United States v Asia as top fund managers fight it out

Warren Buffett warned investors not to "bet against America" in his latest shareholder letter but Platinum Asset Management's Kerr Neilson, for one, seems happy to take that bet.

He's in a lonely place. The third slide in Platinum's latest results presentation shows that 14 of the Platinum International Fund's competitors are backing Buffett's view, with their weightings to US equities clustered around the 50-60 per cent mark.

The Platinum International Fund, meanwhile, stands alone at just 11 per cent (with the remainder dominated by Asia at 32 per cent, Europe at 20 per cent and Japan at 10 per cent).

The competitors are not named, but one of them is likely to be the Magellan Global Fund, managed by Hamish Douglass, chief executive of Magellan Financial Group. Every one of the top 10 holdings listed in its latest investor report is based in the US. Between them they contribute almost half the fund's assets.

So, who's been winning?

In the three years to end of February, the main US index, the S&P 500, gained 24 per cent a year, while the MSCI AC Asia ex Japan Net Index lost 4 per cent (both measured by total returns in Aussie dollars).


That puts Magellan ahead with the Platinum International Fund dragging behind. Still, its three-year annual return of 16 per cent is respectable – but not as respectable as the 21 per cent achieved by the Magellan Global Fund.

All this suggests that both Neilson and Douglass have been doing a decent job of picking stocks, but the latter has had the benefit – either through luck or good judgment, depending on your point of view – of being in the right part of the world.

There are some other significant differences. A large part of Magellan's growth has come from institutional clients paying lower fees. This segment accounts for 71 per cent of total funds under management. Neilson maintains that if the performance is sufficient, then fees shouldn't matter. That's a harder argument to make given recent comparative performance.

The other point that Neilson repeatedly makes is that rather than focusing on particular indices, it is important to avoid losses, which can be particularly damaging to long-term returns when pensions are in their drawdown phase.

Positioning Platinum's funds to avoid serious losses necessarily means factoring a margin of safety, which makes it hard to keep up when markets perform very well – as they had until recently, particularly in the US.

So where do we sit on this battle between fund management heavyweights?

On the fence, naturally. Buffett is right about the US being a wealth-creating powerhouse, but his point is probably as much about equities versus bonds and cash as it is about the US compared with other regions – it's just that he likes to make this kind of point in a patriotic fashion.

Similar to Buffett (at least in the past few decades), Douglass tends to focus on high-quality consumer franchises of the sort that are two-a-penny in America and hard to find anywhere else, so the US naturally winds up being his main focus. These types of stock have done well in the past and, skilfully selected and bought at reasonable prices, we don't doubt that they'll do well over the long-term future.

Neilson, meanwhile, has a point about the rise of Asia as an economic force. China's 16 per cent share of global gross domestic product recently overtook that of the US, and even at the rate of 6.9 per cent in 2015 is still growing almost twice as quickly.

India is next on the list with a 7 per cent share of global GDP. Yet the US comprises 60 per cent of the MSCI World Index, while China and India contribute less than 4 per cent between them. Of course this is a rough comparison, but it does feel as though people might be investing through the rear-view mirror.

So, while investors in the two companies funds should know what they're getting into and balance their portfolios accordingly, investors in the management businesses themselves should probably try to be agnostic. If the stock-picking remains good, then the rest should come out in the wash.

Disclosure: Staff associated with Intelligent Investor may own stock in the companies mentioned.

James Carlisle is research director of Intelligent Investor. This article contains general investment advice only (under AFSL 282288). Authorised by Alastair Davidson. To unlock Intelligent Investor stock research and buy recommendations, take out a 15-day free membership.