Publication details

Eureka Report

August 20, 2020

Investing for growth in a post-COVID world


Evan Lucas

Evan Lucas speaks with the Founding Partner and Chief Investment Officer at Munro Partners, Nick Griffin, about his international approach to investing for growth, why the US is where he's looking right now and where future growth opportunities are going to be.

In the post-COVID world where growth is becoming quite clouded, it becomes very, very prominent to actually speak to somebody that does that for a living.

This week's fund manager interview is with Nick Griffin​, Founding Partner and Chief Investment Officer at Munro Partners, explaining his strategy, his approach and why he looks internationally only, for that growing fund that he has.

It's a fascinating interview, have a very good read and listen about what he says around his approach and why the US right now is where he's looking, but doesn't necessarily mean it's the future of the fund, and where growth opportunities are going to be.

Nick, it's an incredible time to be talking about growth and growth investing considering we're in unprecedented times, with COVID-19. And for someone like yourself, who obviously looks at growth from an international perspective, your fund is completely set up with that view. I want to start with probably the question we always ask to people like yourself, is your strategy. Growth is obviously very much there, but in this current murky world, how are you approaching growth going forward? How are you making sure that the fund continues to meet its mandate, but also navigate through what is a very, very tricky, but also slightly exciting period all at the same time?

Yeah, look, thanks very much for your time. We originally set up the business to be Australia's global growth investor. We wanted to help Australians find great global growth companies. And it says it on the front page of our website, to identify structural change and the resulting winning and losing stocks. If you can find those structural changes, you'll find those big winners, whether it's the internet coming along or whether it's the transport revolution or big box retailing, you'll find those big winners. You get clients the return.

COVID, to be clear, is probably just another one of these big structural changes that we're going to go through in our life and so from our point of view, it obviously slows economies down, which is the bad side of it and it lowers interest rates, which is a good side for investing. The last bit it does is it creates social distancing in some way, shape or form. Now we can argue how long that will go on for, and how that may evolve over time but it definitely is a structural change that our job is to find the resulting winning and losing stocks or the beneficiaries of that, and that's what we've been trying to do.

You talked a bit about the transport revolution, the internet revolution etc, reading your last quarterly update, you've got a very, very interesting chart in there illustrating very clearly, I think, those points. You've clearly got a very interesting view on PayPal, on Facebook, Microsoft, Amazon, but also then those that fed into it. Things like Visa, MasterCard, Tencent Google, Adobe, and now, Atlassian. It's also been an incredible period for the US markets we've obviously seen as we speak, right now, they're back at neutral with regards to where this whole scenario started. Can you sort of run through which, particularly the internet revolution, you're incredibly excited about? Why you're certainly much longer in certain parts of that space rather than others as well, please?

Yeah, so, so it's important to remember that there has been a technology revolution happening before COVID. And so if we just use the example of payments, for instance, you know, digital payments we're taking share around the world over, over a 10 year period. So you use your credit card a lot more now than you used to 10 years ago. And so if you think about that, just looking at the US, you know, 10 years ago, 65 per cent of transactions were cash, 35 per cent were card, and today it's 65 per cent card, 35 per cent cash. And so that trend has been happening for a long time, and that's been driving a lot of these big winners, like PayPal, Visa, MasterCard. All COVID does is accelerate that last 35 per cent going away quicker than you otherwise thought. So countries like Spain or Italy, where I'm sure we've all been and had to pay cash everywhere, will accelerate very quickly to card, and so those digital winners become bigger digital winners. That's what we're doing in payments.

If you think about e-commerce, you know, in the US it's taken nearly 20 years for e-commerce to go from nothing to nearly 20 per cent of US retail sales and in the first six months of 2020, it's gone from 20 per cent to 26 per cent. It's added six percentage points of share, in six months, which otherwise would have taken six years, so you've brought forward all this e-commerce demand. And so again, for a company like Amazon, you know, even though the pie of retail sales has probably got smaller, their share of the pie has got bigger, so their earnings are going up, so their share price is going up.

The last one you mentioned, the internet. Previously a company like Spotify would be a really interesting streaming platform and you pay to listen to your music. It's now probably going to sit at the centre of how artists distribute their product because they can't tour anymore, so they can't promote their albums by touring, or they can't promote their music. And so Spotify suddenly becomes this very powerful centre, a bit like YouTube. These are all things that were happening before the crisis and all that COVID has done is bring a lot of this demand forward or supercharge them. And so that means their earnings look better, which is why their share prices look better, but that bit's still the same. That's been the same for a hundred years in equities and that bit is still the same today.

It's interesting on that point, because again, looking at your last update, and also what you've put out in July, it's looking at your exposures in terms of where you have them. Obviously, you've got huge exposures to Amazon, your Microsofts, your PayPals, your Alphabet, so Google, for those listening out there. Those are the firms that have clearly been the dominant force in the return of the market, in the US from basically their March 19 low to where we are today. The question I've been asking, a few other fund managers, and also those in the tech space is some of those names, Amazon, Microsoft, Alphabet, to some extent as well, are currently going through possible regulatory changes. Do you see the antitrust movement in the US at the moment being a positive or negative thing? And how are you positioning yourself for the possibility that some of your largest exposures could be split up, could see divestment as part of the regulatory changes going forward?

Yeah. Look, amongst those big holdings, you know, they are sort of core holdings in the fund and have been for up to 10 years in some cases. We are looking for the next ones coming along. We're not here to say that these companies are going to be dominant forever. We think they still have got lots of room to run particularly, Amazon. We think that they can, if you look at the maths, get considerably bigger from here. And I know that's very hard for people to get their head around, but the important thing to remember is that back in a pre-digital world, the biggest company in your country used to probably be your biggest bank followed by your biggest supermarket. If you're running a search engine, for instance, you can be the search engine for the planet.

That's what Google is, you know, so you've wiped out every Yellow Pages, in every city of every country in the world. If you’re Facebook, you’re the social network for the planet, and if you're Amazon, you know, your cloud computing for the planet and e-commerce for the planet. Their total addressable market is so much bigger than what we've dealt with in any previous generation, so their market cap by definition gets bigger than what we dealt with in any previous generation. But it's important to remember that the maths actually underlies that. None of these companies are actually particularly expensive today. Regulation obviously comes part and parcel with that. It's important to remember that you have to regulate them in all the countries that they operate around the world, and every regulatory operation is different. Countries can't really deal with digital winners because they win across the platforms. While we're trying to crack down on them in Australia, you're also trying to crack down on them and our other countries.

The last thing we'd say about the covert crisis and also to an extent, the tech crisis that's occurring, or the tech war that's occurring between China and the US is if anything, the threat of regulation on these companies is probably as low as it's been for some time now. We've been dealing with this for about four or five years now. This will be the third antitrust review that Google's been through. And if anything, right now, the Americans are beginning to appreciate the national champions that they built here and how they want them to be strong versus the Chinese versions and also, how they've helped, you know, quite frankly, the country get through what's a very difficult period. And so you need these companies right now.

The last thing I’d just flag is, you know, Amazon, as staggering as this sounds, hired 175,000 people last quarter in the US to deal with the extra demand, just in the US. And so 170,000 people, the army can't even do that. The important thing to recognise is they are important sources of growth for the country. So you do need to balance that argument with the regulation, and if anything, we think the regulatory threat is lower now than it’s ever been.

A very interesting response, because looking also at sort of how you go about your approach. Basically, you've just explained your growth generation, your economic leverage, and to some extent, the stability of the scale and growth, which is clearly what you guys truly believe. The other thing that's become very apparent in the last six months of the COVID crisis is management and management incentives, management growth, how stable they are, and in control of their businesses. Can you also discuss how that comes part of your strategy, because it is becoming a growing part of the fund management community’s thesis is to actually use and look at particularly management and how they’re working the business, looking to grow the business to sort of how you do your investments as well?

Yeah, that's a great question and something that's really come to the fore in this crisis. Unfortunately, you’re going to get maybe a reasonably long answer here.

Good, go for it.

But I would argue that so if you look at equity investing, there seems to be this concept that the economy and the equity market are the same thing, and that you should be over or underweight certain sectors depending on what the economy is doing. I would argue that that's pretty much a complete waste of time. Because ultimately, the equity market is made up of very few winners and lots of losers. If you look at the US market over the last 90 years, 25,000 companies listed, in 90 years, the top 50 companies out of those 25,000 make up nearly 50 per cent of the value of the US market today.

And so 50 companies out of 25,000 were the 50 you had to find. It is a game of very few winners and lots of losers and you find these companies by looking for structural changes by big structural changes and management teams that can benefit from that. So obviously e-commerce was a big structural change, but lots of companies tried, but one company managed to do it being Amazon, and so you need to combine those two things together to find these few winners. What's really important here is this long term viewpoint, so this ability to invest for the long term. This ability to not care about quite frankly, what your shareholders think, and to spend money to make sure you win in a world that's disrupting at a very fast pace, and that's very quickly evolving.

And so I don't think it's a surprise, or it shouldn't be a surprise to people that, you know, suddenly this really bad thing has happened and let's not say it's not. COVID is a very bad thing for the planet. It's very bad thing for the next generation. It's a very bad thing for small business owners all around the world. But as soon as it happened, suddenly there's this grip of this handful of companies that are in an amazing position and that's not an accident it's because they've been spending to prepare for this for years. You know, Microsoft's been building out the datacentre, you know, Microsoft Teams that we're all now using. We're actually doing this call on it. It's actually been around for like four years. It took them ages to get to 11 million users, and then it took them two months to get to 55 million users.

It worked really well right when we needed it to. Thermo Fisher, which is a non-tech company, which is a company that does the diagnostic tests for COVID, which is a company in the fund, you know, they've spent years making sure they had the capability and the distribution to do this, and right when we needed them, they could deliver and they did. They're building, they're embedding value into their businesses that will last another 5 to 10 years from here. And it shouldn't be a surprise that they've got themselves in that position because they've been working very hard to make sure they are in front and so when the demand surge hit, they were ready for it. They didn't know COVID was coming. They were just running their business for a much longer-term view.

In the same breath, let's flip it the other way around. Suddenly COVID hits and there's all these companies that haven't invested in eCommerce. They don't have a working online platform. They’re retailers that are suffering right now, and we know who they are, they’re retailers that were already in a bit of trouble and have been putting off those investments and taking shorter-term decisions, and probably don't have management that own a big chunk of the business. They're the guys that are in trouble right now. That’s your clothing stores, like your Gaps in the US or your Ralph Laurens and these other businesses that really just haven't invested enough in what they're doing and have been chasing shorter term returns at the expense of longer term returns. That's why, if you know it's a game of very few winners, then you have to, (a) identify the areas of structural growth, which we just talked about, and then (b) identify the management teams that can exploit that properly. And always, always, always, it will be the guys who forego the short term to take home the long term. That's what a lot of people miss when they look at the valuations of these companies today.

I actually want to go right back to the start of your answer there. I know you don't talk much about Australian equities. I'm not going to get you to do that, but there was a quote you just said then, which was that companies that spend money and almost ignore shareholders. Can I ask you a question then about the Australian market just on a higher level, which is Australia has always in the last 5 to 10 years anyway, been a market of dividends, and the question I, therefore, have for you, is do you believe that one of the biggest mistakes Australian companies make continuously is that it's not reinvesting in itself? It's giving that money out to shareholders?

[Doorbell rings] The doorbell rang and it rang at the right time. The answer is yes, clearly. Unfortunately, well, fortunately, for retired people, but the tax system encourages companies to pay dividends. Certain management teams over a long period of time have seen the best way to get their share price up was to pay a high dividend. And so you see these payout ratios go from 50 to 60, to 70, to 80 to 90, and then the last CEO collects the 90 per cent payout ratio and has to be the one that delivers the bad news. You can see that in Australia today, whether it's a Telstra or NAB or Westpac or any of these banks, you can see that the last guy who caught the can has to hand out the bad news that they need to cut the dividend. Yeah, that's something that Australia will work out over time, but the tax system has encouraged it. I can see why people like it, but it's not going to, at least in this time of accelerated disruption and accelerated technological change, it's not going to help these companies survive in the long run. The shareholders are smart enough to realise that and that's why even despite the fact that these companies have very high yields, the market is smart enough to work out, that they're not sustainable, so that's why their stocks are performing.

Getting back to what we should be talking about, which is your international exposures. There is now that next step of, you've talked very clearly around the internet transformation and looking at transport as well. I want to then also get a bit more country-specific. Are you looking into Asia as that next growth spot and coming out of COVID in a better position? Is it Europe, or are you still very much of what your fund clearly is set up towards, which is that the US will remain that incredible bright spot? It has the right economics and the right setups that growth, that economic leverage sustainability, and that management, you just spoke about it as being your future, or is there a combination of something there that I possibly missed?

I think that you have missed, I mean, the fact that the companies are in America at the moment is just because they happen to be listed there. From our point of view, we're looking for these larger opportunities and these companies with the management to exploit these opportunities. At the moment, at least in the last 10 years, a lot of those companies have been in the US so, you know, happens to have the best CRM software in the world and it happens to be listed in the US. If it was listed in Europe, if it was SAP in Europe, which we don't like as much, if SAP had actually got that opportunity, then we would have gone for SAP, but we didn't, we went with Salesforce. Netflix happens to be in the US but it's a global TV platform.

That's just a function of where they happen to be and that's because I suppose the US equity market, because maybe these dividend issues that we just talked about and because of the real technology leadership that they had in the West Coast happens to have created a lot of these great companies today. As we look forward, it’s pretty clear that there's obviously going to be a whole bunch of them in China. The positive effect, and I’ll admit there are negative effects, but the positive effect of the US-China cold war, or tech cold war that's effectively going on, and is going to be with us for a long time. The positive effect is that the Chinese will basically build their own technology champions because they will be shut out from US technology. So that means they'll build Alibaba, that'll build Tencent, and they'll build a whole bunch of different software companies underneath that and semiconductor companies as well. So that's a really good opportunity.

And the third area I talk about just with Europe, in particular, is one of the great opportunities that's in front of us, that's, non-tech related that we see a strong structural growth trend for is the de-carbonisation of the planet, which is clearly going to happen from here. And so what you'll see is you'll see a number of these national champions around renewable energy start to appear in the world and most of them are actually in Europe. If you just look at Denmark, for instance, as a country it's a tiny country yet, Orsted, the world's largest offshore wind generator is in Denmark and is rapidly pushing through a $50 billion market cap. And on top of that, the world's largest OEM for wind turbines, Vestas, also happens to be in Denmark and is rapidly pushing through a $30 billion market cap. And so not unlike CSL here in Australia, you know, the size of your country is ultimately irrelevant in creating the size of the companies that could be created in the future. And so we're very open to the opportunities outside the US it's just a matter of where are the companies that we're looking for?

I’ve got to pick you up a little bit on that as well because I think that is another fascinating point. I know, again, we're getting back to an Australian-centric point of view, but I do want to ask you on this is, do you think, therefore, those kinds of companies you've just alluded to particularly, you know, they are clearly new world, new thought process, renewable energy, technology, tech communications in Asia etc, that to promote that kind of opportunity, possibility and creation in Australia requires some regulatory change. Is it investment decisions? Is it grants? How would Australia start to actually not just leveraging towards it, but actually as you said, and alluded to a CSL, produce another thing like that doesn't have to be in health. What is your view about that sort of that avenue that needs to happen to continue to keep Australia in that forefront of being part of the leaders in that space?

Look, to a certain extent it's already happening and so it's important to remember that, you know, Atlassian has appeared in Australia. It's not listed in the Australian stock market, but it's in our fund and it's probably one of the most exciting technology companies in the world today. A market cap of nearly $50 billion or more than $50 billion today started by two guys in their 20s who came out of the University of New South Wales. The fact that Atlassian has happened in Australia is a bit like, you know, well here in Melbourne, it's a bit like, you know, the welcome gold nugget has been discovered. You know, the reality is, is that a lot of venture capital is now coming to Australia, looking for great new ideas. And there are some really good ones coming through, and there's some really good VC investors here in Australia, a good VC community that's coming up that are investing in these companies.

I think it is actually already happening. The last thing that really needs to happen is for the listed investors in Australia, so for the Australian superannuation funds, et cetera, to really be more focused on funding these early stage investments and to fund these growth investments. A lot of these companies that do get to market, I just think in Australia, they face significantly more scepticism here than they would in the US. And so Atlassian did make the choice to list in the US not in Australia and the reason why is because it gave them a higher equity value, which allowed them to buy more businesses, to do more things, to get a better chance of being more successful. And so that's really the last piece, but ultimately Australia has a great education system, it’s got lots of very smart people. There's capital around, the capital just needs to then transfer to the equity market and you will start seeing more of these things and I'm pretty sure you will. I'm reasonably positive about Australian tech companies coming through or Australian renewable companies coming through.

But the last thing I’d just say, you’ve got to careful is when you look at Australia, you have to realise it is just 3 per cent of the listed market, right? And it doesn't mean they won't have these few winners. It just means what's more likely is they're probably not in Australia. If this is a game of very few winners and lots of losers globally, when you're looking for those few winners, you need to be open about the point that it's highly likely that the great winner that you're looking at in Australia is probably not going to be it. There's probably a competitor offshore that's going to pass them in some way, shape or form. And so that's why we set up the fund is to basically say, you know, every time you look at an Afterpay, do you want to look at a PayPal? Or every time you look at this, do you want to look at that? And we're not saying these things are bad businesses, but you just need to put that into the context of the entire industry, because the industry doesn't just look at Australia, it looks at the world, and so when you're investing, you need to think about that as well.

And I think that is a beautiful place to finish. Nick Griffin, thank you so much for your time today.

Thanks very much. I appreciate it.

That was Nick Griffin Founding Partner and Chief Investment Officer at Munro partners.

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