What’s the fund?
This month we decided to review the Munro Global Growth Fund, which was established in August 2016 by Nick Griffin. Nick was formerly of K2 Asset Management where he had been running a similar strategy and delivered an average return of 16.5% for the international share portfolio he managed.
Munro is a global equity long-short fund that is focused on identifying secular trends occurring across the global and investing into a portfolio of 30-50 exposed companies. The fund targets double digit returns in all markets, which it believes is possible by investing into those sectors growing faster than the economy in general. Most importantly, Munro has a focus on capital protection which it delivers through its shorting and stop loss policies.
Many clients of Wattle Partners were early investors in this fund, receiving a substantial management fee discount at the time (from 1.35% to 1.00%), and it has since grown to around $1bn as Nick’s skill and competitive advantage becomes obvious.
Where does it fit in your portfolio?
The Munro fund sits within the Thematic Bucket of portfolios due to its sole focus on identifying companies that are capable of growing earnings in an increasingly uncertain global economy. Munro aim to achieve this by applying a thematic or secular approach to analyzing investments whereby they break down their entire universe of global companies into ‘Areas of Interest’ or sub-sectors which offer the greatest leverage to their identified themes. These themes change regularly but have recently been focused around the following:
- The Digital Enterprise (e.g. Microsoft);
- E-Commerce (Amazon);
- Emerging Consumer;
- Internet Disruption (Google) ;
- Digital Payments (Pay Pal);
- Innovative Health (Danaher);
- Connectivity (Keysight Technologies);
- Food Revolution (IFF);
- Infrastructure (United Rentals); and
- Security (Cisco).
The entire premise of the Thematic Bucket is to expose your portfolio to the themes and sectors that will generate the greatest risk-adjusted returns in the decades rather than months ahead. Munro fits the objectives of the bucket due to Nick Griffin’s proven skill in identifying trends occurring around the world, that saw the fund hold Amazon, Netflix and Alphabet sometime before they became common in Australian share portfolios.
The fund’s exposure and Nick’s competitive advantage is generally within the technology sector, as evidenced by the areas of interest, and therefore complements well with the other investments within the Bucket that are more consumer focused. Importantly, the fund can take both long and short positions, meaning investment ideas that do not pass the due diligence process and are identified as being expensive can be short sold to profit investors.
What does it invest in?
The fund is well diversified, with the largest holding typically between 5% and 7% of the portfolio and a minimum of 30 positions at any given time. The technology and disruption focus of the fund means it is tilted towards the US, with the current geographic allocation as follows:
Of particular interest to investors concerned about the prospects of volatility, is the fact that the fund currently has around 40% in cash following the sale of a number of positions in the lead up to the end of financial year. The managers note that the cash holdings isn’t based on a macroeconomic view but a result of a lack of appropriate opportunities. Sector wise, the fund is overweight technology as you would appreciate, with consumer related businesses and financial services the next largest holdings.
As the Australian currency moves towards long-term lows, it’s worth pointing out that the fund is actively hedged and reports the movement in currency separately to its investment performance for full transparency.
What are the major holdings?
The major holdings of the fund are well spread, including many well-known and popular names. We discuss five of the top holdings below.
Alphabet (Formerly Google): The fund has a long-standing position in Alphabet on the basis that online advertising and in particular advertising on mobile platforms is growing at a substantially faster rate than traditional forms of media. Within this market Google and Facebook along with it are attracting a substantially higher proportion of advertising spend. Munro noted that they found the recent sell off on the back of revenue growth of only 17%, compared to 20% in recent years, bemusing and see substantial value if the company is eventually broken up. They believe the 17x forward price earnings multiple does not reflect the value of Waymo, Google Cloud or YouTube.
Alibaba: Alibaba is an incredible business, being the dominant business to business and business to consumer e-commerce provider in China. The company operates the successful T-Mall and Tao Bao sites among many other businesses. Alibaba was established as an online version of the wholesale markets that occur all over China and has successfully evolved numerous times in the face of increasing competition from outside and within China. The company’s investment in Ant Financial which dominates the online payment landscape in China, offers further upside as it continues to expand into investment, insurance, credit and other financial products.
Amazon: The company speaks for itself in creating one of the richest men in the world in Jeff Bezos. What started as an online bookstore has become an e-commerce behemoth spanning every aspect of the vertical business. Amazon continues to expand its core product overseas and is attracting a larger and larger portion of online sales due to its extensive selection, low prices and extremely efficient procurement technology. The company has expanded into many different business lines, including Audible the audiobook subscription service, Whole Food Markets, where it is seeking to disrupt the traditional grocery store through automation and most importantly, Amazon Web Services which offers cloud support for businesses.
Beyond Meat: Whilst not a large holding, the investment in Beyond Meat was worth mentioning given the success of this company on listing. The company which retails plant based burgers and meat substitutes is exposed to the fast growing vegetarian and vegan food markets and after listing at just $25 is now valued at $140 per share.
Other large holdings include Microsoft, Adobe, United Rentals and ITV.
How has it performed?
The fund performed extremely well in its first 18 months of operation, delivering returns exceeding the benchmark by in excess of 4-5% consistently. In recent months performance has lagged the benchmark, but remains slightly ahead. This has been due to the large increase in the funds cash holdings, to 40%, as they were stopped out of a number of positions and are awaiting opportunities to deploy this capital. Given Munro’s track record of delivering outperformance, we are not concerned about the short-term weakness particularly given it is due to a more conservative allocation to inflated markets.
What income does it provide?
As with all managed funds, the Munro Global Growth Fund must distribute all income and realised capital gains each year. Therefore, distributions are dependent on both the performance of the underlying investments and whether any investments are actually sold. Munro has two traits we value in investment managers, being reasonably low turnover and low active share, indicating it is not replicating the underlying index. This may mean that distributions are not particularly large each year. For instance, the distributions for the 2018 financial year were 3.84 cents per unit and 3.48 cents per unit in 2017.