For anyone actively looking to build wealth (as opposed to preserving it), growth investments are the flavour of choice. But what happens when markets go sideways, central banks raise rates with unprecedented speed, and growth is hard to come by?
It would be foolish to completely throw a growth strategy out the window and start again. What would be far more productive would be to build a suite of tools to help navigate the tough periods and preserve capital, and then deploy that capital again when conditions improve.
This is precisely what Munro Partners have done via the Munro Global Growth Fund (ASX: MAET). It is an absolute return fund, as opposed to a relative return fund, which is one of the key features according to Munro Partners CIO, Nick Griffin:
There are many global growth funds in the world, and all of us purport to do similar things – i.e. find companies that grow.
The difference with MAET, is it's an absolute return growth fund, not a relative return growth fund. Our goal is not to beat an index, our goal is to get you double-digit returns per annum on a three to five-year view. And we've been running absolute return growth funds now for nearly 16 years.
When we say "absolute return", it just means we have downside protection tools, things that we can do to preserve capital in difficult periods.
The Munro Global Growth Fund (MAET) aims to identify the best growth opportunities around the world by focusing on the biggest themes, whilst also providing downside protection when necessary.
In this wire, as part of Livewire's inaugural Listed Series, I speak with Griffin about how he and the team identify opportunities, the six characteristics of great growth companies, the three major themes that have him most excited, and the various tools that he has at his disposal in order to manage downside risk.
Name of the fund and ASX ticker: Munro Global Growth Fund (Hedge Fund) (ASX: MAET)
Asset Class: Global growth equities
Date listed: 2 November 2020
Fund size: $180 million
Investment objective: Aims to provide investors with meaningful, risk-adjusted, absolute returns through exposure to global growth equities over the medium to long term, while maintaining a capital preservation mindset
What is your strategy? Long/short absolute returns
Please note that the interview below was conducted on Friday 17 March
Griffin: Munro Partner's job is to be your global growth investor, and by offering the fund as a quoted product, it makes it easy to access our portfolio of global growth investments.
This allows you to buy the quoted fund today, and you wake up tomorrow and you own 30 to 50 of the best global growth ideas we can find in the world.
We like the simplicity of the ETF product.
We say “invest in the journey” at Munro Partners. Growth investing, as most people would know, is quite volatile. There are lots of companies that purport to be great growth companies and our job is to go find these great growth companies.
We've got a 15-year track record of double-digit returns and the vast majority of those returns come from finding these big structural changes that are occurring in the world, and the resulting winning and losing stocks.
That's where we can fit in people's portfolios because they might not be able to access that purely on the ASX. And that's why they could diversify into a global growth product like ours.
There are many global growth funds in the world, and all of us purport to do similar things, i.e. find companies that grow, and if they grow their earnings then generally their share price grows as well.
The difference with our strategy, or particularly with MAET, is it's an absolute return growth fund, not a relative return growth fund. MAET is not constrained to track any particular index.
Our goal is not to beat the index, our goal is to get you double-digit returns per annum on a three to five-year view. And we've been running absolute return growth funds now for nearly 16 years.
When we say "absolute return", it just means we have these downside protection tools, the things that we can do to protect capital in difficult periods.
Anyone who hears growth investing probably remembers the dot-com boom. They thought it couldn't happen again. Well, guess what? It did in 2022 as well. And things like COVID and the global financial crisis are always going to come along.
Our global growth product is absolute return and it has tools that enable you to smooth that journey, and that's what we're trying to do.
The first and easiest thing we might do to manage moving market dynamics is to run more cash. Sometimes it just makes sense to run more cash. Cash can be useful if the market falls and we can buy things at lower prices.
The second thing we can do is short sell. We can short sell stocks and we can even just short sell futures if we must move very quickly. For example, Nasdaq futures could be used to hedge our portfolio.
The third thing we can do is buy put options on the market. Put options are quite useful instruments. We are well known for buying a put option just before COVID hit. COVID was around, everyone knew it was around, we just didn't think it would be as big as it was. Why not buy a bit of insurance? And so we can buy insurance on the portfolio, which we did.
The last thing we can do is look to manage the currencies. As an international investor, we can lift our US dollar exposure, for instance, or lower our US dollar exposure to deal with different market environments.
They're the main tools that we have, we can use to smooth the returns of the underlying stocks within the portfolio.
So what you're asking is, "what's the right hedge for the portfolio?"
At any one time, the portfolio has 30 to 50 great structural growth ideas that are either internet companies or semiconductor companies or healthcare companies or climate companies, for example, and all these companies we think are going to grow over a long period of time. But there's a market risk outcome out there, and that market risk comes along when things like the financial crisis, or COVID, or the current inflation crisis happen.
What we're looking to do is hedge the portfolio. When we are looking for hedges, we're generally trying to find the cheapest hedge possible. Sometimes that'll be a put option, and that worked very well through COVID. But sometimes when volatility's very high, put options won't work, and so we'll have to short sell futures or short sell stocks. Sometimes that won't work either and sometimes it's just a case of let's just sell and just raise some cash.
It all depends if we can find a cheap hedge. If we can't find a cheap hedge then we ultimately just raise some cash within the portfolio. Those are some of the things we look at.
All of these tools that we're using, we've got better at using over a long period of time, usually out of a "needs-must" situation.
So again, I'll use COVID as an example. We hadn't used futures in a major way until COVID happened, but when COVID happened, we had to move really fast and futures were the fastest way to move. Prior to that, pre-GFC, we hadn't really used put options much, but post GFC we started using put options a lot more. They started working quite well for us because it was quite a low volatility environment.
Over a long period of time, we've put together a toolbox that we think works well. Sometimes it works really well like it did in COVID.
Sometimes it works not as well, like last year. We did add value through these tools, but we added nowhere near as much value as we did in the COVID crisis. But we have the toolbox and everyone else who doesn't have this product doesn't.
That's the key difference between our product and many of our peers. The peer products are long-only relative return funds: the market goes down, they'll come to you and say, "Market was down 26%, but guess what? We're only down 24." And they'll say that's a good result.
We get that is a good result, but for some clients it's not.
Some clients see risk as losing money, not relative underperformance, and they want to know that we're on the same page.
By saying we're an absolute return fund and focused on double-digit returns through the cycle, that fits the profile of what our clients are looking for, and so that's why our product is different from our peers.
We are constructive.
Constructive means we are bullish but are prudent about our bullishness.
We believe we are getting close to the end of this crisis, the inflation crisis. If you just follow the dots here, basically everything we've been through is a function of COVID. COVID caused us to overstimulate the world. We did. And then we had to take all that stimulus out. And unfortunately, central banks, because they didn't know markets would perform out of COVID, got horribly behind the curve.
We went away last Christmas and had holidays and everyone got COVID. Then we came back and COVID was effectively over and central banks were still saying rates are going to be zero for the next three years. So they needed to back that up really quickly and they have, and that's caused asset prices to fall, particularly growth equities.
I think what a lot of people are going through now, as growth managers we went through in January 2022. We were the epicentre at the start and it's now slowly finding its way through the economy.
From that point of view, rates have backed up. We think long-term rates have peaked. So that's a good thing.
The pressure from interest rates or that kryptonite from higher interest rates has gone away.
Even though rates are high, it's not the actual level of rates that is the problem, it's the speed that they move up on us that changes valuations. Yes, earnings are going to slow, the economy's going to slow, but that's less of a problem for growth stocks because most of the companies we have are going to grow through what we see coming in the next 12 months.
Finally, you're worried about whether there is something horrible lying under the surface that's going to come from this big backup in interest rates. And we've seen a bit of that in the last weeks or so with Silicon Valley Bank and Credit Suisse, et cetera, and so that's why we are constructive but not fully invested at this point in time.
We're about 75% invested today. Wary that there might be something else lying under the surface, but ultimately on any three to six-month view, we're sort of coming to the end of this adjustment and quite excited about the opportunities that are presenting themselves.
It's exactly the same. Put really simply, the equity market is made up of thousands and thousands of really mediocre companies and a handful of really good ones. Our job is to find the really good ones. And we do that by, we think, identifying structural change and looking for some great characteristics and a great growth company.
Those characteristics are:
If you've got those six things, you're generally a great growth company.
To give you good examples over the years, Apple (NASDAQ: AAPL) had all six of those and Nokia (NYSE: NOK) did not. Amazon (NASDAQ: AMZN) had all six of those and eBay (NASDAQ: EBAY) did not. Tesla (NASDAQ: TSLA) has all six of those and I'd argue Volkswagen and others do not. And on and on it goes. And it works here in Australia. Macquarie Bank (ASX: MQG) has all six of those and National Australia Bank (ASX: NAB) does not.
Generally, if we just focus on those six great characteristics, we'll find great growth companies, and if we focus on the reverse of those six great characteristics, we'll find a lot of mediocre companies. And then the rest of it is just doing the maths: does everyone know it's a mediocre company or is it about to be revealed as a mediocre company, and does everyone know it's a great growth company already?
If we can get the maths and the quality to line up, then that's a great investment and vice versa.
There's three really exciting things happening in 2023.
The first is AI.
AI is something we've been talking about for ages, and a lot of our AI investments copped it in the neck a bit last year. But ultimately nothing's changed. They're really good opportunities at the moment.
A lot of people would've noticed that Microsoft (NASDAQ: MSFT) has raised the stakes on artificial intelligence by investing in ChatGPT, and then integrating ChatGPT with Bing and now integrating it with its Office products to create Copilot, which they literally announced this week.
What this means is that people around who are listening to this, or reading this, would've had AI all around them all their life, but it'll be an autopilot… it's the recommendation engine in your Netflix (NASDAQ: NFLX) or it's the recommendation when you're shopping. It happens automatically.
What it's going to become is like a co-pilot. It's going to become a tool that you use to ... you'll be able to instruct it to build a presentation. It'll be able to summarise these meeting notes by just listening to the recording. It'll allow me to send a follow-up email. It won't get it right, but it'll get most of it right. It's like predictive text on steroids.
That's super exciting because it makes Microsoft's tools much more powerful. It's going to make Google's (NASDAQ: GOOG) tools much more powerful. But also it means the more we query these things, the more silicon content you're going to need, the more cloud capacity you're going to need.
This is very good for companies like Nvidia (NASDAQ: NVDA), companies like ASML (NASDAQ: ASML) and companies like TSMC (NASDAQ: TSM). Nvidia as the example - and a company I've talked about a lot at Livewire over the years – has a founding shareholder in Jensen Huang. It's got a long growth runway into AI. It can leverage that growth. It's got great ESG principles, it's got the controlling shareholder and pretty much every customer that uses this says it's the best product on the planet.
We think it's got a genuine chance of being the biggest company in the world.
The second big area for us - decarbonisation.
So the IRA (inflation reduction act) got done in the US last year, so we'll be seeing accelerated government support for decarbonisation. We're seeing corporates accelerating their efforts into decarbonisation, and so the rubber is going to hit the road for a lot of these investments this year… dirt's going to get moved. All of these companies could have earnings upgrades into an economic slowdown. So that's still an exciting area for us and the are lots of smaller companies here that we quite like, things like First Solar (NASDAQ: FSLR) in the US, Alfen in Holland.
As big as digitisation was for the last 15 years, we think decarbonisation has an opportunity to be as big for the next 15 years.
The third driver for us, which popped out of nowhere over Christmas, the Chinese are back.
The fact that China has reopened is exciting. The fact that they're getting passports and getting on aeroplanes I think is fantastic. And we're looking forward to seeing queues outside of our luxury good investments in the streets of Melbourne and Sydney quite soon, and we're looking forward to seeing some of our aerospace investments do quite well as China gets back into the aerospace market in a big way.
These are companies we've liked for a long time. They've been held down by these shutdowns in China and now that looks like it's going to reverse, and so that's going to be a good source of earnings growth, which should hopefully lead to share price growth.
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