Back-to-basics billionaire sounds money-printing warning

Billionaire investor and Platinum Asset Management founder Kerr Neilson warns that governments need to walk back their deficits because eventually the big spending and money printing response to COVID-19 will surely exhaust the market's appetite for bonds.

In an exclusive interview with The Australian Financial Review Magazine, Mr Neilson reveals that since handing over the top job to his successor, Andrew Clifford, he has enjoyed returning to the basics of investment research and stays up to listen to company earnings calls on the other side of the world.

He remains part of the investment team at Platinum, whose global healthcare fund is up 24.5 per cent over one year, after fees, and ahead of its benchmark, while the Asia fund smashed the market in March's deadly quarter, down just 1 per cent when the benchmark fell 7.4 per cent.

In a series of interviews at the height of the pandemic in March and April, Mr Neilson said from the beginning: "I’m comfortable in believing that this will pass in a relatively short time in the scheme of markets.

"The damage will be the responses and changes in creation of assets in the form of bonds and so on, and government spending running heavily into deficit, which I think in the initial stages will be absolutely appropriate."

Two paradoxes

However, at "some stage" the world needs to "rein that back in, but as we’ve seen with the issuance of government debt there hasn’t been very much evidence of that".

He is not saying this is an immediate risk, but there will come a time when investors will prefer to own real businesses and assets via equities instead of owning bonds. The fact the world will be awash with nominal assets (bonds) is one of the two paradoxes he observes, the other being the mania for private markets such as venture capital.

"The central banks might have balance sheets which are so vast, that any attempt to raise interest rates creates all sorts of turbulence within their funding and indeed they just meld with government again, as they started out.

"It’s quite an interesting time in economic history I suspect."

At least in part, the high gold price is probably alluding to the fact one day some sovereign debt obligations may not be met, he speculated.

The legendary investor also lashes out at the hard-edged Ayn Rand-style capitalism displayed by Wall Street through the bull market, believing share buy-backs and executive remuneration have been excessive.

"It’s a gentler way of acknowledging that in the end, gated communities destroy themselves," he said.

Books of wisdom

Neilson's wisdom has been reproduced in little illustrated books that Platinum has been printing for years based on practical advice, such as "don't fall in love with stocks". He wishes more people would get into the weeds of earnings calls as he does to learn how businesses really work.

"If they could just get more of a sense of what makes companies work they’d become much better investors. There’s too much of this shorthand enumeration that doesn’t delve into the factors that will give longevity to a business." It is, he said, the difference between understanding Microsoft's confidence in pivoting to a cloud business and missing the nuances that foretold its success.

"There will be other companies that you come across which seem to have lost their compass and you’ll see, there’s enough depth of culture. Because each of these companies had its challenges and then you see the way they can work their way through."

Vesna Poljak is the markets editor and her full interview with Kerr Neilson is published tomorrow in The Australian Financial Review Magazine.