Livewire recently interviewed Nick Griffin, Chief Investment Officer of Munro Partners, to ask him the criteria he uses to identify great growth companies, what the market has wrong at the moment, and how he goes about finding the next digital winners.
Picture: Nick Griffin, Chief Investment Officer, Munro Partners
Q: What are the characteristics of really great growth companies?
Generally there are five characteristics that we follow to help us find great growth companies:
Firstly, you've got to have growth. You have to be in business where the total addressable market is growing. This is what is commonly referred to as a tailwind. For example, in the case of Apple, when it entered the smartphone market with its first iPhone, it was entering in a growing market.
Secondly, you've got to have leverage, so you've got to be able to grow your earnings faster than revenue. Using the same example, its good to be in the smartphone market, but your product has to generate earnings or be able to leverage that growth, something Apple managed to do at that time when many in the smartphone market were not.
Thirdly, it needs to be sustainable. You need the growth to be something that's going to sustain over a three to five-year period. Following the same example, smartphone penetration when Apple first came into the market was less than five percent. And it's now well more than fifty percent, which made it a sustainable trend, i.e.: there was a long runway for growth.
Fourthly, you need to have a controlling or aligned shareholder. We find strongly aligned management or controlling shareholders consistently win versus non-aligned management, and often when nobody expects them to. Apple and the iPhone fit this trend, with most rating their entry into the phone market as a niche or novelty offering at the time they entered the market.
The last thing that's a bit different about us that we always look for: your product has to have great customer perception. Measuring customer perception allows us to do the fundamental research that tells us that something's going to happen before it appears in the numbers. Completing the example, seeing customers reaction to the first iPhone and comparing it to other products in the market made it obvious it would be bigger than a niche product, and ultimately it became the most successful consumer product ever, propelling Apple to become the largest company on the planet. All of the above 5 characteristics played a role in making that happen.
Q: What makes great businesses tick?
For us, the key thing is alignment of interest. If everyone's aligned, it creates a great culture, and it creates a team work ethic to working towards a common goal. It creates a single vision that people want to target. All of those things come together, but they all really come together out of alignment of interest. If great managers have the ability to align their staff around a single goal, usually a simple and single goal, then what's always surprising is how easily they then go and achieve it. We used the example of Apple above, but its important to remember Apple didn’t invent the mobile telephone and they didn’t even invent the smartphone they just had a visionary founder in Steve Jobs, who managed to align his staff culturally towards a simple goal of creating simple easy to use products that harnessed technology. And it was the simplicity of their products that created their success
Q: What has the market got wrong at the moment?
People don't see the difference between a digital business and a physical business: in digital businesses, generally, there are only one or two winners.
If you look at Google, there were eleven search engines in the world when Google started, there's now only one. It's Google and it has got a market cap of five hundred and fifty billion dollars. The number-two search engine in the world is Yahoo and it was sold the other day for five billion dollars. That's a ninety-nine percent difference in value between the number one and number two in the largest digital space in the world. You don't see that anywhere else. You don't see that between Coles and Woollies, you don't see that between CBA and Westpac. This is unique to digital businesses and whether it’s Google, Facebook or even local businesses like Carsales.com it is very hard to identify a meaningful No 2, or No 3, in their space.
Q: What are you investing in today?
Today, we're trying to find the next digital winners to a certain extent. Obviously, Facebook and Google have been winners, and we think they still will be, but we're trying to find the next ones. We've spoken a lot here on Livewire before about the video game stocks, things like Activision Blizzard, and EA Sports. We were meeting with them in San Francisco last week, and they still look very good here. They own great content with great communities around the content that they can leverage, not only just into further games sales, but advertising and also e-sports.
The other area we're looking for big digital winners is in data. We know that the next game is around AI or artificial intelligence. Artificial intelligence runs off computative data: whoever has the most data wins. And so, we're trying to find unique data sets that are under appreciated by the market and we've mentioned this before, but we think the credit bureaus look quite interesting, such as Equifax, TransUnion and Experian.
Q: What's really hyped up at the moment that you're avoiding?
There are always these ‘Number Twos’ that are hyped up that are not necessarily going to be what people think they're going to be. We saw this with Twitter, we probably see this with Snapchat right now. You see this with the food delivery businesses in particular, things like Delivery Hero, which is coming to market and Just Eat in the UK, or Grub Hub in the US, these things are quite hyped up and they're sold to us as a 'winner takes all' type model, but they're not, and as we know, if they become No 2 or No 3 there is significant valuation downside.
I'll give you a good example: Facebook has 1.7 billion users, and 1.3 billion daily active users. Twitter and Snapchat are both around 200 million. Facebook can monetize every one of its users at about $17 per user. Twitter and Snapchat are monetizing at less than $1 per user today, the gap between No 1 and No 2 can be large in a digital world.
Q: What's the single most important lesson you've learnt over the years as an investor?
It was taught to me very early; always know when you're wrong. Look, this is the reality of the business. In any good year, I'm going to get twenty to thirty percent of my decisions wrong. It makes me a terrible surgeon, but makes me quite a good fund manager. The biggest mistake you can do is to fall in love with your stocks and not have the ability, or the processes in place, to recognise when you are wrong.
Q: What do you think gives your strategy an edge?
Our goal is to target investments that have the ability to make more money regardless of the cycle. We don't feel we have an edge on the cycle. We don't feel we have a big edge on the macro. But we do have an edge in finding these great businesses that can grow through the cycle, and that ultimately allows us to pick great stocks and generate positive returns for our investors through a standard investment cycle.
Q: How do you manage risk, especially when markets are fully valued?
We're an absolute return fund, so we see risk as losing money. What we can do is we can use cash, so at the moment, we're running more than thirty percent cash. So that's obviously a great buffer, it allows us to buy through these periods of rotations into things that we like over the long-term. The second thing we do is, we often use exchange-traded put options that are short dated.
Q: Tell me a little bit about your previous fund, K2, and then Munro Partners.
So previously the investment team worked on the K2 Select International Fund where I was the Head of International Strategy. It was a multi-manager product so our process and performance were a portion of the fund’s overall performance. That fund generated returns of over 10% per annum in the 10 years I worked there.
If you look at Munro Partners, we've been going ten months now, and we've made roughly fifteen per cent since we've started. Our goal is to generate absolute return, so we see risk as losing money, not underperformance. What we say at Munro is we're targeting ten per cent per annum, over the cycle. That's something we've done in the past for a long period of time and something we've done this year and hopefully, we'll be able to continue to do it in the future.
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Past performance is provided for illustrative purposes only and is not a guide to future performance. This interview may contain information about securities, opinions and forecasts, all of which may change without notice and none of which has been prepared considering your objectives, financial situation or needs. While this information is provided in good faith and is derived from sources believed to be accurate and reliable at the time of publication, Munro Partners makes no warranty as to the accuracy or reliability of the information.