Portfolio Management

Platinum Asset Management Limited's Business Report

Platinum Asset Management Limited

Introduction

Since the global financial crisis up till FY2012, financial markets worldwide appeared lackluster with slim gains afforded. The recession hit developed markets harder which caused many investors to place their funds into safe-haven investments instead of taking a risk on equities or high-yielding debt. For the past 5 years, gold and other precious metals rallied and broke historical price records. However, FY2013 has displayed a shift in these trends with expectations of upward movements in equity, currency, and gold markets.

Taking the portfolio of Platinum Asset Management Limited (PAML), a managed fund based in Australia, this report seeks to identify risks faced by the fund with respect to their investments; recommend hedging strategies and use of derivatives. These recommendations will include hedging exposures, number of derivative contracts for each hedge, along with the time duration of the said strategies.

The Portfolio and The Outlook for 2013

PAML's portfolio consists of equity, gold, and interest bearing investments in Australian as well as international markets. The fund has invested A$300 million on the S&P ASX 200; US$500 million in the S&P 500, US$100 million in gold exchange traded funds (ETF's), A$350 million in bank accepted bills and US$225 million in Eurodollars.

Equity markets have a more optimistic outlook this year, when compared to the post-finacnial crisis scenario. Barron's research suggested that the S&P 500 would surge higher up to 1,562, close to its all-time high of 1,565 (October, 2007). However, the S&P 500 had reached 1,593, a new all-time high. Although the index has fluctuated between the range of 1550-1565 over the last month, charts suggest rallying movement, although the possibility of a major correction cannot be ruled out. Overall, the current outlook suggests that the markets will settle in the range of 1,560 to 1,570.

The index for the Australian bourse, the S&P ASX 200, opened at the level of 4,705 at the start of the 2013. A bull rally initiated in November continued its run till the mid-March, reaching this year's index high of 5,146. However, the index has witnessed a downward trend for the past couple of months and has hovered slightly below the level of 5,000. The current wave assessment suggests that the index may fall further as a yearly analysis suggests the wave of upward movements shortening, although the same can be considered support for another bull-run.

Gold has definitely seen better days. Climbing high till US$1,790 in October last year, the precious commodity had declined to a low of US$1,348, stabilizing above US$1,400 in the following days. While gold is expected to move slightly higher towards the $1,500 range, a gloomy outlook is expected for the safe-haven commodity given easing of growth concerns and the subsequent movement of capital towards equities.

Risks to PAML's Portfolio

Financial risk, in light of PAML's holdings, defines factors determining the probability of making a loss on an investment. Various hedging tools are used to manage these risks in order to offset losses and ...