Shorting the losers and backing the winners: Plato’s all-weather investment strategy

Our first speaker from the global perspective is Mr. Dave Allen, PLATO Investment Management's Head of Longshore Strategies and Portfolio Manager of the PLATO Global Alpha Fund.

The PLATO Global Alpha Fund is a longshore global equities fund dedicated to proving investors of weather investment solutions that can generate alpha throughout the cycle.

the team isn't mandated to stick to a particular style like value, growth, or quality.

Instead, the fund is focused on generating consistent features so those in the accumulation phase can grow their assets over time.

The fund aims to outperform the MSCI world net returns on the hedge index by 4% per annum after fees over the median long term prior to Plato

Dave worked for J.P. Morgan Asset Management in London for 15 years, where he designed and launched the J.P. Morgan Euro Equity Plus Active Extension Fund, which grew to €6 billion.

Dave's presentation topic is shorting the losers and backing the winners.

Plato's all-weather investment strategy.

Welcome, Dave.

Thank you so much for having me on.

I really appreciate it.

So the fund that I'll talk about today is the PLATO Global Alpha Fund.

So this strategy has MSEO world benchmark and is suitable as a core allocation for your equity exposure or a satellite allocation.

What's really distinctive about this strategy is it's 150% long and 50% short.

What does that mean?

Well, it means we've got 50% more firepower for our best ideas, but we're also got 50% short.

That gives us the ability to make money through the companies that are going to underperform and in this environment where rates are going through the roof, companies that have been limping along and never making a profit are really being found out.

The performance to data have been very strong in last year's value-dominated market and then this year's growth-dominated market.

We're actually outperforming the MSUI world by almost 9% per annum since the strategy was launched.

If we look at the performance, as we alluded to, of strategies that I've run in the past, we have the active extension strategy here on the left hand side from my time with JP Morgan, where over a decade long period, we outperformed by about 4% per annum relative to the MSCI benchmark.

On the right hand side, this is a long shorter, actually a market usual hedge fund strategy where we generated an annualized alpha of around 10%.

per year.

So we have a fantastic, you know we've got 10-11 billion of assets under management and we're sort of known and loved for the Australian income strategy.

But what many of you may not be aware of is we've got a tremendous depth of talent in global longshore.

George Platt, of course, was the head of the Macquarie hedge fund group for many years.

Charles was largely his right hand man.

And we have Don

The Dr Don of course launched Australia's first ever 130-30 strategy when he was back at State Street well over a decade ago and Chanel as well with extensive long short experience.

And they're the faces that are really driving the performance that we've delivered so far.

The key investment philosophy behind everything we do is a company for us to invest, it has to be a high quality business.

But high quality businesses, the market's quite efficient, and they'll tend to trade at a premium to the market.

So we're looking for those high quality businesses that for some reason the market isn't

isn't it really accounting for that value correctly.

Of course, cheap names can remain cheap for 5, 10 years, good being right if you write 5, 10 years too early.

So we'll always wait for those cheap high quality names to have that profit potential to be unlocked with some sort of a catalyst or a change in sentiment.

The final hurdle that a company must

overcome for it to make it into our portfolio is a system of over 100 red flags that we've developed for almost a decade.

The red flags is one of the most distinctive parts of the PLATO investment process.

Really, the red flags are about avoiding landmines and also identifying great short opportunities.

So if we see a cluster of red flags where a company has

weak governance, signs of financial distress, really aggressive accounting.

then those companies we really try and steer clear of.

If a company has eight or more red flags, then that company on average will underperform the benchmark by about 20% over the next 12 months.

It's a pretty substantial number.

If you can just avoid those blow ups in your portfolio, you're halfway there.

But if you can go one step further and short those names, then you can generate some fantastic alpha.

And indeed,

90 to 95 percent of the alpha that we've generated on the strategy to date has actually been on that short side.

There's some really interesting names globally and in Australia at the moment that have a very large number of red flags.

So Brainchip, this is a company

that has 22 red flags.

And that out of the 10,000 companies we look at globally, they're actually, it's the second largest number of red flags.

And it's a company that had a valuation around $3 billion around the start of the year.

And this is a company that's got less revenue than some cafes.

So there are a wealth of opportunities out here.

I think it's almost a once in a lifetime opportunity for shorting strategies to make money on these sorts of names.

On the long side, though, there's some names we really like.

BMW is a great value company.

You know, it's incredible to me.

Such a storied name can trade at six and a half times earnings.

And they've got a huge amount of growth even in their EV space growing.

35% per year, which is the same as Tesla.

We look to drive really consistent returns by having the very best value names, the best growth names and the best quality names in the portfolio.

So not tied to any one thematic or one style.

A great growth name that we like in the portfolio is Novo Nordisk.

Of course, they're

They're at the forefront of the anti-obesity drugs, 80-90% market share in that.

ASML, they're at the very apex of the semiconductor supply chain to actually make the machines that make the chips.

that are behind all of the most advanced AI.

So whoever wins that AI race, ASML will win irrespective of that.

And by having those exposures to some of these great companies that I've personally been invested in for well over a decade, we can drive consistent returns and not just feast and famine returns that you've seen from some highly concentrated managers.

And that's exactly what we're seeing here.

The outperformance of the strategy since launch is almost 9% after fees.

But I think equally gratifying, if you look on the right hand side, the upside and downside capture of the strategy.

So the upside capture is about 1.25.

So that means when the market's going up, we're going up more than the market.

The downside captures about 0.8.

So when the market's going down, we're preserving capital better than the market.

So that provides those nice characteristics we like to see as investors.

That's translated to very consistent returns over time.

This shows the performance of the strategy compared to the 40 largest competitor funds.

And you can see that we've added alpha consistently in a pretty difficult period for investors with lots of different themes.

So what are the key takeaways that we can deliver that high alpha as we've done here and in past lives, but without that high concentration and those severe drawdowns, the focus really on that all weather performance, whether it's a recession or whether it's a growth market where we're not looking to make excuses, we're looking to make returns irrespective.

The red flags are absolutely critical within that to A,

avoid landmines on the long side, but they really drive out from the short side.

And ultimately, that's all contributed to some very strong performance in quite a challenging period for markets.

Are there any questions that you'd like to go through?

Yeah, thanks, Dave.

Absolutely.

There are a few questions here.

The first question we have is around AI.

So we know that there is a lot of hype surrounding AI at the moment.

So how are you looking at AI?

The second part of the question is, any more broadly, how do you play these thematic steps emerge from time to time with so much hype?

Yeah, I think it's an excellent question.

And many people hadn't even heard of CHAP GPT until last November.

And now it's upending almost every industry you can think of.

In such a rapidly changing space, I think it is difficult though to pick the eventual winners downstream.

So it's very much our philosophy that you want to have more of a picks and shovels approach where you're investing right at the apex of the supply chain.

So ASML is a name I mentioned just earlier.

They make the deep ultraviolet lithography machines that are critical to every single AI process in the world.

And that's a way that you can get access to the thematic, but without taking on too much idiosyncratic risk as the landscape changes from week to week and month to month.

That makes sense.

And can you touch on why you do think investors should consider allocating to a long, short strategy as opposed to just all alone only?

Yeah, another good question, I think.

Outperforming consistently with a purely long-only strategy is difficult.

If you want to generate income, long-only is perfect.

It's the perfect vehicle for that.

But if you want to generate alpha, long-only is almost like going to war with a water pistol.

It's hard yakka.

Say that you identify that a company's fraud,

All you can do is not hold it.

But the second you can be long short, you've taken off the handcuffs and you can generate a huge amount of alpha on the short side.

And this environment where there's a lot of dispersion between your winners and your losers, companies are being found out that had lofty valuations that are being torched by rapidly rising rates.

Yeah, it's a great environment for longshore without a doubt.

And we've definitely had that tailwind behind us in generating the strong performance that we have.

Well, thank you, Dave.

Great to see you.

Take care.

Thank you so much.