An independent international boutique fund, Platinum operates (five funds in total and other mandates) diversified funds that specialise in international equities. In just over eight years, the Sydney-based group has amassed around A$6bn in funds under management.

After completing a Bachelor of Commerce at the University of Cape Town, Neilson received what he regards as his baptism of fire into the world of finance working in the investments department of Courtaulds in the UK. To make the most of sharemarket opportunities, Neilson believes all fund managers need patience, understanding, a little healthy skepticism, years of experience - and extreme caution.

For this Portfolio Talk, we're focusing on the Platinum International Fund, an active fund that Kerr Neilson is directly responsible for managing. What are its objectives?

Our goal is to achieve absolute results and absolute returns rather than hug the index. We hope within the next five years to achieve 10% gross total returns.

Over 15 years we've compounded that by over 20% -compared to the market's 12%.

The results so far?

Kerr Neilson is justifiably proud of the figures. Year to date, most fund managers are down around 30% (after going down 75% last year) while Platinum is down around 7%. Neilson is also proud of the fact that Platinum's performance has been achieved with comparatively low risk. Historically, Mercers' figures show that Platinum's volatility risk is lower than the index and their peers. In the year to 30 June 2002, Platinum's International Fund returned 9.8% compared to the MSCI World Index's -23.2% - over five years the returns were 22.2% and 6.5% respectively (see table). "We're still losing money, but we are losing considerably less than others. We've got the record to show that in good and bad markets - we've been Ok."

The worst affected sectors (for the quarter) were IT and Telecom. By geography, the brightest spots were Japan and Greece. In the three months to 30 June 2002, the fund declined 3.8% - while it rose by 3.4% for the six months. In the four months to 31 August 2002, the International Fund grew by A$400m to $A$2bn.

How would you describe your portfolio management style?

We take a distinctly contrarian approach to bottom-up stock picking. Instead of dishing up to the market what they want to hear, we have and will continue to call the market as we see it. The worst part of our industry is that the mythology grows. That's why we feel it's critical not to buy into conventional wisdom - which has a dulling effect on people's abilities and leads to mediocrity.

We never bought into the idea of the US IT market being supreme. In fact, when we were short on tech stocks people though we were mad. The greatest flaw within this industry is the confusion between value and price.

We believe than in a world where big business puts a spin on everything - product must remain sacrosanct. Our fundamental approach is simple. While steering clear of IPOs, we focus on smaller listed companies that tend to be undervalued relative to their big-cap counterparts. All we're trying to do is find companies that will do a decent job. It's all about knowing what you're getting for what you're paying – that means entering those positions at the right price. Within a bull market we could be up to 100% in longs - but within the current market, around 30% are in shorts.

We used to "short" indices, but now we short individual stocks (for example GE, Tyco, P&G, Wal-Mart, Walgreen and Sears). The three pillars underscoring our shorts positions are: Frauds, recovery (undervalued stocks) and misperceptions where we have a different viewpoint to the stock market. We see less disclosure and corporate governance risk in Europe than the US. From our perspective, German and other European companies have a deeper commitment to distribution and the things that make growth profitable. We believe all stocks go through three phases - boredom, discover and the eulogistic phase. We aim to take out the gaps between the market value of the stock and its inherent value. If you buy good companies during the boredom phase, you know you're not going to lose at lot of dough. We take the innards out of an opportunity and buy in during the boredom phase - when something has gone through the wringer or has been neglected. In addition to market value, we also assess business worth.

What have been the most recent portfolio changes and why?

Our eagerness to start accumulating positions notably in EDS (IT outsourcing) and Ericsson has cost us money as these companies sold off with the tech.

Our significant additions were mainly Japanese companies: Takeda, Sky Perfect Communications, Credit Saison, Aiful and Denso. With the exception of the latter, these are domestic plays that are largely unaffected by the movements of the Yen. This provides balance to the export component of the portfolio and exposes the fund to the growth industries in the moribund Japanese economy. Turning to shares sold, we removed Coke, Kimberly Clark, Lagardere, Tokyo Broadcasting, Sony and Zhejian Highway. These shares have each been profitable as investors sought the sanctuary of defensive plays. They no longer offer good value. On the short selling front, we have gradually migrated from the technology sector (such as Intel) to the financials and consumer sensitives, such as Sears and the government sponsored enterprises: Freddie Mac and Fannie Mae.

Based on your reading of global economic indicators and equity markets - have we hit bottom yet?

We think the speculation that Wall Street has hit bottom is premature - and follows the normal pattern of false optimism that can be expected after an 18-year bull market. Our medium-term caution is based on the amount of consumption brought forward from the excessive use of debt by companies and individuals, the stifled criticism directed at key institutions - and the willingness of investors to pay such high prices for true earnings.

Money is still hovering in yesterday's winners. New issuance hovers in the wings. We're in the initial stages of a bear market. As investor risk and regret is replaced by distress and anxiety - we'll start to see significant selling on mutual (managed) funds. But as money is withdrawn from equity mutual funds - even wonderful companies will be revalued downwards. With still low confidence in paying up for growth, investors are now paying over the odds for defensiveness.

But there's simply still too much faith in equities for this to be a fundamental bottom.

How do you go about researching companies for the fund?

We don't use any standard technical analysis. Stock selection is driven purely by our investment team - many who have been together for around 10 years. We spent a lot of time seeing companies. Out of the 1500 to 1700 stocks in our universe, we visit around 200 in a year - plus 150 companies that could be outside that universe. What most fund managers do is try and buy the best stocks today.

For each stock, we look at their inherent market position - in the search for companies that will be the biggest builders of value. When researching companies, we look at themes plus industry and country trends - while all the time looking for biases. This may mean looking at some unlisted companies within the same sector. When looking at individual companies, we' re particularly interested in outstanding and demonstrable management and ask - have they delivered on their own expectations? Fundamentals and valuations are always valid. But because they're constantly changing, they do require a reflexive response.

We often buy dull companies that are plodding away to achieve 6-7% over time. We think that companies that grow at around 7% annually are quite interesting - and those that grow above this are unusual.

We hope that within the next five years to achieve (from this starting point) 10% gross total returns. Over 15 years we've compounded that by over 20% - compared to the market's 12%. To help us find these stocks we screen companies for lots of characteristics, including: has there been a binge on capital spending in this industry, has the R&D spend gone up over a period of years?

We try to have a hit rate of eight out of ten stock picks being right. Stock snapshot - significant additions Takeda (Japan) The country's principal rug producer, with an interesting portfolio has sold off in sympathy with its international peers. Trading on around 20 times earnings with 20% of this capitalisation in cash, it is close to its cheapest valuation ever.

Sky Perfect: Sky Perfect was IPO'd with all the fanfare of the Internet boom and has subsequently fallen over 65%. The entity was one of several license holders to broadcast digital TV via satellite. But as time has passed it has merged with JskyB, and another competitor, Direct TV Japan - has terminated service. Sky is now the communications satellite digital platform over Japan, aggregating some 180 channels - with nearly three million subscribers. With a current net sign-on rate of 40,000 a month, Sky will break even by year-end. This is an attractive proposition to many institutions in Japan given the clear emphasis on solvency and free cash flow. We believe this is the main suppressant on the share price, as subscriber growth has been good. Should Sky eventually gain say, six million subscribers (out of 46 million households) - the share will prove to be a gift.

Credit Saison and Aiful: Both companies represent strong exposure to Japan's growing credit card market. Credit Saison is aiming to be the leading card processor in Japan, and has delivered excellent growth over the last 10 years of recession. Aiful will continue to develop its traditional short-term lending business through its credit card offering. Both companies have very low balance sheet gearing - borrowings to equity being around five times. As credit markets expand in Japan, the potential for leverage is enormous.

Denso: Wired to the fortunes of Toyota, Denso is the leader in car navigation and will ship half a million sets this year. The company will benefit from the intensifying digitisation of cars, be it through pollution abatement or mobile communication and control. The company's commitment to product excellence and innovation is partly revealed by its R&D budget of 9% of sales. While being at the leading edge of auto electronic technology, Denso is targeting to reduce its costs by 30% by 2003.