Can you describe your investment style?
Munro Partners is a global growth investor, so our job is to find the world’s greatest growth companies. In the FGG portfolio, you have managers who are value, contrarian, or pragmatic value – or who take other approaches. Our process is really simple: it’s finding exceptional companies that can grow structurally over long periods of time.
Global growth equity managers have had a really tough 12 months. What did you learn?
I think it’s pretty simple. Growth parts of the market – like technology, e-commerce, digital payments and healthcare – got a huge acceleration out of the COVID lockdowns. People then started to extrapolate that this was a permanent shift. On top of that, interest rates went very low to deal with COVID, which enabled investors to value these companies even higher.
Since then, we’ve learned two things. Firstly, the huge shift we saw during COVID was not permanent. Once COVID lockdowns subsided, we did want to go travelling again, we didn’t want to sit at home all day, and there were only so many pairs of leggings we could buy online! The second thing we learned is that interest rates at 1% are not sustainable. They went back up to 3% very quickly, which killed the discount rate argument. Both these things combined to cause an implosion in high multiple stocks, as big as we’ve seen since the dot-com crash. The unprofitable tech basket went down by nearly 70% and the NASDAQ by 30%. It’s one of the worst sell-offs I’ve seen in my career. Of course, in hindsight, you can see how it all came to be.
Even though your fund has been down over the past year, you’ve still done better than a lot of other global growth investors. Why?
It was reasonably obvious that things had become overly inflated last year and so between March and May, we sold our high-multiple growth stocks like Atlassian (NASDAQ: TEAM), The Trade Desk (NASDAQ: TTD), Twilio (NYSE: TWLO) and Mercado Libre (NASDAQ: MELI). We hit our price targets and did very well out of them. Fortunately, we were just ahead of the big growth sell-off, which started in June 2021, so this helped us outperform in the second half of last year.
We then gravitated to a very high-quality portfolio of companies that we felt would be able to withstand a higher interest rate environment. This included Microsoft (NASDAQ: MSFT), MasterCard (NYSE: MA), Visa (NYSE: V) and ASML (NASDAQ: ASML) –companies that we’ve owned for a long time, that we really like, and that can continue to grow. But even these positions suffered dramatically in January when it became clear that the Fed was miles behind on rates and that the interest rate rises were going to hurt not just high-multiple companies, but all companies. So, in the second week of January, we increased our cash weighting to roughly 40%, meaning our portfolio has around a 60% net exposure.
As you say, you got to roughly 40% cash and stock prices have fallen dramatically. Is it time to start putting the cash to work?
I’ve been asked that every week since January. I usually reply that I should probably do it around the time that people stop asking – and those questions started to dissipate about six weeks ago.
But seriously, there are three things we want to see happen before we dive back in. First, we want to see long term interest rates peak, and we think this happened in May. This means that the derating in markets has probably finished. Secondly, we want to see earnings estimates come down quite dramatically, and that’s the process we’re going through right now. Thirdly, we need time. Generally, bear markets last between six months and two years – and we’re about eight months into this one.
So we would argue that one and a half of the three signals that we’re looking out for have happened: long bond rates have likely peaked and we’re eight months into this bear market. What hasn’t happened is that earnings estimates haven’t rebased.
We spent 10% – 15% of our cash holding in July and we’re happy to continue buying companies that have resilient earnings. The reason why we don’t spend it all is because it makes sense to be a little prudent. But we’re not going to go back any time soon to buying high-growth, high multiple stocks, or the cyclical industrial companies.
We’re in the thick of the US reporting season. What major themes are emerging?
For the first six months of the year, as interest rates were going up, there was a massive price-earnings (P/E) de-rating across the board. However, what we’re now seeing clearly out of the US reporting season is that companies that have resilient earnings are being rewarded. Danaher (NYSE: DHR), Microsoft (NASDAQ: MSFT), AMD (NASDAQ: AMD), Google (NASDAQ: GOOGL), ASML, Amazon (NASDAQ: AMZN) and so on all saw their share price rise on their results. This is a pretty good sign of what I was talking about earlier. A lot of these companies have probably fallen enough. If you think their earnings aren’t going to fall – and so far, so good – you should probably start nibbling away at them.
What is your 1-year, 3-year and 5-year outlook for equity markets?
I’ve heard a number of managers saying that markets are going to be subdued for five years, and that got me a bit depressed.
But I think people get confused. Equity markets are not the same as the economy. Equity markets are the best 500 companies in the US, and the best 200 companies in Australia. As long as these exceptional companies can continue to grow earnings, their share prices will follow. I don’t think interest rates are going to go back to 1% anytime soon, but I also don’t think we’re going to see 6% or 7% rates either. So in a 3% rate environment, any company that can grow its earnings by double digits per annum – of which there are lots – should expect its share price to go up by double digits too.
Are there any particular investment themes that you are following?
Our job is to find you these great global growth companies – and they’re always leveraged to big structural changes. The main areas of structural change we have identified are: healthcare; digital enterprise, which is cloud computing; digital payments; and climate. In all these areas, there are big structural tailwinds, which will lead to earnings growth, and ultimately share price growth. But if I had to call out one area today, it would definitely be climate. The bill that has just been passed by the US Senate is truly transformational. You’ve basically got the largest economy in the world setting rebates for renewable power and renewable energy for the next decade when, prior to this, they’ve only ever set them for two years. Having the US fully on board will be a huge tailwind for the decarbonisation agenda.
Munro recently launched its own climate fund. Can you tell me a bit more about that and why you started it?
It’s meant to be pretty simple. If you accept, as we do, that we’re going to decarbonise the planet, or at least attempt to, it’s going to cost somewhere between US$50 trillion and US$100 trillion. This spend doesn’t rely on government policy, although that helps. It is corporates that are really driving the agenda, with almost every single US corporate setting a net zero target of some description. So we’re expecting to see at least US$50 trillion in revenue going to companies that can help enable decarbonisation. The aim of the Munro Climate Change Leaders Fund is to take that $50tr pie, divide it into categories and try to pick the winners in each category – finding companies that are best positioned to champion and win from this structural change.
At Munro, we run three funds. FGG is invested in the Munro Global Growth Fund (MGGF), which is our absolute return fund. MGGF invests in global growth stocks, of which currently 15% are climate-related stocks. The Munro Concentrated Global Growth Fund, our long-only fund, also has about 15% exposure to climate. And then, the Climate Change Leaders Fund, which is also a long-only fund, is designed to really drill down on that climate theme, finding winners in clean energy, energy efficiency, clean transport and the circular economy. I will point out that it’s a thematic portfolio, not an ESG product. It’s highly concentrated, with only 15 – 25 companies focused on enabling the decarbonisation of the planet.
How does ESG inform your investment decision?
We’re signatories to the UN-backed Principles for Responsible Investment (PRI) and have committed to its six principles. Around two years ago, we decided to integrate ESG into everything we do. We hired our own Responsible Investment Manager, Mike Harut, who has worked at the Future Fund and the Australian Council of Superannuation Investors. We’ve now integrated our own ESG scoring process into all investment decisions. We used to look at every company on five factors – revenue growth, EPS growth, customer perception, control and earnings durability – and we’ve now included ESG as a sixth factor. Mike developed this internal ESG scoring process last year, and we spent the first six months of this year fully implementing it.
Turning to Future Generation Global, we’re incredibly grateful that you manage some of our money on a pro-bono basis. Why do you do it?
Because Geoff Wilson asked me to!
But seriously, it’s really nice to be in a position to support Future Generation Global and charities that support youth mental health which, quite frankly, can spend more time than we can targeting the money to the right people and organisations. We think you do that really well. From our point of view, it’s always nice to go to your events, see where the money is going and the great work that you and your partner organisations are doing.
What are the major lessons you’ve learned from your two decades in the market?
The equity market has only a few great companies. Only 4% of all companies have created the entire value of the market over the past 90 years; 96% of them haven’t created any value at all. So, for me, the biggest lesson is to be prepared to accept you’ve made a mistake and to move quickly.
Investing is a game of winners and losers. You’ve got to find your winners and run them for long periods of time, and cut your losers as quickly as you can. For example, you may have realised early on that smartphones would represent a huge structural shift. But if you weren’t prepared to cut your losers, you’d still be holding BlackBerry (NYSE: BB) shares (and not Apple (NASDAQ: AAPL) shares) today!
We run stop-losses internally to help us recognise when we’ve got to act on a problem – and often that leads us to a winner. Amazon wasn’t the first e-commerce business I bought, that was eBay. I got that one wrong, but we worked out in 2013 that we had to be in Amazon and we’ve run that stock for a decade. Likewise, Google wasn’t the first investment we made in search, Yahoo! was. But again we recognised our mistake, and that led us towards the winner.
There will only ever be a few winners. The climate space is a really good, current example. Everyone’s running around saying they can solve the problem, but in reality, only a few will. The quicker you can get to the winners, the quicker you will get to double digit returns.