Serious equity investors should prepare for rising rates: Kerr Neilson

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The fund manager said the collapse in the value of technology between November and February showed how retail investors and less sophisticated fund managers had confused “transient capital gains” with the competence of investment in 2021.

“When you’re a novice, you take price as a signal of your judgments,” he said. “When you’re a pro, you start with a clear view of what something is worth, and then you look at the price against that.”

After a year of extraordinary gains for stocks popular with retail investors like GameStop and Tesla, the investor also criticized securities regulators for lax investor disclosure, accounting and reporting protections.

“There are now so many games with company numbers, these non-GAAP earnings,” he said. “And there are so many games played. And the SEC allowed it as long as you have a label and a disclaimer, you’re fine. It’s just nonsense, the small bettor is really very exposed.

Chinese industrialists

Mr Neilson suggested investors looking for fairly valued companies with the potential to generate reasonable compound earnings growth should look to Chinese industrialists, ahead of more fashionable tech names like Tencent and Alibaba.

Chinese industrials in healthcare, insurance, consumer staples and services are expected to perform well thanks to cheap valuations, the country’s large middle class and a widening trade gap with the US. United, he said.

“As a global fund manager, I think you limit the exposure [to China] you have, and then work within that framework,” he said. “In terms of physical production, China is bigger than the United States, and China will become more protectionist. At the start of protectionism, there are enormous advantages. When I went to Latin America, it was for protectionism. It was the reverse of what we see.

“When you engage in protectionism, your corporate sector can achieve remarkable returns because you substitute. Some of these health products will be provided to them 30-40% cheaper than foreigners.

Investors in high-growth emerging markets should also accept that nearly all Asian nation states are mercantilist, according to Neilson. “Korea is the leader,” he said. “Followed by the Japanese and the Chinese. They believe that everything should be done at home. And you should only have exports, and everything that enters the country is a curse, and I’m hardly exaggerating.

“So you know in some [Asian] companies, you have a market growth of 10 to 15%. And then you have import substitution. I can see companies selling at very low prices or even in the single digits [profit multiples]which will probably grow by 15 to 30% per year.

Pressure at Magellan

Mr Neilson also acknowledged developments this week at fund manager Magellan, where its co-founder, Hamish Douglass, has requested indefinite medical leave.

“The thing is, once you’re in the game, you work so hard,” Neilson said. “And that has a cost to relationships, health or ego. Those are the three big costs, usually it’ll be relationships, and if you’re lucky it won’t be health, and if you’re luck will not be ego, but one of those things will suffer.

Mr Neilson declined to speculate on whether Mr Douglass would return. “I hope so, he’s a perfectly reasonable guy, I think there’s a bit of wickedness to it actually,” he said. “To be good, you have to give a lot of your time.”

Mr Neilson retired from Platinum in 2020 but retains a 22% stake and said he remains a big supporter of his investment team.

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