Taking your shorts to the bank

PLATINUM Capital is one of the most successful fund management companies in the country. Under the stewardship of Kerr Neilson, its portfolio grew by 13.8 per cent in the year to June, compared with a 23 per cent slide on world stock markets. The overall return for the past eight years has been just more than 20 per cent. It remains to be seen whether there can be another encore in the current roller coaster markets.

Shareholders in the listed fund collected a 15-cent total dividend for the year, which represents a fully franked yield of 6.6 per cent at the latest price of $2.20.

Platinum has scored big by taking short positions in the stocks of many US corporations. It turned its back on the sickly American dollar some time ago. Around 63 per cent of its assets are hedged into Australian dollars, 28 per cent is in European currency, and the balance in the Korean won. The company has never invested much of its portfoilo in Australia. For ages its only holding here was Origin Energy. During this year it added Lihir Gold and MIM. Significantly, it also sold short the shares of all four big banks.

Platinum is not alone in disliking banks. The stock prices of NAB, CBA, ANZ and Westpac have taken a tremendous shellacking in recent months, which has carved nearly 15 per cent off the sector. Broker AB Amro says foreign investors have been selling Australian banks and shifting the proceeds to Asian markets, especially Hong Kong. As we have said before in this column, good luck. If the price of oil does not fall back soon, many Asian economies are going to bleed.

The argument that our banks no longer deserve their defensive reputation reflects a belief that the shares looked expensive, selling at 13 times earnings, compared with single digit multiples among their overseas counterparts. There are some good reasons for that premium. Banking consultancy Oliver, Wyman & Company calculates that loan losses suffered by US and European banks could exceed $US130 billion this year. Telecom collapses have been compounded by debt problems in Brazil. On top of that, in many cases, investment banking analysts are in serious trouble with the US stock exchange regulators. Our leading banks are only affected peripherally by these woes. But there are some specific issues. The market is terrified that NAB’s Frank Cicutto wants to spend $30 billion or so buying Abbey National or something else in the UK. Westpac seems to have got in a pickle over junk bonds and may have to fess up and take some write-downs. CBA and ANZ are targets of various pot shots on the business pages. Quite a lot of the bank selling has been soaked up by small investors … and why not? The prospective dividend yields on offer are now pushing through 5 per cent, and carry juicy franking credits. Banking shares might not return to the top of the pops quickly, but there will be strong support from the dividend scalpers during the November reporting season. Further out, banks will recapture their solid earnings safe harbour status.

They always have.

A familiar feel in mid-town Manhattan

AUSSIE accents recently rolled around the lobby of the swish St Regis Hotel in mid-town Manhattan The CEOs of 22 of our biggest companies were in town for a roadshow organised by Merrill Lynch. By all accounts it was standing room only for the big hitter US institutional investors at the conference.

The Merrill men said there was also a doubling of demand for one-on-one meetings with the visiting Australian executives compared with the last New York get together two years ago. The collective story they told was that Australia offers a combination of attractive valuations, defensive high quality earnings, cost reduction efforts and healthy dividend yields. Woolworths chief Roger Corbett reported expanding margins and $500 million trimmed from costs by improved logistics. Orica managing director Malcolm Broomhead weighed in with the same restructuring theme bringing much improved returns on capital and strong free cash flow. The chief financial officer of BHP Billiton, Chris Lynch, told the hard-nosed audience that the merged group had already snared $220 million of its $270 million cost saving targeted by June 2003.

Other present and potential national champions putting their wares on display were Amcor, CSR, Foster’s, Wesfarmers, Westfield Holdings and Telstra. It is good that their voices are being heard in what is still the pre-eminent financial capital of the world.

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