Hunting for the best global growth small and mid cap companies

Munro Partners’ investment process presents as a finely-tuned instrument designed to whittle down the 50,000-odd listed companies on the planet to a handful that have the best long-term growth prospects.

The process begins with structural drivers – global forces that act as a significant tailwind. From there, Munro operates within what it calls areas of interest (AOIs) – key themes such as big data, AI, security, climate and consumer.

It is within these areas of interest that the 12-person Munro investment team hunts for companies that tick all the boxes of Munro’s criteria, which include customer perception, management alignment, the ability to grow revenue at a certain pace, for those earnings to be durable, and good ESG practice.

Munro Portfolio Manager, Qiao Ma, adds that once all the boxes are ticked;

"Then we look for the earnings upside, we look for the multiple upside, and finally, a catalyst to decide how big this position could be in a certain portfolio. So, every single stock, every single portfolio is built and selected in exactly the same way".

This methodology applies to the Munro Global Growth Small & Mid Cap Fund, for which Qiao is primarily responsible. The Fund has been one of the best performers in its segment over the past 12 months, enjoying a 55% return in 2024. As of 30 April, the fund was up 66.7% since inception (cumulative). 

In the Fund in Focus above, Qiao shares more about the process and shares current examples of stocks that make the cut. You can watch the video or read a summary of the interview below.

INTERVIEW SUMMARY

One mission: Growth

“We do one thing only. We look for the best growth companies,” Qiao says of the fund’s unwavering focus. 

Every company in the portfolio must have a long-term structural tailwind - a central pillar of Munro’s investment philosophy.

These structural drivers are captured in Munro’s “areas of interest” – thematics like big data, AI, security, and infrastructure. 

Qiao emphasises, “All the stocks come from the existing Munro areas of interest, which are the long-term thematics that we’ve done a tonne of work on and that we have the highest conviction on.”

Importantly, this focus is applied with depth and scale.

“I have the luxury of running a small mid-cap fund, but having the entire 12-person investment team at Munro actively engaged… giving ideas, reviewing triggers… across eight different areas of interest,” she adds.

Six criteria every company must meet

To make it into the Munro portfolio, a company must clear six specific hurdles:

1. Structural tailwind – “If you don’t have an identifiable Munro high conviction structural growth trend behind you, you’re probably not even going to be in our universe.”
2. Customer perception – “Are you a killer customer product? Do your customers smile a little bit when your name is mentioned?”
3. Management alignment – “We are big backers of founder-led companies. We think founders work harder, are much more ambitious, very long-term, and great capital allocators.”
4. Revenue growth – “At least twice the pace of GDP – high single-digit per cent at a minimum.”
5. Earnings durability – “You need to be able to show you can double earnings every five years.”
6. Good ESG practice – “Nowadays, without ESG practice, your growth gets torpedoed.”

Once a company passes these filters, Munro then considers earnings and multiple upside and looks for a catalyst to determine position sizing. 

“Every single stock, every single portfolio is built and selected in exactly the same way,” Qiao says.

Munro’s investible universe is narrow by design. 

“Roughly, we have about 600 companies in these structurally growing areas globally,” Qiao says, adding that only a couple of hundred fall into the small and mid-cap category.

What’s in the portfolio?

The small and mid-cap portfolio currently concentrates around six key thematics, accounting for around 80–90% of holdings. 

Three areas Qiao highlights include:

Security

“Geopolitical risks are rising, domestic crime prevention needs are rising… companies that provide solutions to a heightened risk environment are going to have a really nice tailwind.” 

She notes this theme spans from defence to cyber, with opportunities emerging globally.

Big Data

Qiao points to exchanges like Tradeweb (NASDAQ: TW), a leader in electronic platforms for fixed income and currencies. “A really simple way of thinking about it is: whenever there's a lot of debate in the market… exchanges make money.” 

She says exchanges have performed well and may benefit further from ongoing volatility.

Infrastructure

“People are often surprised that a small mid-cap growth fund is looking at infrastructure,” Qiao notes. But the need is real, particularly in the US.

“The entire country is a little bit like a leaking house,” she says.

A standout name here is Comfort Systems USA (NASDAQ: FIX), a specialty contractor operating in Texas.

“All you need to know about Comfort Systems is that for a very long time, this company chugged along at 8–10% growth, trading at 15x earnings. Over the past three years, it’s grown at 20+%, and yet you can still buy it at 15x earnings.”

Managing risk and staying disciplined

Even with a strong return profile, Munro remains vigilant about downside risk.

“There is risk, there’s volatility. That’s just the name of the game of investing today,” Qiao admits.

The first line of defence is a strict stop-loss discipline. 

“A 20% fall from peak or cost triggers a review. Every stock gets reviewed. There is nowhere to hide" says Qiao. 

The second is diversification. 

“No one area of interest can ever be more than 20% of the portfolio,” Qiao explains, ensuring the fund delivers multiple uncorrelated growth drivers at any time.

She also stresses that the portfolio remains attractively valued.

“A lot of these companies are trading at multiples quite a bit lower than the start of the year… we are seeing a lot of opportunities today.”

Access to the world's most promising small and mid cap companies

Munro has an unwavering conviction that finding tomorrow’s winners comes from understanding how and why the world is changing – and their investment track record bears this out. Find out more by visiting their website or their fund profile below.

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Munro Global Growth Small & Mid Cap Fund

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