Platinum Group Metals Ltd. Annual Report 2021

Plain-text annual report

A Annual Report 2021 Platinum Asset Management Limited ABN 13 050 064 287 Platinum Asset Management Limited Annual Report 2021PAGE HEADINGPAGE SUB HEADINGB Directors Guy Strapp (appointed on 27 August 2020) Stephen Menzies Anne Loveridge Brigitte Smith Tim Trumper Andrew Clifford Kerr Neilson Elizabeth Norman Andrew Stannard Michael Cole (retired on 20 November 2020) 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 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 Ernst & Young The EY Centre Level 34, 200 George Street Sydney 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/Shareholder-information/ Corporate Governance Statement The Corporate Governance Statement can be viewed at www.platinum.com.au/PlatinumSite/media/About/ ptm_corp_gov.pdf Platinum Asset Management Limited Annual Report 2021PAGE HEADINGPAGE SUB HEADINGContents Chairperson’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 The history of money and its role in the modern world article by Julian McCormack 1 2 6 16 19 53 54 56 58 60 61 102 103 IV Platinum Asset Management Limited Annual Report 20212 CHAIRMAN’S REPORT 2021 November 2020 turned out to be a somewhat unusual time to be appointed Chair, with COVID-19 restrictions leading to many remote (rather than physical) board meetings and a generally more challenging process to get to know Platinum’s people and business. I am pleased to say that, despite this, I was still able to hold face-to-face meetings with the entire investment team and all the business leaders. Whether in person or online, those early discussions reinforced my early perceptions about Platinum as being a place where the competitive advantage of the business resides largely in the breadth and depth of a talented team. This team is united by a common investment philosophy, one that is focused on generating long-term absolute returns through a contrarian and index-agnostic approach to stock selection. Importantly, Platinum’s business has continued to operate to its full capability while staff were working from home. The management team also adapted Platinum’s business development and research processes so that they could continue uninterrupted by the COVID-19 travel restrictions, while continuing to focus on developing Platinum’s business and delivering several product enhancements during the year, which I will describe later in this report. Funds Under Management (“FUM”) The last year was an exceptional period for equity investors, with the global stock market up 28%1 for the year ended 30 June 2021. Platinum’s strategies all delivered strong absolute investment returns, with Platinum’s flagship International and Asian equity funds both providing investment returns of circa 26% for the year ended 30 June 2021. The strongest-performing Platinum Trust® funds included the Platinum International Brands Fund (C Class +51%) and the Platinum International Health Care Fund (C Class +32%), which both significantly exceeded the returns of their nominated indices.2 FUM as at 30 June 2021 was $23.5 billion, an increase of 10% from the 30 June 2020 closing FUM of $21.4 billion. The change in FUM was driven primarily by investment performance of $5.5 billion. However, this was offset by net fund outflows of $2.3 billion. Although net outflows continued through 2021, despite strong absolute investment returns, they were down from the prior financial year (2020: $3.0 billion). Average FUM for the year decreased by 1.6% to $23.4 billion from an average FUM of $23.7 billion for the previous year. 1 2 MSCI AC World Net Index (A$). MSCI AC World Net Index (A$) and MSCI AC World Health Care Net Index (A$). References to “Platinum” are to Platinum Investment Management Limited. Source: Platinum. Fund returns are pre-tax, net of fees and costs and assume the reinvestment of distributions. Past performance is not a reliable indicator of future returns. Platinum Asset Management Limited Annual Report 20213 Operating Performance Profit before tax increased by 6.1% to $234.2 million for the year ended 30 June 2021 (2020: $220.8 million). Earnings per share for the 2021 financial year were up 1.4 cents to 28.2 cents per share (2020: 26.8 cents). Total revenue and other income increased by 5.9% to $316.4 million for the year ended 30 June 2021 (2020: $298.7 million). The significant increase in gains from Platinum’s seed investments was partially offset by a decrease in management and performance fee income. The 3.8% decrease in investment management fees (excluding performance fees) was primarily driven by the 1.6% decline in average FUM. Costs Included in the Remuneration Report on page 28 of the Company’s 2021 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 the link between investment performance and variable remuneration. Total employee expenses (including share-based payment expenses) increased by $6.8 million on the prior year. This primarily reflects an increase in variable compensation from the relatively lower level in the previous financial year. Total expenses for the financial year increased by $4.3 million to $82.2 million, on the prior year with employee expenses being the main contributor to this increase. Notwithstanding this, no member of the investment team received variable awards under the Profit Share Plan and Platinum’s Chief Executive Officer (CEO)/Co-Chief Investment Officer (CIO), Andrew Clifford, did not receive any variable awards for the 2021 financial year, either under the CEO Plan or the Investment Team Plan. Other costs decreased by $2.5 million compared to the previous financial year. The cost decrease is primarily due to negotiated cost savings with key suppliers. In addition, COVID-19 continued to restrict some marketing activities and business travel, however, those costs are likely to increase as restrictions ease. Dividends The Directors have declared a 2021 final fully franked ordinary dividend of 12 cents per share. This will be paid on 16 September 2021. A 2021 interim fully franked ordinary dividend of 12 cents per share was paid during the year. Whilst the Company has a Dividend Reinvestment Plan in place, it has not been activated. Platinum Asset Management Limited Annual Report 20214 CHAIRPERSON’S REPORT 2021 CONTINUED Business Development Platinum’s broad range of business development activities continued throughout 2021, albeit with some modifications due to COVID-19. Importantly, we also delivered two significant enhancements to our product range. First, we launched the fixed cash distribution option, which allows investors in the Platinum Trust® funds to elect to receive a fixed (currently 4%) annual cash distribution yield. Many investors rely on the annual distribution as a way to supplement their income. However, because distributions comprise dividends, interest, and realised capital gains or losses on the sale of investments, the distribution in any financial year can be unpredictable. The fixed cash distribution option has been designed to provide investors with access to more certain cash flow outcomes. We also launched the Platinum Investment Bond (Bond) in March 2021. The Bond is an investment vehicle that offers unique tax treatment, which is not available through many other savings and investment products. The Bond is a collaboration between Platinum (the investment manager) and Australian Unity (through its subsidiary Lifeplan Australia Friendly Society Limited - the issuer and administrator of the Bond). The Bond provides investors with access to two investment options, the Platinum International Fund established in 1995 and the Platinum Asia Fund established in 2003. Environmental, Social & Governance (“ESG”) Platinum has a deep and consistent commitment to sustainable business practices and responsible investment management. Since 2013, Platinum has been purchasing carbon credits to offset its carbon emissions. Mindful of the need to reduce carbon emissions, from April 2021 our Sydney office began sourcing 100% of its electricity needs from renewable energy sources. This year, we also strengthened our commitment to ESG by becoming a signatory to the United Nations Principles for Responsible Investment (UN PRI), and in February 2021, we appointed a dedicated investment specialist focused on ESG matters to work with the investment team and the broader organisation on the continued development, integration and communication of our ESG practices and policies. Lastly, during the financial year we improved our carbon disclosure by publishing our estimates of the carbon emissions generated by our funds’ investment portfolios. We hope that investors will use this information to consider ways in which they can offset the carbon emissions generated by their investments in our funds. For further information on ESG, please read Platinum’s ‘Corporate Responsibility and Sustainability Report’ available on our website. Platinum Asset Management Limited Annual Report 20215 Annual General Meeting The Company’s Annual General Meeting (“AGM”) will be held as a virtual event whereby shareholders can join online. The AGM Notice, including details of how to join the meeting, will be dispatched to shareholders in the coming weeks. The Board and its Associated Committees Platinum’s Audit, Risk and Compliance Committee (ARCC) has had a busy year, reviewing Platinum’s risk management framework and internal audit plan, receiving regular reporting on risk management matters and the results of internal audits, and monitoring the impact of changes to the legal and regulatory environment affecting Platinum. The ARCC also oversaw an external audit tender process, resulting in Ernst & Young’s appointment being approved by the Company’s shareholders at the last AGM. Furthermore, with the introduction of the new Modern Slavery Act 2018 (Cth), the ARCC reviewed PTM’s first modern slavery statement, which was filed with the Australian Border Force in March this year. This statement can be found on Platinum’s website. Lastly, as this is the first financial year that PTM is required to disclose against the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations – 4th Edition, the ARCC also reviewed and uplifted PTM’s corporate governance policies and procedures to address any gaps arising as a result of the revised requirements. Platinum’s Nomination and Remuneration Committee (NRC) similarly had a busy year. The NRC recommended the aggregate 2021 variable remuneration pool and awards for the CEO, Executive Directors and other senior managers within Platinum. In addition, the NRC continued with the Company’s program of succession planning, resulting in the appointment of myself to the Board and Kerr Neilson’s orderly transition into a non-executive director role, both in August 2020. Lastly, the NRC also dedicated much of its time to the development and introduction of a new long-term incentive plan which aims to retain key investment personnel and encourage an orderly transition to the next generation of leaders in the years to come. More details of this plan can be found in the Remuneration Report. Finally After the strong returns across Platinum’s investment product range during the year ended 30 June 2021, I expect that the future outlook for equity markets will be on the minds of many investors. I encourage you to read the Managing Director’s letter to shareholders by Andrew Clifford, which explains the basis of our investment philosophy and discusses Platinum’s investment outlook. Guy Strapp Chairman 25 August 2021 Platinum Asset Management Limited Annual Report 20216 MANAGING DIRECTOR’S LETTER 2021 At the time of writing, a large proportion of Australia’s population is in lockdown as the country endures another wave of COVID-19 infections, just as it was a year ago when I was writing last year’s letter to shareholders. In many respects, Australia has travelled through this period relatively well, though this is of little comfort to families that have been directly impacted by the disease and the loss of love ones. Nor to those who have suffered serious financial consequences, or to those simply impacted by the transformations of their daily lives and the loss of time with family and friends that cannot be regained. There appears to be light at the end of the tunnel, as our governments ramp up their vaccination efforts, and there are good reasons to hope that 2022 will gradually return to some sense of normalcy. It has clearly been a very difficult time for many of our clients and shareholders and we extend our best wishes to all. As I reported last year, the business handled the initial lockdown in March 2020 well, with a successful team effort to get the business fully operational on a work-from-home (WFH) basis immediately. As such, when Sydney was subject to lockdowns again in late June 2021, the transfer back to a WFH basis was seamless. In the intervening period, it was good to see the team back in the office from late last year, as we tested hybrid office – WFH arrangements. Our London team was particularly happy to be back in the office after WFH for a full 12 months. From the experience of this period, there are undoubtedly significant benefits to our employees and the business from greater flexibility in our working arrangements. There are also costs as well, most notably, the loss of social connection across the team, which is important in building a cohesive workplace. Finding the right balance in the post-COVID era is likely to be an iterative process and once we are back in the office, we will continue to experiment. Investment Performance Investment performance of the Platinum Trust Funds to 30 June 2021 FUND International Fund Global Fund (Long Only)1 Asia Fund European Fund Japan Fund International Brands Fund International Health Care Fund International Technology Fund 1-YEAR P.A. 5-YEAR COMPOUND P.A. 10-YEAR COMPOUND P.A. 26% 33% 26% 26% 18% 51% 32% 29% 11% 14% 15% 11% 10% 18% 20% 18% 11% 13% 13% 11% 14% 13% 19% 15% Source: Platinum Investment Management Limited. Fund returns are annualised, calculated using the relevant fund’s NAV unit price for C Class and represent the combined income and capital returns over the specified period. Fund returns are net of accrued fees and costs, pre-tax, and assume the reinvestment of distributions. Past performance is not a reliable indicator of future performance. 1 The Platinum Unhedged Fund was renamed Platinum Global Fund (Long Only) on 14 May 2021. Platinum Asset Management Limited Annual Report 2021 7 Investment performance is a critical driver of the future performance of our business. Over the last 12 months, clients have experienced strong absolute returns, with almost all our funds producing returns in the mid-20% range or better, for our Australian clients, and in the mid-30% range in US dollar terms for our offshore clients. This has been achieved in an investment environment that remains highly uncertain. The internet continues to enable new e-commerce businesses that are impacting a wide range of traditional business models, from retail (Amazon, Alibaba), to banking and finance (PayPal, Afterpay), travel and leisure (Priceline, Airbnb, Uber), and media (Google, Facebook, TikTok, Tencent). The biotech revolution promises to make similar far-reaching changes to all the component parts of our healthcare system in the years ahead. There is also the rising urgency for the world to deal with climate change, which is redirecting investment globally toward reducing carbon emissions and away from fossil fuels. Additionally, the global political environment continues to be problematic, with tensions between China and the West remaining at high levels. A raft of regulatory changes over the last year in China have caused uncertainty across a range of industries, including e-commerce and property development, both important drivers of economic growth. Of course, one cannot fail to mention the uncertainty for businesses and consumers induced by the COVID-19 pandemic and the waves of infections that have spread across the world. With this, there have also been extraordinary levels of government spending and money printing in response to the crisis, particularly in the US, resulting not only in dramatic increases in indebtedness in the major economies, but also the highest rates of inflation that have been seen, in some cases, for decades. All this, of course, has occurred at a time when investors can earn miniscule rates of interest on their bank deposits and fixed interest investments. If one was to describe this highly uncertain environment to investors of a decade ago, who had not experienced the intervening 10 years, it is likely that they would have assumed a highly depressed stock market trading on crisis-level valuations. Instead, we have one of the most exciting bull markets with some of the most extraordinary valuations seen in history, at least in some segments of the market. One could readily explain the phenomenon to a degree. Investors, pushed into the market by low interest rates on their savings, decided to back the companies that were winners in this environment, whether that be the fast-growing e-commerce, payments, and software companies, or in biotech companies revolutionising healthcare and helping to fight COVID-19. Alternatively, investors sought out highly defensive businesses selling consumer staples, such as household products and food and beverages. Investors, naturally, avoided anything exposed to the wild swings in the global economy, or potentially impacted by the tensions between China and the US. Platinum Asset Management Limited Annual Report 20218 MANAGING DIRECTOR’S LETTER 2021 CONTINUED This all makes intuitive sense. Unfortunately, it misses the most critical variable in investing, and that is, the return you receive in the long run will be determined by the price you pay for your investment and the future earnings or cashflows that it produces. Today, the prices being paid for the obvious beneficiaries of the current environment are high by any standard of history, even when adjusted for today’s low interest rates. Perhaps more importantly, there are risks for today’s market darlings that are possibly not given enough attention by investors. One risk is the potential for higher interest rates if inflation remains more persistent than otherwise expected. Another risk is the extraordinary sums of capital being attracted into these fast-growing areas, setting the scene for a more competitive environment in the future. Netflix faces numerous new players in video streaming, as does Afterpay in the buy now, pay later (BNPL) sector. Facebook now has to share user’s attention with TikTok. It is not unusual for disruptors in fast-growing sectors to be disrupted! Finally, there is the attention of the competition authorities around the world, that are carefully examining the business practices of the largest e-commerce players. Does the rapid change in technology the world is experiencing, together with permanently low interest rates, mean that “this time is different”? Or is it just like any other bull market in history, where excess liquidity and a good story propel prices ever higher? Only time will tell, but the one feature of the investing landscape that is likely to remain permanent, is the role of human psychology. Investors’ intuitive responses, driven by their cognitive biases, lead them to be systematically overly optimistic when times are good, and similarly overly pessimistic when they are not. These biases are at the core of Platinum’s investment approach of looking amongst the out-of-favour stocks for opportunities and avoiding the popular stocks. As such, our conclusion is that it is likely that we are in a traditional bull market, that will end at some point, with painful consequences for those who remain invested in the hottest parts of the market when the music stops! Platinum Asset Management Limited Annual Report 20219 Funds Under Management – Retention and Growth Funds Under Management ($ million, to 30 June 2021) OPENING BALANCE (1 JULY 2020) FLOWS PERFORMANCE INVESTMENT DISTRIBUTION AND OTHER % OF 2021) TOTAL CLOSING BALANCE (30 JUNE 13,241 (1,323) 3,389 (759) 14,548 62% FUNDS Retail offerings Platinum Trust Funds (excluding funds fed from PIXX and PAXX) and Platinum Global Fund (mFund) Quoted Managed Funds 2,144 (277) 559 PIXX and PAXX 453 (18) Listed Investment Companies PMC and PAI 837 - MLC Platinum Global Fund Institutional mandates Management Fee Mandates UCITS Platinum World Portfolios Cayman Funds 656 (109) 448 30 (111) - “Absolute” Performance Fee Mandates 352 (71) “Relative” Performance Fee Mandates 3,224 (346) TOTAL 21,385 (2,255) Source: Platinum Investment Management Limited. 112 213 185 110 8 77 798 5,451 (29) 518 2% (62) 988 4% - - - - - 732 3% 2,426 10% 447 38 2% 0% 358 2% (209) 3,467 15% (1,059) 23,522 100% The ‘Distribution and Other’ figure is comprised of the distribution from the Platinum Trust Funds/PGF/PIXX/ PAXX (as applicable). 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). Past performance is not a reliable indicator of future returns. Platinum Asset Management Limited Annual Report 2021 10 MANAGING DIRECTOR’S LETTER 2021 CONTINUED Funds under management were up 10% for the year to $23.5 billion, despite net outflows from the funds of $2.3 billion and a cash distribution at year end of a further $1 billion. These net outflows were more than offset by strong absolute investment performance that added $5.5 billion to the value of the funds. While we would usually see strong investment performance as a prelude to better funds flow in the future, there are a number of other variables to consider. Firstly, there has been a proliferation of new global managers in the Australian market in recent years, of which many have so-called growth investment styles. While we suspect this investment style will be seriously challenged at some point in the future, the behaviour of investors to follow past returns will likely see these managers take a significant share of fund flows for the moment. A longer-term issue is the trend towards the use of exchange-traded funds (ETFs). Hand in hand with this trend, has been the acceleration of the DIY investor during the pandemic, as highlighted by the success of the free trading program Robinhood in the US, and similar platforms elsewhere. While ETFs are traditionally associated with passive or index investing, increasingly, ETF providers are preying on investors’ fear of missing out, by packaging up neat parcels of stocks that tap into favourite investment themes, such as cloud computing or clean energy. A bear market may create a setback for the DIY investor and ETFs, though we suspect over the longer term, this trend will be ongoing. Our quoted managed fund (QMF) versions of the Platinum International Fund and Platinum Asia Fund were launched in 2017 to address this market (along with providing direct market access to our funds for our existing client base) and have been successful with $512 million under management (as at 31 July 2021). However, our assessment is that the DIY ETF investor has somewhat different requirements to our traditional client base, and accordingly, we are currently exploring the possibility of developing products to better target this market. Of increasing importance for our clients is their fund manager’s focus on the sustainability of their investee companies with respect to environmental, social and governance (ESG) issues. As long-term investors, a focus on the sustainability of our investments, across a range of issues, including those relating to ESG, has always been central to our process. Today’s market requires us to clearly demonstrate this to our clients, and as such, we have made the consideration of ESG issues an explicit part of our process. Additionally, we are in the early stages of increasing our engagement with our investee companies on ESG issues. Our goal is to set the standard in ESG integration in investing, which we can comfortably do without changing our fundamental approach to investing. We have recruited a dedicated ESG analyst to work with the investment team on delivering an approach to ESG that is deeply integrated in our investment analysis, and clearly communicated to our clients. Early initiatives include publishing the underlying carbon emissions of our investee companies in our funds, and providing clients with an ability to offset these emissions via the purchase of carbon credits. Additionally, we have become a signatory to the United Nations Principles of Responsible Investing (UN PRI). Platinum Asset Management Limited Annual Report 202111 We continued to evolve the communications effort with regard to financial advisers and our direct investors. This was evidenced through the regular rollout of enhanced webinars, virtual meetings and in some instances, a return to face-to-face meetings. Investment content was timely, accessible via a number of mediums, and widely distributed – not only through Platinum’s website, social media and advertising, but through several external content distributors. For the second year, we held our annual investor and adviser roadshow as a virtual event for Australian and New Zealand clients, as well as for our overseas UCITS clients. On our product and service offerings, we launched the Platinum Investment Bond in collaboration with Australian Unity. The product allows investors to access our global and Asian equity investment capabilities through the structure of a tax-effective investment bond. The attraction also lies in the ease of attaining long-term savings goals, estate planning benefits, as well as a product that caters for those who may have reached the upper limit of their superannuation contributions. We also introduced a fixed cash distribution option for the Platinum Trust Funds that offers investors the convenience of a stable cash flow. This removes the uncertainty for clients around the distribution amount, which is a particularly appealing feature for retirees. One of the biggest impacts of COVID-19 has been on our ability to expand our offshore businesses in Europe and the US, with our London office and the AccessAlpha Worldwide team in the US, limited by the extended periods of lockdowns in their respective countries and their inability to travel to meet prospective clients. Additionally, our investment specialists and investment team members have been unable to lend the usual support to the effort. While we have, of course, taken to virtual client interactions and attended numerous virtual conferences and events, both locally and offshore, our experience has been that, while this approach has been effective in maintaining contact with existing clients, it has been less effective in engaging with new prospects. Given the uncertainty of the last 12 months, it is our assessment that many prospective clients have been unwilling to make substantial changes to their manager line-ups. Building on Platinum’s continued progression of team members, a number of investment analysts and portfolio managers transitioned to new roles and opportunities. This included the appointment of Clay Smolinski to the role of co-Chief Investment Officer, alongside myself. Clay’s appointment will greatly assist in embedding the investment fundamentals across the team, as well as assisting with the client-facing communications that go hand in hand with the role. Platinum continuously focuses on the growth and development of the investment team and we pride ourselves on the long tenure of its members. Our portfolio managers have an average of 17 years of investment management industry experience (as at 30 June 2021), with 15 years at Platinum. Other members of the investment team on average have been with Platinum for more than seven years. We recognise that not everyone will spend their entire career at Platinum, and so our focus is on ensuring that the team continues to perform at a high level and there is a smooth succession when individuals depart. Platinum Asset Management Limited Annual Report 202112 MANAGING DIRECTOR’S LETTER 2021 CONTINUED Costs Costs remain well controlled, coming in at 26% of total revenue, in line with the previous financial year. Within these, employee costs rose $7.2 million to $44.4 million in 2021 (2020: $37.2 million). As previously discussed, the 2021 financial year saw strong investment performance across our funds. It should therefore be of no surprise to shareholders that variable compensation increased on the prior year. This increase was further accentuated by the full-year impact of 2020 salary increases and higher leave and on-cost expenses (partly COVID related). Share-based payment expenses totalled $6.4 million in 2021, roughly in line with the prior year. The current year charge reflected the combined cost of our deferred short-term remuneration plan (which defers a portion of each year’s short-term incentive over four years and is payable in Platinum shares) and our new Platinum Partners Long Term Incentive Plan, which has an eight-year service period and total shareholder return vesting conditions. The introduction of the Partners Plan is an important step in both aligning the interests of key staff with shareholders and also enhancing our remuneration structure to attract and retain. I expect the plan to become a more significant part of senior staff members’ total compensation in future years, with a commensurate impact on share-based payment expense. More information on this initiative can be found in the Remuneration Report. Non-employee costs reduced 7%, from $33.9 million in 2020 to $31.4 million in 2021. This was due to strong cost control across all expense categories (partly COVID related), as well as the turnaround effect of one-off 2020 legal expenses and office fit-out charges. It is a measure of Platinum’s culture of thrift that 2021 non-employee costs were actually lower than they were in 2018, with the additional costs of offshore office and product expansion being more than offset by savings in other areas of the business. Outlook It is highly likely that over the next 12 months, as progress is made in vaccinating large portions of the populations in the major economies, that the world will continue to progress toward a full reopening. This should underwrite ongoing improvements in economic activity. Whether this translates into good performance for stock markets is far from clear, given the many uncertainties outlined earlier. Nevertheless, it is a market environment that we would expect will provide many opportunities to investors. The investment team is focused on ensuring our funds are well positioned to take advantage of such opportunities as they arise. Platinum Asset Management Limited Annual Report 202113 Concluding Remarks There are many elements to the funds management business that happen behind the scenes. The daily processing of fund applications and redemptions, answering our client phone calls and emails, the settlement of our purchases and sales of shares for the funds, ensuring we meet the complex regulatory requirements for this industry, and keeping our IT systems up to date. We are fortunate to have a team of dedicated professionals in all these roles who do a tremendous job in ensuring that our business runs efficiently, and in navigating the past 12 months, I would like to thank them for their hard work. Finally, I would like to thank our clients and shareholders for their continued support during a challenging year, and again extend our best wishes to all to stay safe and keep well. Andrew Clifford Managing Director Platinum Asset Management Limited Annual Report 202114 Platinum Asset Management Limited Annual Report 2021PAGE HEADINGPAGE SUB HEADING15 Financial Statements 2021 Platinum Asset Management Limited General Information The financial statements were authorised for issue, in accordance with a resolution of Directors, on 25 August 2021. The Directors have the power to amend and reissue the financial statements. Platinum Asset Management Limited Annual Report 2021PAGE HEADINGPAGE SUB HEADING16 SHAREHOLDER INFORMATION The shareholder information set out below was applicable as at 20 August 2021. 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 5,067 10,909 3,319 2,282 80 21,657 480 Platinum Asset Management Limited Annual Report 2021 17 Ordinary shareholders Twenty largest ordinary shareholders The names of the twenty largest shareholders of the Company are listed below: ORDINARY SHARES % OF TOTAL NUMBER HELD SHARES ISSUED J Neilson K Neilson HSBC Custody Nominees (Australia) Limited Platinum Investment Management Limited (nominee) JP Morgan Nominees Australia Limited Citicorp Nominees Pty Limited Pacific Custodians Pty Limited National Nominees Limited Jilliby Pty Limited J Clifford BNP Paribas Nominees Pty Limited BKI Investment Company Limited BNP Paribas Nominees Pty Limited Xetrov Pty Limited Mrs Michele Martinez Starbrook Enterprises Pty Limited Brispot Nominees Pty Limited BNP Paribas Nominees Pty Limited Six SIS Limited First Samuel Limited Citicorp Nominees Pty Limited 126,037,421 126,037,420 89,069,072 29,364,201 26,899,699 24,765,534 8,018,094 7,263,124 6,500,000 5,000,000 3,825,232 1,738,000 1,697,637 1,500,000 1,072,309 1,000,000 953,405 816,913 803,066 760,381 21.48 21.48 15.18 5.01 4.59 4.22 1.36 1.24 1.1 1 0.85 0.65 0.30 0.29 0.26 0.18 0.17 0.16 0.14 0.14 0.13 463,121,508 78.94 Unquoted ordinary shares There are no unquoted ordinary shares, however the Company has shares based payment arrangements through which a total of 15,202,506 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 will have already been acquired on-market) will be allocated to these employees (please refer to the Remuneration Report and Note 17 for further details). Platinum Asset Management Limited Annual Report 2021 18 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 % OF TOTAL NUMBER HELD SHARES ISSUED 252,074,841^ 32,831,449^ 42.97 5.60 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 payment date These dates are indicative and may be changed. 2 September 2021 3 September 2021 16 September 2021 Notice of Annual General Meeting The Annual General Meeting (AGM) of Platinum Asset Management Limited will be held on Friday 17 November 2021. Details of how to attend the meeting will be included in the AGM Notice. 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 2021 DIRECTORS’ REPORT 19 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 2021. 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: Guy Strapp Stephen Menzies Anne Loveridge Brigitte Smith Tim Trumper Kerr Neilson Andrew Clifford Elizabeth Norman Andrew Stannard Michael Cole Chairman (from 21 November 2020) and Non-Executive Director (appointed on 27 August 2020) Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director (Executive Director until 31 August 2020) Chief Executive Officer/Managing Director Executive Director and Director of Investor Services and Communications Executive Director and Chief Financial Officer Chairman and Non-Executive Director (retired on 20 November 2020) 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 Fund Under Management (“FUM”) at 30 June 2021 was $23.5 billion and this represented an increase of 10% from the 30 June 2020 closing FUM of $21.4 billion. The closing FUM figure at 30 June 2021 was reduced by the annual net distribution outflow of $997 million. Average FUM for the year of $23.4 billion was similar to the average FUM of $23.7 billion for the previous year. The change in closing FUM was driven by absolute investment returns of $5.5 billion offset by net fund outflows of $2.3 billion and the 30 June 2021 net distribution. The Group’s profit before tax was $234 million for the year ended 30 June 2021, which is a 6.1% increase from the previous year. The increase in profit before tax was primarily due to gains on investments. Platinum Asset Management Limited Annual Report 2021 20 DIRECTORS’ REPORT CONTINUED The Group earned performance fee revenue of $4.0 million (2020: $9.1 million). Absolute investment performance contributed to the value of PIML’s seed investments which made a net gain for the year of $43.9 million (2020: $8.7 million). Staff costs (including share-based payments and related on-costs) were higher compared to the prior period, primarily due to higher variable compensation expenses. Non-staff expenses reduced by $2.5 million compared with the prior year primarily due to a decrease in custody costs that was partially offset by increased insurance expense. The Chairperson’s report and Managing Director’s Letter to shareholders provide further discussion and analysis of the group’s financial results and investment performance. Platinum continues to implement measures to maintain the ongoing safety and well-being of employees including allowing employees to work from home. COVID-19 has not had a direct impact on Platinum’s ability to perform core business activities or on Platinum’s revenues. Accordingly, Platinum has not received any COVID-19 related financial assistance or support. Platinum believes it is well positioned for growth because: • • • It maintains a highly differentiated product and maintains a strong position in the Australian retail market; Our offshore initiatives provide a platform for growth over the medium-term; and Our investment team continues to deliver high research quality and a large idea base. The Company is in a strong financial position, with a strong balance sheet. However, the most significant driver of sustainable future growth is, and will always be, the delivery of superior, long-term, investment returns for our clients. Likely developments Information about the business strategies and prospects for future financial years of the consolidated entity are included in the Operating and Financial Review. Further information about likely developments in the operations of the consolidated entity and the expected results of those operations in future financial years has not been included in this report because disclosure of the information would be likely to result in unreasonable prejudice to the consolidated entity because the information is commercially sensitive. 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 2021 final fully franked dividend of 12 cents per share ($70,401,468 including dividend paid on treasury shares), with a record date of 3 September 2021 and payable to shareholders on 16 September 2021. A 2021 interim fully franked dividend of 12 cents per share ($70,401,468 including dividend paid on treasury shares) was paid on 18 March 2021. A 2020 final fully franked dividend of 11 cents per share ($64,534,679) including dividend paid on treasury shares) was paid on 22 September 2020. Platinum Asset Management Limited Annual Report 202121 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, Social & Governance (“ESG”) Reporting Shareholders are encouraged to read Platinum’s Corporate Responsibility and Sustainability Report which is available at www.platinum.com.au/About-Platinum/ptm-shareholders. It is noted that the consolidated entity is not subject to any significant environmental regulation under Commonwealth, State or Territory laws. Information on Directors Guy Strapp BCOM, DIP AF&I, CFA Independent Non-Executive Director since 27 August 2020. Chairman (since 21 November 2020) and member of the Audit, Risk & Compliance and Nomination & Remuneration Committees (since 27 August 2020). Mr Strapp has over 35 years’ experience having worked in a variety of roles in Australia and abroad at Bank of America, JP Morgan Investment Management, Citigroup Asset Management and BT Financial Group. More recently, he held the positions of CIO and CEO of Eastspring Investments (formerly Prudential Asset Management) in Hong Kong. Guy brings to the Board his extensive local and international experience in asset management, gained on both the investment and distribution side of the business. Mr Strapp is also the Chair for the Australian wealth manager, First Samuel Limited. Stephen Menzies BECON, LLB, LLM Independent Non-Executive Director since 11 March 2015. Chair of the Nomination & Remuneration Committee and member of the Audit, Risk & Compliance. 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. Mr Menzies is a director of Platinum World Portfolios Plc. Former directorships include Freedom Insurance Group Ltd until 29 April 2019 and Century Australia Investments Limited until 5 March 2019. Platinum Asset Management Limited Annual Report 202122 DIRECTORS’ REPORT CONTINUED Anne Loveridge BA (HONS), FCA (AUSTRALIA), GAICD Independent Non-Executive Director since 22 September 2016. Chair of the Audit, Risk & Compliance Committee and member of the Nomination & Remuneration Committees. Ms Loveridge has over 35 years’ of experience in the financial services industry including as a Committee Chairperson and Non-Executive Director for three ASX-listed organisations. Formally trained as a Chartered Accountant, Anne has a breadth of experience in financial reporting, auditing, risk, ethics and regulatory affairs following a 30 year career at PwC Australia, where she retired as Partner and Deputy Chair in 2015. Through various senior leadership roles, Anne also has experience and a focus on leadership, performance and culture. Ms Loveridge is entitled to receive payments from PwC as part of a retirement plan. The payments are based on a set formula relating to her partnership and tenure with PwC. The amount is fixed and is not dependent on the revenues, profits or earnings of PwC. The Board is satisfied that this does not affect Ms Loveridge’s independence as a non-executive Director, nor does it constitute a conflict of interest and complies with the Corporations Act. The Board has, however, put in place appropriate safeguards to address any perceived conflicts of interest if they were to arise from time to time. Brigitte Smith B.CHEM ENG (HONS), MBA, MALD, FAICD Independent Non-Executive Director since 31 March 2018. Member of the Audit, Risk & Compliance and Nomination & Remuneration Committees. 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. Prior to GBS Ms Smith worked in the US and Australia in operating roles with fast growth technology based businesses, and at Bain & Company as a strategic management consultant. Tim Trumper MBA, UNE Independent Non-Executive Director since 1 August 2018. Member of the Audit, Risk & Compliance and Nomination & Remuneration Committees. 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. Platinum Asset Management Limited Annual Report 202123 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 Non-Executive Director from 1 September 2020 (Executive Director from 12 July 1993 to 31 August 2020). Member of the Audit, Risk & Compliance and Nomination & Remuneration Committees (since 1 September 2020). Mr Neilson founded Platinum 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 30 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 202124 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 25 years of legal experience in asset management and banking, in England and across Asia Pacific. Ms Jefferies joined Platinum from BNP Paribas Securities Services, where she was Head of Legal, Asia Pacific and Company Secretary of all Australian subsidiaries. Prior to this Ms Jefferies held senior legal positions with Russell Investments, Morley Funds Management (Aviva Investors) and Lord Abbett. She also 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 2021, and the number of meetings attended by each Director were: BOARD (HELD 6) ATTENDED NOMINATION & REMUNERATION COMMITTEE (HELD 6) ATTENDED* AUDIT, RISK & COMPLIANCE COMMITTEE (HELD 4) ATTENDED* Guy Strapp** Stephen Menzies Anne Loveridge Brigitte Smith Tim Trumper Kerr Neilson*** Andrew Clifford Elizabeth Norman Andrew Stannard Michael Cole** 5 6 6 6 6 6 6 6 6 3 5 6 6 6 6 5 – – – 2 4 4 4 4 4 3 – – – 2 Executive Directors may be invited to attend committee meetings as guests. * ** Mr Strapp and Mr Cole attended all meetings held during the time they were Directors. *** Mr Neilson was appointed a non-executive director as of 1 September 2021. Mr Neilson has attended all Committee meetings since 1 September 2021. Platinum Asset Management Limited Annual Report 2021 25 Interests in Registered Schemes The relevant interest in units of registered schemes managed by PIML for each Director is set out below. REGISTERED SCHEME Platinum Asia Fund DIRECTOR 30 JUNE 2021 30 JUNE 2020 Andrew Clifford 5,504,435 4,596,001 Kerr Neilson 47,323,794 70,032,218 Elizabeth Norman 1,271,902 Tim Trumper 27,268 933,746 27,268 Platinum International Fund Andrew Clifford 30,502,697 29,623,555 Kerr Neilson 14,817,222 36,530,841 Elizabeth Norman Stephen Menzies 512,480 62,530 497,709 62,530 Platinum Global Fund Andrew Clifford 6,017,357 5,566,437 Kerr Neilson 5,000,000 5,000,000 Elizabeth Norman 696,663 644,457 Platinum European Fund Kerr Neilson 15,399,420 11,725,650 Elizabeth Norman 283,112 – Platinum Japan Fund Kerr Neilson 34,029,763 37,515,151 Elizabeth Norman 239,591 235,287 Platinum Global Fund (Long Only) Kerr Neilson 27,691,013 27,542,508 Elizabeth Norman 171,193 153,677 Platinum International Brands Fund Kerr Neilson 2,533,841 2,518,798 Platinum International Healthcare Fund Kerr Neilson 12,723,287 12,650,427 Platinum International Technology Fund Kerr Neilson 14,504,419 9,173,625 Elizabeth Norman 182,975 – Platinum International Fund (Quoted Managed Hedge Fund) Anne Loveridge 15,721 12,454 Platinum Asia Fund (Quoted Managed Hedge Fund) Anne Loveridge Brigitte Smith Stephen Menzies 15,252 60,358 24,398 12,356 59,093 23,886 Platinum Asset Management Limited Annual Report 2021 26 DIRECTORS’ REPORT CONTINUED Indemnity and Insurance of Directors and Officers During the year, the Company incurred a premium in respect of a contract for indemnity insurance for the Directors and Officers of the Company named in this report. Indemnity of Auditor To the extent permitted by law, the Company has agreed to indemnify its auditors, Ernst & Young Australia, as part of the terms of its audit engagement agreement against claims by third parties arising from the audit (for an unspecified amount). No payment has been made to indemnify Ernst & Young Australia during or since the financial year. Non-Audit Services Details of the amounts paid or payable to the auditor for non-audit services provided during the financial year by the auditor are outlined in Note 24 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 24 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 Ethics for Professional Accountants issued by the Accounting Professional and Ethical Standards Board. Rounding of Amounts The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to ‘rounding-off’. Amounts in this report have been rounded off in accordance with that Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. 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 202127 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 53. 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 Guy Strapp Chairman 25 August 2021 Sydney Andrew Clifford Director Platinum Asset Management Limited Annual Report 2021 28 DIRECTORS’ REPORT CONTINUED Remuneration Report A Message from the Chair of the Nomination and Remuneration Committee On behalf of the Board, I am pleased to present the 2021 Remuneration Report. The core purpose of the Company is to deliver strong investment returns to clients over the medium to long-term, consistent with a risk profile that seeks to preserve clients’ capital during market downturns. Platinum believes that strong medium to long-term investment performance is the primary driver of fund inflows, profit growth and ultimately long-term value creation for shareholders. As such, Platinum’s remuneration policy is shaped around this core purpose. Importantly, Platinum can only achieve strong investment performance if it is able to attract and retain strong investment talent, supported by a team of similarly talented client service, business development and operational staff, since the key to the success of any asset management company lies in the skill and tenure of its team. Accordingly, Platinum’s remuneration program has three key elements, being fixed remuneration (salary and superannuation), short term variable awards, and long term variable awards. To ensure the alignment of Platinum’s investment team with investment returns for clients, the size of the short term variable remuneration pool for the investment team generally varies with the extent of relative investment performance generated for our clients, measured over both 1 and 3 year periods. That said, 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 inevitable. During such periods, the Board retains the right to make discretionary awards as it deems appropriate having regard to a number of quantitative and qualitative measures. The Committee focussed this year’s discretionary awards on the need to recognise and reward good performance by those individuals who need to be retained by the Company. Furthermore, to ensure a strong alignment with shareholders, this year Platinum introduced the new Platinum Partners Long Term Incentive Plan (the “Partners Plan”), with awards this year being granted to a number of Platinum’s investment team members. These awards have an eight year service period (more than double the typical industry standard) and vesting of the awards is dependent on certain total shareholder return (“TSR”) hurdles being achieved. The objective of this new plan is to attract and retain key talent by providing an opportunity to share in the firm’s future value creation. Platinum Asset Management Limited Annual Report 202129 Platinum’s Nomination and Remuneration Committee has been active in the 2021 financial year and up to the date of this report. In particular, we have: • • • • Introduced the new Partners Plan with initial awards being made under the plan to key investment team members as part of Platinum’s broader succession and retention policy; Continued to push forward our program of Board renewal with the appointment of a new Chairman; Reviewed and updated the CEO’s remuneration arrangements and KPIs; Reviewed and recommended to the Board the aggregate 2020/2021 variable remuneration pool as well as the individual awards for the CEO, executive directors and senior managers; and • Approved Platinum’s revised diversity and inclusion policy and objectives. 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 202130 DIRECTORS’ REPORT CONTINUED Remuneration Report – continued 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 2021. The Remuneration Report forms part of the Directors’ Report. The information provided in this Remuneration Report has been audited by the Company’s auditor, Ernst & Young, as required by section 308 (3C) of the Corporations Act 2001. Summary of Remuneration Outcomes for 2021 The Board remains focussed on ensuring there is a robust and rigorous process in place to determine remuneration outcomes. The Board applied significant oversight and judgement to ensure remuneration outcomes were fair, appropriate and competitive having regard to both individual and company-wide performance. In determining remuneration outcomes this year, the Board specifically: • • • • Sought to reward selected individuals within our client service, business development and operational teams who made outstanding contributions during the year. The Board recognises that it is critical that the Company retain talented non-investment staff to incentivise future innovation and business growth. Acknowledged that there were a number of investment professionals who delivered strong investment outcomes across a number of Platinum’s sector funds and who were consequently worthy of recognition. Considered the current level of staff ownership in the Company and the alignment of remuneration with shareholders’ return experience. Took into account the need to balance shareholder outcomes against key staff retention risk. The outcomes were as follows: • • Staff expenses increased by $7.2m on the prior year. Short term incentive payments accounted for $3.2m of this increase, with the remainder of the increase reflecting salary rises, termination payments, increased leave related accruals (largely due to COVID-19) and payroll tax related accrual adjustments. The underperformance of the international fund, relative to its index, was countered by significant outperformance in several of our sector funds. In comparison to the prior year, short term variable remuneration for the investment team (as a whole) increased, as did variable remuneration for non-investment staff (as a whole). There were no awards made under the Profit Share Plan (“PSP”), largely due to the under-performance of our international fund versus its index. However, the Investment Team Plan and General Employee Plan cash pools were increased. With the exception of a small group of employees who each made outstanding contributions to the business, increases in cash variable awards for non-investment staff members were generally modest, as were salary increases. Platinum Asset Management Limited Annual Report 202131 • • A total of $8.9m (2020: 8.7m) of short term variable remuneration was deferred for four years via the issuance of deferred rights under the existing Deferred Remuneration Plan. These rights will vest in June 2025 subject to continued service and non-forfeiture conditions. The accounting impact of the awards will be expensed through the profit and loss statement over the five year service period of the awards, so the expense impact will be apportioned over time. A total of 8.2m rights (2020: Nil) were awarded to select investment team members (excluding KMP) under the new Platinum Partners Long Term Incentive Plan (“Partners Plan”). Vesting of the rights is subject to Total Shareholder Return (TSR) conditions being met and other non-forfeiture conditions. The rights have a June 2029 exercise date. The awards will be expensed through the profit and loss statement over their nine year accounting service period, so the expense impact will be apportioned over time. The Committee intends that the operation of the Partners Plan will be extended more broadly in the future (including to KMP and non-investment team key leaders) to promote a greater alignment between the teams and with shareholders. • As was the case in 2020, the Chief Executive Officer/Chief Investment Officer, Mr Andrew Clifford, did not receive any variable awards in 2021. The allocation of the 2021 profits attributed to both shareholders and staff (in the form of remuneration) is outlined in the first graph below. It shows that the compensation awarded to staff was modest, relative to the returns to shareholders, with shareholders receiving a share of profits more than three times greater than staff. The second graph shows that alignment between director/staff shareholders and non- related shareholders remains strong. That said, with the transition of Mr Kerr Neilson into a non-executive directorship in September 2020, the Board is cognisant of the need to increase the equity ownership of key personnel over time, subject to the creation of shareholder value. The awards made this year under the new Partners Plan mark an important first step in this journey. Graph 1: Share of 2021 Profit (pre tax and pre staff costs) Graph 1: Share of 2021 Profit (pre tax and pre staff costs) Graph 2: Composition of PTM share ownership Graph 2: Composition of PTM share ownership Staff costs and Staff costs and share-based share-based payments expense payments expense 18% 18% 57% 57% Shareholders Shareholders 25% 25% Tax (community) Tax (community) Non Non related related shareholders shareholders 50% 50% Executive Directors and staff Executive Directors and staff 7% 7% 43% 43% Non Non Executive Executive Directors Directors Platinum Asset Management Limited Annual Report 2021 32 DIRECTORS’ REPORT CONTINUED Remuneration Report – continued Guiding Principles of KMP and Staff Remuneration The core purpose of the Company is to deliver strong investment returns to clients over the medium to long-term, consistent with a risk profile that seeks to protect clients’ capital against downside market risk. The Company can only achieve this by attracting and retaining superior investment talent, supported by a team of similarly talented client service, business development and operational staff. The success of our remuneration program is best measured by our long-term investment performance outcomes and the retention rate of key staff members. Platinum’s remuneration program has three1 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 nature of the role and the required levels of skills and experience. Short Term Variable Remuneration (cash and deferred equity): 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 (comprised entirely of non-executive directors), before ultimately being approved by the Board. Variable awards can be made in the form of cash or by an award of deferred rights that vest after a four year period, subject to continuous service during that period and other non-forfeiture conditions. This deferral element is designed to align employee’s interests with shareholders’, retain talent and foster sound financial, operational and risk management practices. 3. Long Term Variable Remuneration: key members of staff will be periodically invited by the Nomination & Remuneration Committee (upon the recommendation of the CEO), to participate in the new Partners Plan in order to directly align their compensation with shareholder value creation. These awards take the form of deferred rights and have an eight year service period. Vesting of the rights is dependent on certain total shareholder return hurdles being achieved. 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). Platinum Asset Management Limited Annual Report 202133 1. Fixed Remuneration Fixed Remuneration – Set to attract exceptional talent – Benchmarked to market – Rewards each employee for their skills, attributes and role accountabilities Reward Framework 2. Short Term Variable Remuneration (Cash & Deferred Equity) Variable Remuneration (Cash) – Performance goals set annually at the beginning of each performance period – Awards made annually with reference to individual performance – Other performance considerations include: • Company performance • Risk management factors • Leadership and behavioural factors • Competition for key staff 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 3. Long Term Variable Remuneration (Deferred equity) Long Term Variable Remuneration (Deferred equity) – On an invitation only basis – Improves alignment of employees and shareholders to future value creation – Vesting subject to performance hurdles – Significant deferral period to encourage a long term commitment to the firm Short Term Variable Remuneration Plans There were three short term variable cash remuneration plans in operation during the 2021 financial year, each of which operated in conjunction with the short term 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 award the value of which is linked to the PTM share price, which will vest four years after the grant date so long as the employee remains employed by Platinum during that time. Platinum Asset Management Limited Annual Report 202134 DIRECTORS’ REPORT CONTINUED Remuneration Report – continued The table below summarises the main characteristics of the Investment Team Plan and the Profit Share Plan, each of which are then discussed in more detail in the following section. PLAN SUMMARY Investment Team Plan PARTICIPANTS POOL FORMULA CAP Investment team Weighted average 1 and 3 year performance2 2x salary of investment team (caps out at 5% outperformance) AWARD TYPE HURDLE MSCI3 Profit Share Plan Investment team Weighted average 1 and 3 year performance 5% of adjusted net profit (caps out at 6% outperformance) MSCI +1% 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 aggregate base salaries 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 also benchmarked to appropriate external market data. 2 3 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. MSCI refers to the relevant MSCI index applicable to each strategy. Platinum Asset Management Limited Annual Report 202135 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-based4 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 Employee 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, skills and experience of each employee and their contribution during the year. Total remuneration outcomes (comprising both fixed and variable components) are also benchmarked to appropriate external market data. 4 Excluding investment related revenue and expenses. Platinum Asset Management Limited Annual Report 202136 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 (upon the recommendation of the CEO), generally during the annual award cycle. The proportion of each short term variable award that is allocated as deferred rights under the plan will vary 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”) at which PTM shares were traded on the ASX over the seven trading days prior to the award 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 rights. If an employee resigns from Platinum before the four year vesting period, in most circumstances, the deferred rights will be forfeited. In order to satisfy the obligations of the Company that arise from the granting of deferred rights, the Company currently intends to purchase PTM shares on-market and hold these shares within an employee share trust. Upon the exercise of a deferred right, eligible employees will receive one PTM ordinary share from the employee share trust in satisfaction of the right. No amount is payable by any eligible employee on either grant or exercise of the right. There is flexibility within the plan for the Committee to award cash or some other instrument rather than deferred rights, but the Committee currently envisages awarding rights over 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. Platinum Partners Long Term Incentive Plan (applies to selected staff only) In July 2021, the Nomination & Remuneration Committee approved the new Platinum Partners Long Term Incentive Plan (“Partners Plan”). The objective of the Partners Plan is to directly align employees’ compensation with shareholder value creation, foster sustainable growth, sound financial, operational and risk management practices, and to retain key talent. In its first year of operation the Committee approved allocations in the Partners Plan to members of the investment team. Platinum Asset Management Limited Annual Report 202137 Eligible employees are invited to participate in the Partners Plan by the Nomination & Remuneration Committee (upon the recommendation of the CEO), generally during the annual award cycle following a robust selection process that takes into account the performance of the individual, their contribution to the broader business and their likely contribution to future shareholder value creation. This approach is deliberately not formulaic but instead reflects the best judgement of Directors. The amount of each award will vary by employee, taking account the factors noted above. The number of deferred rights awarded is determined by dividing the discretionary award amount by the PTM share price, using a volume weighted average price (“VWAP”) at which PTM shares were traded on the ASX over the seven trading days prior to the grant date. The vesting of the deferred rights is conditional upon the Company meeting minimum Total Shareholder Return (“TSR”) performance hurdles as set forth in the table below (“TSR Hurdle”). Alternative criteria to TSR (for example financial growth or Investment performance measures) were considered by the Board but ultimately rejected as either not being fully aligned to shareholder outcomes, that could then generate perverse award outcomes (potentially applicable if individual investment performance was used as a criteria), or already employed as a criteria for short term awards (in the case of aggregate investment performance), or substantially correlated to TSR (in the case of EPS or Revenue growth). Each award that is granted, is divided into four tranches, with one quarter of the award being tested against the TSR Hurdle at the end of each year following the award grant date (“Performance Period”), for four years. The start price for the TSR Hurdle calculation will be the VWAP at which PTM shares were traded on the ASX over the seven trading days prior to the first trading day of the relevant Performance Period, and the end price will be the VWAP at which PTM shares were traded on the ASX over the seven trading days up to and including the last trading day of the relevant Performance Period. The number of PTM shares that an employee will be entitled to receive upon exercise of a deferred right within a tranche, will depend on the annualised TSR achieved by the Company during the relevant Performance Period (see table below). If the minimum TSR Hurdle (i.e. 7.5%) for a Performance Period is not met, then that tranche of deferred rights will not meet the vesting condition and will be forfeited. AWARD PERFORMANCE PERIOD PROPORTION OF AWARD THAT IS TESTED AGAINST THE TSR HURDLE Year 1 Year 2 Year 3 Year 4 25% 25% 25% 25% TSR 1 Year TSR 2 Year annualised TSR 3 Year annualised TSR 4 Year annualised TSR Platinum Asset Management Limited Annual Report 202138 DIRECTORS’ REPORT CONTINUED Remuneration Report – continued TSR HURDLE (VESTING CONDITION) TSR < 7.5% ENTITLEMENT TO RESULTING PTM SHARES PER DEFERRED RIGHT Nil TSR between 7.5% and 10% (target) Between 0.75 and 1 (on a pro-rata straight line basis) TSR between 10% and 15% Between 1 and 2 (on a pro-rata straight line basis) TSR at or above 15% 2 The exercise of deferred rights that have vested i.e. those deferred rights that have met or exceeded the TSR Hurdle for a Performance Period, is also subject to an eight year continuous service condition. In order to protect shareholders from the dual risks of loss of revenue and the loss of other key staff, Platinum has introduced certain “bad leaver” provisions under the Partners Plan rules. Under these rules, if an eligible employee leaves Platinum prior to the expiry of the eight year service condition, the employee will forfeit all deferred rights awarded (both vested and unvested) if the Board determines, acting reasonably, that the employee is a “bad leaver”. A bad leaver is defined under the Partners Plan rules, and includes a failure to comply with Platinum’s non-compete / non solicit / non-poaching conditions. Furthermore, awards of deferred rights may also be forfeited in accordance with any malus/clawback policy as may be established by the Board from time to time. Following the expiry of the eight year service condition, an eligible employee has a further five years to exercise any vested deferred rights. In certain limited situations, as set forth in the plan rules, the right to exercise deferred rights (both vested and those that subsequently vest after the relevant leaving date) may be accelerated if an eligible employee leaves Platinum prior to the expiry of the eight year service condition, provided that the Board has not determined that the employee is a “bad leaver”. In order to satisfy the obligations of the Company that may arise from the granting of deferred rights, the Company currently intends to purchase PTM shares on-market and hold these shares within an employee share trust. However, under the plan rules, the Company may also issue shares to satisfy deferred rights that are exercised. No amount is payable by any eligible employee on either grant or exercise of a deferred right. 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 carry an entitlement to an alternative dividend equivalent payment. This entitlement arises once a tranche of an award meets its TSR Hurdle for a Performance Period and continues until the corresponding deferred rights are exercised (“Holding Period”). During the Holding Period, an eligible employee will receive an amount approximately equal to the amount of dividends5 that would have been paid to the employee had they held the relevant resultant number of shares from the date the TSR Hurdle was met. Platinum has two inactive long-term remuneration plans, being an “Options and Performance Rights Plan” (OPRP) and a “Fund Appreciation Rights Plan” (FARP). There were no allocations under either plan in the current or prior year. 5 Adjusted for franking credits. Platinum Asset Management Limited Annual Report 202139 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 Guy Strapp Chairman (appointed 21 November 2020) and Non-Executive Director (appointed 27 August 2020) Stephen Menzies Non-Executive Director Anne Loveridge Non-Executive Director Brigitte Smith Non-Executive Director Tim Trumper Non-Executive Director Kerr Neilson Non-Executive Director (Executive Director until 31 August 2020) Andrew Clifford Chief Executive Officer (CEO) and Managing Director Elizabeth Norman Executive Director and Director of Investor Services and Communications Andrew Stannard Executive Director and Chief Financial Officer Michael Cole Chairman and Non-Executive Director until retirement on 20 November 2020 There were no other employees that held a KMP position within the Company or consolidated entity. Managing Director and other KMP Remuneration Managing Director/CEO Remuneration Mr Andrew Clifford is both the Managing Director/CEO and Chief Investment Officer (CIO) of the Company. Mr Clifford is eligible for discretionary awards under the CEO Plan (capped at A$1 million), subject to meeting certain key performance indicators (KPIs), as set by the Board. In addition, Mr Clifford is entitled to receive discretionary awards in relation to his role as CIO via the Investment Team Plan (ITP) and the Profit Share Plan (PSP). All amounts awarded to Mr Clifford under the CEO Plan, ITP or PSP will be provided to Mr Clifford as an equivalent award of deferred equity rights issued pursuant to the Deferred Remuneration Plan. Despite the achievement of a number of his CEO KPI’s (see table on the following page), having regard to the performance of the international fund relative to the index, Mr Clifford did not wish to receive any variable remuneration either in his role as CEO or CIO. Accordingly, although the Nomination and Remuneration Committee had initially intended for Mr Clifford to receive a partial award under the CEO Plan, the Nomination and Remuneration Committee ultimately recommended that Mr Clifford should not receive any variable remuneration awards under the CEO Plan, or under any of the other variable remuneration plans (Investment Team Plan and the Profit Share Plan). Platinum Asset Management Limited Annual Report 2021 40 DIRECTORS’ REPORT CONTINUED Remuneration Report – continued CEO PLAN: SHORT TERM REMUNERATION KEY PERFORMANCE INDICATORS AND PERFORMANCE PERFORMANCE MEASURES (EQUALLY WEIGHTED) FY21 PERFORMANCE AGAINST KPI’S Revenue and Profit Growth Average base fee revenue fell by 3.8% (target increase was 10%) MAXIMUM AWARD: $1M AWARDED: NIL Delivery against strategic plan – diversification of client base Average base fee margins maintained. Adjusted profit (excluding investment income and performance fees) decreased by 7.5% (target increase was 10%). Overall Assessment: Did not meet target Significant activity across Europe and US. New Cayman Funds seeded. Some new customer growth in UCIT funds. However, overall growth in client assets was disappointing in 2021. Overall Assessment: Partially met target People and Culture Leadership Generally well managed investment team cohesion and stability, albeit with one regretted departure. Risk Management & Operational Effectiveness Strong results from staff culture survey. Staff engagement and performance successfully maintained after transition to remote working due to COVID-19. Overall Assessment: Partially Met target No significant regulatory issues identified in 2021. No significant errors or breaches of investment guidelines. Continued enhancement of risk management framework and corporate governance frameworks. IT infrastructure was strengthened and operational effectiveness maintained. Overall Assessment: Met target Platinum Asset Management Limited Annual Report 202141 The performance measures that will apply for Mr Clifford’s 2022 financial year scorecard are as set forth below: CEO PLAN: SHORT TERM INCENTIVE MAXIMUM AWARD: $1M KEY PERFORMANCE INDICATORS AND PERFORMANCE PERFORMANCE MEASURES (EQUALLY WEIGHTED) Investment Performance Revenue and Profit Growth Diversification of client base People and Culture Leadership FY22 KEY PERFORMANCE INDICATORS Investment performance improvement Weighted average 1 & 3 year investment performance above benchmark across all portfolios. Base fee revenue and operating profit growth of 10% per annum, while having due regard to the quality of that growth. Diversification of client base Ongoing diversification of client base from Australia/NZ managed funds and the Australian institutional market. Investment team cohesion Ensure strong cohesion and stability within the investment team by attracting, retaining and developing key staff. Making Platinum a great place to work, ensuring low turnover across the broader team and the delivery of programs that aim to improve culture. Risk Management & Operational Effectiveness Good corporate reputation maintained. Effective implementation of operational risk policies and procedures. Ongoing regulatory compliance across all applicable jurisdictions with no material breaches or errors. Strengthening of IT and operational infrastructure. Platinum Asset Management Limited Annual Report 202142 DIRECTORS’ REPORT CONTINUED Remuneration Report – continued Managing Director and other KMP Remuneration – continued Other KMP Remuneration 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 and launch of several important business initiatives during the year including the new Platinum Investment Bond product and fixed cash distribution option for the Platinum Trust® Funds. There was an extensive development of the content and delivery of our communications with both investors and advisers, expansion of client relationships, as well as ongoing work associated with our European and US business development operations. The variable compensation paid to Andrew Stannard reflected both his role as Chief Operating Officer, his input into various strategic business issues and the provision of technical support for a number of new business development opportunities. Highlights included the delivery of the first phase of a multi-year project to upgrade Platinum’s operational effectiveness, the provision of operational support for new onshore and offshore business development, strong cost control, and working with the Board to design and implement a new long term remuneration plan. Platinum Asset Management Limited Annual Report 202143 Remuneration of Executive Key Management Personnel (KMP) The table below presents disclosure of the remuneration provided by the consolidated entity to executive KMP’s of the consolidated entity, based on the amounts awarded to the individuals during the year. No awards were made to KMP under the Partners Plan during the financial year. Any future awards made to KMP under the Partners Plan will be subject to shareholder approval at the upcoming AGM. SHORT TERM VARIABLE REMUNER- ATION (CASH) (2) $ SUPER- OTHER ANNUA- TION $ (1) $ CASH SALARY $ 2021 Andrew Clifford 450,000 – 21,694 Kerr Neilson (until 31/8/20) 75,000 219,178 3,616 – – SHORT TERM VARIABLE REMUNER- ATION (DEFERRED) (3) $ VARIABLE REMUNER- ATION AS A % OF TOTAL REMUNER- ATION (4) TOTAL $ – 471,694 0% – 297,794 Elizabeth Norman 425,000 Andrew Stannard 425,000 – – 21,694 1,000,000 500,000 1,946,694 21,694 425,000 250,000 1,121,694 1,375,000 219,178 68,698 1,425,000 750,000 3,837,876 2020 Andrew Clifford 450,000 Kerr Neilson 450,000 Elizabeth Norman 425,000 Andrew Stannard 425,000 1,750,000 – – – – – 21,003 21,003 – – – – 471,003 471,003 21,003 725,000 450,000 1,621,003 21,003 400,000 150,000 996,003 84,012 1,125,000 600,000 3,559,012 0% 77% 60% 57% 0% 0% 72% 55% 48% (1) “Other” represents a payment for accumulated annual and long service leave entitlements on retirement as an Executive Director in the current year. During previous years, an estimate of the amount was provided for in the consolidated entity’s statement of financial position and the annual increase in the provision was included in the table on the following page. (2) See the “Variable Remuneration Plans” section above 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 “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. (4) Fixed remuneration refers to salary and superannuation. Variable remuneration refers to both cash and deferred components. Platinum Asset Management Limited Annual Report 2021 44 DIRECTORS’ REPORT CONTINUED Remuneration Report – continued The table below presents the remuneration provided by the consolidated entity to executive KMP of the consolidated entity, in accordance with accounting standards. SUPER- OTHER ANNUA- TION $ (1) $ VARIABLE REMUNER- ATION (CASH) (2) $ CASH SALARY $ 2021 Andrew Clifford 450,000 24,091 21,694 Kerr Neilson (until 31/8/20) 75,000 6,285 3,616 – – VARIABLE REMUNER- ATION (DEFERRED) (3) $ VARIABLE REMUNER- ATION AS A % OF TOTAL REMUNER- ATION (4) TOTAL $ 237,997 733,782 32% – 84,901 Elizabeth Norman 425,000 8,758 21,694 1,000,000 409,100 1,864,552 Andrew Stannard 425,000 9,594 21,694 425,000 165,401 1,046,689 1,375,000 48,728 68,698 1,425,000 812,498 3,729,924 2020 Andrew Clifford 450,000 6,086 21,003 Kerr Neilson 450,000 (12,818) 21,003 – – 174,000 651,089 – 458,185 Elizabeth Norman 425,000 6,061 21,003 725,000 343,500 1,520,564 Andrew Stannard 425,000 27,632 21,003 400,000 95,700 969,335 1,750,000 26,961 84,012 1,125,000 613,200 3,599,173 0% 76% 56% 60% 27% 0% 70% 51% 48% (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 above 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 $237,997 attributable to Andrew Clifford represents the current year portion of the 2018 deferred award of $1,000,000. The accounting valuation of $409,100 attributable to Elizabeth Norman represents the current year portion of the 2021 deferred award of $500,000, the 2020 award of $450,000, the 2019 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 $165,401 attributable to Andrew Stannard represents the current year portion of the 2021 deferred award of $250,000, the 2020 award of $150,000, the 2019 award of $150,000, the 2018 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 2021 45 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. Platinum Asset Management Limited Annual Report 202146 DIRECTORS’ REPORT CONTINUED Remuneration Report – continued Remuneration Structure The following table displays the current Non-Executive Directors and their roles at 30 June 2021: NON-EXECUTIVE DIRECTOR GUY MICHAEL ANNE STEPHEN BRIGITTE STRAPP* COLE** LOVERIDGE MENZIES KERR ** SMITH TRUMPER NEILSON* TIM Board Chair Chair Director Director Director Director Director Audit, Risk & Compliance Committee Nomination & Remuneration Committee Member Member Chair Member Member Member Member Member Member Member Chair Member Member Member The table below shows how the cash salary remuneration is allocated reflecting their roles at 30 June 2021. NON-EXECUTIVE DIRECTOR GUY MICHAEL ANNE STEPHEN BRIGITTE STRAPP* COLE** LOVERIDGE MENZIES KERR ** SMITH TRUMPER NEILSON* TIM Board $230,000 $170,000 $130,000 $130,000 $130,000 $130,000 $130,000 Audit, Risk & Compliance Committee Nomination & Remuneration Committee $15,000 $15,000 $30,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $30,000 $15,000 $15,000 $15,000 Total $260,000 $200,000 $175,000 $175,000 $160,000 $160,000 $160,000 * Mr Strapp became a Non-Executive Director on 27 August 2020 and Chairman on 20 November 2020. Having regard to the fact that the Chairman’s fee had not changed since listing, following a benchmarking exercise, the Board approved an increase in the Chairman’s fee of $60,000 effective from Mr Strapp’s appointment as Chairman. ** Mr Cole retired as Chairman and Non-Executive Director on 20 November 2020. *** Mr Neilson became a Non-Executive Director on 1 September 2020. Platinum Asset Management Limited Annual Report 202147 Remuneration of Non-Executive Directors The table below presents actual amounts received by the Non-Executive Directors. The increase in total remuneration is primarily due to the higher number of Non-Executive Directors during 2021. CASH SALARY $ SUPER- ANNUATION $ VARIABLE REMUNER- ATION (CASH) $ VARIABLE REMUNER- ATION (DEFERRED) $ TOTAL $ 2021 Guy Strapp (from 27/8/20) Michael Cole (until 20/11/20) Stephen Menzies Anne Loveridge Brigitte Smith Tim Trumper Kerr Neilson (from 1/9/20) 2020 Michael Cole Stephen Menzies Anne Loveridge Brigitte Smith Tim Trumper 205,590 16,27 1 78,204 175,000 175,000 160,000 160,000 7,429 16,625 16,625 15,200 15,200 133,333 12,667 1,087,1 27 100,0 1 7 200,000 175,000 175,000 160,000 160,000 870,000 1 9,000 1 6,625 1 6,625 1 5,200 1 5,200 82,650 – – – – – – – – – – – – – – – – – – – – – – – – – – – – 221,86 1 85,633 191,625 191,625 175,200 175,200 146,000 1,187,144 2 1 9,000 1 91,625 1 91,625 175,200 175,200 952,650 Stephen Menzies is Platinum Investment Management Limited’s (PIML’s) nominee on the Board of the offshore UCITS, Platinum World Portfolios Plc (PWP) and payments are made directly by PWP. Amounts paid in the current year were €24,000 (equivalent to A$37,920) (2020: €24,000 (equivalent to A$40,928)). Platinum Asset Management Limited Annual Report 2021 48 DIRECTORS’ REPORT CONTINUED Remuneration Report – continued Managing Director and other Senior Executive employment agreements and Non-Executive Directors’ services 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 at least twelve months’ notice. All other Executive Directors can terminate their appointment by providing at least 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. Mr Kerr Neilson retired as an employee of Platinum Investment Management Limited (but remained a Director of the Company (albeit a Non-Executive Director)) with effect from 31 August 2020. Platinum Asset Management Limited Annual Report 202149 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 – 22,000 – 22,000 Guy Strapp (from 27/8/20) Michael Cole (until 20/11/20) Stephen Menzies Anne Loveridge Brigitte Smith Tim Trumper Andrew Clifford (1) Kerr Neilson 240,000 40,000 22,000 41,666 18,900 32,831,449 252,074,841 Elizabeth Norman (2) 766,748 Andrew Stannard (3) – – – – – – – – – – (240,000) (4) – – – – – – – – – 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 356,987 shares and vested, but unexercised, rights equivalent to 113,279 shares, both pursuant to awards made under the Company’s deferred remuneration plan. (3) Andrew Stannard has contingent rights to receive up to 148,813 shares and vested, but unexercised, rights equivalent to 21,552 shares, both pursuant to awards made under the Company’s deferred remuneration plan. (4) Resigned during the year. Platinum Asset Management Limited Annual Report 2021 50 DIRECTORS’ REPORT CONTINUED Remuneration Report – continued Oversight and Governance The Board, through its Nomination & Remuneration Committee, provides oversight over all fixed and variable remuneration 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; 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 2021 financial year, the Nomination & Remuneration Committee dealt with the following significant items that relate to remuneration arrangements: • • • • Introduced the new Partners Plan with initial awards being made under the plan to key investment team members as part of Platinum’s broader succession and retention policy; Continued to push forward our program of Board renewal, including the appointment of a new Chairman; Reviewed and updated the CEO’s remuneration arrangements and KPIs; Reviewed and recommended to the Board the aggregate 2020/2021 variable remuneration pool for Platinum as well as the individual awards for the CEO, executive directors and senior managers; and • Approved Platinum’s revised diversity and inclusion policy and objectives. Platinum Asset Management Limited Annual Report 202151 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 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 publicly available information at comparable companies. 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. Other related party payments involving KMP OneVue Services Pty Limited is a related party of the former Director Mr Cole. The consolidated entity paid $25,000 (2020: $60,000) to OneVue between 1 July 2020 and 20 November 2020. The services were provided on an arms length basis and Mr Cole was not involved in the decision to utilise OneVue’s services. Shareholders’ Approval of the 2020 (prior year) Remuneration Report A 25% or higher “no” vote on the Remuneration Report at an AGM triggers a reporting obligation on a listed company to explain in its next Annual Report how concerns are being addressed. At the last AGM (held 20th November 2020), the Company’s Remuneration Report was carried on a poll and received a vote in favour of 95.75%. Platinum Asset Management Limited Annual Report 202152 DIRECTORS’ REPORT CONTINUED Remuneration Report – continued Link between performance and KMP remuneration paid by the consolidated entity The table below shows Platinum’s five year performance across a range of metrics and corresponding KMP remuneration outcomes. 2021 2020 2019 2018 2017 Closing funds under management ($m) Average funds under management ($m) Net flows ($m) Average base management fee (bps p.a.) Base fee revenue ($m) Total revenue and other income ($’000) Total expenses ($’000) Operating profit after tax ($’000) Basic earnings per 23,522 21,385 24,769 25,699 22,713 23,363 (2,255) 23,749 (3,031) 25,394 26,528 23,443 (246) 1,034 (3,565) 114 265 316,419 82,207 116 276 116 295 116 307 127 296 298,666 299,320 353,290 333,549 77,897 76,421 84,966 62,971 163,258 155,611 158,336 191,594 192,647 share (cents per share) 28.17 26.76 27.03 32.36 31.74 Total dividends (cents per share) Share price at end of year Total aggregate KMP fixed remuneration paid ($) (1) Total aggregate KMP variable remuneration paid ($) (2) (3) 24 4.91 24 3.73 27 4.85 32 5.76 30 4.63 2,717,490 2,854,551 2,808,483 2,510,503 2,558,913 2,237,498 1,738,200 1,792,575 4,762,595 1,721,800 (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 amount is higher in FY2021, FY2020 and FY2019 due to the appointment of additional Directors in FY2019 and FY2018. (2) The increase in 2021 KMP variable remuneration reflected an increase in General Employee Plan awards made to Elizabeth Norman and Andrew Stannard in that year. (3) The increase in 2018 KMP variable remuneration reflected Investment Team and Profit Share Plan awards made to the CIO related to the significant investment out-performance generated for clients in that year. 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 2021 AUDITOR’S INDEPENDENCE DECLARATION TO THE DIRECTORS OF PLATINUM ASSET MANAGEMENT LIMITED 53 Ernst & Young 200 George Street Sydney NSW 2000 Australia GPO Box 2646 Sydney NSW 2001 Tel: +61 2 9248 5555 Fax: +61 2 9248 5959 ey.com/au As lead auditor for the audit of the financial report of Platinum Asset Management Limited for the financial year ended 30 June 2021, I declare 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 financial year. Ernst & Young Rita Da Silva Partner 25 August 2021 Sydney A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Platinum Asset Management Limited Annual Report 202154 CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2021 Revenue Management fees Performance fees Total revenue Other income Interest Distributions and dividends Share of profit of associates Gains on financial asset at fair value through profit or loss Foreign exchange (losses)/gains on overseas bank accounts Total revenue and other income Expenses Employee expenses NOTE CONSOLIDATED 2021 $’000 2020 $’000 3 3 6 265,290 3,950 269,240 275,902 9,078 284,980 541 3,437 30,974 12,955 (728) 1,707 1,855 7,426 1,237 1,461 316,419 298,666 Salaries and employee related expenses 44,395 37,207 Share-based payments Custody and unit registry Business development Technology, research and data Legal, compliance and other professional Depreciation of right-of-use assets Depreciation of fixed assets Mail house, periodic reporting and share registry Insurance Rent and other occupancy Finance costs on lease liabilities Other Total expenses Profit before income tax expense Income tax expense Profit after income tax expense 17 9 9 15 7 6,413 9,569 6,025 5,247 3,768 1,926 1,272 1,166 1,482 392 197 355 82,207 234,212 70,954 163,258 6,803 11,274 6,579 5,340 3,998 1,926 1,870 1,123 847 463 239 228 77,897 220,769 65,158 155,611 Platinum Asset Management Limited Annual Report 2021 55 Other comprehensive income Exchange rate translation impact of foreign subsidiaries and associates Other comprehensive income for the year, net of tax Total comprehensive income for the year Basic earnings per share Diluted earnings per share NOTE CONSOLIDATED 2021 $’000 2020 $’000 (5,399) (1,040) (5,399) 157,859 (1,040) 154,571 CENTS CENTS 28.17 28.00 26.76 26.76 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 2021 56 CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2021 Assets Current assets Cash and cash equivalents Term deposits Trade and other receivables Total current assets Non-current assets Equity investments in associates Financial assets at fair value through profit or loss Fixed assets Right-of-use assets Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Employee benefits Lease liabilities Income tax payable Total current liabilities Non-current liabilities Provisions Employee benefits Lease liabilities Net deferred tax liabilities Total non-current liabilities Total liabilities Net assets NOTE CONSOLIDATED 2021 $’000 2020 $’000 12 6 10 9 9 14 13 15 13 13 15 7 143,277 49,876 27,612 220,765 107,622 44,340 2,777 6,767 161,506 382,271 6,178 3,920 1,871 9,804 21,773 1,311 718 5,239 11,206 18,474 40,247 342,024 105,333 49,876 34,682 189,891 125,019 27,626 4,007 8,669 165,321 355,212 5,575 3,757 1,744 10,825 21,901 1,009 628 7,085 5,628 14,350 36,251 318,961 Platinum Asset Management Limited Annual Report 2021 57 NOTE CONSOLIDATED 2021 $’000 2020 $’000 18 19 714,893 717,998 (575,834) (572,082) 202,965 342,024 173,045 318,961 Equity Issued capital Reserves Retained profits Total equity The above consolidated statement of financial position should be read in conjunction with the accompanying notes. Platinum Asset Management Limited Annual Report 2021 58 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2021 CONSOLIDATED ISSUED CAPITAL $’000 RESERVES $’000 RETAINED PROFITS $’000 TOTAL EQUITY $’000 Balance at 1 July 2020 717,998 (572,082) 173,045 318,961 Profit after income tax expense for the year Other comprehensive income Exchange rate translation impact of foreign subsidiaries and associates Total comprehensive income for the year Transactions with owners in their capacity as owners: Treasury shares acquired (net) (Note 18) Share–based payments reserve Dividends paid – – – – 163,258 163,258 (5,399) – (5,399) (5,399) 163,258 157,859 (3,105) – – – 1,647 – – – (3,105) 1,647 (133,338) (133,338) Balance at 30 June 2021 714,893 (575,834) 202,965 342,024 Platinum Asset Management Limited Annual Report 2021 59 CONSOLIDATED ISSUED CAPITAL $’000 RESERVES $’000 RETAINED PROFITS $’000 TOTAL EQUITY $’000 Balance at 1 July 2019 723,490 (576,863) 174,461 321,088 Profit after income tax expense for the year Other comprehensive income Exchange rate translation impact of foreign subsidiaries and associates Total comprehensive income for the year Transactions with owners in their capacity as owners: Treasury shares acquired (net) (Note 18) Share–based payments reserve Dividends paid – – – – 155,611 155,611 (1,040) – (1,040) (1,040) 155,611 154,571 (5,492) – – – 5,821 – – – (5,492) 5,821 (157,027) (157,027) Balance at 30 June 2020 717,998 (572,082) 173,045 318,961 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. Platinum Asset Management Limited Annual Report 2021 60 CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2021 NOTE CONSOLIDATED 2021 $’000 2020 $’000 Cash flows from operating activities Receipts from operating activities Payments for operating activities Finance costs paid Income taxes paid 276,507 (71,661) (197) (64,139) Net cash from operating activities 16 140,510 Cash flows from investing activities Interest received Proceeds on maturity of term deposits Purchase of term deposits Payments for purchases of fixed assets Receipts from sale of financial assets Payments of purchases of financial assets Proceeds from sale of investments in associates Dividends and distribution received Net cash provided by investing activities Cash flows from financing activities Dividends paid Payments for purchase of treasury shares Payment of lease liability principal Net cash used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effects of exchange rate changes on cash and cash equivalents 277,363 (68,389) (239) (57,903) 150,832 1,920 371,754 (339,753) (2,261) 66 (26,167) – 2,558 8,117 519 117,753 (117,753) (41) 69,532 (75,514) 42,804 3,478 40,778 (133,337) (157,027) (7,326) (1,744) (8,143) (1,855) (142,407) (167,025) 38,881 (8,076) 105,333 112,947 (937) 462 Cash and cash equivalents at the end of the year 143,277 105,333 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. Platinum Asset Management Limited Annual Report 2021 61 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2021 Note 1. Corporate information Platinum Asset Management Limited (the “Company”) is a for-profit entity that is incorporated and domiciled in Australia. The Company is listed on the Australian Securities Exchange (ASX code: PTM). The principal activities of the Company and its subsidiaries (the “Group”) are described in note 4 segment information. This financial report was authorised for issue in accordance with a resolution of the Directors on 25 August 2021 and Directors have the power to amend and reissue the financial report. Note 2. Significant accounting policies Basis of preparation 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”). The consolidated financial statements are presented in Australian Dollars, which is also the Company’s functional 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 at fair value through profit or loss. The principal accounting policies have been included in the relevant notes to which the policy relates and have been 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 requires 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. In particular, the assessment of whether the Group has significant influence or control of those entities impacts on how their financial results are presented within these financial statements. Accounting standards and interpretations not yet mandatory or early adopted during the year There are no standards that are not yet effective that are expected to have a material impact on the Group in the current or future reporting periods and on foreseeable future transactions. The Company has not early adopted any standards, interpretations or amendments that have been issued but are not yet effective. Platinum Asset Management Limited Annual Report 202162 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2021 Note 2. Significant accounting policies – continued Accounting Standards adopted during the year There are no standards that are effective for the first time in the current period that have a material impact on the Group. Note 3. Revenue & other income The Group derived revenue (management and performance fees) from Australian and offshore investment vehicles and mandates as follows: Revenue breakdown by geographic region Australia Offshore: United States, Ireland and Cayman Islands Distributions and dividends is comprised of: Distribution received from investment in PAXX Dividend received from investment in PAI Dividend received from equity securities held by the Cayman and other seed funds Distribution received from investment in the Platinum Trust Funds Total distributions and dividends 2021 $’000 2020 $’000 261,323 7,917 269,240 279,520 5,460 284,980 2021 $’000 458 2,100 861 18 3,437 2020 $’000 562 1,200 82 11 1,855 Platinum Asset Management Limited Annual Report 2021 63 Note 3. Revenue & other income – continued ACCOUNTING POLICY Revenue is measured at an amount the Group expect to be entitled to receive in exchange for services provided to clients and recognised as performance obligations to the client are satisfied. Management fees are recognised over the period the service is provided. Management fees are based on a percentage of portfolio value of the fund or mandate and calculated in accordance with the Investment Management Agreement or Constitution. 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 are a form of variable consideration. Performance fees are recognised as revenue only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Other income is measured at the fair value of the consideration received or receivable and is recognised if it meets the criteria below: – – – – 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 Group becomes entitled to the income. Dividends: brought to account on the applicable ex-dividend date. Netgains/(losses)onfinancialassetsatfairvaluethroughprofitandloss: relates to net gains/(losses) on financial assets held directly by the consolidated investments, and recognised as and when the fair value of these investments changes and if disposed, the proceeds less carrying amount of financial assets disposed. Note 4. Segment information The Group 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; and investments and other: through the Group’s investment in the (a) ASX listed, Platinum Asia Investments Limited (“PAI”) (b) PWP (c) unlisted Platinum Trust Funds (d) the ASX quoted managed fund Platinum Asia Fund (Quoted Managed Hedged Fund) (“PAXX”) and (e) other seed funds. Also included in this category are Australian dollar term deposits as well as associated interest derived from these. Platinum Asset Management Limited Annual Report 202164 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2021 Note 4. Segment information – continued The segment financial results, segment assets and liabilities are disclosed below: 30 JUNE 2021 30 JUNE 2020 FUNDS INVESTMENTS AND OTHER $’000 MANAGEMENT $’000 TOTAL MANAGEMENT $’000 $’000 FUNDS INVESTMENTS AND OTHER $’000 TOTAL $’000 Revenue and other income Management and performance fees 269,240 - 269,240 284,980 - 284,980 Interest Net gains on financial assets and equity in associates Distributions and dividends Net foreign exchange (losses)/ gains on overseas bank accounts Total revenue and 288 253 541 482 1,225 1,707 - - - 43,929 43,929 3,437 3,437 (728) (728) - - - 8,663 8,663 1,855 1,855 1,461 1,461 other income 269,528 46,891 316,419 285,462 13,204 298,666 Expenses 82,018 189 82,207 77,506 391 77,897 Profit before income tax expense 187,510 46,702 234,212 207,956 12,813 220,769 Income tax expense 57,607 13,347 70,954 61,699 3,459 65,158 Profit after income tax expense 129,903 33,355 163,258 146,257 9,354 155,611 Other comprehensive income 34 (5,433) (5,399) (10) (1,030) (1,040) Total comprehensive income 129,937 27,922 157,859 146,247 8,324 154,571 Total assets 131,590 250,681 382,271 47,900 307,312 355,212 Total liabilities 31,764 8,483 40,247 Net assets 99,826 242,198 342,024 33,180 14,720 3,071 36,251 304,241 318,961 Platinum Asset Management Limited Annual Report 2021 65 Note 4. Segment information – 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 Executive Directors of the Company, who are responsible for the allocation of resources to operating segments and assessing their performance. Note 5. Group information The consolidated financial statements of the Group include: OWNERSHIP INTEREST NAME McRae Pty Limited Platinum Asset Pty Limited Platinum Investment Management Limited (“PIML”) Platinum Employee Share Trust^ Platinum GP Pty Limited Platinum Arrow Trust* PRINCIPAL PLACE OF BUSINESS / COUNTRY OF INCORPORATION Australia Australia Australia Australia Australia Australia Platinum UK Asset Management Limited** United Kingdom Platinum Management Malta Limited** Malta Platinum Asia Ex-Japan Opportunities Master Fund Ltd Cayman Islands Platinum Asia Ex-Japan Opportunities Fund Ltd Platinum Global Opportunities Master Fund Ltd Cayman Islands Cayman Islands Platinum Global Opportunities Fund Ltd Cayman Islands Platinum Europe Opportunities Master Fund Ltd*** Cayman Islands Platinum Europe Opportunities Fund Ltd*** Cayman Islands Platinum Japan Opportunities Master Fund Ltd*** Cayman Islands Platinum Japan Opportunities Fund Ltd*** Cayman Islands 2021 % 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 2020 % 100 100 100 100 100 - 100 100 100 100 100 100 100 100 100 100 ^ Platinum Employee Share Trust holds PTM shares on behalf of employees selected to participate in the Deferred Remuneration Plan and Partners Plan (see Note 17 for further details). Platinum Arrow Trust started trading on 1 September 2020. * ** Platinum UK Asset Management Limited and Platinum Management Malta Limited both act as sales and servicing centres for the Group, predominantly with the objective of generating additional fund inflows into PWP. *** Dormant entities. Platinum Asset Management Limited Annual Report 2021 66 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2021 Note 5. Group information – continued ACCOUNTING POLICY 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. 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 2021 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. Note 6. Equity investments in associates At 30 June 2021, the Group’s investment(s) in PAI, PWP and PAXX represent interests in associates which are accounted for using the equity method of accounting. Information relating to this is shown on the next page: Platinum Asset Management Limited Annual Report 202167 Note 6. Equity investments in associates – continued a. Interests in associates ENTITY COUNTRY OF INCOR- PORATION EQUITY INTEREST % FAIR VALUE $’000 CARRYING AMOUNT $’000 REASON FOR ASSESSMENT OF SIGNIFICANT INFLUENCE 2021 2020 2021 2020 2021 2020 PAI Australia 8.2 8.2 36,900 30,300 38,694 34,549 Ownership interest was 8.2% at 30 June 2021; PIML acts as Investment Manager (IM) in accordance with the Investment Management Agreement; PIML provides performance and exposure reports to the PAI Board. PWP Ireland 16.3 14.8 66,324 64,265 66,324 64,265 Ownership interest was 16.3% at 30 June 2021; PIML acts as 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. PAXX Australia 1.7 18.3 2,604 26,205 2,604 26,205 Ownership interest was 1.7% at 30 June 2021; PIML acts as IM for PAXX and its underlying fund, Platinum Asia Fund. Management has assessed that significant influence remains after the decrease in equity interest. 105,828 120,770 107,622 125,019 Platinum Asset Management Limited Annual Report 202168 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2021 Note 6. Equity investments in associates – continued Interests in associates – continued a. The fair value of PAI reflects the 30 million shares held multiplied by the PAI closing share price at 30 June 2021 of $1.23 (2020: $1.01). The fair value of PWP is approximated by the shares held in the sub-funds multiplied by their respective closing share prices at 30 June 2021. The fair value of PAXX reflects units held multiplied by the PAXX’s 30 June 2021 ex-redemption price of $5.05 (2020: $4.71). The carrying value reflects the Group’s share of each associate’s net assets, including assessment of any impairment (see Note 6c for further details). b. Associates’ statement of financial position 30 June 2021 Associates financial position PAI PWP PAXX Total associates’ statement of financial position Group’s share of associate PAI PWP PAXX Total Group’s share of associate TOTAL ASSETS^ $’000 TOTAL LIABILITIES* $’000 NET ASSETS $’000 498,661 447,174 180,624 27,270 610 26,522 40,838 66,461 3,052 2,144 137 448 471,391 446,564 154,102 1,072,057 38,694 66,324 2,604 107,622 Platinum Asset Management Limited Annual Report 2021 69 Note 6. Equity investments in associates – continued b. Associates’ statement of financial position – continued 30 June 2020 Associates financial position PAI PWP PAXX Total associates’ statement of financial position Group’s share of associate PAI PWP PAXX Total Group’s share of associate TOTAL ASSETS^ $’000 TOTAL LIABILITIES* $’000 NET ASSETS $’000 432,120 454,211 146,220 13,343 5,370 3,022 35,650 65,034 26,758 1,101 769 553 418,777 448,841 143,198 1,010,816 34,549 64,265 26,205 125,019 ^ * All assets held by associates are current assets. Associates total liabilities include non-current liabilities of $17,698,000 (2020: $9,236,000). c. Carrying amount of investment using the equity method Opening balance Sale of PAXX units Redemption of PWP units Share of associates’ profit (see Note 6d) Exchange rate translation impact Dividends paid and dilution of unitholding (see Note 6d) 2021 $’000 125,019 (29,869) (12,935) 33,517 (5,567) (2,543) 2020 $’000 117,593 – – 9,188 – (1,762) Closing balance (see Note 6a) 107,622 125,019 Platinum Asset Management Limited Annual Report 2021 70 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2021 Note 6. Equity investments in associates – continued d. Associate’s net income PAI $’000 PWP $’000 PAXX $’000 TOTAL $’000 30 June 2021 Associates’ net income Total investment income Total expenses Profit/(loss) before tax Income tax expense Total profit/(loss) after tax Group’s share of associate Total investment income Total expenses Profit/(loss) before tax Income tax expense Total profit/(loss) after tax 115,040 7,313 107,727 (31,801) 75,926 9,445 600 8,845 (2,615) 6,230 Dividend received and dilution of unitholding (2,085) – Undistributed profit in the period 4,145 20,560 152,174 5,508 146,666 – 37,577 – 37,577 – 304,791 12,821 291,970 (31,801) 146,666 37,577 260,169 21,460 900 20,560 – 20,560 6,727 – 6,727 – 6,727 (458) 6,269 37,632 1,500 36,132 (2,615) 33,517 (2,543) 30,974 Platinum Asset Management Limited Annual Report 2021 71 Note 6. Equity investments in associates – continued d. Associate’s net income – continued PAI $’000 PWP $’000 PAXX $’000 TOTAL $’000 30 June 2020 Associates’ net income Total investment income Total expenses Profit/(loss) before tax Income tax benefit Total profit/(loss) after tax Group’s share of associate Total investment income Total expenses Profit/(loss) before tax Income tax expense Total profit/(loss) after tax Dividend received and dilution of unitholding 63,942 8,664 55,278 (16,669) 38,609 5,275 715 4,560 (1,375) 3,185 (1,202) Undistributed profit in the period 1,983 32,319 7,828 24,491 – 19,464 – 19,464 – 24,491 19,464 1,083 262 821 – 821 1,812 2,633 3,562 – 3,562 – 3,562 (752) 2,810 115,725 16,492 99,233 (16,669) 82,564 9,920 977 8,943 (1,375) 7,568 (142) 7,426 Platinum Asset Management Limited Annual Report 2021 72 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2021 Note 6. 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 Assessmentofsignificantinfluence: At 30 June 2021, the consolidated entity was assessed as having significant influence over PAI, PWP and PAXX, as a result of its direct investment and investment management activities and other factors outlined in Note 6a. 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 2021, no impairment was identified for PAI, PWP and PAXX. The carrying amount for PAI is equal to the fair value of PAI’s underlying net assets. Platinum Asset Management Limited Annual Report 202173 Note 7. Income tax Income tax expense (a) The income tax expense attributable to profit comprises: Current tax payable Deferred tax 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 Share–based payments Other non–deductible expenses Franking credits received Income tax expense (b) Non–current liabilities – net deferred tax liabilities Deferred tax liabilities comprise temporary differences attributable to: Unrealised foreign exchange gains on cash Share–based payments Employee provisions Unrealised gains on investments Capital expenditure on fixed assets not immediately deductible Expense accruals Net deferred tax liabilities 2021 $’000 63,151 7,803 70,954 2020 $’000 63,682 1,476 65,158 234,212 70,264 220,769 66,231 (855) 1,076 389 798 (664) (488) (1,476) 334 942 (385) 70,954 65,158 2021 $’000 2020 $’000 6 4,747 (1,274) 8,477 (359) (391) 11,206 243 4,747 (1,618) 2,877 (184) (437) 5,628 Platinum Asset Management Limited Annual Report 2021 74 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2021 Note 7. Income tax – continued (b) Non-current liabilities - net deferred tax liabilities – continued The net deferred tax liability figure is comprised of $2,024,000 (2020: $2,239,000) of deferred tax assets and $13,230,000 (2020: $7,867,000) of deferred tax liabilities. The deferred tax assets that will be recovered or settled within 12 months are estimated to be $2,003,000 at 30 June 2021 (2020: $2,055,000). 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 and is expected to cease after 30 June 2023. 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 202175 Note 8. Earnings per share Profit after income tax attributable to the owners of Platinum Asset Management Limited 163,258 155,611 2021 $’000 2020 $’000 Weighted average number of ordinary shares used in calculating basic earnings per share Adjustment for deferred rights Weighted average number of ordinary shares used in calculating diluted earnings per share Basic earnings per share Diluted earnings per share NUMBER NUMBER 579,542,631 581,507,729 3,587,674 13,929 583,130,305 581,521,658 CENTS 28.17 28.00 CENTS 26.76 26.76 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. The weighted average number of ordinary shares used to calculate basic (and diluted) earnings per share does not include treasury shares. 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 potential ordinary shares that have a dilutive impact. Platinum Asset Management Limited Annual Report 2021 76 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2021 Note 9. Depreciable assets Fixed assets - at cost Less: Accumulated depreciation Right-of-use asset - at cost Less: Accumulated depreciation 2021 $’000 6,018 (3,241) 2,777 10,620 (3,853) 6,767 2020 $’000 9,735 (5,728) 4,007 10,595 (1,926) 8,669 Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Balance at 1 July 2019 AASB 16 adjustment on 1 July 2019 Additions Depreciation expense Balance at 30 June 2020 Additions Depreciation expense Balance at 30 June 2021 FIXED RIGHT-OF-USE ASSET $ ’000 ASSETS $’000 3,616 – 2,261 (1,870) 4,007 42 (1,272) 2,777 - 10,595 – (1,926) 8,669 24 (1,926) 6,767 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 of 2.5 to 8 years using the diminishing balance method. 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. Right-of-use assets are measured at cost comprising the amount of the measurement of the lease liability adjusted for any lease payments made before commencement date. Right-of-use assets are depreciated over the lease term on a straight-line basis. Platinum Asset Management Limited Annual Report 2021 77 Note 10. Financial assets at fair value through profit or loss Platinum Trust Fund investments Equity securities held by the seeded investments 2021 $’000 220 44,120 44,340 2020 $’000 184 27,442 27,626 ACCOUNTING POLICY The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the consolidated entity’s process for managing them. The consolidated entity’s 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 participants 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. Note 11. 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: (i) quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1); (ii) inputs other than quoted prices included within level 1 that are observable for the asset or liability either directly (as prices) or indirectly (derived from prices) (level 2); and (iii) inputs for the assets or liabilities that are not based on observable market data (unobservable inputs) (level 3). At 30 June 2021, the investments 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, PWP would be classified as level 2 whilst PAI and PAXX would be classified as level 1. Further details of the fair value of investments in associates is provided in note 6. Platinum Asset Management Limited Annual Report 2021 78 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2021 Note 11. Fair value measurement – continued Fair value hierarchy – continued 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 2021 and 30 June 2020. 2021 Assets LEVEL 1 $’000 LEVEL 2 $ ’000 LEVEL 3 $ ’000 TOTAL $ ’000 Equity securities held by wholly owned seed funds 43,649 Platinum Trust Fund investments – 43,649 211 220 431 260 – 260 44,120 220 44,340 2020 Assets LEVEL 1 $ ’000 LEVEL 2 $ ’000 LEVEL 3 $ ’000 TOTAL $ ’000 Equity securities held by wholly owned seed funds 27,442 Platinum Trust Fund investments – 27,442 – 184 184 – – – 27,442 184 27,626 Valuation techniques used to classify assets as level 2 The direct investments in the Platinum Trust Funds are valued using their respective Net Asset Values (adjusted for the buy-sell spread) and include the impact of the 30 June distribution. Accordingly, management has assessed the fair value investments as being level 2 investments. Valuation techniques used to classify assets as level 3 Unlisted investments held by wholly owned seed funds are classified as level 3. These assets are valued in accordance with a valuation policy established by PIML as the investment manager. Level 3 assets were 0.1% of net assets at 30 June 2021 (2020: 0%). Platinum Asset Management Limited Annual Report 2021 Note 12. Trade and other receivables Management fees receivable Performance fees receivable Prepayments Distribution receivable from PAXX and Platinum Trust Funds Sundry debtors 79 2021 $’000 24,892 128 1,902 476 214 2020 $’000 23,047 9,042 1,914 573 106 27,612 34,682 Management and performance fees receivable(s) are received between three to 30 days after balance date. ACCOUNTING POLICY Trade receivables represents amounts receivable for services that have been delivered. These amounts are initially recognised at fair value. An analysis is performed at each balance date to measure any expected credit loss. Expected credit losses are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the group expects to receive, discounted at an approximation of the original effective interest rate. No adjustment was required for expected credit losses during the year or prior period. Distributions are recognised when the consolidated entity becomes entitled to the income. Platinum Asset Management Limited Annual Report 2021 80 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2021 Note 13. Provisions & employee benefits Current liabilities Annual leave Long service leave Non-current liabilities Long service leave Provision for payroll tax on Deferred Remuneration Plan 2021 $’000 2,220 1,700 3,920 718 1,311 2,029 2020 $’000 1,826 1,931 3,757 628 1,009 1,637 ACCOUNTING POLICY Employee benefit liabilities represents accrued 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. Note 14. Trade and other payables Trade payable GST payable 2021 $’000 3,934 2,244 6,178 2020 $’000 3,830 1,745 5,575 ACCOUNTING POLICY Payables represent amounts owing at balance date. Trade payables relate to services provided to the consolidated entity at balance date, which are unpaid. Due to their general short-term nature, they are measured at amortised cost and are not discounted. The amounts are unsecured and are usually paid within 14 to 30 days of being invoiced. Platinum Asset Management Limited Annual Report 2021 81 Note 15. Leases PIML has entered into lease agreements for the Sydney and London premises it occupies and pays rent on a monthly basis. Set out below are the carrying amounts of lease liabilities and the movements during the period: Balance at 1 July AASB 16 adjustment on 1 July Payments Accretion of interest Balance at 30 June Current Non–current 2021 $’000 8,829 – (1,916) 197 7,110 1,871 5,239 2020 $’000 – 10,444 (1,854) 239 8,829 1,744 7,085 The following amounts are recognised in the statement of profit or loss in respect of leases: Rent and other occupancy Depreciation of right of use asset Finance costs on lease liabilities 30 JUNE 2021 $’000 30 JUNE 2020 $’000 392 1,926 197 2,515 463 1,926 239 2,628 Future minimum rentals payable under short–term leases are as follows: Within one year 30 JUNE 2021 $’000 30 JUNE 2020 $’000 96 89 Platinum Asset Management Limited Annual Report 2021 82 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2021 Note 15. Leases – continued ACCOUNTING POLICY Assets and liabilities arising from the premises lease are initially measured on a present value basis. Lease liabilities include the net present value of the future lease payments, less any lease incentives receivable. The lease payments used to determine the lease liability were discounted using an estimated incremental borrowing rate of 2.5% at the date of initial application. The consolidated entity is exposed to potential future increases in variable lease payments based on an index or rate, which are not included in the lease liability until they take effect. When adjustments to lease payments based on an index or rate take effect, the lease liability is reassessed and adjusted against the right-of-use asset. Lease payments are allocated between principal and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The lease payments for short-term leases are be charged to the consolidated statement of profit or loss and other comprehensive income. Note 16. Reconciliation of profit after income tax to net cash from operating activities 2021 $’000 2020 $’000 Profit after income tax expense for the year 163,258 155,611 Adjustments for: Share-based payments expense Foreign exchange differences on foreign bank account Distributions and dividends received Depreciation of fixed assets Depreciation of right-of-use asset Interest income Gain on investments Movement in operating assets and liabilities: Movement in trade and other receivables Movement in income tax payable Movement in trade and other payables Movement in deferred tax assets Movement in deferred tax liabilities Movement in provisions 6,413 728 (3,437) 1,272 1,926 (541) (43,929) 7,070 (1,021) 413 215 7,588 555 6,803 (462) (1,855) 1,870 1,926 (1,707) (8,664) (7,716) 5,743 (2,218) 77 1,399 25 Net cash from operating activities 140,510 150,832 Platinum Asset Management Limited Annual Report 2021 83 Note 17. Share based payments Deferred Remuneration Plan In June 2016, a “Deferred Bonus Plan” (now known as a “Deferred Remuneration Plan” or “DRP”) was approved by the Nomination & Remuneration Committee of the Company. The main objective of the Deferred Remuneration Plan is to recognise the contributions made by key employees and to retain their skills within the firm. Vesting is conditional on continuous employment for a period of four years from the date of grant. 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. The number of rights granted and the accounting expense for the current and comparative year is shown below. The trust will generally purchase an equivalent number of the Company’s shares on market and will hold these shares until the vesting date (four years from each grant) and subsequent exercise. NUMBER OF DEFERRED RIGHTS 2020 $’000 2021 $’000 Opening balance Granted during the year Forfeited during the year 7,115,680 1,810,880 (1,682,250) Vested, exercised and then transferred to eligible employees (271,171) 5,095,797 2,341,845 (34,233) (287,729) Closing balance Exercisable at the end of the period 6,973,139 7,115,680 734,408 352,516 Long-Term Remuneration Plan Whilst the Nomination & Remuneration Committee approved the new Platinum Partners Long Term Incentive Plan (“Partners Plan”) in July 2021, services were received from employees from date of communication during the year ended 30 June 2021. The objective of the Partners Plan is to directly align employees’ compensation with shareholder value creation, foster sustainable growth, sound financial, operational and risk management practices, and to retain key talent. Platinum Asset Management Limited Annual Report 2021 84 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2021 Note 17. Share based payments – continued Long-Term Remuneration Plan – continued The vesting of the deferred rights is conditional upon the Company meeting minimum Total Shareholder Return (“TSR”) performance hurdles as set forth in the table below (“TSR Hurdle”). Each award that is granted, is divided into four tranches, with one quarter of the award being tested against the TSR Hurdle at the end of each year following the award grant date (“Performance Period”), for four years. The start price for the TSR Hurdle calculation will be the VWAP at which PTM shares were traded on the ASX over the seven trading days prior to the first trading day of the relevant Performance Period, and the end price will be the VWAP at which PTM shares were traded on the ASX over the seven trading days up to and including the last trading day of the relevant Performance Period. The number of PTM shares that an employee will be entitled to receive upon exercise of a deferred right within a tranche, will depend on the annualised TSR achieved by the Company during the relevant Performance Period (see table below). If the minimum TSR Hurdle (i.e. 7.5%) for a Performance Period is not met, then that tranche of deferred rights will not meet the vesting condition and will be forfeited. AWARD PERFORMANCE PERIOD PROPORTION OF AWARD THAT IS TESTED AGAINST THE HURDLE Year 1 Year 2 Year 3 Year 4 25% 25% 25% 25% HURDLE 1 Year TSR 2 Year annualised TSR 3 Year annualised TSR 4 Year annualised TSR TSR HURDLE (VESTING CONDITION) TSR < 7.5% ENTITLEMENT TO RESULTING PTM SHARES PER DEFERRED RIGHT Nil TSR between 7.5% and 10% (target) Between 0.75 and 1 (on a pro-rata straight line basis) TSR between 10% and 15% Between 1 and 2 (on a pro-rata straight line basis) TSR at or above 15% 2 The exercise of deferred rights that have vested (i.e. those deferred rights that have met or exceeded the TSR Hurdle for a Performance Period) is also subject to an eight year continuous service condition. Platinum Asset Management Limited Annual Report 202185 Note 17. Share based payments – continued Long-Term Remuneration Plan – continued 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 carry an entitlement to an alternative dividend equivalent payment. This entitlement arises once a tranche of an award meets its TSR Hurdle for a Performance Period and continues until the corresponding deferred rights are exercised (“Holding Period”). During the Holding Period, an eligible employee will receive an amount approximately equal to the amount of dividends that would have been paid to the employee had they held the relevant resultant number of shares from the date the TSR Hurdle was met. In the current year, the total fair value of rights arising from the June 2021 allocation awards was $27,568,379 (2020: $0), which was based on the 8,229,367 additional rights (2020: 0) granted. The fair value of rights was estimated at $3.35 based on the share price at grant date of $4.36 adjusted for the fair value of dividends forfeited and graded vesting based on the TSR Hurdle. The fair value was estimated using a Monte Carlo model with expected volatility of 35%, expected dividend yield of 5.2% and risk free rate of 0.01%. Expenses Arising from Share-Based Payment Transactions (DRP & Partner Plan) ACCOUNTING EXPENSE Deferred rights granted in 2021: Partners Plan Deferred rights granted in 2021: DRP Deferred rights granted in 2020: DRP Deferred rights granted in 2019: DRP Deferred rights granted in 2018: DRP Deferred rights granted in 2017: DRP Deferred rights granted in 2016: DRP Total share–based payments expense Associated payroll tax expense Total 2021 $’000 2,665 1,442 925 566 736 79 – 6,413 366 6,779 2020 $’000 – – 1,520 1,267 2,131 831 1,054 6,803 371 7,174 Platinum Asset Management Limited Annual Report 2021 86 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2021 Note 17. Share based payments – 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 an employee becomes unconditionally entitled to the share. In measuring the share-based payment expense, 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 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 202187 Note 18. Issued capital 2021 SHARES 2020 SHARES Ordinary shares - fully paid (a) 586,678,900 586,678,900 Treasury shares (b) (8,018,094) (6,687,403) Total issued capital 578,660,806 579,991,497 2021 $’000 751,355 (36,462) 714,893 2020 $’000 751,355 (33,357) 717,998 (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 significant 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 17). 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: 2021 SHARES 2020 SHARES 2021 $’000 2020 $’000 Opening balance 6,687,403 5,095,797 33,357 27,865 Shares acquired by the Employee Share Trust Shares transferred to employees Balance at the end of the financial year 1,779,817 1,879,335 7,326 7,105 (449,126) (287,729) (4,221) (1,613) 8,018,094 6,687,403 36,462 33,357 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 purchases shares in the Company, the consideration paid is deducted from total shareholders’ equity and the shares are treated as treasury shares. Treasury shares are recorded at cost and when restrictions on employee shares are lifted which is dependent on vesting and exercise of the rights, the cost of such shares will be adjusted to the share- based payments reserve. Platinum Asset Management Limited Annual Report 2021 88 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2021 Note 19. Reserves Foreign currency translation reserve Capital reserve Share-based payments reserve 2021 $’000 (6,334) 2020 $’000 (935) (588,144) (588,144) 18,644 16,997 (575,834) (572,082) Foreign currency translation reserve Exchange differences arising on translation of foreign controlled entities and associates are recognised in other comprehensive income and accumulated as a separate reserve within equity. The movement in the current year relates primarily to translating the net assets of PWP and the Cayman Funds. 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 PIML 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 PIML. Subsequently, 140,250,000 shares on issue representing 25% of the issued shares of the Company were sold to the public by existing shareholders. The amount of $588,144,000 was established on listing as a result of the difference between the consideration paid for the purchase of non-controlling interests and the share of net assets acquired in the minority interests. Share-based payments reserve In June 2016, the consolidated entity established the Deferred Remuneration Plan. The amount in the share-based payments reserve is comprised of the amortisation of the rights granted and any associated future tax deduction. Platinum Asset Management Limited Annual Report 2021 89 Note 19. Reserves – continued Movements in reserves Movements in each class of reserve during the current and previous financial year are set out below: SHARE- BASED PAYMENTS $’000 FOREIGN CURRENCY $’000 CAPITAL $’000 TOTAL $’000 Balance at 30 June 2019 11,176 105 (588,144) (576,863) Exchange rate translation impact Movement in share–based payments reserve Balance at 30 June 2020 – (1,040) 5,821 16,997 (935) (588,144) (572,082) – – (1,040) 5,821 – – (5,399) 1,647 – – Exchange rate translation impact – (5,399) Movement in share–based payments reserve Balance at 30 June 2021 1,647 18,644 (6,334) (588,144) (575,834) Note 20. Dividend made and proposed Dividends paid Dividends paid during the financial year were as follows: Final dividend paid for the 2020 financial year (11 cents per share) Interim dividend paid for the 2021 financial year (12 cents per share) Final dividend paid for the 2019 financial year (14 cents per share) Interim dividend paid for the 2020 financial year (13 cents per share) 2021 $’000 2020 $’000 63,799 69,538 – – 133,337 – – 81,421 75,606 157,027 Platinum Asset Management Limited Annual Report 2021 90 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2021 Note 20 Dividend made and proposed – continued Dividends not recognised at year-end Since 30 June 2021, the Directors declared to pay a 2021 final fully franked dividend of 12 cents per share, payable out of profits for the 12 months to 30 June 2021. The dividend has not been provided for at 30 June 2021, 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% 2021 $’000 2020 $’000 61,767 54,583 9,029 10,431 70,796 65,014 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. Note 21. Financial risk management Financial risk management objectives The Group’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: • • PAI, PWP and PAXX; and Equity and other securities held by the seeded investments, being the offshore Cayman Island domiciled funds Platinum Global Opportunities Fund Ltd and Platinum Asia Ex-Japan Opportunities Fund Ltd (the “Cayman Funds”) and other seed funds. 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, Platinum International Fund (Quoted Managed Hedge Fund) (“PIXX”) and PAXX; its ASX-listed investment companies, Platinum Capital Limited (“PMC”) and PAI; and PWP. The Group 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 Group. Platinum Asset Management Limited Annual Report 2021 91 Note 21. Financial risk management – continued Financial risk management objectives – continued This note mainly discusses the direct exposure to risk of the Group. The Group’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 Group 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 redemptions from Platinum’s investment products and the termination of investment mandate arrangements; (ii) market volatility: Platinum invests in global markets. It follows that a decline in overseas stock markets, adverse exchange rates and/or interest rate movements will all impact on FUM; (iii) a reduction in the ability to retain and attract investors: that could be caused by a decline in investment performance, but also a range of other factors, such as the high level of competition in the funds management industry; (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 Group. Historically, the amount of performance fees earned by the Group has fluctuated significantly from year to year and has been a material source of fee revenue. For those funds or investment mandates that pay a performance fee, the fee is calculated either semi-annually or annually and is based on an absolute or relative outperformance. Performance fees may be earned by the Group, if the investment return of a Platinum Trust Fund, PMC, PAI, PWP or any other applicable investment mandate exceeds their hurdle rates. Should the actual performance of one or more of these entities be higher than the applicable hurdle rate, a performance fee would be receivable. As at 30 June 2021, performance fees of $127,517 (2020: $9,042,000) were receivable. Platinum Asset Management Limited Annual Report 202192 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2021 Note 21. Financial risk management – continued Market risk – continued If global equity markets fell 10% over the course of the year and consequently the Group’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 the performance of investment funds or mandates over the course of the year that resulted in negative absolute performance 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. PIML may employ strategies to manage the impact of adverse market and exchange rate movements on the funds it manages. Market risk may be managed through derivative contracts, including futures, options and swaps. Currency risk may be managed through the use of forward currency contracts. The section below mainly discusses the direct impact of foreign currency risk, price risk and interest rate risk on the Group’s financial instruments held at 30 June 2021. Foreign currency risk The Group is exposed to foreign currency risk, because it holds foreign currency cash, as well as securities which are denominated in foreign currencies, either directly or through its direct investments in PWP, PAI, PAXX, Cayman Funds and other seed funds and receivables/ payables dominated in USD. The following tables demonstrate the sensitivity to a reasonably possible change in USD and HKD exchange rates, with all other variables held constant. The impact on the Group’s profit before tax is due to changes in the fair value of financial assets and liabilities. The Group’s exposure to foreign currency changes for all other currencies is not material. Platinum Asset Management Limited Annual Report 202193 Note 21. Financial risk management – continued Foreign currency risk – continued FINANCIAL ASSETS AND LIABILITIES IMPACT ON NET PROFIT BEFORE TAX OF 10% INCREASE/(DECREASE) IN AUSTRALIAN DOLLAR USD $’000 INCREASE/(DECREASE) HKD $’000 INCREASE/(DECREASE) 30 JUNE 2021 30 JUNE 2020 30 JUNE 2021 30 JUNE 2020 Cash and cash equivalents (725)/(886) (1,340)/1,637 (237)/289 (2,382)/2,912 (6,029)/7,369 (5,842)/7,140 – – (3,355)/4,100 (2,518)/3,077 – – – – – – Investments in: PAXX PWP PAI Equity securities held by the seeded investments (4,012)/4,904 (2,755)/3,367 Platinum Trust Funds (20)/24 (17)/21 Receivables Payables (40)/49 30/(37) (299)/365 11/(14) – – – – – – – – 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$752,202 lower/A$846,683 higher (2020: A$759,713 lower/A$928,511 higher). Price risk At 30 June 2021, the Group is exposed to indirect price risk through its equity-accounted investments in PAI, PWP, PAXX, Platinum Trust Funds and equity securities held by seeded investments. The impact of price risk is summarised in the table below: ENTITY PAI PWP PAXX Equity securities held by seeded investments Platinum Trust Funds IMPACT ON NET PROFIT BEFORE TAX OF 10% INCREASE/(DECREASE) IN 30 JUNE NET ASSET VALUES 2020 $’000 INCREASE/(DECREASE) 2021 $’000 INCREASE/(DECREASE) 3,869/(3,869) 6,632/(6,632) 260/(260) 4,411/(4,411) 2/(2) 3,455/(3,455) 6,427/(6,427) 2,620/(2,620) 3,030/(3,030) 1/(1) Platinum Asset Management Limited Annual Report 2021 94 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2021 Note 21. Financial risk management – continued Price risk – continued Interest rate risk At 30 June 2021, cash and term deposits are the only significant assets with potential exposure to interest rate risk held by the Group . A movement of +/-1% in Australian interest rates occurring throughout the year ended 30 June 2021 would cause the Group’s net profit before tax to be $1,432,769 higher/lower (2020: $1,053,334 higher/lower), based on the impact on its interest-bearing cash balances. An interest rate movement at 30 June 2021 will not impact the profit earned from term deposits, as term deposit interest rates are determined on execution. Credit risk Credit risk relates to the risk of a counterparty defaulting on a financial obligation resulting in a loss to the Group (typically “non-equity” financial instruments). Credit risk arises from the financial assets of the Group that include: cash and term deposits and trade and other receivables. 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 for which PIML is the investment manager, will result in reduced investment performance. There is no direct loss for the Group other than through the ensuing reduction in FUM, as noted above in the section on “market risk”. The credit quality of cash and term deposits held by each entity in the Group, by counterparty, can be assessed by reference to the counterparty’s external credit ratings. All term deposits are held with Australian banks that have a credit rating of AA- (2020: AA-) or higher. At 30 June 2021 and 30 June 2020, the relevant credit ratings were as follows: RATINGS AA- A+ A 2021 $’000 2020 $’000 185,342 151,636 6,955 856 2,910 663 193,153 155,209 Platinum Asset Management Limited Annual Report 2021 95 Note 21. Financial risk management – continued Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in meeting obligations associated with its liabilities. The Group manages liquidity risk by maintaining sufficient cash reserves to cover its liabilities and receiving management fees to meet operating expenses on a regular basis. Management monitors its cash position on a daily basis and prepares forecasts on a weekly basis. Remaining contractual maturities The following table details the Group’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. 2021 Trade and other payables Lease liabilities Total 2020 Trade and other payables Lease liabilities Total AT CALL $’000 WITHIN 30 DAYS $’000 BETWEEN 1 AND 3 MONTHS $’000 OVER 3 MONTHS $’000 – – – 6,178 165 6,343 – 331 331 – 6,929 6,929 AT CALL $’000 WITHIN 30 DAYS $’000 BETWEEN 1 AND 3 MONTHS $’000 OVER 3 MONTHS $’000 – – – 5,575 159 5,734 – 477 477 – 8,704 8,704 TOTAL $’000 6,178 7,425 13,603 TOTAL $’000 5,575 9,340 14,915 Financial liabilities at fair value through profit or loss The Group had no financial liabilities at fair value through profit or loss at 30 June 2021 or 30 June 2020.The Group does not have a significant direct exposure to liquidity risk. Fair value of financial instruments Unless otherwise stated, the carrying amounts of financial instruments reflects their fair value. Platinum Asset Management Limited Annual Report 2021 96 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2021 Note 21. 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) External requirements PIML is required to hold an Australian Financial Services Licence (“AFSL”) issued by the Australian Securities and Investments Commission (“ASIC”). The AFSL authorises PIML to provide deal in certain financial products, provide general financial product advice in respect of certain financial products and to operate registered managed investment schemes. PIML has complied with all financial conditions of its AFSL during the financial year. Note 22. Related party transactions Subsidiaries and associates Interests in subsidiaries and associates are set out in Note 5 and Note 6. Key management personnel Disclosures relating to key management personnel are set out in Note 23 and the Remuneration Report in the Directors’ Report. Tax consolidation and dividend transactions Platinum Asset Management Limited is the head entity of the Australian consolidated tax group and is also 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. Tax payable by the Australian consolidated group and dividends to shareholders are paid using income sourced from the main operating subsidiary, PIML. Fees received PIML provides investment management services to: (i) the Platinum Trust Funds and Platinum Global Fund; (ii) the Irish domiciled, PWP; (iii) two ASX-listed investment companies, PMC and PAI; (iv) two ASX quoted managed funds, PIXX and PAXX; and (v) the Cayman Funds. Platinum Asset Management Limited Annual Report 202197 Note 22. Related party transactions – continued Tax consolidation and dividend transactions – continued Fees received – continued PIML 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, PWP, PMC and PAI. The Group 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 Group. The total related party fees and receivables were as follows: Recognised in the statement of profit or loss and other comprehensive income 2021 $ 2020 $ 219,609,966 234,373,871 Receivable in the statement of financial position 19,031,105 24,910,151 Investment transactions During the year, the subsidiary PIML received a final 2021 fully franked dividend of $900,000 (2020: $600,000) and an interim 2021 fully franked dividend of $1,200,000 (2020: $600,000) from its investment in PAI. PIML also received the 30 June 2021 distribution of $457,686 (2020: $561,997) from PAXX and $17,862 from the Platinum Trust Funds (2020: $10,980). During the year, PIML invested $10,000,000 into the Platinum Arrow Trust. Other related party transactions Mr Stephen Menzies is PIML’s nominated representative on the Board of PWP. PIML reimburses Stephen Menzies for any incidental travel and accommodation associated with attendance at PWP Board meetings in Ireland. During the year, the amount reimbursed was Nil (2020: $11,042). PIML incurred a fee of $2,537,378 (2020: $2,530,695) for general marketing and distribution services provided by Platinum UK Asset Management Limited. PIML incurred a fee of $62,755 (2020: $0) for general marketing and distribution services provided by Platinum Management Malta Limited. 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 $4,600,000 (2020: $8,710,000). 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. Guarantees entered into by the parent entity in relation to the debts of its subsidiaries There are no guarantees entered into by the parent entity in relation to debts of its subsidiaries, no contingent liabilities and no capital commitments. Platinum Asset Management Limited Annual Report 2021 98 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2021 Note 23. Key management personnel The aggregate remuneration that the Group provided to Executive and Non-Executive Directors was as follows: Cash salary, Directors’ fees and short-term incentive cash awards Accounting expense related to the KMP allocation under the Deferred Remuneration Plan^ Superannuation Increase in the Group’s annual and long service leave provision 2021 $’000 2020 $’000 3,887 3,745 812 169 49 4,917 613 167 27 4,552 ^ Andrew Clifford, Elizabeth Norman and Andrew Stannard are the only members of KMP who have received 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 is as follows: 2021 GRANT (UN- VESTED) 2020 GRANT (UN- 2019 GRANT (UN- VESTED) VESTED) 2018 GRANT (UN- VESTED) 2017 GRANT (VESTED) 2016 GRANT (VESTED) TOTAL Number of rights allocated to KMP during the year Accounting expense attributed to KMP 153,462 160,859 108,696 248,346 86,208 48,623 806,194 $130,500 $104,400 $99,000 $356,998 $121,600 – $812,498 Platinum Asset Management Limited Annual Report 2021 99 Note 23. Key management personnel – continued Interests of Non-Executive and Executive Directors in shares The relevant interest in ordinary shares in the Company that each Director held at balance date was: Michael Cole (until 20/11/20) 240,000 – (240,000)* OPENING BALANCE ADDITIONS DISPOSALS Guy Strapp (from 27/8/20) – 22,000 Stephen Menzies Anne Loveridge Brigitte Smith Tim Trumper Andrew Clifford Kerr Neilson Elizabeth Norman Andrew Stannard * Resigned during the year. 40,000 22,000 41,666 18,900 32,831,449 252,074,841 766,748 – – – – – – – – – – – – – – – – – – CLOSING BALANCE – 22,000 40,000 22,000 41,666 18,900 32,831,449 252,074,841 766,748 – Platinum Asset Management Limited Annual Report 2021 100 NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2021 Note 24. Remuneration of auditors During the financial year, the following fees were paid or payable for services provided by the auditor of the Company, Ernst & Young Australia (“EY”) (2020: PricewaterhouseCoopers Australia (“PwC”)), and its overseas network firms as indicated below: Audit services Audit and review of the financial statements and AFSL audit Audit and review of the financial statements and AFSL audit Audit of financial statements Audit services for managed funds that PIML acts as responsible entity Audit and review of the financial statements and compliance plan audit Audit of financial statements Total audit and review of financial statements Compliance and assurance services Compliance and assurance services PwC Total audit, compliance and assurance services Taxation services Compliance services Compliance services Compliance services Taxation services for managed funds for which PIML acts as responsible entity Fund distribution compliance services Other taxation services Taxation services Foreign tax agent fees Total taxation services Other services Other services Other services Total other services AUDITOR 2021 $ 2020 $ EY 156,000 – PwC Overseas EY – 6,325 121,125 – PwC Overseas PwC EY Overseas EY PwC PwC PwC Overseas PwC EY PwC & Overseas PwC – – 162,325 – 162,325 50,750 1,227 – – – – 51,977 7,500 – 7,500 237,660 58,259 417,044 108,591 525,635 – 205,639 350,130 67,408 114,962 738,139 – 108,355 108,355 Total fees paid and payable to the auditors and their related practices 221,802 1,372,129 Platinum Asset Management Limited Annual Report 2021 101 Note 25. Parent entity information Set out below is supplementary information about the parent entity. Statement of profit or loss and other comprehensive income Profit after income tax Total comprehensive income Statement of financial position Total current assets Total assets Total current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained profits Total equity PARENT 2021 $’000 134,936 134,936 2020 $’000 158,096 158,096 2021 $’000 126,250 756,738 9,023 9,023 PARENT 2020 $’000 126,232 756,720 10,431 10,431 747,715 746,289 714,893 31,481 1,341 717,998 26,950 1,341 747,715 746,289 ACCOUNTING POLICY The accounting policies of the parent entity are consistent with those of the consolidated entity except for the following: – – Investments in subsidiaries are accounted for at cost in the parent entity; and Dividends received from subsidiaries are recognised as other income by the parent entity. Note 26. Events after the reporting period Apart from the dividend declared on 25 August 2021, no other matter or circumstance has arisen since 30 June 2021 that has significantly affected, or may significantly affect the Group’s operations, the results of those operations, or the Group’s state of affairs in future financial years. Platinum Asset Management Limited Annual Report 2021 102 DIRECTORS’ DECLARATION 30 JUNE 2021 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 2021 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 Guy Strapp Chairperson 25 August 2021 Sydney Andrew Clifford Director Platinum Asset Management Limited Annual Report 2021 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PLATINUM ASSET MANAGEMENT LIMITED 103 Ernst & Young 200 George Street Sydney NSW 2000 Australia GPO Box 2646 Sydney NSW 2001 Tel: +61 2 9248 5555 Fax: +61 2 9248 5959 ey.com/au REPORT ON THE AUDIT OF THE FINANCIAL REPORT Opinion We have audited the financial report of Platinum Asset Management Limited (the Company) and its subsidiaries (collectively the Group), which comprises the consolidated statement of financial position as at 30 June 2021, the consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, notes to the financial statements, including a summary of significant accounting policies, and the directors’ declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: (a) Giving a true and fair view of the consolidated financial position of the Group as at 30 June 2021 and of its consolidated financial performance for the year ended on that date; and (b) Complying with Australian Accounting Standards and the Corporations Regulations 2001. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Platinum Asset Management Limited Annual Report 2021104 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 thefinancialreport section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (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. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial report of the current year. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of thefinancialreport section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial report. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial report. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Platinum Asset Management Limited Annual Report 2021INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PLATINUM ASSET MANAGEMENT LIMITED 105 Revenue recognition of management and performance fees WHY SIGNIFICANT HOW OUR AUDIT ADDRESSED THE KEY AUDIT MATTER The Group’s key revenue streams are management and performance fees earned by Platinum Investment Management Limited (PIML), a consolidated subsidiary, through the Investment Management Agreements in place with Platinum Funds and other investment vehicles. For the year ended 30 June 2021, management fees were $265,290,000 and performance fees were $3,950,000, which made up of 84% and 1% of total revenue and other income respectively. Due to the quantum of these revenue streams and the impact that the variability of market-based returns can have on the recognition and earning of performance fees, this was considered a key audit matter. Disclosures relating to these revenue streams are included in Note 3 to the financial report. Our procedures included: – – Recalculating management fees, on a sample basis, in accordance with contractual arrangements; Assessing the performance fees recognised for the period to 30 June 2021 from investments vehicles on a sample basis, and assessing whether they met the relevant revenue recognition criteria. This included assessing the inputs into the calculation model and examining the methodology applied in accordance with contractual arrangements; and – Assessing the adequacy of the disclosures in Note 3 to the financial report in accordance with Australian Accounting Standards. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Platinum Asset Management Limited Annual Report 2021 106 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PLATINUM ASSET MANAGEMENT LIMITED Accounting for investments in associates WHY SIGNIFICANT HOW OUR AUDIT ADDRESSED THE KEY AUDIT MATTER Investments may be accounted for by consolidation, equity accounting, joint venture or as investments at fair value. The determination of the appropriate accounting depends upon the ability of the Group to exercise control or significant influence. The Group’s investments in associates where significant influence was deemed to be present as at 30 June 2021 was $107,622,000. This matter was considered a key audit matter as judgement is required in determining the appropriate accounting, particularly due to the Group’s practice of seeding investment products, resulting in ownership percentages changing over time. Disclosures relating to investments in associates are included in Note 6 to the financial report. Our procedures included: – – – Evaluating the Group’s assessment of control or significant influence for each investment vehicle, and accounting treatment and presentation thereon; Performing independent assessment of control or significant influence over the associate investments with consideration to: • Equity ownership • Representation on the Board of the directors of the investee • Participation and ability for the Group to influence decision making of the investee • Material transactions between the Group and the investee Obtaining external supporting evidence of the Group’s ownership interest in the investees, recalculated the carrying amount by agreeing inputs such as net asset value and share prices of the investees, and assessing for any impairment based on evidence obtained; – Assessing the adequacy of the disclosures in Note 6 to the financial report in accordance with Australian Accounting Standards. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Platinum Asset Management Limited Annual Report 2021 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PLATINUM ASSET MANAGEMENT LIMITED 107 Information other than the financial report and auditor’s report thereon The directors are responsible for the other information. The other information comprises the information included in the Company’s 2021 annual report, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. 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. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. 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 Group’s ability to continue as a going concern, disclosing, as applicable, matters relating 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. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Platinum Asset Management Limited Annual Report 2021108 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PLATINUM ASSET MANAGEMENT LIMITED Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: • • • • Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Platinum Asset Management Limited Annual Report 2021INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PLATINUM ASSET MANAGEMENT LIMITED 109 • • Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. From the matters communicated to the directors, we determine those matters that were of most significance in the audit of the financial report of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Platinum Asset Management Limited Annual Report 2021110 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PLATINUM ASSET MANAGEMENT LIMITED REPORT ON THE AUDIT OF THE REMUNERATION REPORT Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 28 to 52 of the directors’ report for the year ended 30 June 2021. In our opinion, the Remuneration Report of Platinum Asset Management Limited for the year ended 30 June 2021, 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. Ernst & Young Rita Da Silva Partner 25 August 2021 Sydney A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Platinum Asset Management Limited Annual Report 2021The history of money and its role in the modern world Designed and produced by 3C Creative Agency, 3c.com.au Article The history of money and its role in the modern world By Julian McCormack Investment Specialist, Platinum Asset Management Artwork by Edmon de Haro www.marlenaagency.com © 2021 Platinum Asset Management Limited “ Money is the most universal and most efficient system of mutual trust ever devised.” Yuval Hariri II The history of money and its role in the modern world Preface The last 18 months have certainly been a testing time. The global pandemic has forced us to adjust our lives in ways we never imagined or thought possible. We have endured lockdowns as well as restrictions on family visits, social gatherings, exercise and holidays, not to mention the devastating health impact and tragic loss of life. We have for the most part adapted, shifting our work (where possible) and shopping online, ‘Zooming’ our friends and family, and keeping the dream alive of our next vacation. When able to venture out, we have kept our obligatory 1.5 metres distance and shunned cold hard ‘dirty’ cash in favour of ‘tap and go’. Yet, money in many respects has become more important than ever. At an individual level, the ‘value’ of money has undoubtedly increased, as many employees were stood down and struggled to pay their mortgage, rent, utilities and groceries. At a broader public level, the value of money has, however, been somewhat distorted after governments around the world collectively spent an unfathomable amount to protect their populations and rescue their economies. With debts racking up into the trillions of dollars, funded largely by central banks, and no hope of paying it off anytime soon, the mind boggles. It is difficult to put a value on protecting humanity. We are now seeing the impact of all this ‘money printing’ in rising inflation, with a strong rebound in economic activity fuelling a surge in commodity, house and share prices. With the service sector effectively ‘closed for business’ at various stages during the pandemic, as we were unable to travel and dine out, there has been strong demand for manufactured goods, as we improved our homes, beefed up our technology and curiously, purchased more cars. The strong demand, coupled with a temporary shut-down in manufacturing in 2020, has caused prices for some consumer goods to soar to decade highs. Used car and truck prices, for example, rose 45% in the US in the 12 months to June 2021, reflecting increased demand and supply constraints, such as the global semiconductor shortage.1 As vaccination rates increase and more economies reopen, we expect this recovery to gain momentum, particularly as employment grows, confidence returns and consumers draw down on their accumulated savings. Those who were able, chose to hold onto the generous government payments last year, sending savings rates to record high levels of over 30% in the US and 20% in Australia in 2020.2 1 Source: Federal Reserve Bank of St Louis. 2 Source: Federal Reserve Bank of St Louis; Reserve Bank of Australia. Platinum Asset Management Limited Annual Report 2021 III These savings are now making their way back into the economy as consumers unleash pent-up demand. As this ‘velocity of money’ increases (i.e. how often money is spent in the economy), inflation usually follows. Higher inflation should theoretically translate to higher bond yields. However, at the time of writing, after a brief spike to 1.7% p.a. in March 2021, yields on US 10-year Treasuries continue to hover below 1.3% p.a. - as the market seems to accept the premise that the rise in inflation will be ‘transitory’. 3 There is always a danger in consensus thinking. We aren’t in the business of forecasting economic variables, however, we believe there is a risk that price rises will be more long-lasting than what is currently priced in by the markets, which may see central banks increase official interest rates much earlier than expected. Such extraordinary levels of money creation and signs of significant inflation (after a long absence) begs the question of the role and value of money in society. We place enormous trust in the value of money when we transact. In our feature article, Investment Specialist Julian McCormack delves into the origins of money over many centuries - from ‘barter’ and debt, to metal-backed currencies, fiat currencies and the rise of the US dollar. It’s a fascinating look at history and makes one realise just how the form and function of money has shifted over time – often driven by political and economic motivations of governments. Central banks have also played a role, notably their various interest rate policies and bond-buying activities. Reflecting on the past provides a valuable perspective on current events. With inflation creeping up and extraordinarily large budget deficits that need to be funded at some point, we suspect that change is afoot. A low interest rate environment has been the primary driver of asset markets in recent years, a change in that scenario could have significant implications for equities, particularly high growth stocks, which have been a major beneficiary of this trend. Andrew Clifford, Chief Executive Officer & Co-Chief Investment Officer, Platinum Asset Management August 2021 3 Source: FactSet Research Systems. IV The history of money and its role in the modern world Platinum Asset Management Limited Annual Report 2021 V In recent years, we have stretched the limits of any traditional understanding of money via radical policies, such as negative interest rates, quantitative easing and yield curve control. As the global financial crisis (GFC) saw the re-writing of the monetary policy rule book, so the COVID-19 crisis saw the abandonment of any pretence of ‘fiscal rectitude’ in every major economy. The history of money and its role in the modern world By Julian McCormack In the rebound from the COVID- induced disruption, inflation and nominal growth have risen sharply and debate has raged about the transience of the inflationary surge. As we explored in last year’s annual report, the defining characteristic of populists is that they spend money.1 Now, in order to grapple with the question of incipient inflation, we must grapple with defining money itself. VI The history of money and its role in the modern world Money is a social institution whose rules are more like religious edicts than physical laws. There is nothing definite about money, save our understanding that it has value and our trust in that value’s persistence. Money is in essence a story – and that story is changing. In this article, we will briefly examine the history of money and demonstrate that its form and purpose have shifted over time. Our contention is that another shift is underway in the function and nature of money at present – with central banks now effectively providing infinite funding, which is being married to fiscal spending after 40 years of austerity – a shift we examine briefly toward the article’s close. THE BARTER MYTH A typical history of money usually starts with a story of a world of barter transactions transformed into a world of money-based transactions.2 This is almost certainly wrong. Credit is, by an enormous margin, more common than barter in every recorded traditional society. It is vanishingly rare that any sociologist or anthropologist has recorded an instance of barter as a form of exchange – we repeat – this has almost never been recorded. Vastly more common is the building of ‘debt’ and its expunging via social obligation. “I’ll scratch your back if you scratch mine.” Or “I’ll give you these eggs, if at some time in the future you help me erect a barn”.3 This may be confused for barter – but note the creation of obligations that persist through time, not the discrete, instantaneous exchanges of value described in economics text books as barter. Platinum Asset Management Limited Annual Report 2021 VII MONEY AS CONGEALED TRUST All societies are based on trust to some degree. Historically, we developed money not to replace barter, but to replace trust. Once dealing with large-scale societies and members of different social groupings, a unit of exchange becomes necessary. Historically, this did not tend to emerge until large numbers of people moved through areas in which they were strangers – particularly as soldiers. Having been rewarded with plunder, how might a soldier transport the value of their loot home? Coins help, particularly when the coins themselves are made from precious metals – especially metal recently liberated from its former owners. Throughout the history of Europe and Asia, in periods of relative peace, credit- based systems of commerce predominate; in periods of war and generalised violence, coin-based systems predominate.4 Precious metal coins evolved as money in order to substitute for prior exchanges of value based on trust and reciprocity. “ Money is the most universal and most efficient system of mutual trust ever devised… Money isn’t a material reality – it is a psychological construct... But why does it succeed? People are willing to do such things when they trust the figments of their collective imagination. Trust is the raw material from which all types of money are minted.”5 VIII The history of money and its role in the modern world MONEY WAS RARELY A STATE-BACKED MONOPOLY UNTIL RECENTLY For most of its history, money has comprised varied mediums of exchange with different issuers whose coins and notes were in mixed circulation across multiple jurisdictions. In antiquity, the value of coinage was based on the content of the metal it was composed of, meaning that a Persian coin, such as a Daric, was readily usable in ancient Greece, as the purity of the metal content was generally accepted.6 Ancient merchants issued certificates of deposit, which could be transferred to third parties in different states. These were specific and contractual, rather than general bearer receipts representing specific, repeated, face- values in coin or equivalent value.7 The first genuine ‘paper money’ was developed by the Chinese, and again, it was not originally a state monopoly system.8 In 9th century China, ‘exchange notes’ were developed – these were negotiable certificates dubbed ‘flying money’. These precursors of banknotes were widespread in China by the early 11th century.9 Later, in Europe, banknotes – literal IOUs claimable against an individual bank or depositor at a bank – were in common circulation alongside centrally issued notes and coins for centuries. In more modern times, the acceptance of Spanish silver coins was so widespread in the United States in its early years, that its more important forms were recognised as legal tender. The dollar sign ‘$’ derives from the superimposition of a ‘P’ and an ‘S’, which was a symbol for peso. Spanish coins remained in circulation until the middle of the 19th century in the US.10 There was no monopoly on the issue of currency within nation states until relatively recently.11 Platinum Asset Management Limited Annual Report 2021 IX X The history of money and its role in the modern world CENTRAL BANKS EMERGED SPECIFICALLY TO FINANCE GOVERNMENTS, ESPECIALLY THEIR WARS The foundation of the central bank par excellence, the Bank of England, occurred in 1694, when the Bank was established to assist William III in funding his ongoing war with France. The Bank was private, with King William III and Queen Mary among its original stockholders, and was granted a royal charter enabling it to issue bank notes and act as a banker to the government. This was necessary largely because of the strength of Parliament, which had responsibility for issuing supply bills since the 15th century and whose power had been increased by the Glorious Revolution of 1688-89, which installed William III and Queen Mary. The foundation of one of the world’s early12 and preeminent central banks was necessary as a result of Parliament’s intentional underfunding of a war.13 The Bank of England was private and existed alongside other banks, each issuing their own currency in the form of bank notes. THE GOLD STANDARD WAS AN ACCIDENT It was only by mistake that multi-metallism and bimetallism slipped into gold-only backing for currency. Prior to the late 17th century, the Royal Mint was managed by the Company of Moneyers, whose members were notorious for “self-dealing, corruption and drunkenness”.14 To deal with the situation, the British government took the extraordinary step of appointing Sir Isaac Newton to the post of Warden of the Mint in 1696, which he gladly accepted for its handsome salary. Despite his genius, Newton was in some financial hardship at the time.15 Newton’s initial responsibilities revolved around assaying and the prevention of counterfeiting, which was rife at the time. Eventually, he grappled with the problem of an outflow of silver and sought to set the price of gold and silver relative to each other in Britain. Platinum Asset Management Limited Annual Report 2021 XI In doing so, however, he set the price of silver relative to gold too cheaply versus other European powers, causing silver to flow offshore and over time, locking Britain into a de facto monometallic gold standard. This occurred by draining the Bank of England’s reserves of silver and leaving gold alone to dominate the reserves held in British banks.16 A similar dynamic occurred in the US. The country’s first Treasury Secretary Alexander Hamilton, drawing inspiration from Newton’s 1717 report on setting the ratio of gold and silver, set this ratio for the metals in the US at 15:1. However, the market value of the metals relative to each other changed – discoveries of huge, silver-rich mines in Nevada helped to drive down the price of silver relative to gold, such that the ratio of the prices in the open market drifted out to 16:1 by the 1810s. This effectively created an arbitrage opportunity – a holder of silver could sell silver for gold, take that gold to the Mint to exchange it back into silver, sell that silver for gold on the open market and make a profit. This resulted in gold being driven out of circulation – an example of Gresham’s Law in operation – leaving gold as the dominant reserve metal.17 Simply put – the gold standard arose by mistake. XII The history of money and its role in the modern world Platinum Asset Management Limited Annual Report 2021 XIII The gold standard never implied that currency was actually ‘backed by gold’ in any literal sense – no country ever had a currency fully backed by gold in the modern era, with the proliferation of trade acceptances, bank notes and other instruments ensuring that currency in circulation was always multiples of gold backing and that the rate of backing was not constant. As an example, in Britain, in 1913, currency in circulation was backed approximately one-part-in-seven by gold.18 Gresham’s Law: ‘Good money’ leaves circulation, leaving ‘bad money’ traded. Where people mistrust the value of a currency, they seek to hoard more trustworthy alternatives – leaving the ‘bad money’ in circulation; and where an arbitrage exists, the ‘cheap’ money will remain in circulation, with the ‘dear’ money forced out of circulation.19 THE HEADY BENEFITS OF GOLD Adherence to at least a partial backing of currency by gold, assisted states in gaining access to London capital markets in the 18th and 19th centuries. Partial gold backing gave creditors some confidence of repayment, thus allowing credit to flow, paradoxically diminishing the backing of gold to currency! How the gold was acquired was irrelevant: for example, Japan’s industrialisation was catalysed by the seizure of gold from China following the 1894-95 Sino-Japanese War via massive reparations, which facilitated Japanese borrowing in London.20 For merchants and investors, trade credit and foreign direct investment were catalysed by use of the gold standard due to the tradability of merchants’ acceptances and bank bills globally. XIV The history of money and its role in the modern world For merchants, there were huge financing advantages in being able to borrow against future cargoes or revenue streams. On the other hand, creditors were able to on-sell credit risk in the form of discounted merchants’ acceptances. Throughout the 19th and early 20th centuries this was easiest in London by a wide margin, given the immense depth of the market for acceptances there relative to any other financial centre.21 GOLD’S COLOSSAL COSTS The gold standard had two colossal costs. It was deeply, cruelly regressive; and it was ferociously unstable. The functioning of the classical gold standard allowed for gold to function as a money supply equilibration tool, which tended toward a shrinking money supply and deflation in order to stem gold outflows caused by any rise in domestic prices, as shown in the diagram on the right.22 The effect of this cycle, with specie (gold) flowing out of economies in the presence of trade deficits, was to induce periodic bouts of deflation and deep recessions. One effect of these recessions, in the absence of social safety nets of the modern state, was to steeply reduce life expectancy during and in their aftermath. The gold standard was brutal in its impacts on everyday people.23 The 19th century was racked by financial crises and a run on banks roughly once every 10 years somewhere in major financial centres globally.24 The reason is simple, and inherent to the gold standard itself. The banking system created money in the form of banknotes and merchants’ acceptances. These were all exchangeable for gold, albeit usually at a discount. However, the system itself was always multiple times geared in terms of currency in circulation versus available gold supply. Platinum Asset Management Limited Annual Report 2021 XV GOLD FUNCTIONED AS A MONEY SUPPLY EQUILIBRATION TOOL GOLD INFLOW (= INCREASED MONEY SUPPLY) GOLD INFLOW (= INCREASED MONEY SUPPLY) TRADE SURPLUS (EXCESS EXPORTS) DOMESTIC PRICE INFLATION TRADE SURPLUS (EXCESS EXPORTS) DOMESTIC PRICE INFLATION LOWER DOMESTIC PRICES ENCOURAGE EXPORTS, HINDER IMPORTS HIGHER DOMESTIC PRICES ENCOURAGE IMPORTS, HINDER EXPORTS DOMESTIC PRICE DEFLATION TRADE DEFICIT (EXCESS IMPORTS) GOLD OUTFLOW TO PAY FOR EXCESS IMPORTS (= DECREASED MONEY SUPPLY) LOWER DOMESTIC PRICES ENCOURAGE EXPORTS, HINDER IMPORTS HIGHER DOMESTIC PRICES ENCOURAGE IMPORTS, HINDER EXPORTS DOMESTIC PRICE DEFLATION TRADE DEFICIT (EXCESS IMPORTS) GOLD OUTFLOW TO PAY FOR EXCESS IMPORTS (= DECREASED MONEY SUPPLY) XVI The history of money and its role in the modern world At the first hint of instability or insolvency on the part of one or more banks, all participants had both the incentive to exchange currency for gold, and the legal right to do so. The arbitrary assignment of a metal as the determinant of value for currency, and as a limit to its supply, did nothing to avert instability – indeed, it encouraged it. US AND BRITISH BANKING CRISES UNDER THE GOLD STANDARD 1908 NEW YORK BANKING CRISIS 1905 CHICAGO BANKING CRISIS 1899 NEW YORK BANKING CRISIS 1893 US BANKING CRISIS 1821 MISSOURI BANKING CRISIS 1836-37 BRITISH BANKING CRISIS 1847 BRITISH BANKING CRISIS 1866 BRITISH BANKING CRISIS 1878 BRITISH BANKING CRISIS 1890 NEW YORK BANKING CRISIS BRITISH BANKING CRISIS 1825 US BANKING CRISIS AND DEPRESSION 1837 BRITISH BANKING CRISIS 1857 US BANKING CRISIS 1873 NEW YORK BANKING CRISIS 1884 BRITISH BANKING CRISIS 1891 MIDWESTERN US BANKING CRISIS 1896 MID-ATLANTIC US BANKING CRISIS 1903 US BANKING CRISIS 1907 Source: https://www.federalreservehistory.org/essays/banking-panics-of-the-gilded-age https://www.researchgate.net/publication/299890635_British_Financial_Crises_in_the_ Nineteenth_and_Twentieth_Centuries https://www.stlouisfed.org/a-foregone-conclusion/chapter-one Platinum Asset Management Limited Annual Report 2021 XVII THE BRETTON WOODS SYSTEM – EXORBITANT PRIVILEGE, NAKED POWER In the final stages of World War II, with Allied victory relatively certain, one of the world’s most influential living economists faced off against a US Treasury functionary to decide the fate of the non-communist world’s monetary system. John Maynard Keynes had been a leading economist for 30 years and the most exalted economist globally for over a decade. He set forth his ideas for a global balance of payments adjustment system using a new, international unit of exchange known as the Bancor, to be administered by an International Clearing Union. The system was elegant, flexible, fair and sought to avoid risks caused by extreme imbalances, both for deficit and surplus nations. Squaring off against Keynes was a largely unknown economist, Harry Dexter White. He was no slouch himself, a PhD with degrees from Stanford and Harvard. He also happened to represent the nation that accounted for one-half of global industrial production at the time.25 Readers can likely guess what happened. Despite a clearly articulated explanation of a functional international balance of payments system delivered by such an esteemed economist, raw power won the day. In July 1944, at a holiday resort named Bretton Woods in New Hampshire, all key Allied powers agreed to install the US dollar as the dominant unit of exchange in all international transactions, and avoid any penalty or self-balancing mechanism for inveterate surplus- generating nations. Why? Because the Americans were the preeminent creditor nation globally, and in White’s words, they did not want to be repaid in “funny money”.26 XVIII The history of money and its role in the modern world POST BRETTON WOODS – FROM CREDITOR TO DEBTOR AND ONTO FUNNY MONEY The flaw in the Bretton Woods System, similar to those of the classical gold standard, is that it rested on the commitment of one country to provide two reserve assets: dollars, the supply of which is unlimited; and gold, the supply of which is limited. The problem was articulated as early as 1947 by Belgian born economist Robert Triffin – indeed the paradox became known as the ‘Triffin Dilemma’. This stated that should the US not provide enough dollars to fund a growing global economy, growth would be stifled and the system would grind into a deflationary rut; however, should the US provide ample dollar funding to promote global growth, then the backing of the dollar by gold would be thrown into question. The dollar would then become susceptible to the international equivalent of a bank run. American liabilities to foreigners first exceeded US gold reserves as early as 1960. Rapidly growing and efficient Germany and Japan found themselves posting large trade and current account surpluses and thus accumulating dollars throughout the 1950s and 1960s. Would these dollar reserves hold their value, when clearly gold backing for such large reserves was insufficient? Speculation mounted against the dollar throughout the 1960s and institutional responses included the foundation of a Gold Pool to share the cost of meeting gold redemptions, the issuance of Special Drawing Rights by the International Monetary Fund (IMF) in an attempt to provide an alternative reserve asset (Bancor anyone?) and the use of exchange rate bands around the dollar known as the ‘snake’. It was all too little too late. In August 1971, after Britain requested a large redemption of dollars for gold in order to meet redemptions against the imperilled pound, US President Richard Nixon did the inevitable and suspended the convertibility of gold for dollars. It was never to be reinstated.27 Funny money indeed. Platinum Asset Management Limited Annual Report 2021 XIX % of GDP 0 5 -5 -10 -15 -20 Gold inflow (= increased money supply) Trade surplus (excess exports) Domestic price inflation Lower domestic prices encourage exports, hinder imports Higher domestic prices encourage imports, hinder exports Domestic price deflation Trade deficit (excess imports) The history of money and its role in the modern world Gold outflow to pay for excess imports (= decreased money supply) XX POST 1971: ADRIFT IN A FIAT OCEAN % annual rate Since 1971, global trade, investment and general economic activity have come to rest on floating currencies, unbacked by gold or any other ‘hard asset’ (i.e. fiat currencies). The US dollar has retained dominance of global transactions – it is used in approximately 85% of all foreign exchange transactions, with US exports only representing 13% of the global total and US foreign direct investment just 20%.28 4.0 0.0 2.0 3.0 1.0 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 2018 Germany UK USA China 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 -1.0 The purchasing power of all currencies has utterly collapsed versus any form of hard asset – gold, commodities, real property and so forth. Japan -3.0 -2.0 When charted beside the currency debasements of the late Roman Empire – the collapse in the buying power of the dollar since 1971 measured in gold looks similarly cataclysmic. In gold terms, the dollar has lost roughly 98% of its value in 50 years (see below). However, the commercial world keeps turning. Economic agents continue to accept and use state-issued, unbacked fiat currency, the dominance of which is unchallenged, with alternatives, such as gold or crypto currencies, peripheral at best.29 ROMAN SILVER COINAGE VALUE OF US DOLLAR IN GOLD AVERAGE PERCENTAGE OF SILVER IN COINS MINTED IN A.D. 1 - A.D. 300 (INCLUSIVE) 1 20 40 60 80 100 120 140 160 180 200 220 240 260 280 300 A.D. % 100 95 90 85 80 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 0 Index, Dec 1969 = 100 100 90 80 70 60 50 40 30 20 10 0 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 2019 Source: https://warwick.ac.uk/fac/arts/classics/staff/butcher/debasement_and_decline.pdf; Bloomberg. Platinum Asset Management Limited Annual Report 2021 XXI A WORLD IN A DAZE: THE POST-GFC PERIOD TO 2020 The post-GFC period to 2020 was replete with breathless reporting about “unprecedented monetary policies” and some amount of fear about “Keynesian” excesses and “big government”.30 The trouble with that narrative was that it was untrue. There was little unprecedented about the monetary response of policy officials globally – interest rate setting/ manipulation, zero rates and bond buying were all features of the Depression-era monetary responses to the 1929 Wall Street Crash in many countries, notably in the US and Japan – albeit slower in most major economies and with highly unhelpful tariffs imposed globally.31 Far from there being a wave of huge Keynesian policy responses, there was little fiscal support for major economies after 2010. Every major economy shrank their respective budget deficits from 2010 onward. In Europe, Germany seized the opportunity of the crisis to discipline the spendthrift peripheral nations of the European Union (EU). In the US, the 2010 Tea Party revolution saw fiscal hawks become pivotal in the House, advocating for spending cuts and lower deficits. China’s initial stimulus came in the form of bank-directed credit growth, which resulted in the deep financing reforms and industrial slowdown of 2013-16. This contrasts with massive fiscal support unleashed in major economies in the 1930s by ‘populists’ in most major economies of the day.32 Populists re-emerged toward the end of the 2010s and fiscal restraint began to erode, most notably in the form of the Trump tax cuts, which entrenched ~5% of gross domestic product (GDP) budget deficits as a permanent feature of US fiscal policy.33 There was also friction within Europe about the strictures of the EU’s fiscal compact, which seeks to limit budget deficits to 3% of GDP and government debt to 60% of GDP.34 XXII The history of money and its role in the modern world Platinum Asset Management Limited Annual Report 2021 XXIII We have written for several years about the emergence of populism and its largely overlooked core definition: populists spend money! Extraordinary shifts in public opinion about trade policy, socialism and nationalism have followed.35 However, the coup de grâce of 40 years of austerity in fiscal policy may have come with the policy responses to the 2020 COVID-19 pandemic. Gold inflow Gold inflow (= increased money supply) (= increased money supply) 2020: THE COUP DE GRÂCE FOR AUSTERITY? Trade surplus Trade surplus (excess exports) (excess exports) After 40 years of falling interest rates and declining/ low inflation in the developed world, investors have been trained to believe that inflation is impossible. Central banks globally begged elected officials to spend money for a decade – and in general, they refused to do so in most large economies.36 That was until 2020. Lower domestic prices Lower domestic prices encourage exports, encourage exports, hinder imports hinder imports Domestic price Domestic price deflation deflation Just as the GFC saw the abandonment of monetary rectitude among central bankers, so the reaction to COVID-19 may have seen the abandonment of any pretence of fiscal discipline among elected officials in the developed world. Gold outflow to pay Gold outflow to pay for excess imports for excess imports (= decreased money supply) (= decreased money supply) CENTRAL GOVERNMENT BUDGET BALANCES 5 5 0 0 % of % of GDP GDP -5 -5 -10 -10 -15 -15 -20 -20 1968 1968 1973 1973 1978 1978 1983 1983 1988 1988 1993 1993 1998 1998 2003 2003 2008 2008 2013 2013 2018 2018 Germany Germany UK UK USA USA China China Japan Japan 2003 2003 2005 2005 2007 2007 2009 2009 2011 2011 2013 2013 2015 2015 2017 2017 2019 2019 2021 2021 Source: Bloomberg; OECD; Fitch. Annual data to 2020. Average percentage of silver in coins minted in A.D. 1 to A.D. 300 (inclusive) Average percentage of silver in coins minted in A.D. 1 to A.D. 300 (inclusive) 1 20 40 60 80 100 120 140 160 180 200 220 240 260 280 300 1 20 40 60 80 100 120 140 160 180 200 220 240 260 280 300 Index, Dec 1969 Index, Dec 1969 = 100 = 100 100 100 90 90 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 2019 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 2019 A.D. A.D. % % 100 100 95 95 90 90 85 85 80 80 75 75 70 70 65 65 60 60 55 55 50 50 45 45 40 40 35 35 30 30 25 25 20 20 15 15 10 10 5 5 0 0 Domestic price Domestic price inflation inflation Higher domestic prices Higher domestic prices encourage imports, encourage imports, hinder exports hinder exports Trade deficit Trade deficit (excess imports) (excess imports) % annual % annual rate rate 4.0 4.0 3.0 3.0 2.0 2.0 1.0 1.0 0.0 0.0 -1.0 -1.0 -2.0 -2.0 -3.0 -3.0 5 % of GDP 0 -5 -10 -15 -20 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 2018 Germany UK USA China Japan Gold inflow (= increased money supply) Trade surplus (excess exports) Domestic price inflation Lower domestic prices encourage exports, hinder imports Higher domestic prices encourage imports, hinder exports Domestic price deflation Trade deficit (excess imports) XXIV The history of money and its role in the modern world Gold outflow to pay for excess imports (= decreased money supply) Correspondingly, inflation and inflation expectations rose dramatically. US 5-YEAR BREAKEVEN INFLATION RATE % annual rate 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 Source: Federal Reserve Bank of St. Louis. Data as at 18 August 2021. At present, debate rages about the permanence or transience of 2021’s inflation surge. The breakeven rates for the US, currently project an inflation rate of 2.5% in five years’ time, close to 20-year highs. Average percentage of silver in coins minted in A.D. 1 to A.D. 300 (inclusive) And we believe that inflation may well prove more durable than many foresee. However, more important is the insight that there is nothing remotely resembling a physical law that defines inflation. 1 20 40 60 80 100 120 140 160 180 200 220 240 260 280 300 A.D. % 100 95 90 85 80 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 0 ON INFLATION It is reasonably clear that no central bank, nor economic observer, has a robust, predictive model of inflation. One member of the Federal Reserve board is reported to have described inflation modelling in the early 2010s as “crap in, crap out”.37 US Federal Reserve (Fed) Chairs have shifted between a core and headline consumer price index (CPI) as their preferred measure of inflation.38 Additionally, robust measures of inflation are rejected if they give problematic modelling results.39 This is hardly a scientific approach. Index, Dec 1969 = 100 100 90 80 70 60 50 40 30 20 10 0 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 2019 Platinum Asset Management Limited Annual Report 2021 XXV It also seems reasonably clear that inflation is a multi- variate phenomenon, with causation stemming from diverse factors, such as wealth and income distribution, savings rates, money supply, and interest rates as well as institutional factors, such as the power of organised labour. What seems absolutely clear is that Milton Friedman’s aphorism that “inflation is always and everywhere a monetary phenomenon” is at best an oversimplification. See below for Paul Volcker’s view: “ …when we talk about credibility, I think far, far, too much emphasis is put on these monetary targets.”40 Perhaps most powerfully – inflation may be what we expect it to be. This is the “rational expectations” school of inflation causation: no policy tool can be employed to fight (or encourage) inflation, unless it is expected to work by enough economic agents within a system.41 It is worth remembering that in the late 1970s, it was accepted by virtually all serious economists that inflation was a persistent feature of the system.42 This was on the cusp of the “Volcker Shock” and the taming of inflation for a generation. Contrast this to the situation which presents itself now: there is close to universal consensus that inflation is transitory. Bond markets globally at the time of writing are strengthening, with yields falling and curves flattening, despite buoyant commodity prices, inflation expectations, business survey results and consumer expectations. Moreover, just as Volcker was explicit about the need to tame inflation, today’s central bankers appear resolute in their desire for increased inflation and perfectly comfortable with rates of inflation above target for periods of time.43 XXVI The history of money and its role in the modern world MODERN MONETARY THEORY For well over a decade, a series of ideas have percolated around the fringes of mainstream economics, which appear to describe the functioning of monetary systems in the post-1971 fiat world well, those of Modern Monetary Theory (MMT). MMT provides a description of pure fiat monetary systems, which is sensible and robust, and corresponds well to massive debt accumulations seen by governments with deep capital markets and widely accepted currencies. To summarise: • • • • • • There is little ‘debt like’ about government debt in its own currency – it can be extinguished instantly and is functionally an offset account to reserves in the banking system; Taxes are not solely collected in order to spend the money, as money can be created instantly via issuance of government bonds (remembering that these are just offset accounts to bank reserves) as well as in the banking system, where the vast majority of money creation occurs; Fiat currency maintains a value in part because citizens must pay tax in that currency; Taxes also have impacts on aggregate demand and by extension inflation and wealth distribution, and can be used to condition behaviour (e.g. ‘sin’ taxes); There is no inter-generational burden of government debt in a government’s own currency – remember, it can be extinguished instantly; The consequence of excessive government bond issuance or direct money creation is currency weakness and inflation – NOT insolvency or penury.44 This framework provides a reasonable basis for understanding how Japan has accumulated colossal government debt, with no inflation, no currency collapse and reasonable economic outcomes. Platinum Asset Management Limited Annual Report 2021 XXVII XXVIII The history of money and its role in the modern world Real per capita GDP in Japan has grown comparably or even faster than that of the US since the peak of ‘Japan mania’ in 198945 and the country’s ratio of employed persons to total population is higher than that of the US.46 This has also been achieved with far lower income and wealth inequality than in the US.47 This would seem to be inconsistent with classical economics’ notions of ‘crowding out’ or the existence of an inverse relationship between interest rates and inflation. These are simply unobservable. An MMT explanation of the role of money and debt in fiat economies appears to offer a reasonable approximation of reality. CONCLUSION We would counsel against passive acceptance of consensus when thinking about a phenomenon as incredibly complex as inflation, especially in the face of monetary policy tools that allow for effectively limitless money creation, in combination with ambitious fiscal targets globally. However, more profoundly, we would highlight the central point of this article – money is a fluid, social institution, and the governing structures around it – centrals banks, treasuries, monetary policy settings and tools – are all subject to profound change. There is every chance that we are living through a period of such change, that decades of no change have shifted to weeks of decadal change. Fed buying of corporate bonds, unprecedented peace-time budget deficits, profound questioning of globalisation, massive transfer payments, unprecedented savings rates, and huge asset price surges, indicate there is ample evidence to suggest this. Platinum Asset Management Limited Annual Report 2021 XXIX POST SCRIPT: MONEY IS POLITICAL In the last two centuries, Britain and the US, both creditor nations, embraced and expanded forms of a gold standard, but when their trade and current account positions slipped into deficit, they pushed for revaluations, and finally abandoned their respective versions of a gold standard altogether. Britain lacked the economic and military power to retain reserve currency status without gold backing. The US remained the dominant military and industrial power globally after 1971 and its power increased in subsequent decades given the decline and fall of the Soviet Union and related communist states. And of course, the dollar retained reserve currency status. The loudest voices clamouring for ‘hard money’ systems tend to be creditors, or those ideologically aligned with them. There is a distinct moral overtone to gold standard/ hard money arguments. Take for example Jim Rickard’s view: “ A gold standard is the ideal monetary system for those who create wealth through ingenuity, entrepreneurship, and hard work. Gold standards are disfavored by those who do not create wealth but instead seek to extract wealth from others through inflation, inside information, and market manipulation.”48 How, precisely, the use of gold in monetary policy would avoid market manipulation and the use of inside information escapes your humble author. Any passing knowledge of the 1920s will suffice to dispel such a notion.49 There is also a tendency to millennialism and dark prophecy, such as Ronald Reagan’s statement before the 1982 election that: “ No nation in history has ever survived fiat money, money that did not have precious metal backing.”50 XXX The history of money and its role in the modern world The glaring logical fallacies here are that vanishingly few nations in history have survived having any form of currency, or anything for that matter – all nations fall eventually – and that all nations in existence today have unbacked currencies. The delicious irony is that economic policies under US President Reagan saw fiscal deficits, which increased the level of national debt from 22% to 38% of GDP.51 So much for prophecy. The Cantillon Effect: Money may not be neutral. If money enters circulation at a specific point, say the banking system, then inflationary effects may have an outwardly radiating effect, allowing early holders of the ‘new’ money to benefit in terms of spending power.52 To demonstrate – imagine that it is 1610, and a huge shipment of gold arrives in Spain from the New World, and that the influx of gold goes on to trigger inflation. Now, imagine that prior to docking, one of the sailors takes a tender and races to shore to spend his share of the gold. He gets the advantage of spending the gold, before the inflationary impact of the rest of the bullion on the economy is felt, thus enjoying a possibly significant benefit in terms of buying power versus other people in Spain affected later by the increase in money supply. Now, imagine that a hedge fund manager is a close counterparty with a money centre bank, and that the Federal Reserve injects huge levels of funding into the banking system to shore it up in a period of volatility. The hedge fund manager may benefit from that liquidity before virtually anyone else in the economy given the rapidity with which they can draw on credit via their banking relationships, access to capital, and ability to deploy that capital rapidly. Platinum Asset Management Limited Annual Report 2021 XXXI XXXII The history of money and its role in the modern world 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 Julian McCormack, “The Dam has Broken”, Platinum Asset Management 2020 Annual Report, pp v-xxv, https://www.platinum.com.au/ PlatinumSite/media/Financial-Statements/ptm_0620.pdf See for instance: https://www.forbes.com/sites/peterpham/2017/11/20/what-is-money/#3c2a124816ea This set of ideas is taken from David Graeber’s excellent work “Debt: The First 5,000 Years”, Melville House, Brooklyn, 2011. See especially pp22-28 Ibid, pp212-214 Yuval Hariri, “Sapiens: A Brief History of Humankind”, Vintage Books, 2011, p131 See for example: https://coinweek.com/ancient-coins/ancient-coins-wealth-persian-empire/ https://www.theibns.org/joomla/index.php?option=com_content&view=article&id=251&limitstart=1 https://www.theibns.org/joomla/index.php?option=com_content&view=article&id=251&limitstart=1 Heilbrunn Timeline of Art History. New York: The Metropolitan Museum of Art, http://www.metmuseum.org/toah/ ht/?period=07®ion=eac#/Key-Events, accessed 28 August 2015; Paper Money, http://www.silkroadfoundation.org/artl/papermoney. shtml, accessed 2 July 2019 Barry Eichengreen, “Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System”, Oxford University Press, 2011, p12 See for example: https://www.economist.com/briefing/2017/04/27/the-history-of-central-banks Sweden’s Riksbank is recognised as the world’s first central bank, founded in 1664, https://www.clevelandfed.org/en/newsroom-and- events/publications/economic-commentary/economic-commentary-archives/2007-economic-commentaries/ec-20071201-a-brief- history-of-central-banks.aspx https://www.parliament.uk/about/living-heritage/evolutionofparliament/parliamentaryauthority/revolution/overview/financialrevolution/; https://www.bankofengland.co.uk/about/history ; https://www.economist.com/briefing/2017/04/27/the-history-of-central-banks Eichengreen, pp14-15 Ibid. Also https://www.royalmint.com/discover/uk-coins/sir-isaac-newton/ Mark Metzler, “Lever of Empire: The International Gold Standard and the Crisis of Liberalism in Prewar Japan”, University of California Press, 2006, p18 https://oll.libertyfund.org/titles/laughlin-the-history-of-bimetallism-in-the-united-states-1898/simple#lf0073_label_056; Milton Friedman, “Bimetallism Revisited”, Journal of Economic Perspectives, Volume 4, Number 4, Fall 1990 Liaquat Ahamed, “Lords of Finance: 1929, The Great Depression and the Bankers Who Broke the World”, Random House, 2009, p168 See for example: https://www.economist.com/buttonwoods-notebook/2010/03/25/currency-controls-and-greshams-law Metzler, pp29-33 Eichengreen, pp15-18 From Metzler, p19 See for example: “Long-Term Trends in Life Expectancy and the Consequences of Major Historical Disasters”, https://www.demogr.mpg.de/ books/drm/009/part1.pdf, p6 Edward Chancellor, “Devil Take the Hindmost: A History of Financial Speculation”, Plume, 2000, p121; https://www.federalreservehistory. org/essays/banking-panics-of-the-gilded-age Eichengreen, p39 See Eichengreen pp44-46; Takekazu Iwamoto, “The Keynes Plan for an International Clearing Union reconsidered”, Kyoto University Economic Review, Vol. 65, No. 2, October 1995, pp 27-42; https://www.economist.com/the-economist-explains/2014/06/30/what-was- decided-at-the-bretton-woods-summit Eichengreen, pp49-57; William L Silber, “Volcker: The Triumph of Persistence”, Bloomsbury, 2012, pp48-105 Eichengreen, p2 See for example: https://www.platinum.com.au/Insights-Tools/The-Journal/Bitcoin-Primer Danielle DiMartino Booth, “Fed Up: An Insider’s Take on Why the Fed is Bad for America”, p65, p88, p159 Ray Dalio, “Principles for Navigating Big Debt Crises”, Greenleaf, 2018; see also Chancellor, chapter 7; Richard J Smethurst, “Takahashi Korekiyo, Japan’s Keynes: From Foot Soldier to Finance Minister”, Harvard, 2007 Note – the term populist is widely misused, versus its initial meaning – i.e. a member or supporter of the Populist Party in the US, which arose in the 1890s and favoured policies like the use of silver to increase the money supply and alleviate debt for farmers and workers – see Thomas Frank, “The People, No! A Brief History of Anti-Populism”, Metropolitan Books, 2020 https://www.cbo.gov/publication/55551 https://www.europarl.europa.eu/factsheets/en/sheet/89/the-eu-framework-for-fiscal-policies See for example: https://www.independent.co.uk/news/world/americas/americans-socialism-positive-axios-poll-b1874049.html See for example: https://www.bloomberg.com/news/articles/2019-11-11/ecb-s-mersch-adds-voice-in-call-for-more-fiscal-stimulus; https://www.brookings.edu/blog/ben-bernanke/2020/01/04/the-new-tools-of-monetary-policy/; https://www.theguardian.com/australia- news/2019/jul/02/reserve-bank-governor-calls-for-more-federal-spending-to-boost-economy; https://www.washingtonpost.com/ opinions/2019/03/07/risk-our-economy-secular-stagnation/; https://www.afr.com/topic/monetary-policy-5zu This was James B Bullard, quoted in DiMartino Booth, p249 Ibid Ibid Silber, p172 See Silber, pp115-118 Silber, pp172-175 https://www.federalreserve.gov/newsevents/speech/powell20200827a.htm; https://www.ecb.europa.eu/home/search/review/html/index. en.html http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf; http://moslereconomics.com/wp-content/uploads/2018/04/Soft- Curency-Economics-paper.pdf; Stephanie Kelton, “The Deficit Myth: How to Build Better Economy”, John Murray Press, 2020 https://ourworldindata.org/grapher/real-gdp-per-capita-pennwt?time=1989..2017&country=JPN~USA https://data.worldbank.org/indicator/SL.EMP.TOTL.SP.ZS?locations=JP-US https://www.weforum.org/agenda/2015/03/why-inequality-is-different-in-japan/; https://data.oecd.org/inequality/income-inequality.htm James Rickards, “The Death of Money: The Coming Collapse of the International Monetary System”, Penguin, 2015, p287. Also note the American neologism – “disfavored”…really? See for example: John Brooks, “Once in Golconda: A True Drama of Wall Street, 1920-1938”, Wiley, 1969 https://www.forbes.com/sites/johntamny/2015/11/18/ted-cruz-and-rand-paul-versus-critics-of-the-gold-standard/?sh=536365678238 https://www.econlib.org/library/Enc1/Reaganomics.html See for example: https://www.aier.org/article/sound-money-project/cantillon-effects-and-money-neutrality Disclaimer: This publication has been prepared by Platinum Investment Management Limited ABN 25 063 565 006 AFSL 221935 (“Platinum”), trading as Platinum Asset Management (Platinum®). This publication contains general information only and is not intended to provide any person with financial advice. It does not take into account any person’s (or class of persons’) investment objectives, financial situation or needs, and should not be used as the basis for making investment, financial or other decisions. You should obtain professional advice before making an investment decision. To the extent permitted by law, no liability is accepted by Platinum for any loss or damage as a result of any reliance on this information. This publication reflects Platinum’s views and beliefs at the time of preparation, which are subject to change without notice. No representations or warranties are made by Platinum as to their accuracy or reliability. This publication may contain forward-looking statements regarding Platinum’s intent, beliefs or current expectations with respect to market conditions. Readers are cautioned not to place undue reliance on these forward-looking statements. Platinum does not undertake to revise any such forward-looking statements to reflect events and circumstances after the date hereof. © Platinum Investment Management Limited 2021. All rights reserved.

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