd has been critical in driving the differential in performance of value and growth stocks. This conclusion arises from a consideration of likely returns from a wide range of individual companies based on our expectations of future earnings and cash flows. Without doubt, we currently see far superior investment opportunities from the value end of the spectrum.4 As an example, consider the opportunity the market gave investors in US company, Micron Technology in the past year. Micron is one of three producers of memory chips (DRAM) and one of five producers of flash memory chips (NAND). These products are found in computers of all types from mobile phones to servers found in large data centres. During the year, the business experienced a cyclical downturn as mobile phone sales and investment in data centres slowed, and then found itself in the centre of the trade disputes as a major supplier to Huawei. The stock was sold off aggressively and traded at levels around book value, which was an extraordinary valuation given the accumulated intellectual property and industrial expertise in this company. Earnings have fallen sharply, but, in our conservative assessment, should recover to levels that place the stock (based on the lows of the year) on a price-to-earnings ratio (P/E) of 4 to 5 times. At this level, the recovered earnings represents an annual return of 20 to 25% to investors who purchased the stock at its lows, from a business that has net cash and has committed to using free cash flow to buy back stock. Compare this with a market favourite such as Paypal, a company that we exited in the past 12 months. Paypal is a well-positioned online payments business growing its business at a rate in the mid-teens. We have no great issue with the market’s favourable view of Paypal, but the company trades on a P/E of over 50 times, or an initial earnings yield of a little under 2%. It needs to grow at a high rate for a long period of time to ever provide an investor with a reasonable return. 3. 4. Source: Bloomberg, 18 August 2019 and https://www.abc.net.au/news/2019-08-18/a-third-of-global- bonds-17-trillion-dollars-have-negative-yields/11420860 Refer to Platinum’s The Journal on our website for further reading: https://www.platinum.com.au/ Insights-Tools/The-Journal/Macro-Overview-June-2019 PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 20198 Managing Director’s Letter 2019 – continued Conceptually, in our view the investment logic to sell Paypal and to buy Micron is absolutely rock solid. Of course, we may be wrong about the prospects for either of these individual stocks, but the point is that there are currently a multitude of opportunities for investors to sell high-flying favourites and to acquire more attractively priced but somewhat imperfect companies. Despite the sound logic of such a move, there is of course a significant dilemma in taking such a path; simply that investors’ current preference for growth over value will remain in place and that in the short term, investment performance will continue to lag. Given the recent falls in interest rates and the escalation of the US trade war, this would appear to be a very real prospect. However, as an investment manager we believe it is more important to minimise the risk of loss to clients than to achieve the maximum return possible, even if at times it means that our investment returns lag the competition. There is no question in our mind that Micron is a much safer and higher returning investment than Paypal over the long term. As such, not only have we continued to migrate our portfolios towards the better value available in markets, we have reduced our net exposure to markets through increased cash and short positions. Undoubtedly, these moves have suppressed investment returns in recent years as we have sought to reduce risk in portfolios. In addition, we also note that our portfolios are highly differentiated by both industry and geography from the growth strategies of many of our competitors that have not surprisingly been popular in recent years, providing an important diversification in portfolios for our clients. In assessing the adequacy of our medium-term returns, we would suggest that they be viewed in the context of our risk averse and differentiated approach. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 20199 Funds Under Management – Retention and Growth Funds Under Management ($ million, to 30 June 2019) FUNDS Retail offerings Platinum Trust Funds (excluding funds fed from PIXX and PAXX) and Platinum Global Fund (mFund) OPENING BALANCE (1 JULY 2018) FLOWS INVESTMENT PERFORMANCE DISTRIBUTION AND OTHER CLOSING BALANCE (30 JUNE 2019) % OF TOTAL 16,927 (254) 46 (780) 15,939 64 Quoted Managed Funds (PIXX and PAXX) 313 201 Listed Investment Companies (PMC and PAI) 934 – MLC Platinum Global Fund Institutional mandates Management Fee Mandates UCITS Platinum World Portfolios “Absolute” Performance Fee Mandates “Relative” Performance Fee Mandates 970 (134) 2,421 (13) 444 (22) 498 (55) 3,192 31 TOTAL 25,699 (246) Source: Platinum Investment Management Limited 5 8 (1) 58 (1) 2 (33) 486 (94) 848 835 2 3 3 – – – – 2,466 10 421 445 2 2 107 224 (1) 3,329 14 (908) 24,769 100 The ‘Distribution and Other’ figure is comprised of the distribution from the Platinum Trust Funds/PGF/PIXX/PAXX to investors and also to clients who have selected the “relative” performance fee mandate. The balance also includes dividend and tax payments made by the Listed Investment Companies – Platinum Capital Limited (ASX code: PMC) and Platinum Asia Investments Limited (ASX code: PAI). PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 10 Managing Director’s Letter 2019 – continued Short-term investment performance is the best lead indicator of fund flows in the asset management business. This is simply the result of human nature, as our cognitive biases strongly attract us to assets that performed well recently. In this light, the fact that funds under management only fell by 3.6% over the course of the year is a good result. We would attribute this outcome to the strong understanding and appreciation of our investment approach by our clients and their advisers. Simply, they have benefited from our cautious approach in ‘hot’ markets before. In addition, our increased engagement with financial advisers and clients over recent years has ensured that they have remained well informed about our views on markets and the positioning of our funds. Despite this relatively good outcome for the year ending 30 June 2019, this is unlikely to be maintained in the year ahead if performance remains subdued, particularly relative to the broader market. As expected, the trend in flows has deteriorated in the second half of the year, which saw net outflows of $935 million (excluding year-end fund distributions of $780 million) versus net inflows in the first half of the year of $689 million. As always, there is a very clear focus within the business on investment results, though improved outcomes cannot be ‘willed’ into place. It is a case of maintaining our quality of research and discipline in the investment decision process. In the meantime, we are not simply sitting back and waiting for investment returns to improve. There is ongoing investment in the business, which will provide us with a solid platform for future growth. Our investment specialists function, first established in 2013, has been a step change in our engagement with the adviser channel in Australia and New Zealand. We now have four investment specialists focused on the financial adviser channel, each with significant experience in financial markets, with three being former Platinum investment analysts. A full program of annual events for advisers has been developed, including a capital city roadshow (annual since 2012) and a regional adviser roadshow (annual since 2014), which this year will visit a combined 36 locations. The investment specialists also conduct several hundred meetings each year with advisers around the country, research professionals, and also speak at a range of industry events, dealer group conferences and at advisers’ client events. Members of the investment team present at selected events on their specific areas of expertise. Our New Zealand annual roadshow has been going since 1999, and has extended its reach in recent years to some of New Zealand’s smaller cities. We have now made our direct investor roadshow across six capital cities an annual event (previously a biannual event having commenced in 1999). There are ongoing efforts to build informative and thoughtful content for investors, accessible via our website and widely distributed through external channels. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 201911 A key opportunity to grow the business lies with our offshore efforts. This commenced with the launch of our UCITS funds for the European market in 2015. In late 2018, we established our UK office to enhance our efforts to develop and service the European client base. The efforts of the UK team continue to be supplemented on a regular basis by visits from members of the investment team and investment specialists. Our partnership with AccessAlpha Worldwide to develop our US institutional client base is well advanced, with ongoing regular visits to potential clients by the team. In late 2018, appropriate fund structures were created for our prospective US clients. In the local market, we are focused on improving access to our services to a wider range of investors. An example of this was our launch of our quoted managed funds in September 2017, which provided a mechanism for accessing our flagship International Fund and Asia Fund via the convenience of an ASX transaction. These funds have continued to experience inflows over the last 12 months. We continue to look for opportunities to expand investors’ access to our various equity strategies. We are quietly ambitious to grow our business, though we do have self-imposed limitations. Within the wealth management industry there is increasing innovation and complexity in product development, often with new incentive mechanisms to attract funds. At times, it is far from clear whether these innovations are for the benefit of the product manufacturer or the end client. As an investment-led business, we want to be clear that any initiative we pursue will be first and foremost for the benefit of potential clients. In addition, we are also equally clear that our efforts to grow the business must not impact our ability to deliver good investment outcomes to our longstanding and loyal clients. Costs The most important resource within Platinum is its employees, and as such accounts for well over half of the company’s expenses. Total costs fell by $8.6 million to $76.4 million, driven by a $14.1 million fall in cash variable remuneration (bonuses). The fall in cash variable remuneration is a direct result of our approach to linking remunerating outcomes for employees within our investment team to investment performance. In an ideal world, I would prefer to see these costs rising, reflecting good client investment outcomes. Excluding the fall in cash variable remuneration, costs otherwise increased by $5.5 million. The increase predominantly reflected an increase in the number of employees and ongoing increases in the amortisation costs associated with our Deferred Remuneration Plan. The increase in the size of our team reflects the ongoing investment in the business outlined earlier: in particular, an increase in the size of our investment specialists team, including our UK office, to support the increasing engagement with financial advisers locally and development of the business offshore. There has also been an ongoing increase in the development of the investment team’s capacity, which as at 30 June 2019 accounted for 36 of Platinum’s 114 employees. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 201912 Managing Director’s Letter 2019 – continued Selected employees are awarded stock under the Deferred Remuneration Plan, with a vesting period of four years. These grants are made annually to allow employees to gradually increase their ownership of the company. At the balance date, rights to 5.1 million shares were outstanding under the plan, and to date, none have vested with employees. The plan ensures that employees who contribute to the development of the business over the long term are rewarded, and serves as an important mechanism for employee retention. Royal Commission Much has been written about the Royal Commission into Misconduct in the Banking, Superannuation, and Financial Services Industry. For our business in particular, the long-term issue has centred on the conflicts of interest in the industry that have prevented us, as an independent investment manager, from participating in the entirety of the market. Ideally, in a post-Royal Commission world, the government and regulators will work with the industry to substantially reduce, if not eliminate, these conflicts. The critical role a financial adviser plays in managing the financial affairs of individual investors should not be forgotten. In an environment where each individual is required to save (at a minimum via compulsory superannuation contributions), everyone is an investor. Investing well is not easy, not only because of the complexity of tax regulations, but also because our intuitive responses to investment issues often lead us astray. There remains an important role for independent financial advisers to guide individuals through the investing process. Outlook Our recent investment performance may lead one to a take a subdued view of our future prospects. However, I believe that the long period of outperformance of growth over value, discussed at the outset, is setting up an extraordinary opportunity for Platinum to make a substantial difference to our clients’ investment outcomes. As such, I remain optimistic in our ability to grow the business over the long term. We have been here before. Finally, I would like to thank our clients and shareholders for your support. I appreciate that our results over the last 12 months have been far from what you would have desired or expected. I can assure you that the entire team at Platinum has been and will continue to work diligently to improve both client and business outcomes. During the year, we celebrated 25 years in business. On the occasion, we recognised 21 employees who have worked with us for over 15 years. We are fortunate to have a team of great ability, and with this depth of experience, we will continue to work to serve the interests of our clients and shareholders. Andrew Clifford Managing Director PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 201913 Financial Statements 2019 Platinum Asset Management Limited General Information The financial statements were authorised for issue, in accordance with a resolution of Directors, on 20 August 2019. The Directors have the power to amend and reissue the financial statements. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 201914 Shareholder Information The shareholder information set out below was applicable as at 15 August 2019. 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 6,069 13,533 3,816 2,355 70 25,843 501 PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 15 Ordinary shareholders Twenty largest ordinary shareholders The names of the twenty largest shareholders of the Company are listed below: ORDINARY SHARES J Neilson K Neilson HSBC Custody Nominees (Australia) Limited Citicorp Nominees Pty Limited Platinum Investment Management Limited (nominee) JP Morgan Nominees Australia Limited National Nominees Limited Jilliby Pty Limited Pacific Custodians Pty Limited J Clifford BNP Paribas Nominees Pty Limited BNP Paribas Nominees Pty Limited Citicorp Nominees Pty Limited Xetrov Pty Limited BKI Investment Company Limited HSBC Custody Nominees (Australia) Limited Mrs Michele Martinez Warbont Nominees Pty Limited Navigator Australia Limited AMP Life Limited NUMBER HELD 126,037,421 126,037,420 65,175,020 34,282,877 29,364,201 28,779,804 10,629,682 6,500,000 5,095,797 5,000,000 3,826,373 2,422,074 2,143,172 1,500,000 1,238,000 1,125,859 1,072,309 942,325 899,848 878,590 % OF TOTAL SHARES ISSUED 21.48 21.48 11.11 5.85 5.01 4.91 1.81 1.11 0.87 0.85 0.65 0.41 0.37 0.26 0.21 0.19 0.18 0.16 0.15 0.15 452,950,772 77.21 Unquoted ordinary shares There are no unquoted ordinary shares, however under the Deferred Remuneration Plan, a total of 5,095,797 deferred rights have been allocated to eligible employees of Platinum Investment Management Limited, 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 (please refer to the Remuneration Report and Note 20 for further details). PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 16 Shareholder Information – 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 252,074,841 32,831,449 % OF TOTAL SHARES ISSUED 42.97 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 date (books close) for dividend Dividend paid These dates are indicative and may be changed. 27 August 2019 28 August 2019 20 September 2019 Notice of Annual General Meeting The details of the Annual General Meeting (AGM) of Platinum Asset Management Limited are: 10am Wednesday 20 November 2019 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 2019 Directors’ Report 17 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 2019. 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 Elizabeth Norman Executive Director and Director of Investor Services and Communications Andrew Stannard Chairman and Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director (from 1 August 2018) Chief Executive Officer/Managing Director Executive Director Executive Director and Chief Financial Officer Principal Activities The Company is the non-operating holding company of Platinum Investment Management Limited (“PIML”) and its controlled entities. Platinum Investment Management Limited (“Platinum”), trading as Platinum Asset Management, operates a funds management business. Operating and Financial Review FUM at 30 June 2019 was $24.8 billion and this represented a decrease of 3.6% from the 30 June 2018 closing FUM of $25.7 billion. The FUM at 30 June 2019 is after the impact of the 30 June 2019 net distribution outflow of $0.8 billion. Average FUM for the year decreased by 4.1% to $25.3 billion from an average FUM of $26.4 billion for the previous year. The reduction in FUM was driven by net fund outflows of $246 million. Despite the fund outflows, the absolute investment return remained positive contributing $224 million to FUM during the financial year. Our two ASX quoted managed funds, Platinum International Fund (Quoted Managed Hedge Fund) (ASX code: PIX) and Platinum Asia Fund (Quoted Managed Hedge Fund) (ASX code: PAX) continued to do well with total FUM increasing to $486 million at 30 June 2019 (30 June 2018: $312.5 million). PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 201918 Directors’ Report – continued The profit before income tax expense, excluding performance fees, for the funds management business was $219.5 million for the year ended 30 June 2019, down 1.4% on the previous year (see table below). FUNDS MANAGEMENT BUSINESS SEGMENT Profit before income tax expense* Less: Performance fees Profit before income tax expense, excluding performance fees * Refer to note 11. JUNE 2019 $A’000 219,491 30 JUNE 2018 $A’000 244,436 21,878 % DECREASE 219,461 222,558 (1.4)% Performance fee revenue was negligible for the year at $30,000 (2018: $21.9 million) and our seed investments made an overall loss for the year of $988,000, including dividends and distributions (2018: $19.5 million gain) and these two highly variable factors, which are dependent on investment performance and market conditions, combined to reduce overall profitability. It is important to explain why PIML makes seed investments. Over the course of the last few years, Platinum has expanded the range of investment products offered by it thereby growing its investor base and FUM. Seeding is an important part of our overall growth strategy as it provides new products with some key benefits: – – – – – It demonstrates the investment manager’s commitment to the product and strategy; It aligns the interest of the investment manager with that of investors; It provides the additional scale required to effectively construct and manage the portfolio from inception; It helps to dilute and manage the impact of cash flows, providing stability to the portfolio; and It removes the investment and operational risks for initial investors who would otherwise be the first investor. The investment manager’s seeding of its newly created products is not intended to be a long-term commitment. As each product grows to sufficient size and scale, it is the intention of Platinum to reduce or eliminate its level of investment and to recycle that cash into other parts of the business. The decision to invest is driven by the strategic growth needs of the business. The investments are not intended to be held for the purposes of market speculation. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 19 Total expenses decreased by $8.5 million or 10.1% from the previous financial year. The decrease primarily related to a 17.4% decline in staff costs (including share-based payments and related on-costs) from $52.8 million in 2018 to $43.6 million for 2019. This decline was mostly due to investment team remuneration decreasing in line with investment performance. Other non-staff expenses were controlled, increasing just 2% when compared to the previous year. For the reasons noted, profit after tax attributed to members declined to $157.7 million (2018: $189.2 million) for the year. This represents a decline in profit after tax of 16.7%. Earnings per share was 27.03 (2018: 32.36) cents per share. During the financial year, Platinum UK Asset Management Limited commenced operations in London as the European distribution and servicing centre for Platinum and Platinum World Portfolios Plc, which currently has three employees. Platinum continues to be positioned for the future: – – – – The investment team are able to find good value in the market; The smooth leadership transition has helped ensure continuity of key people; The Company has made significant progress in relation to its future growth plans; and Platinum continues to invest in people, processes and technology. 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. Dividends 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. Since the end of the financial year, the Directors have declared a 2019 final fully-franked dividend of 14 cents per share ($82,135,046), with a record date of 28 August 2019 and payable to shareholders on 20 September 2019. A 2019 interim fully-franked dividend of 13 cents per share ($75,816,914) was paid on 18 March 2019. A 2018 final fully-franked dividend of 16 cents per share ($93,313,125) was paid on 21 September 2018. 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. Environmental Regulation The consolidated entity is not subject to any significant environmental regulation under Commonwealth, State or Territory laws. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 201920 Directors’ Report – continued Information on Directors Michael Cole AM, 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 41 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 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 Committee 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 was co-founder and Managing Director of GBS Venture Partners for twenty years and has worked with Australian and US fast growth companies as an investor and board member, supporting business strategy, human resources and operations. Ms Smith has worked in the US and Australia in operating roles with fast growth technology based businesses, and at Bain & Company as a strategic management consultant. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 201921 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 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 the then Chairman the late 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 30 June 2018 and Executive Director since 12 July 1993. Mr Neilson joined Platinum as a co-founding member in 1994 and 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. 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 29 years of finance experience with expertise in audit, financial control, operations, funds management, financial services regulation and corporate governance. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 201922 Directors’ Report – continued 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 24 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 2019, and the number of meetings attended by each Director were: BOARD (HELD 7) ATTENDED NOMINATION & REMUNERATION COMMITTEE (HELD 5) ATTENDED AUDIT, RISK & COMPLIANCE COMMITTEE (HELD 4) ATTENDED Michael Cole Stephen Menzies Anne Loveridge Brigitte Smith Tim Trumper Andrew Clifford Kerr Neilson Elizabeth Norman Andrew Stannard 7 7 7 7 6 5 5 6 7 5 5 5 5 4 – – – – 4 4 4 4 4 – – – – Tim Trumper was only eligible to attend 6 Board meetings and 4 Nomination & Remuneration/ Audit, Risk & Compliance Committee meetings as he joined the Board on 1 August 2018. During the financial year, in addition to the four scheduled Board meetings, three adhoc Board meetings were scheduled to approve an extension of the on-market share buy-back period, to approve the CEO’s remuneration and Key Performance Indicators (KPIs) and to approve the release of the Company’s cleansing statement in connection with Kerr Neilson’s proposed controller sale. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 23 Indemnity and Insurance of Officers During the year, the Company incurred a premium in respect of a contract for indemnity insurance for the Directors and Officers of the Company named in this report. Indemnity and Insurance of Auditor The Company has not, during or since the end of the financial year, indemnified or agreed to indemnify the auditor of the Company or any related entity against a liability incurred by the auditor. During the financial year, the Company has not paid a premium in respect of a contract to insure the auditor of the Company or any related entity. Non-Audit Services Details of the amounts paid or payable to the auditor for non-audit services provided during he financial year by the auditor are outlined in Note 22 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 22 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 by the PTM Audit, Risk and Compliance Committee 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. Managing Tax Risk The Board is committed to acting with integrity and transparency in all tax matters. The Company aims to meet all of its obligations under the law and pay the appropriate amount of tax to the relevant authorities. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 201924 Directors’ Report – continued Auditor’s Independence Declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 43. Auditor PricewaterhouseCoopers continues in office in accordance with section 327 of the Corporations Act 2001. This report is made in accordance with a resolution of Directors, pursuant to section 298(2)(a) of the Corporations Act 2001. On behalf of the Directors Michael Cole Chairman 20 August 2019 Sydney Andrew Clifford Director PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 25 Remuneration Report A Message from the Chair of the Nomination & Remuneration Committee As shareholders may well 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 investors’ capital. Platinum believes that long-term investment performance is the primary driver of fund inflows, profit growth and ultimately 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 retaining superior investment talent, supported by a team of similarly talented client service and operational staff. 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 largely varies with the extent of investment 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, resulting in relative underperformance. As Platinum’s investment approach builds portfolios from the bottom up on an index agnostic basis, periods of underperformance relative to the broader market 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 significant employee shareholding, we believe that Platinum’s shareholders are better served by a remuneration policy that closely aligns remuneration with the investment performance that we generate for our clients. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 201926 Directors’ Report – continued Remuneration Report – continued Your Nomination & Remuneration Committee has been active in the 2019 financial year and up to the date of this report. In particular, we have: – – – – – – Continued to push forward our program of Board renewal, including the appointment of Mr Tim Trumper to the Board in August 2018; Worked to ensure the smooth transition of CEO responsibilities to Mr Andrew Clifford, including the design and recommendation to the Board of his new remuneration arrangements and KPIs; Reviewed and recommended that the Board approve the aggregate 2019 variable remuneration pool for Platinum as well as the individual awards for the CEO, Executive Directors and Senior Managers; Reviewed and updated the Board skills matrix to better reflect the required skills of the Board; Conducted an annual review of UCITS V remuneration and disclosure rules; and Discussed the Company’s remuneration practices with external stakeholders. We will continue to refine and review our remuneration arrangements to ensure that they align with Platinum’s core purpose and we welcome your feedback. Stephen Menzies Chair of Nomination & Remuneration Committee PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 201927 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 2019. 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 2019 – As noted in the Managing Director’s letter, the investment team’s remuneration is closely aligned with the investment returns that are generated for clients; – – – – – – The underperformance of our funds versus market indices and/or lower revenues for the 2019 adversely affected variable remuneration outcomes for Platinum's employees in aggregate. With the exception of a very small group of employees who each made outstanding contributions to the business, variable awards were significantly down on prior year and salary increases were kept modest, mostly reflecting increased competition for key staff; There were no awards made under the Profit Share Plan (“PSP”) due to the underperformance of our funds versus the indices and the investment team and general employee plan pools were substantially reduced; The Chief Executive Officer/Chief Investment Officer, Mr Andrew Clifford, elected not to receive any variable awards in 2019; A total of $7.47m was awarded to eligible participants under the Deferred Remuneration Plan in the 2019 financial year. The accounting impact of the award will be expensed through the profit and loss statement over the five year period of the award, so the expense impact is apportioned; The allocation of 2019 profits attributed to both shareholders and employees is outlined in the first graph on the following page. It shows that the compensation awarded to employees was modest, relative to the returns to shareholders, with shareholders receiving a share of profits four times greater than staff; and The second graph 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 201928 Directors’ Report – continued Remuneration Report – continued Graph 1: Actual Share of 2019 Profit Graph 1: Actual Share of 2019 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* 15% 15% 25% 25% Tax Tax 60% 60% Shareholders Shareholders * Includes staff costs and share based payments expense * Includes staff costs and share based payments expense Non Non employee employee 50% 50% 50% 50% Directors Directors and staff and staff 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 protect against downside market risk. 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 strong long-term investment performance track record, a history of high retention rates amongst key investment and operational staff, and a record of profitable growth. Platinum’s remuneration program has two1 key elements: 1. 2. 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 criteria. Variable award recommendations are generally made annually on a discretionary basis following rigorous review by senior management and the Nomination & Remuneration Committee, which comprises non-executive directors only, before ultimately being approved by the Board. Variable awards can be made in the form of cash or a deferred equity award that vests over a four year period. This deferral element is designed to foster sustainable growth, as well as sound financial, operational and risk management practices, and to retain talent. 1. Platinum also has two inactive long-term Remuneration Plans, being an “Options and Performance Rights Plan” (OPRP) and a “Fund Appreciation Rights Plan” (FARP). There was no allocation under either plan in either the current or the prior year. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 29 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 2. Variable Remuneration (Deferred equity) 2. Variable Remuneration (Cash) Variable Remuneration (Deferred equity) – 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 – Awards made annually with reference to individual performance – Other performance conditions include: • Company performance • Risk management factors • Leadership and behavioural factors • Competition for key staff Variable Remuneration Plans There were three variable remuneration plans in operation during the 2019 financial year, 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 employed by Platinum during that time. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 201930 Directors’ Report – continued Remuneration 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 performance2 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 0% 1% n/a Cash and/ or deferred equity award Investment Team Plan (applies to members of the investment team only) Under this plan, in a period where there is aggregate weighted average outperformance (relative to a weighted benchmark comprised of nominated market indices) 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 rolling outperformance of all funds and mandates under management (relative to a weighted benchmark comprised of nominated market indices). The pool starts at 100% of the aggregate of the base salaries of the investment team. 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. 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 rolling 1 year and 3 year time frame and is relative to a nominated market index. The total remuneration outcome (comprising both fixed and variable components) for each investment professional is then benchmarked to appropriate external market data to ensure that their package remains competitive. 2. 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 201931 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 will then be determined by an individual assessment of each employee’s contribution to the investment team during the period. Individual awards will generally range from 0% to 120% of base salary and reflect the business necessity of retaining high performing talent during the inevitable short term dips in weighted 1 and 3 year investment performance. Profit Share Plan (“PSP”) (applies to selected members of the investment team only) The PSP is designed to reward key members of the investment team for their contribution to the development of Platinum’s business through the generation of strong investment performance (relative to a weighted benchmark comprised of nominated market indices). Eligible members of the investment team are issued notional units in the PSP. The notional units have no capital value and cannot be sold or transferred to a third party. Notional units of an eligible member of the PSP are adjusted each year based upon a prospective assessment of each such member’s long-term contribution potential to the future development of Platinum. Each year the profit share percentage pool is determined based upon the weighted average 1 year and 3 year rolling outperformance of all funds and mandates under management (relative to a weighted benchmark comprised of nominated market indices). There is no profit share until weighted average 1 year and 3 year rolling outperformance is greater than 1%. So, for example, if the average of the 1 and 3 year rolling performance of our funds and mandates exceeded the weighted benchmark by 2.5%, then 1.5% of the Company’s management fee-based3 net profit before tax would be made available to the PSP pool. The profit share figure is limited each year to 5% of profit before tax, though the Nomination & Remuneration Committee may elect to carry over investment 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. These performance indicators take into account the responsibilities, skill and experience of each employee and their contribution during the year. Total remuneration outcomes (comprising both fixed and variable components) are then benchmarked to appropriate external market data to help ensure that high performing talent is retained. 3. Excluding investment related revenue and expenses. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 201932 Directors’ Report – continued Remuneration Report – continued 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 foster sustainable growth, as well as sound financial, operational and risk management practices, and to retain talent. 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, 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. In order to satisfy the obligation to the Company that arises from the granting of deferred awards, the Company intends to 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), 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 a “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 201933 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 Tim Trumper Non-Executive Director (from 1 August 2018) Andrew Clifford Chief Executive Officer (CEO) and Managing Director Kerr Neilson Executive Director Elizabeth Norman Executive Director and Director of Investor Services and Communications Andrew Stannard Executive Director and Chief Financial Officer There were no other employees that held a KMP position within the Company or consolidated entity. Managing Director and other KMP Remuneration Managing Director/C…O Remuneration With effect from 1 July 2018, Mr Andrew Clifford assumed the role of Managing Director/CEO in addition to his existing responsibilities as Chief Investment Officer (CIO). As a consequence of this change, Mr Clifford was, from 1 July 2018, eligible for discretionary awards under the new CEO Plan (capped at A$1 million), subject to meeting certain key performance indicators (KPIs), as set by the Board. In addition, Mr Clifford retained his entitlement to receive discretionary awards in relation to his role as CIO via the Investment Team Plan (subject to a $1.5 million cap) and the Profit Share Plan (subject to a $1.5 million cap)4. Despite the achievement of a number of KPI’s, (see table on following page) in light of the disappointing investment performance achieved by the flagship funds and reduced profitability of the Company, Mr Clifford chose not to receive any variable incentive awards from the CEO Plan, Investment Team Plan or the Profit Share Plan. The Board accepted his election. 4. For further information on Mr Clifford’s employment terms and remuneration package, please refer to the Company’s ASX announcement dated 28 June 2018. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 201934 Directors’ Report – continued Remuneration Report – continued CEO PLAN: SHORT TERM INCENTIVE KEY PERFORMANCE INDICATORS AND PERFORMANCE PERFORMANCE MEASURES (EQUALLY WEIGHTED) Financial Strategic Execution MAXIMUM AWARD: $1M AWARDED: NIL People Leadership Risk Management & Operational Effectiveness FY19 PERFORMANCE AGAINST KPI’S Average fee margins maintained. Adjusted profit margin was not maintained. Average FUM fell 4%. Total Shareholder Return fell 11%. Overall only partially met target New distribution team in London established. Asset consultant ratings for key Australian funds were maintained. Significant increase in offshore client engagement. Advocacy on behalf of clients to both the Royal Commission and Franking Credit enquiry. Some progress on building offshore clients. However, due mostly to disappointing relative investment performance coupled with poor general equity market conditions, overall growth in client assets was disappointing in 2019. Overall partially met target Enhanced cohesion and stability of the investment team with no regretted departures. New hires in business development and investment research. Revised policies around work flexibility to enhance “employer of choice” status. Overall met target No significant regulatory issues identified in 2019. No significant errors or breaches of investment guidelines. Continued enhancement of risk management framework. Upgraded corporate governance framework. Overall met target Other KMP Remuneration Kerr Neilson continued to waive his ability to receive variable compensation. This waiver was accepted by the Nomination & Remuneration Committee and agreed by the Board. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 201935 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 marketing of new offshore funds (to support US business initiatives), ongoing work associated with our European business operations, the successful growth of the 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 implementation of a new investment trading platform and various operational initiatives as well as overseeing the operational set-up of the offshore business. 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 VARIABLE REMUNERA- TION (CASH) (2) (DEFERRED) (3) $ $ VARIABLE REMUNERA- TION AS A % OF TOTAL REMUNERA- TION (4) TOTAL $ 2019 Andrew Clifford Kerr Neilson Elizabeth Norman Andrew Stannard 2018 Andrew Clifford Kerr Neilson Elizabeth Norman Andrew Stannard 450,000 450,000 425,000 425,000 23,512 (29,211) 20,155 (14,154) 20,531 20,531 20,531 20,531 – – 900,000 425,000 174,000 – 224,525 69,050 668,043 441,320 1,590,211 925,427 1,750,000 302 82,124 1,325,000 467,575 3,625,001 450,000 450,000 425,000 425,000 1,750,000 4,428 (5,384) (3,364) (4,151) (8,471) 20,049 20,049 20,049 20,049 2,632,000 – 1,300,000 450,000 174,000 – 163,645 42,950 3,280,477 464,665 1,905,330 933,848 80,196 4,382,000 380,595 6,584,320 26% 0% 71% 53% 49% 86% 0% 77% 53% 72% (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 for further details. Andrew Clifford received no cash variable awards from either the Investment Team Plan or the Profit Share Plan. 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 $224,525 attributable to Elizabeth Norman represents the current year portion of the 2019 deferred award of $350,000, the 2018 award of $350,000, the 2017 award of $300,000 and the 2016 award of $300,000. The accounting valuation of $69,050 attributable to Andrew Stannard represents the current year portion of the 2019 deferred award of $150,000, 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. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 36 Directors’ Report – continued Remuneration Report – continued The table below presents supplementary disclosure of the remuneration provided by the consolidated entity to executive KMP of the consolidated entity, based on the amounts awarded to the individuals during the year. CASH SALARY $ SUPER- ANNUATION $ VARIABLE- REMUNERA- TION VARIABLE- REMUNERA- TION (CASH)(1) (DEFERRED)(2) $ $ VARIABLE REMUNERA- TION AS A % OF TOTAL REMUNERA- TION(3) TOTAL $ 2019 Andrew Clifford Kerr Neilson Elizabeth Norman Andrew Stannard 2018 Andrew Clifford Kerr Neilson Elizabeth Norman Andrew Stannard 450,000 450,000 425,000 425,000 20,531 20,531 20,531 20,531 – – 900,000 425,000 – – 350,000 150,000 470,531 470,531 1,695,531 1,020,531 1,750,000 82,124 1,325,000 500,000 3,657,124 450,000 450,000 425,000 425,000 20,049 20,049 20,049 20,049 2,632,000 – 1,300,000 450,000 1,000,000 – 350,000 150,000 4,102,049 470,049 2,095,049 1,045,049 1,750,000 80,196 4,382,000 1,500,000 7,712,196 0% 0% 74% 56% 50% 89% 0% 79% 57% 76% (1) See the “Variable Remuneration Plans” section above for further details. The “variable remuneration (cash)” attributable to Andrew Clifford is comprised of awards under the Investment Team Plan. 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. These awards vest 4 years after the award date. (3) Fixed remuneration refers to salary and superannuation. Variable remuneration refers to both cash and deferred components. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 37 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 receive 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 of shareholders. Remuneration Structure The following table displays the current Non-Executive Directors and their roles at 30 June 2019. MICHAEL COLE ANNE LOVERIDGE STEPHEN MENZIES BRIGITTE SMITH TIM TRUMPER Board Chair Director Director Director Director Audit, Risk & Compliance Committee Member Chair Member Member Member Nomination & Remuneration Member Committee Member Chair Member Member PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 38 Directors’ Report – continued Remuneration Report – continued The table below shows how the cash salary remuneration is allocated reflecting their roles at 30 June 2019. MICHAEL COLE ANNE LOVERIDGE STEPHEN MENZIES BRIGITTE SMITH TIM TRUMPER * Board $170,000 $130,000 $130,000 $130,000 $119,167 Audit, Risk & Compliance Committee $15,000 $30,000 $15,000 $15,000 $13,750 Nomination & Remuneration $15,000 Committee $15,000 $30,000 $15,000 $13,750 Total $200,000 $175,000 $175,000 $160,000 $146,667 * We note that Tim Trumper was appointed as a Director on 1 August 2018. 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) $ 2019 Michael Cole Stephen Menzies Anne Loveridge Brigitte Smith 200,000 175,000 175,000 160,000 Tim Trumper (from 1 August 2018) 146,667 2018 Michael Cole Stephen Menzies Anne Loveridge Brigitte Smith (from 31 March 2018) 856,667 200,000 175,000 175,000 40,000 590,000 19,000 16,625 16,625 15,200 13,933 81,383 19,000 16,625 16,625 3,800 56,050 – – – – – – – – – – – – – – – – – – – – – – TOTAL $ 219,000 191,625 191,625 175,200 160,600 938,050 219,000 191,625 191,625 43,800 646,050 PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 39 Stephen Menzies is Platinum Investment Management Limited’s (PIML’s) nominee on the Board of the offshore UCITS company, Platinum World Portfolios Plc (PWP) and payments are made directly by PWP. Amounts paid in the current year were Euro 24,000 (equivalent to A$38,309) (2018: Euro 22,032 (equivalent to A$34,257)). 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. The tenure of all Directors, except for the Managing Director, Mr Andrew Clifford, 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 resignation, variable remuneration is only paid if the Executive Director is still employed at the date of payment. However, the Board retains discretion to make variable remuneration payments (both cash and deferred) in certain exceptional circumstances, such as bona-fide retirement. Mr Andrew Clifford can terminate his employment by providing twelve months’ notice. Mr Kerr Neilson can terminate his appointment by providing three months’ notice. All other Executive Directors can terminate their appointment by providing six months’ notice. Mr Andrew Clifford has entered into a post-employment restraint whereby he may not solicit either employees or clients for a period of twelve months. 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. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 201940 Directors’ Report – continued Remuneration 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: OPENING BALANCE ADDITIONS DISPOSALS CLOSING BALANCE Michael Cole Stephen Menzies Anne Loveridge Brigitte Smith Tim Trumper Andrew Clifford(1) Kerr Neilson Elizabeth Norman(2) Andrew Stannard(3) 240,000 40,000 22,000 41,666 – – – – – 18,900 32,831,449 312,074,841 766,748 – – – – – – – – – – – 60,000,000 – – 240,000 40,000 22,000 41,666 18,900 32,831,449 252,074,841 766,748 – (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 247,314 shares pursuant to awards made under the Company’s deferred remuneration plan. (3) Andrew Stannard has contingent rights to receive up to 78,996 shares pursuant to awards made under the Company’s deferred remuneration plan. Oversight and Governance The Board, through its Nomination & Remuneration Committee, provides oversight of remuneration and incentive policies. This particularly includes oversight of the remuneration and employment packages and terms of employment for Executive Directors, Non-Executive Directors (NEDs) and Senior Managers. The role of the Nomination & Remuneration Committee is set out in its Charter. Its responsibilities include the following functions that are relevant to remuneration: – – – – To review and make recommendations to the Board in respect of the CEO, Executive Director, and Non-Executive Director appointments; To review and make recommendations to the Board in respect of the variable remuneration awards in respect of the CEO/CIO, Executive Directors, Senior Managers and Portfolio Managers; To provide oversight on the overall aggregate variable remuneration outcome for Platinum, ensuring appropriate alignment with all stakeholders; To review significant changes in remuneration policy and structure, including deferred remuneration plans and benefits; PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 41 – – – – To oversee the Company’s strategic human resources initiatives, including diversity and inclusion; To make ongoing assessments of the collective skills required to effectively discharge the Board’s duties; To review the composition, functions, responsibilities and size of the Board as well as Director tenure; and To ensure appropriate Board succession planning. During the 2019 financial year, the Nomination & Remuneration Committee dealt with the following significant items that relate to remuneration arrangements: – – – – – – Designed and recommended the Board approve the incoming CEO’s new remuneration arrangements and key performance indicators; Reviewed and made recommendations to the Board regarding Platinum’s aggregate variable remuneration pool as well as the individual awards for the CEO, Executive Directors and Senior Managers; Ongoing implementation and review of Board succession plans, including the appointment of Mr Trumper as a Non-Executive Director in August 2018; Reviewed and updated the Board skills matrix to better reflect the required skills of the Board; Reviewed the UCITS V remuneration and disclosure rules; and Discussed with external stakeholders, the Company’s remuneration practices. Remuneration services provided to management and the Committee The firm utilised Financial Institutions Remuneration Group (FIRG) as the primary source of remuneration benchmarking data and the firm has historically used PricewaterhouseCoopers (PwC) as a consultant to the remuneration and benefit plans both in Australia and also in the UK. In addition, certain KMP roles were benchmarked to publically available information at comparable companies. No consultants were engaged by the Nomination & Remuneration Committee in relation to KMP remuneration during the year. 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. Loans to KMP and their related parties No loans were provided to KMP or their related parties during the year or at the date of this report. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 201942 Directors’ Report – continued Remuneration Report – continued Other related party payments involving KMP In the current year, the consolidated entity paid $70,000 (2018: $50,000) to OneVue Services Pty Limited for the provision of services associated with the build, customisation and enhancement of the Platinum web-site. OneVue is a related party of the Chairman of Platinum Asset Management Limited, Mr Michael Cole. These services are provided on an arms length basis and the Chairman was not involved in the decision to utilise OneVue’s services. Shareholders’ Approval of the 2018 (prior year) Remuneration Report A 25% or higher “no” vote on the Remuneration Report at an AGM triggers a reporting obligation on a listed company to explain in its next Annual Report how concerns are being addressed. At the last AGM, the Company’s Remuneration Report was carried on a poll and received a vote in favour of 96.6%. Link between performance and KMP remuneration paid by the consolidated entity The table below shows Platinum’s five year performance across a range of metrics and corresponding KMP incentive outcomes. 2019 2018 2017 2016 2015 Revenue ($’000) 299,320 353,290 333,549 344,658 360,422 Expenses ($’000) 76,421 84,966 62,971 62,464 58,872 158,336 191,594 192,647 199,870 213,499 27.03 32.36 31.74 34.24 36.66 27 32 30 32 47 Operating profit after tax ($’000) Basic earnings per share (cents per share) Total dividends (cents per share) Total aggregate fixed remuneration paid ($)(1) 2,808,483 2,510,503 2,558,913 2,518,991 2,362,901 Total aggregate variable remuneration paid ($) 1,792,575 4,762,595 1,721,800 1,452,200 1,125,000 (1) Total aggregate fixed remuneration paid represents salaries and superannuation (and includes the Director’s Fees disclosed and paid to Stephen Menzies for his Directorship of the UCITS fund). The increase in 2019 reflects the appointment of additional Directors in FY2019 and FY2018. The level of aggregate KMP remuneration paid each year reflects a combination of factors, including investment performance for clients, the operating performance of the firm, individual and team performance and also the degree of competition for executive talent. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 Auditor’s Independence Declaration 43 As lead auditor for the audit of Platinum Asset Management Limited for the year ended 30 June 2019, I declare that to the best of my knowledge and belief, there have been: (a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Platinum Asset Management Limited and the entities it controlled during the period. R Balding Partner PricewaterhouseCoopers 20 August 2019 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 201944 Consolidated Statement of Profit or Loss and Other Comprehensive Income For the year ended �0 June 2019 NOTE CONSOLIDATED 2019 $’000 2018 $’000 Revenue Management fees Performance fees Other income Interest Distributions and dividends Share of (loss)/profit of associates (Losses) 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 11 2, 11 11 11 20 7 22 Profit before income tax expense Income tax expense Profit after income tax expense for the year 12(a) 295,188 30 295,218 3,542 3,714 (2,599) (2,103) 1,548 – 306,803 21,878 328,681 3,744 23,272 9,211 (12,954) 1,296 40 299,320 353,290 38,743 12,755 49,231 13,348 7,119 4,858 2,892 2,617 2,366 1,944 1,192 737 589 447 162 7,429 3,558 2,813 2,214 1,995 1,661 990 724 460 444 99 76,421 222,899 64,563 158,336 84,966 268,324 76,730 191,594 PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 45 Other comprehensive income Exchange rate translation impact of foreign subsidiaries 15 Other comprehensive income for the year, net of tax NOTE CONSOLIDATED 2019 $’000 (16) (16) 2018 $’000 7 7 Total comprehensive income for the year 158,320 191,601 Profit after income tax expense for the year is attributable to: Owners of Platinum Asset Management Limited Non-controlling interests Basic earnings per share Diluted earnings per share 10 10 157,651 685 158,336 CENTS 27.03 27.03 189,221 2,373 191,594 CENTS 32.36 32.36 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 2019 46 Consolidated Statement of Financial Position As at �0 June 2019 Assets Current assets Cash and cash equivalents Term deposits Trade and other receivables Income tax receivable Total current assets Non‑current assets NOTE CONSOLIDATED 2019 $’000 2018 $’000 112,947 163,799 6 81,877 27,922 – 222,746 183 3,616 121,392 344,138 27,876 52,557 3,333 247,565 95,920 98,796 2,986 197,702 445,267 8,108 3,809 5,082 23,544 3,249 – 16,999 26,793 1,560 4,491 6,051 23,050 321,088 1,145 6,214 7,359 34,152 411,115 Equity investments in associates 2(a) 117,593 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 5 7 8 9 9 12(b) PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 47 Equity Issued capital Reserves Retained profits Total equity attributable to the owners of Platinum Asset Management Limited Total equity attributable to non‑controlling interests: Non-controlling interests Total equity NOTE 14 15 16 4 CONSOLIDATED 2019 $’000 2018 $’000 723,490 731,245 (576,863) (582,006) 174,461 185,940 321,088 335,179 – 321,088 75,936 411,115 The above consolidated statement of financial position should be read in conjunction with the accompanying notes. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 48 Consolidated Statement of Changes in Equity For the year ended �0 June 2019 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 Exchange rate translation impact of foreign subsidiaries (Note 15) Total comprehensive income for the year Transactions with owners in the capacity as owners Treasury shares acquired (Note 14) Share-based payments reserve (Note 15) Dividends paid (Note 17) Decrease in retained earnings on deconsolidation of PIXX (Note 4) Additional external investment in PAXX (Note 4) – – – (11,688) – – – – – 189,221 2,373 191,594 7 7 – 3,805 – – 7 189,221 2,373 191,601 – – – – (11,688) 3,805 – (181,240) (16,845) (198,085) – – – – (1,357) (1,357) 91,765 75,936 91,765 411,115 Balance at 30 June 2018 731,245 (582,006) 185,940 PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 49 CONSOLIDATED ISSUED CAPITAL $’000 RESERVES $’000 RETAINED PROFITS $’000 NON- CONTROLLING INTERESTS $’000 TOTAL EQUITY $’000 Balance at 1 July 2018 731,245 (582,006) 185,940 75,936 411,115 Profit after income tax expense for the year Other comprehensive income Exchange rate translation impact of foreign subsidiaries (Note 15) Total comprehensive income for the year Transactions with owners in the capacity as owners Treasury shares acquired (Note 14) Share-based payments reserve (Note 15) Dividends paid (Note 16) Transactions with non-controlling interests Decrease in retained earnings on deconsolidation of PAXX (Note 4) Decrease in equity on deconsolidation of PAXX – – – – 157,651 685 158,336 (16) – – (16) (16) 157,651 685 158,320 (7,755) – – – – – – 5,159 – – – – – – (169,130) – – – (7,755) 5,159 (169,130) – 56,199 56,199 – (1,701) (1,701) – (131,119) (131,119) Balance at 30 June 2019 723,490 (576,863) 174,461 – 321,088 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 50 Consolidated Statement of Cash Flows For the year ended �0 June 2019 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 NOTE CONSOLIDATED 2019 $’000 2018 $’000 299,886 328,304 (75,982) (57,569) (91,242) (82,516) 13 166,335 154,546 3,435 3,869 (375,752) (518,250) 321,753 565,394 Payments for purchases of fixed assets 7 (1,367) (881) Dividends and distributions received from seed investments Receipts from sale of financial assets Payments for purchases of financial assets Purchase of units held directly by PAXX (whilst consolidated) Net cash (used in) investing activities Cash flows from financing activities 2,421 – – 1,700 36,695 (52,949) 4 (56,199) (105,709) (64,673) (29,095) Dividends paid 17 (169,130) (181,240) Proceeds from units issued (net applications into PAXX and other non-controlling interests) Net cash (used in) financing activities (Decrease)/ 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 Cash and cash equivalents at the end of the financial year 56,199 64,673 (112,931) (116,567) (52,305) 8,884 163,799 154,263 1,453 112,947 652 163,799 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 Notes to the Financial Statements �0 June 2019 51 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 a number of the products it offers to investors and this has impacted on the accounting treatment adopted in the consolidated financial statements as follows: PIML OWNERSHIP INTEREST AT 30 JUNE 2019 ACCOUNTING TREATMENT ADOPTED IN THESE ACCOUNTS ENTITY Platinum Trust Funds Platinum Asia Fund (Quoted Managed Hedge Fund) (“PAXX”) Interest is less than 1% in each Fund. 14.7% Fair value accounting applied (see Note 5). Consolidation accounting was applied until 20 May 2019. From 20 May 2019, PAXX has been treated as an investment in associate and equity accounting has been applied (see Note 2).^ Investment in associate. Equity accounting applied (see Note 2).* Investment in associate. Equity accounting applied (see Note 2).* Platinum World Portfolios Plc 14.6% (“PWP”) Platinum Asia Investments Limited (“PAI”) 8.3% ^ * PAXX’s absolute return for FY2019 was lower than FY2018, and hence PIML’ s exposure to variable returns was also relatively much lower. Furthermore, PIML’s ownership interest in PAXX decreased during the period. These factors, in combination, led to the assessment that from 20 May 2019, PIML was no longer considered to control PAXX, and PAXX was deconsolidated from the consolidated group. PIML (and the consolidated entity) was assessed as having significant influence over PAXX and equity accounting was applied, following consideration of factors such as (i) ownership interest and (ii) exposure or rights to variable returns. At 30 June 2019, PIML (and the consolidated entity) was assessed as having significant influence over Platinum Asia Fund (Quoted Managed Hedge Fund) (“PAXX”), Platinum Asia Investments Limited (“PAI”) and Platinum World Portfolios Plc (“PWP”) (Refer to Note 2 for further details). PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 52 Notes to the Financial Statements �0 June 2019 In order to better present the accounting treatment of the investments adopted in these consolidated accounts (as presented in the table on the previous page), management has presented the notes in three parts: PART A – Notes 1 to 4: Notes that explain the accounting treatment of the entities that form part of the Platinum consolidated group or investments in associates 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 accounting 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 201953 PART A – Notes 1 to 4 Notes that explain the accounting treatment of the entities that form part of the Platinum consolidated group or investments in associates Notes 1 to 4 focus on the accounting treatment adopted in these accounts and contain key information relating to the parent entity, subsidiaries, controlled entities and associates. Note 1 Subsidiaries and controlled entities At 30 June 2019 and 30 June 2018, 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 GP Pty Limited Platinum UK Asset Management Limited* PRINCIPAL PLACE OF BUSINESS/ COUNTRY OF INCORPORATION OWNERSHIP INTEREST 2019 % 2018 % Australia Australia Australia Australia United States Australia United Kingdom 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 n/a ^ * Platinum Employee Share Trust holds PTM shares on behalf of employees selected to participate in the Deferred Remuneration Plan (see Note 20 for further details). During the financial year, Platinum incorporated in the UK, Platinum UK Asset Management Limited, a wholly-owned subsidiary company. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 54 Notes to the Financial Statements �0 June 2019 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 2019 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: from 20 May 2019, the consolidated entity was assessed as no longer exerting control over PAXX, for the purpose of applying the consolidation accounting standard. On 20 May 2019, PIML’s ownership interest in PAXX reduced, as did its exposure or rights to PAXX’s variable returns. From 20 May 2019, PIML was considered to exert significant influence over PAXX, and equity accounting was applied. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 201955 Note 2. Equity investments in associates At 30 June 2019, the consolidated entity’s investment(s) in Platinum Asia Investments Limited (“PAI”), Platinum World Portfolios Plc (“PWP”) and Platinum Asia Fund (Quoted Managed Hedge Fund) (“PAXX”) 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 (COUNTRY OF INCORP‑ ORATION) PAI (Australia) PWP (Ireland) EQUITY INTEREST % FAIR VALUE $’000 CARRYING AMOUNT $’000 REASON FOR ASSESSMENT OF SIGNIFICANT INFLUENCE 2019 2018 2019 2018 2019 2018 8.3 8.3 30,900 37,800 32,567 34,972 Level of ownership interest was 8.3% at 30 June 2019; PIML acts as Investment Manager (IM) in accordance with the Investment Management Agreement; PIML provides performance and exposure reports to the PAI Board. 14.6 13.7 63,444 63,409 61,631 60,948 Level of ownership interest was 14.6% at 30 June 2019; 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. Level of ownership interest was 14.7% at 30 June 2019; PIML acts as Investment Manager (IM) for PAXX and its underlying fund, Platinum Asia Fund. PAXX (Australia) 14.7 19.9 23,395 19,641 23,395 n/a 117,739 120,850 117,593 95,920 PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 56 Notes to the Financial Statements �0 June 2019 Note 2. Equity investments in associates – continued a. Interests in associates – continued The fair value of PAI reflects the 30 million shares held multiplied by the PAI closing share price at 30 June 2019 of $1.03 (2018: $1.26). The fair value of PWP reflects the shares held in the sub-funds multiplied by their respective closing unit prices at 30 June 2019. The fair value of PAXX reflects units held multiplied by the PAXX’s 30 June 2019 ex-redemption price of $4.20 (2018: $4.40). PIML held more units in PAXX in 2019 relative to 2018 because PIML reinvested its 2018 distribution into additional units. The carrying value reflects the consolidated entity’s share of each associate’s net assets, including assessment of any impairment (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 30 June 2019 Total assets Total liabilities Net assets Total assets Total liabilities Net assets 401,222 7,900 393,222 33,221 426,498 654 4,653 32,567 421,845 62,311 680 61,631 PLATINUM ASIA FUND (QUOTED MANAGED HEDGE FUND) (“PAXX”) $’000 GROUP’S SHARE OF ASSOCIATE $’000 168,320 9,602 158,718 24,810 1,415 23,395 Total group’s share of associates’ statement of financial position (share of PAI’s net assets of $32,567,000, PWP’s net assets of $61,631,000 and PAXX’s net assets of $23,395,000) = $117,593,000. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 57 Note 2. Equity investments in associates – continued b. Share of associates’ statement of financial position – continued 30 June 2018 Total assets Total liabilities Net assets 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 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. c. Carrying amount of investment using the equity method Opening balance 2019 $’000 2018 $’000 95,920 91,692 Initial recognition of PAXX as an equity investment on deconsolidation 24,272 Share of associates’ profit (see Note 2d on following page) Dividends paid (see Note 2d on following page) Partial disposal of PAI Acquisition of additional PWP units (Japan sub-fund) Closing balance (see Note 2a) 1,100 (3,699) – – 117,593 – 8,031 (1,700) (21,252) 19,149 95,920 PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 58 Notes to the Financial Statements �0 June 2019 Note 2. Equity investments in associates – continued d. Associate’s net income PLATINUM ASIA INVESTMENTS LIMITED $’000 GROUP’S SHARE OF ASSOCIATE $’000 PLATINUM WORLD PORTFOLIOS $’000 GROUP’S SHARE OF ASSOCIATE $’000 2019 Total investment income Total expenses (Loss)/profit before tax Income tax benefit (Loss)/profit after tax Dividend received and dilution of unitholding throughout the year and foreign currency translation impact Realised and unrealised gain on investment in associate 6,284 (6,552) (268) 110 (158) 520 (543) (23) 8 (15) (18,038) (6,791) (24,829) – (2,635) (992) (3,627) – (24,829) (3,627) (2,390) (2,405) 4,310 683 PLATINUM ASIA FUND (QUOTED MANAGED HEDGE FUND) (“PAXX”) $’000 GROUP’S SHARE OF ASSOCIATE $’000 GROUP’S SHARE OF ALL ASSOCIATES (TOTAL) $’000 Total investment income Total expenses Profit/(loss) before tax Income tax benefit Profit/(loss) after tax Dividend received and dilution of unitholding throughout the year and foreign currency translation impact Realised and unrealised gain/(loss) on investment in associate 2,757 – 2,757 – 2,757 406 – 406 – 406 (1,709) (1,535) (3,244) 8 (3,236) (1,283) 637 (877) (2,599) The other comprehensive income was $nil. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 59 Note 2. Equity investments in associates – continued d. Associate’s net income – continued PLATINUM ASIA INVESTMENTS LIMITED $’000 GROUP’S SHARE OF ASSOCIATE $’000 PLATINUM WORLD PORTFOLIOS $’000 GROUP’S SHARE OF ASSOCIATE $’000 5,107 (884) 4,223 – 4,223 (504) 3,719 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, dividend received and dilution of unitholding throughout the year and foreign currency translation impact Realised and unrealised gain on investment in associate Total investment income Total expenses Profit before tax Income tax expense Profit after tax Realised equity accounting gain on partial disposal of PAI shares, dividend 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 GROUP’S SHARE OF ALL ASSOCIATES (TOTAL) $’000 11,786 (1,462) 10,324 (1,789) 8,535 676 9,211 The other comprehensive income was $nil. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 60 Notes to the Financial Statements �0 June 2019 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 2019, the consolidated entity was assessed as having significant influence over Platinum Asia Investments Limited (“PAI”), Platinum World Portfolios Plc (“PWP”) and Platinum Asia Fund (Quoted Managed Hedge Fund ) (“PAXX”), as a result of its direct investment and investment management activities and other factors outlined on page 55. 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 2019, no impairment write-down was required for PAI because the underlying value of each asset and liability has been measured in accordance with the accounting standards. The carrying value of the PWP investment is less than its fair value and the carrying value of the investment in PAXX is equal to its fair value. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 201961 2019 $’000 169,120 169,120 PARENT 2018 $’000 181,222 181,222 2019 $’000 118,574 749,062 (5,082) (5,082) PARENT 2018 $’000 110,734 744,557 – – 743,980 744,557 723,490 731,245 18,854 1,636 11,666 1,646 743,980 744,557 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 PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 62 Notes to the Financial Statements �0 June 2019 Note 4. Non-controlling interest(s) On 20 May 2019, the consolidated entity no longer exerted control over Platinum Asia Fund (Quoted Managed Hedge Fund) (“PAXX”) for the purpose of applying the consolidation accounting standard but exerts significant influence for the purpose of the investment in associates accounting standard (see note 2). As a result of the deconsolidation from the Platinum group, the external (non-related parties) non-controlling interest in the Platinum group was $nil at 30 June 2019. Opening balance 2019 $’000 75,936 Profit after income tax attributable to non-controlling interests – PAXX 685 Additional external investment into PAXX during the year Decrease in retained earnings on deconsolidation of PAXX/PIXX Decrease in equity on deconsolidation of PAXX Distribution paid to external unitholders of PAXX Profit after income tax attributable to non-controlling interests – PIXX 56,199 (1,701) (131,119) – – – 2018 $’000 – 1,016 91,765 (1,357) – (16,845) 1,357 75,936 PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 63 PART B – Notes 5 to 22 Operations – Notes that explain the operations of the consolidated entity Note 5. Non-current assets – financial assets at fair value through profit or loss Platinum Trust Fund investments Unit trust – held directly by Platinum Asia Fund (Quoted Managed Hedge Fund) (“PAXX”)^ 2019 $’000 183 – 183 2018 $’000 194 98,602 98,796 ^ At 30 June 2019, the financial assets of PAXX have been classified as an equity investment in an associate and have been valued in the consolidated statement of financial position based on PIML’s share of PAXX’s net assets (see note 2). ACCOUNTING POLICY Under AASB 9: Financial Instruments, the consolidated entity’s investments are managed on a fair value basis and the consolidated entity evaluates the information about its investments on a fair value basis together with other related financial information. Consequently, these investments are measured at fair value through profit or loss. The consolidated entity has applied AASB 13: Fair Value Measurement as the basis to value its financial assets at fair value through profit or loss. 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. The fair value includes the impact of the 30 June distribution. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 64 Notes to the Financial Statements �0 June 2019 Note 6. Current assets – trade and other receivables Management fees receivable Performance fees receivable Interest receivable Prepayments Sundry debtors Distribution receivable from PAXX since deconsolidation Distribution receivable – PAXX investment in Platinum Asia Fund whilst consolidated 2019 $’000 24,467 5 246 1,561 329 1,314 – 27,922 2018 $’000 27,959 1,180 138 1,693 36 – 21,551 52,557 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. Distributions are recognised when the consolidated entity becomes entitled to the income. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 Note 7. 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 65 2018 $’000 1,530 (1,204) 326 5,775 (4,321) 1,454 146 (120) 26 2,566 (1,547) 1,019 729 (568) 161 2,986 2019 $’000 1,710 (1,312) 398 6,010 (4,691) 1,319 163 (131) 32 3,473 (1,761) 1,712 756 (601) 155 3,616 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 2017 Additions Disposals 217 216 – Depreciation expense (107) Balance at 30 June 2018 Additions Disposals 326 181 – Depreciation expense (109) Balance at 30 June 2019 398 1,208 570 – (324) 1,454 235 – (370) 1,319 21 13 – (8) 26 17 – (11) 32 OFFICE PREMISES FIT OUT $’000 1,250 23 – (254) 1,019 907 – (214) 1,712 FURNITURE & EQUIPMENT $’000 TOTAL $’000 133 2,829 59 – 881 – (31) (724) 161 27 – 2,986 1,367 – (33) (737) 155 3,616 PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 66 Notes to the Financial Statements �0 June 2019 Note 7. Non-current assets – fixed assets – continued At 30 June 2019, there was software and applications in the course of construction and development of $10,800 (2018: $406,252), which is included as part of the software & applications additions and balance at 30 June 2019. 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. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 201967 Note 8. Current liabilities – trade and other payables Trade payables GST payable Distribution payable – PAXX to unitholders (whilst consolidated) 2019 $’000 5,995 2,113 – 8,108 2018 $’000 4,326 2,373 16,845 23,544 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. Note 9. Current and non-current liabilities – employee benefits Current liabilities Annual leave Long service leave Non‑current liabilities 2019 $’000 1,489 2,320 3,809 2018 $’000 1,337 1,912 3,249 Payroll tax on Deferred Remuneration Plan 1,560 1,145 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 2019 68 Notes to the Financial Statements �0 June 2019 Note 10. 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 2019 $’000 2018 $’000 157,651 189,221 NUMBER NUMBER 583,162,543 584,732,213 CENTS 27.03 27.03 CENTS 32.36 32.36 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. Note 11. 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 associated costs including those of the London office; and Investments and other: through the consolidated entity’s investment in the (a) ASX quoted, Platinum Asia Investments Limited (b) PWP (c) unlisted Platinum Trust Funds and (d) the quoted managed fund, PAXX. Also included in this category are Australian dollar term deposits as well as associated interest derived from these. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 69 Note 11. Operating segments – continued The segment financial results, segment assets and liabilities are disclosed on the following page(s). 2019 Revenue Management and performance fees Interest Distributions and dividends* 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 FUNDS MANAGEMENT $’000 INVESTMENTS AND OTHER $’000 TOTAL $’000 295,218 265 – – – 295,483 (75,992) 219,491 (64,289) 155,202 (16) – 295,218 3,277 3,714 3,542 3,714 (4,702) (4,702) 1,548 3,837 (429) 3,408 (274) 3,134 – 1,548 299,320 (76,421) 222,899 (64,563) 158,336 (16) 155,186 3,134 158,320 8,294 – – 29,978 38,272 13,477 6,848 20,325 17,947 104,653 117,776 81,877 1,560 112,947 117,776 81,877 31,538 305,866 344,138 – 2,725 2,725 13,477 9,573 23,050 303,141 321,088 PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 70 Notes to the Financial Statements �0 June 2019 Note 11. Operating segments – continued 2018 Revenue FUNDS MANAGEMENT $’000 INVESTMENTS AND OTHER $’000 TOTAL $’000 Management and performance fees Interest 328,681 436 – 3,308 328,681 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 7 23,312 23,312 (3,743) (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 7 175,430 16,171 191,601 4,299 – – 37,187 41,486 11,093 1,496 12,589 28,897 159,500 194,716 27,876 21,689 163,799 194,716 27,876 58,876 403,781 445,267 16,845 4,718 21,563 27,938 6,214 34,152 382,218 411,115 PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 71 Note 11. Operating segments – continued * The amount in the tables on the previous pages disclosed as “Distributions, dividends (and gains on forward currency contracts)” is comprised of: Dividend received by PIML from its investment in PAXX since deconsolidation Distribution received by PAXX from Platinum Asia Fund whilst consolidated 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 2019 $’000 1,299 – 2,400 15 3,714 – 3,714 2018 $’000 – 21,551 1,700 21 23,272 40 23,312 ^ The amount in the tables on the previous pages disclosed as “Net (losses)/gains on financial assets and equity in associates” is comprised of: Realised/unrealised losses from PAXX (during the period of consolidation) (Un)realised losses on Platinum Trust Fund investments Losses on financial assets (total as appears in the consolidated statement of profit or loss and other comprehensive income) Share of (loss)/profit of associates 2019 $’000 (2,092) (11) (2,103) (2,599) (4,702) 2018 $’000 (12,968) 14 (12,954) 9,211 (3,743) 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 2019 $’000 2018 $’000 291,238 8,082 299,320 320,719 32,571 353,290 PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 72 Notes to the Financial Statements �0 June 2019 Note 11. 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 measured 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/(losses) on financial assets at fair value through profit and loss: relates to net gains/(losses) 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 2019Note 12. 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 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 Income tax expense (b) Non-current liabilities – net deferred tax liabilities: 73 2019 $’000 65,985 (1,723) 301 64,563 2018 $’000 71,318 5,165 247 76,730 222,899 66,870 268,324 80,497 (557) (1,010) 8 (748) (3,758) 447 95 (551) 64,563 76,730 2019 $’000 2018 $’000 Deferred tax liabilities comprises temporary differences attributable to: Unrealised foreign exchange gains on cash Deferred Remuneration Plan Employee provisions Unrealised gains on investments Capital expenditure on fixed assets not immediately deductible Expense accruals Net deferred tax liabilities 851 4,082 (1,143) 1,874 (829) (344) 4,491 402 3,633 (975) 4,316 (836) (326) 6,214 PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 74 Notes to the Financial Statements �0 June 2019 Note 12. Taxation – continued The net deferred tax liability figure is comprised of $2,316,000 (2018: $2,137,000) of deferred tax assets and $6,807,000 (2018: $8,351,000) 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 $1,487,000 (2018: $1,301,000). 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 201975 Note 13. Reconciliation of profit after income tax to net cash from operating activities 2019 $’000 2018 $’000 Profit after income tax expense for the year 158,336 191,594 Adjustments for: Depreciation expense Cash outlay on shares and transaction costs associated with the Deferred Remuneration Plan Share-based payments accounting expense (see Note 20) Foreign exchange differences Interest income Dividend and distribution income pre-deconsolidation (Gain)/loss on investments Change in operating assets and liabilities: Decrease/(increase) in trade and other receivables (Increase) in sundry debtors Increase/(decrease) in income tax payable Decrease/(increase) in prepayments Increase in trade creditors and GST (Decrease) in income tax provision and expense (Increase)/decrease in deferred tax assets (Decrease)/increase in deferred tax liabilities Increase in employee provisions and payroll tax 737 724 (7,470) 4,858 (1,548) (3,542) – 4,702 4,667 (293) 5,082 132 1,409 – (166) (1,544) 975 (11,703) 3,558 (1,138) (3,744) (23,272) 3,703 (377) – (3,333) (535) 989 (7,757) 18 5,147 672 Net cash from operating activities 166,335 154,546 PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 76 Notes to the Financial Statements �0 June 2019 Note 13. 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 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 receipts relating to the purchase and sale 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 14. Equity – Issued capital 2019 SHARES 2018 SHARES Ordinary shares – fully paid(a) 586,678,900 586,678,900 Treasury shares(b) Total issued capital (5,095,797) (3,471,866) 581,583,103 583,207,034 2019 $’000 751,355 (27,865) 723,490 2018 $’000 751,355 (20,110) 731,245 (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 20). 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 given below: Opening balance Additional shares held by the Employee Share Trust Shares allocated to employees Balance at the end of the financial year 2019 SHARES 2018 SHARES 3,471,866 1,626,026 1,623,931 – 1,845,840 – 2019 $’000 20,110 7,755 – 2018 $’000 8,422 11,688 – 5,095,797 3,471,866 27,865 20,110 PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 77 Note 14. Equity – Issued capital – continued 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. Note 15. Equity – reserves Foreign currency translation reserve Capital reserve Share-based payments reserve 2019 $’000 105 2018 $’000 121 (588,144) (588,144) 11,176 6,017 (576,863) (582,006) 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 $105,000 at 30 June 2019 (30 June 2018: $121,000).The movement in the current year relates to translation of the Platinum UK Asset Management Limited net assets. 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. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 78 Notes to the Financial Statements �0 June 2019 Note 15. Equity – reserves – continued 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 20 for further information. 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 2017 2,212 114 (588,144) (585,818) Exchange rate translation impact of foreign subsidiaries Movement in share-based payments reserve Balance at 30 June 2018 Exchange rate translation impact of foreign subsidiaries Movement in share-based payments reserve Balance at 30 June 2019 Note 16. Equity – retained profits – 3,805 6,017 7 – – – 7 3,805 121 (588,144) (582,006) – (16) 5,159 11,176 – 105 – – (16) 5,159 (588,144) (576,863) 2019 $’000 2018 $’000 Retained profits at the beginning of the financial year 185,940 177,959 Profit after income tax expense attributable to owners of the Company Dividends paid (Note 17) Retained profits at the end of the financial year 157,651 189,221 (169,130) (181,240) 174,461 185,940 PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 Note 17. Equity – dividends Dividends paid Dividends paid during the financial year were as follows: Final dividend paid for the 2018 financial year (16 cents per share) 93,313 Interim dividend paid for the 2019 financial year (13 cents per share) 75,817 Final dividend paid for the 2017 financial year (15 cents per share) Interim dividend paid for the 2018 financial year (16 cents per share) – – 2019 $’000 79 2018 $’000 – – 87,758 93,482 169,130 181,240 Dividends not recognised at year-end Since 30 June 2019, the Directors declared to pay a 2019 final fully-franked dividend of 14 cents per share, payable out of profits for the 12 months to 30 June 2019. The dividend has not been provided for at 30 June 2019, because the dividend was declared after year-end. Franking credits Franking credits available at reporting date based on a tax rate of 30% Franking credits/(debits) that will arise from the payment/(refund) 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% 2019 $’000 2018 $’000 64,017 77,903 5,082 (3,333) 69,099 74,570 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 2019 80 Notes to the Financial Statements �0 June 2019 Note 18. 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 201981 Note 18. 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 on performance share fees and performance fees earned by the consolidated entity. Historically, the amount of performance share fees earned by the consolidated entity has fluctuated significantly from year to year and can be a material source of fee revenue. For those investment mandates that pay a performance share fee, the fee is based on a proportion of each Mandate’s investment performance, and is calculated at the end of each calendar year and is based on absolute (and not relative) return. Performance fees may be earned by the consolidated entity, if the investment return of a Platinum Trust Fund, Platinum Capital Limited, Platinum Asia Investments Limited, Platinum World Portfolios or applicable mandate exceeds its specified benchmark. Should the actual performance of one or more of these entities be higher than the applicable benchmark or index, a performance fee would be receivable for the financial year. As at 30 June 2019, performance fees of $4,842 (2018: $1,180,270) were receivable. If global equity markets fell 10% over the course of the year and consequently the consolidated entity’s FUM fell in line with global equity markets, it follows that management fees would fall by 10%. If there was a 10% decrease in performance of investment mandates over the course of the year that resulted in an actual negative performance for the Investment Mandate for the year, then no performance fee would be earned. The above analysis assumes a uniform 10% fall across all global equity markets. This is extremely unlikely as there is a large degree of variation and volatility across markets. For example, it is quite feasible for the Chinese market to fall whilst other Asian markets go up. To mitigate the impact of adverse investment performance on FUM, the Investment Manager may employ hedging strategies to manage the impact of adverse market and exchange rate movements on the funds it manages. Market risk may be managed through derivative contracts, including futures, options and swaps. Currency risk may be managed through the use of forward currency contracts. The section on the following pages 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 2019. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 201982 Notes to the Financial Statements �0 June 2019 Note 18. 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 2019, the consolidated entity held US$24,204,470 (equivalent to A$34,481,758) in cash (2018: US$18,525,503 (equivalent to A$25,032,773). 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$3,132,878 lower/ A$3,828,578 higher (2018: A$2,277,530 lower/A$2,783,989 higher). 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$542,546 lower/A$749,602 higher (2018: A$2,496,946 lower/A$3,051,711 higher). 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 2019, then the consolidated entity’s net assets would have been A$5.6m lower/ A$6.8m higher (2018: A$5.8m lower/A$7.0m 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 2019, was the Japanese Yen (2018: Hong Kong Dollar). A 10% increase/decrease in the Australian Dollar would have caused net profit before tax to be A$2,081,556 lower/A$2,544,124 higher, based on PIML’s interest in PWP at 30 June 2019 (2018: A$2,180,699 lower/A$2,719,894 higher). 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 2019, was the US Dollar (2018: Hong Kong Dollar), which was the currency with the largest exposure in this entity at 30 June 2019. A 10% increase/decrease in the Australian Dollar would have caused the consolidated entity’s net profit before tax to be A$1,535,900 lower/A$1,877,211 higher (2018: A$1,417,016 lower/A$1,731,890 higher). PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 201983 Note 18. Financial risk management – continued Foreign currency risk – continued Investment in PAXX PAXX is a feeder fund that invests in Platinum Asia Fund (PAF), 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 2019, was the US Dollar (2018: Hong Kong Dollar), which was the currency with the largest exposure in PAXX at 30 June 2019. A 10% increase/decrease in the Australian Dollar would have caused the Company’s net profit before tax to be A$980,579 lower/A$1,198,486 higher (2018: A$1,774,000 lower/ A$2,168,000 higher). The US Dollar was the largest exposure because PAI/PAF was partly hedged back into the US Dollar, via forward contracts. Price risk At 30 June 2019, the consolidated entity is exposed to indirect price risk through its equity- accounted investments in Platinum Asia Investments Limited, Platinum World Portfolios and 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 2019 $’000 INCREASE/(DECREASE) 2018 $’000 INCREASE/(DECREASE) 3,257/(3,257) 6,163/(6,163) 2,339/(2,339) 3,497/(3,497) 6,094/(6,094) 1,964/(1,964) Interest rate risk At 30 June 2019, 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 2019 will cause the consolidated entity’s net profit before tax to be $763,999 higher/lower (2018: $422,751 higher/lower), based on the impact on its interest- bearing cash balances. An interest rate movement at 30 June 2019 will not impact the profit earned from term deposits, as term deposit interest rates are determined on execution. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 84 Notes to the Financial Statements �0 June 2019 Note 18. 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- (2018: 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 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 2019 and 30 June 2018, the relevant credit ratings were as follows: Rating AA– A BBB+ 2019 $’000 2018 $’000 194,070 754 – 166,582 24,886 207 194,824 191,675 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 2019 85 Note 18. 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. 2019 Trade payables GST payable Current tax payable AT CALL $’000 – – – Employee-related provisions 3,809 WITHIN 30 DAYS $’000 5,995 2,113 – – 3,809 8,108 Total 2018 Distribution payable – PAXX to unitholders Trade payables GST payable AT CALL $’000 – – – WITHIN 30 DAYS $’000 16,845 4,326 2,373 – Employee-related provisions 3,249 Total 3,249 23,544 BETWEEN 1 AND 3 MONTHS $’000 OVER 3 MONTHS $’000 – – – – – – – 5,082 1,560 6,642 BETWEEN 1 AND 3 MONTHS $’000 OVER 3 MONTHS $’000 – – – – – – – – 1,145 1,145 TOTAL $’000 5,995 2,113 5,082 5,369 18,559 TOTAL $’000 16,845 4,326 2,373 4,394 27,938 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 2019 or 30 June 2018. 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 2019 86 Notes to the Financial Statements �0 June 2019 Note 18. 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. Note 19. 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 2018): (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). At 30 June 2019, the investments by PIML in PAXX, 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, they would be classified as level 2. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 201987 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 2019 and 30 June 2018. The consolidated entity has no assets or liabilities that are classified as level 3. LEVEL 1 $’000 LEVEL 2 $’000 TOTAL $’000 2019 Assets Platinum Trust Fund investments 2018 Assets Unit trust – held directly by Platinum Asia Fund (Quoted Managed Hedge Fund) (“PAXX”)* Platinum Trust Fund investments – – – – – 183 183 183 183 98,602 194 98,796 98,602 194 98,796 * At 30 June 2018, assets held directly by PAXX were classified as fair value investments, because PAXX was consolidated into the Platinum group. Valuation techniques used to classify assets and liabilities as level 2 PIML’s direct investments in 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. Note 20. 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. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 88 Notes to the Financial Statements �0 June 2019 Note 20. Share-based payments – continued Deferred Remuneration Plan (applies to all staff) – continued 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. VESTING CONDITION Continuous employment for a period of 4 years from the grant date. The number of rights granted and the accounting expense for the current and comparative year is shown below. The 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 2019 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 2019 NUMBER OF DEFERRED 2018 NUMBER OF DEFERRED RIGHTS GRANTED RIGHTS GRANTED 3,471,866 1,626,026 1,623,931 1,878,168 – (32,328) 5,095,797 3,471,866 2019 $’000 1,300 2,144 797 617 4,858 416 5,274 2018 $’000 – 2,144 797 617 3,558 689 4,247 PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 89 Note 20. 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 201990 Notes to the Financial Statements �0 June 2019 Note 21. Key management personnel disclosures 2019 $’000 2018 $’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 3,932 6,722 Accounting expense related to the KMP unvested allocation under the Deferred Remuneration Plan^ Superannuation Decrease in the consolidated entity’s annual and long service leave provision 468 163 – 4,563 381 136 (8) 7,231 ^ 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 expense attributable to KMP are based on the allocation of deferred rights in the current and prior years, that have still not vested and is as follows: 2019 GRANT 2018 GRANT 2017 GRANT 2016 GRANT TOTAL Number of rights allocated to KMP during the year Accounting expense attributed to KMP 108,696 248,346 86,208 48,623 491,873 $87,000 $261,001 $67,393 $52,201 $467,575 The accounting valuation of $467,575 represents the amount expensed through the income statement in the current year, with respect to grants made in each year between 2016 and 2019. 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 Tim Trumper Andrew Clifford Kerr Neilson Elizabeth Norman Andrew Stannard 240,000 40,000 22,000 41,666 – – – – – 18,900 32,831,449 312,074,841 766,748 – – – – – CLOSING BALANCE 240,000 40,000 22,000 41,666 18,900 32,831,449 – – – – – – 60,000,000 252,074,841 – – 766,748 – PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 91 Note 22. 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 96,542 93,730 2019 $ 2018 $ 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 – 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 295,992 300,369 54,478 447,012 50,000 444,099 116,745 87,090 Taxation services 556,017 487,580 Taxation services – overseas PricewaterhouseCoopers firms Foreign tax agent fees Services provided to Platinum UK Asset Management Limited PwC US work associated with the set-up of the Cayman Funds Total taxation services Other services – PricewaterhouseCoopers Compliance and assurance services Total other services 42,597 62,926 – 778,285 17,855 – 3,892 596,417 163,943 163,943 148,083 148,083 Total fees paid and payable to the auditor and its related practices 1,389,240 1,188,599 PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 92 Notes to the Financial Statements �0 June 2019 PART C – Notes 23 to 27 Miscellaneous Notes – Miscellaneous Notes that are required by the accounting standards Note 23. Related party transactions Subsidiaries and associates Interests in subsidiaries and associates are set out in Note 1 and Note 2. Key management personnel Disclosures relating to key management personnel are set out in Note 21 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 code: PIX) and Platinum Asia Fund (Quoted Managed Hedge Fund) (ASX code: PAX). 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 2019 and 30 June 2018 were as follows: PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 201993 Note 23. Related party transactions – continued Fees received – continued Related party fees 30 JUNE 2019 $ 30 JUNE 2018 $ 245,515,816 257,492,273 Included in these figures, is related party fees receivable, disclosed in the statement of financial position as at 30 June 2019 and 30 June 2018 as follows: Related party fees receivable 30 JUNE 2019 $ 30 JUNE 2018 $ 19,001,623 23,317,632 Investment transactions During the year, PIML received the final 2018 fully-franked dividend of $1,800,000 (2018: $500,000) and the interim 2019 fully franked dividend of $600,000 (2018: $1,200,000) from its investment in PAI. PIML also received the 30 June 2019 distribution of $1,298,813 (2018: $4,816,109) from PAXX and $15,000 from the Platinum Trust Funds (2018: $21,000). Other related party transactions Mr Stephen Menzies is PIML’s nominee on the Board of PWP. PIML reimburses Stephen Menzies for any incidental travel and accommodation associated with attendance at Board meetings in Ireland. During the year, the amount reimbursed was $17,523 (2018: $nil). In the current year, the consolidated entity paid $70,000 (2018: $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. During the current financial year (on 17 September 2018), Platinum UK Asset Management Limited was incorporated and PIML transferred A$1,094,920 as funding for Platinum UKs operations and expenses. The service fee incurred by PIML was $1,902,272. The Company allocated additional rights to eligible employees under the Deferred Remuneration Plan. In the current year, the amount transferred to the Platinum Employee Share Trust was $7,470,000 (2018: $11,873,050) and the Trust still retained $899,970 (2018: $170,518) at balance date mainly to settle a purchase of shares that was due to settle on 1 July 2019. A further $300,000 was transferred after 30 June 2019 in order to settle a pre-30 June 2019 trade. 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. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 94 Notes to the Financial Statements �0 June 2019 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 2019, 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 receiving 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 2019 $’000 2018 $’000 17,705,018 18,421,972 Maximum exposure (includes PIMLs interest & fees receivable) Platinum Trust Funds 18,175 20,879 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 another entity refers to involvement that exposes the entity to variability of returns from the performance of another entity (excluding subsidiaries and associates). The consolidated entity will apply the standard to its interest in the Platinum Trust Funds. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 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 95 2019 $’000 2018 $’000 1,838 8,102 1,279 1,768 7,796 3,422 11,219 12,986 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. Please refer to Note 27 that discusses changes to the accounting for leases that will apply from 1 July 2019. 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 2019, no other matter or circumstance has arisen since 30 June 2019 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 2019 96 Notes to the Financial Statements �0 June 2019 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 2019, 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 July 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 adoption of the standard for annual reporting periods commencing 1 July 2019 will result in increased disclosure. An assessment has been made on existing leases held by the consolidated entity and the adoption of this standard is expected to result in the recognition of existing leased assets and liabilities of approximately A$10,734,000 and A$10,889,000 respectively from 1 July 2019. The difference relates to the inclusion of depreciation for the leased assets and interest for the lease liabilities. There are no other standards that are not yet effective that are expected to have a material impact on the consolidated entity in the current or future reporting periods and on foreseeable future transactions. Note 28. Accounting Standards adopted during the financial year (a) Adoption of AASB 15: Revenue from contracts with customers and associated amendments The consolidated entity has adopted AASB 15 for reporting periods commencing 1 July 2018. 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 can 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. However, management fees are recognised based on the applicable investment management agreements and earned on a daily basis. These are consistent with how performance and management fees are already recognised in the consolidated entity’s accounts. AASB 15 has been applied by the consolidated entity and did not result in a material change in revenue recognition for the consolidated entity. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 201997 Note 28. Accounting Standards adopted during the financial year – continued (b) Adoption of AASB 9: Financial Instruments (and applicable amendments) (“AASB 9”) AASB 9: Financial Instruments addresses the classification, measurement and derecognition of financial assets and financial liabilities. It introduced revised rules around hedging accounting and impairment. The standard was applicable from 1 January 2018. The consolidated entity has adopted AASB 9 for reporting periods commencing 1 July 2018. AASB 9 replaces the classification and measurement model in AASB 139: Financial Instruments: Recognition and Measurement with a new model that classifies financial instruments based on the business model within which the financial instruments are managed, and whether the contractual cash flows under the instrument solely represent the payment of principal and interest. Under the new standard, financial instruments are classified as: – – – Amortised cost if the objective of the business model is to hold the financial instruments to collect contractual cash flows and those cash flows represent solely payments of principal and interest (SPPI); Fair value through other comprehensive income if the objective of the business model is to hold the financial instruments to collect contractual cashflows from SPPI and to sell; or All other financial instruments must be recognised at fair value through profit or loss. An entity can, at initial recognition, also irrevocably designate a financial instrument as measured at fair value through profit or loss if it eliminates or significantly reduces a measurement or recognition inconsistency. Derivative and equity instruments are measured at fair value through profit or loss unless, for equity instruments not held for trading, an irrevocable option is taken to measure at fair value through other comprehensive income. AASB 9 has been applied retrospectively by the consolidated entity. Given no debt instruments are held by the consolidated entity, which could result in a reclassification of the financial instruments to amortised cost or fair value through other comprehensive income (‘FVOCI’), the adoption of AASB 9 did not have any impact on the recognition and measurement of the consolidated entity’s financial instruments. There are no other standards that are effective for the first time in the current year 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 201998 Directors’ Declaration �0 June 2019 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 2019 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 20 August 2019 Sydney Andrew Clifford Director PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 Independent Auditor’s Report To the members of Platinum Asset Management Limited 99 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 2019 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 2019 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 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 2019100 Independent Auditor’s Report To the members of Platinum Asset Management Limited Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of …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 proves custodian and administration services for the trusts that the Group manages. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019101 Materiality Key audit matters Audit scope MATERIALITY AUDIT SCOPE – – – – – – For the purpose of our audit we used overall Group materiality of $11.1 million, which represents 5% of the Group’s profit before tax. We applied this threshold, together with qualitative considerations, to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the financial report as a whole. We chose Group profit before tax because, in our view, it is the 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 significant entities within the Group being Platinum Investment Management Limited (PIML) and Platinum Asia Fund (Quoted Managed Hedge Fund (PAXX)). The Group engagement team directed the involvement of component auditors. All other audit procedures were performed by the Group engagement team. For the work performed by component auditors, we considered the level of involvement we needed to have in their audit work to be able to evaluate whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the Group financial report as a whole. This included active dialogue during the audit and review of their work. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019102 Independent Auditor’s Report To the members of Platinum Asset Management Limited 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. We communicated the key audit matters to the Audit, Risk and Compliance Committee. KEY AUDIT MATTER HOW OUR AUDIT ADDRESSED THE KEY AUDIT MATTER Revenue Refer to note 11 – Operating segments This was a key audit matter because revenue is the Group’s most significant account balance in the consolidated statement of profit or loss and other comprehensive income, as well as the related party nature that makes them sensitive. Additionally, although there was no significant judgement involved in their determination, performance fees fluctuate depending on market performance. We performed the following audit procedures, amongst others: – – – – Obtained the most recent report issued by the third party service provider to assess the design and operating effectiveness of relevant controls over the funds under management (FUM). This report included an unqualified independent audit opinion over the design and operating effectiveness of those controls. 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. Assessed whether the revenue accounting policy was consistent with the requirements of Australian Accounting Standards. Agreed a sample of management fees back to relevant supporting external evidence, such as management agreements, underlying fund financial statements and third party calculations. – Recalculated a sample of management fees. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019103 KEY AUDIT MATTER 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, evaluate and assess the scope of the power and decision making authority held by the Group Assessed the Group’s exposure to each investment vehicles’ returns by considering the ownership percentage of the Group and multiplying the expected management and performance fees by the ownership percentage of the Group. Accounting for investment vehicles Refer to note 1 – Subsidiaries and controlled entities This was considered a key audit matter given the judgement required in determining the appropriate classification and accounting for the Group’s investments in subsidiaries and controlled 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 power to affect the amount of the return from each investment. At 20 May 2019, the Group concluded that it no longer controlled Platinum Asia Fund (Quoted Managed Hedge Fund) (“PAXX”) and as a result, this previously consoidated investment was recognised as an investment in associate and equity accounted from that date. 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 2019, but does not include the financial report and our auditor’s report thereon. Prior to the date of this auditor’s report, the other information we obtained included the Directors’ report, the Chairman’s report, Shareholder information and the Corporate directory. We expect the remaining other information to be made available to us after the date of this auditor’s report. Our opinion on the financial report does not cover the other information and we do not and will not express an opinion or any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information 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. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019104 Independent Auditor’s Report To the members of Platinum Asset Management Limited If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the other information not yet received, if we conclude that there is a material misstatement therein, we are required to communicate the matter to the Directors and use our professional judgement to determine the appropriate action to take. Responsibilities of the directors for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the Directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. 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. PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019105 Report on the Remuneration Report Our opinion on the Remuneration Report We have audited the remuneration report included in pages 25 to 42 of the Directors’ report for the year ended 30 June 2019. In our opinion, the remuneration report of Platinum Asset Management Limited for the year ended 30 June 2019 complies with section 300A of the Corporations Act 2001. Responsibilities The Directors of the Company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. PricewaterhouseCoopers R Balding Partner 20 August 2019 Sydney PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019 106 PLATINUM ASSET MANAGEMENT LIMITED ANNUAL REPORT 2019

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