AS AT 31 DECEMBER 1996

Performance
Platinum Capital Limited declined 3.4% over the last six months in comparison to the 5.2% gained by the MSCI World Accumulation Index (A$ terms). Both Japan and Korea experienced sharp declines (-17% and -28% respectively), whilst the UK (up 23%) and Hong Kong (up 17%) were the strong performers. The US, French, German and Australian markets all rose approximately 9% for the same period.

PCL Cumulative Performance Of NAV (Pre-Tax) And Share Price Versus

MSCI World Accumulation Index
This last half year has not been one of our best. There have been many opportunities and yet our returns have been modest. The drag on our performance has emanated from three sources. Firstly, our concern about earnings growth and attendant valuations of the US market persuaded us to fully hedge our US portfolio. Secondly, we had three significant stocks - mentioned in the September review - that lost money. Thirdly, our investments in Korea, which although among the cheapest in Asia, exposed us to the worst performing market, bar Thailand. The positive result achieved was thus carried by our European, Brazilian and Japanese investments - the latter outperforming a market which retreated through the year.

Shown below is the performance of the MSCI and its components for 1996. Note the heavy weighting of the US market. It is quite evident that misreading that market was the most expensive decision of the year. The third column shows the return from various markets over 5 years.

MSCI Indexes(A$/Capital)	1996 1 Year Performance	MSCI Weightings as at 30.9.96	1991-1996 Compound Annual % Change
US	13.5%	42%	11.6%
Japan	(21.4%)	21%	(1.2%)
UK	15.4%	10%	8.1%
Europe (excluding UK)	8.7%	19%	10.6%
Pacific (excluding Japan)	10.2%	4%	13.5%
Other		4%
World	4.5%	100%	7.9%

During 1996, the US market was driven by stocks that we would tend to avoid. Uncertainties about the strength of economic growth in the US - and globally - led investors to focus on companies with predictable and visible earnings. As discussed previously, this narrowing of interest to companies which were already highly rated is reminiscent of the "Nifty Fifty" era.

For 1997, it is likely that the headwind of corporate restructuring and fiscal austerity will act as a drag on world economic growth. This should allow easy money conditions and lowish interest rates to persist and could continue to support "Nifty Fifty" type stocks. Nevertheless, we believe that better opportunities lie elsewhere. In particular, in Europe several of our holdings that made very small contributions in 1996 and which fall into the category of convergence or restructuring stories, are now closer to maturity. In Japan, our holdings have demonstrated good earnings growth, which together with a reappraisal of their valuations relative to the Japanese market, is resulting in these companies showing strong price appreciation relative to a weak host market. Our exposure to the smaller markets of Korea, Brazil and Indonesia is the result of factors peculiar to each country. We believe Korea will soon benefit from easier monetary conditions and will greatly benefit from an improvement in world trade. In the case of Indonesia, the market is already responding to low interest rates and accelerating profit growth in the financial sector, while Brazil is gradually making headway with its reforms.

Disposition Of Assets

Region	31 December 1996
Japan	26.6%
Western Europe	26.4%
South America	9.5%
Other Asia	8.3%
Eastern Europe and Russia	5.8%
North America	4.3% *
Australia	1.8%
Cash	17.3%

* Fully Hedged

Top Ten Holdings (as at 31 December 1996)

Stock	Country	Industry	% Holding
Firebird Fund	Russia	Investment Fund	5.8%
Fuji Photo Film	Japan	Photographic Equipment	4.9%
Canon	Japan	Office Equipment	4.0%
Sekisui House	Japan	Home Builders	2.9%
Lagardere	France	Media/Defence	2.7%
Yamanouchi Pharm.	Japan	Pharmaceutical	2.4%
Nintendo	Japan	Home Entertainment	2.3%
Lyonnaise des Eaux	France	Utility	2.1%
Olivetti	Italy	Telecoms/Computers	2.1%
Daimler Benz	Germany	Autos	1.9%
TOTAL			31.1%

Portfolio Changes
The team has been working hard to find promising companies which are yet to be appreciated, in line with our established methodology. Valuations of these companies should converge toward their counterparts in currently favoured markets. You will notice that among the main holdings we have sold IBM and Delta Airlines which reached our price objectives towards the end of the year. In Europe we have acquired seven new positions and sold Tabacalera, while in Japan we have acquired two new holdings. The positions in both Indonesia and Brazil were also expanded. Some of these new companies are outlined later in this report.

The fund has all but eliminated its earlier themes of shipping, newsprint and technology, the latter having produced good results and the former two mixed results.

On currencies, we remain hedged out of the yen and the "DM block" into US dollars. Further, some sixty percent of overseas assets are hedged back into Australian dollars.

New Investment Ideas

Guinness (UK)
Guinness, better known for its stout beer than its portfolio of spirit brands such as Johnnie Walker, Dewar's and Bell's Whisky, and Gordons and Tanqueray Gin, could produce interesting returns over the next three years. While globalisation and global brands are all the rage among investment professionals, Guinness is being neglected because of its apparent dull earnings prospects.

We think things are changing. Travel, media and other influences are encouraging people to try something different: we are intrigued by the resurgence of cigars and the openings of cigar bars, and the general retro tendency à la Harley Davidson. A whole generation of drinkers were missed by the spirit companies but a swing back in fashion is plausible.

Apart from this rather flimsy hypothesis, what will cause a shift in drinking patterns with the current emphasis on health consciousness (though this doesn't seem to be impeding drug usage)! The most important change is the realisation by the large spirit companies that they had erred in favour of the developing markets of Latin America and South East Asia at the expense of their traditional strongholds. Further, the companies appear to have realised that in these markets they had misdirected their advertising spend to the older drinker rather than targeting the younger generation. They had therefore done little to arrest the general shift to white spirits and wine that characterised the late seventies/early eighties. As a consequence, sales of Scotch whisky in the largest markets, the US and the UK, have halved over the last fifteen years, largely offsetting strong growth in new markets.

The change in emphasis in media spend comes at an opportune time. There are already signs of nascent recovery in scotch and - surprisingly - gin, evidenced by volume gains in the US. On the theme of change in tastes, it is also interesting to see the surge in Guinness stout sales in the US, possibly assisted by the company's sponsorship of Irish Pubs.

The attraction of this investment is that the stock price discounts no improvement in spirit volumes. Guinness earns an above average return on invested funds, has the prospect of growing at least in line with the UK market (even without stabilisation of consumption in the US), and yet trades on a PE of 12x 1997 earnings. Furthermore, these earnings largely represent free cash flow.

For a company that has already established a predominant global presence, both in terms of branding and global distribution, and which is currently well into a rejuvenation program with a new spirits division head, this is a very modest valuation.

Hornbach (Germany)
Otmar Hornbach has built up an enviable record by adopting the best retailing practices to suit German needs. He pioneered the concept of out-of-town DIY stores with accompanying garden centres, similar in concept to Home Depot and Castorama. The stock price reflected his success and quadrupled between 1990-95 to peak at DM 200. A continued commitment to geographic expansion, a weaker German economy and miserable weather have all conspired to produce lower profits in the current year, causing the stock price to halve.

The obvious question is whether there has been a fundamental deterioration in the business. Competition has intensified as imitators have followed Hornbach's formula and indeed floor space is growing faster than trend sales growth in the industry, which is about 4% pa real. However, competition is not all bad. Experience shows that on occasions when competitors open nearby, sales drop sharply, but then gradually recover to higher levels than before.

Like most investment opportunities there are always some uncertainties. Herr Hornbach is now in his sixties and there is concern about management succession. Also the company has had some problems with systems development and had to scrap recently developed software. This could be construed as poor management of a key function. However the expansion programme is on track with 19 stores providing a 40% increase in selling space being scheduled for the next three years.

Our assessment is that this remains a company able to achieve well above average growth and yet the market is focusing on the near term uncertainties. A little help from the German consumer - and there are signs of sales improvements - will do wonders for profits.

Nintendo (Japan)
Nintendo has fallen a long way from its former exalted position as the best performing stock on the Tokyo market. Over the years the company had built up a dominant position as the leading supplier of interactive home-use games. Imitators naturally emerged and today this former purveyor of playing cards, finds itself up against strong competition like Sega and Sony and other vendors of CD-ROM based games suitable for use on PCs.

Nintendo's trump card however is the power and sophistication of its recently launched Nintendo 64-bit game machine. Working in collaboration with the champion of 3D virtual reality, Silicon Graphics, the company has developed an exclusive chip that critics reckon produces the most realistic games around. By leap frogging from 16-bit directly to 64-bit, the company exposed itself to delays and a tiring product line-up both of which adversely affected sales, profits and investor sentiment.

The focus of investor concern now relates to two principal areas. Firstly, the potential threat of PC based games with powerful sponsors like Microsoft and Sony taking over the market and sidelining Nintendo, rather in the way Apple lost its prominence in PCs. The question being asked is: why should someone buy a US$200 game player, when a PC costing, say, $2000 can do nearly as good a job as well as performing an educational role. The second concern relates to the shortage of game titles and that these are delivered by cartridge rather than the more common device of CD-ROMs.

Both of these concerns are valid, however Nintendo has built up a "must-have" reputation through excellent distribution and innovation. From a technical viewpoint, a strong case can be mounted for a separate machine for games played via a TV screen. Game critics are almost unanimous in their praise for the 3D graphic functions from the new offering and indeed it is partly the complexity of writing to this platform that is impeding the release of new titles. This leading edge technology of course also attracts the leading software writers.

The final proof lies in consumer acceptance. To date this is most encouraging with the company failing to keep up with demand, even though production schedules have increased to 0.5 million units per month. Software output is also ramping up and the company anticipates 22 titles by March 1997. With the 64-bit machine still to be released outside the US and Japan, and the associated build-up in software sales, the prospects for a dramatic rebound in profits in the year to March 1998 are most promising.

Other
We mentioned earlier the additions to our holdings in Brazil and Indonesia. In the case of Brazil, new holdings are Petrobras and Electrobras, both of which will benefit from continued structural reform. In Indonesia, we have taken the view that interest rates will continue to fall significantly and have bought companies that will benefit from this tendency, notably the housing developer, Ciputra and Bank Danamon.

Summary
The above commentary may give you some sense of the way we approach the problem of investing and indeed it may diverge from some preconceived notions. Clearly, those who follow a more conventional path of pursuing nearby earnings visibility, have done better than us over the last 18 months. We do not believe that this pattern will necessarily hold going forward.

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