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Investment Guide
Beating the crowds
Susan Kitchens, 12.09.02

Kerr Neilson, remote himself in Sydney, shows how investing in neglected areas pays off.

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To be a successful investor, you need to be both creative and contrarian. It is impossible to beat the markets or outperform other investors if your portfolio looks like everyone else's. Kerr Neilson of Platinum Asset Management is not as famous as Sir John Templeton or Warren Buffett, but he has delivered stellar returns and built a $3 billion fund management company by avoiding the obvious.

His mantra: Find out where most investors have their money and then go in the opposite direction.

This simple approach has served him well. His flagship Platinum Fund has returned a remarkable 18% compounded annually for the past 15 years. This year the fund is making money even as global indexes are down.

Neilson, 53, is himself well off the beaten path: He does all of his stock picking in Sydney--a beautiful city but hardly a hotbed of global hedge-fund talent. He has more than 30 years as a broker and fund manager. In 1983, Neilson, a native of South Africa, immigrated to Australia and was soon the head of Bankers Trust's nascent retail fund-management division there; within eight years he had $2.8 billion in assets under management. During this time, he met George Soros, who asked him to manage some of the billionaire's assets globally. In 1994, Neilson decided to strike out on his own by starting Platinum Asset Management; Soros is the only outside shareholder (20%).

He met Dixon Boardman of Optima Fund Management in New York while looking for investors; Platinum is now one of the funds in Optima's stable. "Kerr is the best manager we've ever found," says Boardman. "He's never had a down year."

Neilson's first step in picking stocks is to look for the areas of greatest neglect. This is immediately clear when you look at his portfolio: At the moment, nearly 20% is in Japanese stocks; the European insurance sector is another favorite. This kind of thinking goes against human nature, which seeks positive news.

"There is an astonishing desire by most people to be with the crowd--it's comforting there," says Neilson by telephone from his office, which overlooks Sydney's famous opera house. "The reality is that by the time the big opportunities are recognized, a fair deal of the money's been made."

Japan is an example. With its stock market mired in a 12-year slump and the banking system choking on bad debt, few countries look less appealing at first glance. "The story for Japan is lamentable," says Neilson; he criticizes the weak government, which is in a stalemate about how to reform the economy. "But the fact is, we are invested in individual companies, and it's irrelevant what we think about the government. Within that penumbra of misery you'll find some interesting stocks."

One example is Denso, a maker of automobile components, such as airbags and door locks, with $18 billion in sales in 2002. It sells half of its products to Toyota. Neilson likes Denso; first, because it's a less obvious play than a larger company, such as Toyota or Nissan; it also has no debt. Neilson says that Denso, which spends 9% of sales on R&D, has improved its production and design process to become one of the most efficient and lowest-cost manufacturers he's found worldwide. It's also increased profits by 10% compounded annually since 1995, compared with the downslide of the Japanese economic environment. As a supplier to other healthy businesses, Denso stands a good chance of remaining healthy itself in the long term. Another bonus is that Denso is developing electronic car-navigation gear, which Neilson believes will see a lot of growth--particularly in Europe. "We're talking about a major evolution [in electronic car gadgets]," he says. Denso sells at 20 times earnings.

A similar story can be found at Alpine, another Japanese auto-parts maker, which is a subsidiary of Alps, a high-end radio maker. With only $1.5 billion in sales, Alpine is small; but it has no debt, spends 7% of sales on R&D and is also picking up business from the car-navigation segment, says Neilson. Alpine's customers of high-tech equipment, such as digital radio systems, include DaimlerChrysler, Jaguar and BMW. "We like to find a company that's supplying the leaders in the field, not the second-raters," he says.


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