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Thursday, 21 December 2017
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Growth Funds Management

I saw a presentation from Nick Griffin of Munro Partners at the AIA Conference this year. They are investors in global growth stocks and have an absolute return not relative return investment philosophy. Their flagship fund is the Munro Global Growth Fund. It was started in July 2016 and has returned 28.83% in the last year. Their benchmark is the RBA 90 day bank bill rate. Some of their biggest holdings include Amazon, Facebook, alphabet (Google), Visa. The presentation was focused on global disruptors. He made some interesting points:

  • Munrio are targeting growth not value. Companies that consistently earn more than the year before are rewarded with higher stock prices over time.
  • Sustained earnings growth is worth more than cyclical earnings growth and is generally valued at higher multiples than otherwise.
  • The market will often mis-price growth and its sustainability. Consensus earnings estimates often under estimate growth.
  • P/E ratios often underestimate the sustainability and cash generation capacity of earnings growth allowing opportunities to invest in stocks well below their intrinsic value.

Their stock picking process includes five qualitative factors:

  • Growth - They look for faster earnings, EBITDA or revenue growth than peers.
  • Economic leverage - They look for pricing power or economic leveraged to improve margins.
  • Sustainability - They look for an ability to sustain growth due to scale, position, intellectual property or locational advantages.
  • Control - They look for significant management ownership and incentives.
  • Customer perception - They are looking for companies that benefit from strong customer reviews and rapid adoption.

From those five corporate characteristics they develop a score for winners and losers.

They also have three quantitative factors:

  • Earnings upside/downside - They have an in-house valuation model that identifies bull and bear case scenarios.
  • Multiple upside/downside - they look at corporate characteristics to determine appropriate multiple target price target.
  • Catalysts - They map a “catalyst calendar” including the timing and magnitude of re-ratings.
  • To take long positions companies must rate highly at least 2 of the three quant factors, with the potential to double within 3 to 5 years.
  • Short positions must rate highly in all three quant factors with the potential to fall 10 to 20% within six months.

Current themes include:

  • Media Dis-intermediation. The point being that digital advertising is still taking share and adding value. Facebook and Google are dominating growth in ad spend.
  • The rise of Gaming. The global gaming market is seeing strong growth leading to adjacent opportunities.
  • Connectivity. This is about connectivity between devices, cars and the cloud and is growing at an exponential rate. Data generated by all these connected devices can now be analysed and interpreted in real-time by emerging artificial intelligence applications. This is now an “arms race” to connect and interpret the global economy on a real-time basis and as such they are targeting the “weapons manufacturers” in silicon and network providers as the key beneficiaries of the trend. This includes artificial intelligence, silicon and chip manufacturers, networking companies. In particular they foresee a new semiconductor cycle and recognise the value of credit reporting agencies (the biggest one is Equifax) which own significant financial data about individuals going back before the digital age. This is gold dust information.

But perhaps the central theme I took away, was that Nick Griffin is an expert at identifying growth and undervalued growth stocks and a large part of that is recognising that just because a share price has gone up does not mean that a stock is expensive if the market is underestimating the sustainability of that growth. On that basis companies like Apple, Google, Facebook,Tencent and many others, despite being over-researched, despite their size and despite the share price performance, can still be undervalued.

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