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MUNRO GLOBAL GROWTH FUND DECEMBER QUARTER 2016 Strictly Private & Confidential
MUNRO GLOBAL GROWTH FUND DECEMBER QUARTER 2016
Strictly Private & Confidential
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DisclaimerNeither Munro Asset Management Limited, Munro Investment Holdings Pty Ltd nor Munro Partners (together “Munro”) are providing any general advice or personal adviceregarding any potential investment in any financial products within the meaning of section 766B of the Corporations Act.
• Munro Asset Management Limited is the holder of an Australian Financial Services Licence (AFSL) number 480509. Our Financial Services Guide can be located on ourwebsite: www.munropartners.com.au. This presentation is not an advertisement and is not intended for public use or distribution. As such, it is not to be released ormade available to any other party, or used for any other purpose.
• Munro has issued a product disclosure statement (PDS) on 1 July 2016 offering investors an opportunity to subscribe for units in the Munro Global Growth Fund (Fund). Ifyou would like to receive a copy of the PDS, then please contact Munro on (03) 92900900 or [email protected] and Munro will arrange for a copy of thePDS to be forwarded to you. Alternatively, a copy of the PDS for the Fund is available on our website www.munropartners.com.au/access. All prospective investorsshould consider the contents of the PDS in full prior to making a decision regarding an investment in the Fund.
• No consideration has been made of any specific person’s investment objectives, financial situation or needs. The provision of this presentation is not and should not beconsidered as a recommendation in relation to an investment in any entity or that an investment in any entity is a suitable investment for any specific person. Recipientsshould make their own enquiries and evaluations they consider appropriate to determine the suitability of any investment (including regarding their investmentobjectives, financial situation, and particular needs) and should seek all necessary financial, legal, tax and investment advice.
• Munro, its directors, related parties, representatives and employees do not accept any liability for results of any actions taken or not taken on the basis of information inthis presentation, or for any negligent misstatements, errors or omissions of any of its contents and no legal or other commitments or obligations shall arise by reason ofthe provision of this Presentation or its contents, except as required by law.
• It contains selected information and does not purport to be all-inclusive or to contain all of the information that may be relevant. The information contained in thePresentation has not been independently verified, nor have they conducted any due diligence in respect of the information provided. It should be noted that anyprojections or past performance are provided for general reference purposes and are based on assumptions relating to the general economy and other factors beyondthe control of Munro. Returns of the Munro Global Growth Fund are net of applicable fees, costs and taxes. Returns have not been annualised. Past performance is not areliable indicator of future performance. The MSCI AC World TR Index (AUD) refers to the MSCI All Country World Net Index in Australian dollars. The Top 5 Holdingsdepict end of month figures and may have changed materially from holdings during the month or not disclosed due to confidentiality reasons. Numbers may not sumdue to rounding. Please also see our Financial Services Guide, Privacy Policy and Terms of Use via www.munropartners.com.au/legals/.
• The recipient represents to Munro that it is capable of making its own independent assessment as to the validity and accuracy of the financial assumptions, data, results,calculations and forecasts contained, presented or referred to in the Presentation, and the economic, financial, regulatory, legal, taxation and accounting implications ofsuch. The recipient further represents to the Munro that it is not relying on any recommendation or statement by Munro. The recipient acknowledges that noindependent third-party audit or review has been obtained by Munro or has been undertaken by an such an independent third party of the financial assumptions, data,results, calculations and forecasts contained, presented or referred to in the Presentation.
• This Presentation may contain forward-looking statements, forecasts, historical performance, estimates, projections and opinions ("Forward Statements"). Norepresentation is made or will be made that any Forward Statements will be achieved or is correct. Actual future results and operations could vary materially from theForward Statements. Similarly no representation is given that the assumptions disclosed in this Presentation upon which Forward Statements may be based arereasonable. The recipient acknowledges that circumstances may change and the contents of this Presentation may become outdated as a result.
CONTENTSGLOBAL MARKET OUTLOOK 4
MUNRO GLOBAL GROWTH FUND (MGGF) PERFORMANCE ANALYSIS 13
KEY INVESTMENT THEMES FOR 2017 17
- OUTDOOR ACTIVE (LONG) 20
- CONNECTIVITY (LONG) 23
3
4
GLOBAL MARKET OUTLOOK
5
GLOBAL MARKET OUTLOOKGrowth is improving in most global economies...with stimulus still to come.
Source: Bloomberg Consensus Data
52.6
52.0
49.3
49.9
46.0
49.4
51.7
49.5
50.4
45.7
51.5
52.6
50.4 50.4
46.0
51.9
53.5
51.451.2
46.3
53.2
53.7
51.351.7
46.2
54.754.9
52.4
51.4
45.2
44.0
46.0
48.0
50.0
52.0
54.0
56.0
US Eurozone Japan China Brazil
Global Purchasing Managers Indices (PMI's)
Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16
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GLOBAL MARKET OUTLOOKUS GDP consensus forecasts have been consistently revised down...can Trump change the playbook?
Source: Bloomberg Consensus Data
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0.5
1
1.5
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2.5
3
3.5
4
(%)
US Real GDP Consensus Forecasts
2011 2012 2013 2014 2015 2016 2017
2014
20132012
2011
2017
2016
2015?
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GLOBAL MARKET OUTLOOKThe transition from monetary accommodation to potential fiscal accommodation has led to some large trend reversals.
-20
0
20
40
60
80
100
120
Key Sovereign Bond Yields(10yr %)
US Italy Germany France
70
80
90
100
110
120
130
Global Currencies(%)
DXY Japanese Yen Euro Australian Dollar
50
100
150
200
250
300
CBOE Volatility Index(%)
Source: Bloomberg Consensus Data
40
60
80
100
120
140
160
180
Global Commodities(%)
Iron Ore Copper Brent Crude Oil CRB Commodity Index
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GLOBAL MARKET OUTLOOKS&P 500 Index valuation is high, however earnings growth has now inflected positively and looks likely to continue.
Source: Bloomberg Consensus Data
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5
10
15
20
25
30
0
20
40
60
80
100
120
140
S&P 500 Index Forward Valuation (RHS) and EPS (LHS)
S&P 500 Fwd EPS (LHS) S&P 500 Fwd P/E (RHS)
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GLOBAL MARKET OUTLOOKTrend reversals has resulted in a large shift to Value stocks since the election on Nov 8th.
85
90
95
100
105
110
115
120
Vanguard US Value vs Growth ETF's(% Indexed to 100)
Vanguard Growth ETF Vanguard Value ETF
Value has outperformed by 9% in 2016
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GLOBAL MARKET OUTLOOKYield carry for equities has shrunk, but importantly remains positive.
Source: Bloomberg Consensus Data
-8
-6
-4
-2
0
2
4
6
8
Jan-62 Jan-66 Jan-70 Jan-74 Jan-78 Jan-82 Jan-86 Jan-90 Jan-94 Jan-98 Jan-02 Jan-06 Jan-10 Jan-14
S&P 500 Earnings Yield - US 10yr Bond Yield(%)
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GLOBAL MARKET OUTLOOKIf ‘Animal Spirits’ can be revived there is another leg to this bull market.
Source: Citi Investment Research
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GLOBAL MARKET OUTLOOKSelected market valuations…. Still look ok provided earnings growth comes through.
Source: Bloomberg Consensus Data
P/E Ratio Dividend Yield (%)
2016 2017 2018 2016 2017 2018
S&P 500 Index 20.1 17.3 15.6 2.1% 2.1% 2.3%
European Stoxx 600 Index 19.5 15.3 13.9 3.4% 3.5% 3.8%
UK FTSE 100 Index 27.5 14.8 13.6 4.0% 4.2% 4.4%
Hang Seng Index 11.9 11.5 10.5 3.7% 3.6% 3.8%
Hang Seng China Enterprises Index 7.8 8.0 7.3 3.9% 3.7% 4.0%
Brazil Ibovespa Index 14.1 12.4 10.4 2.9% 3.3% 4.2%
Nikkei 225 Index 21.6 18.7 17.4 1.7% 1.7% 1.9%
S&P/ASX 200 Index 17.6 16.5 15.6 4.1% 4.3% 4.5%
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MGGF PERFORMANCE ANALYSIS
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
NIKKEI 225 DOW JONESINDUS. AVG
FTSE 100 INDEX STXE 600 € Pr HANG SENGCHINA ENT
INDX
SHANGHAI SECOMPOSITE
S&P 500 INDEX HANG SENGINDEX
MSCI AWCI NetAUD
MGGF
August 1 to December 31 2016(%)
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MUNRO GLOBAL GROWTH FUNDLocal currency returns of various global markets and the return of the MSCI World AC Index in AUD next to the return of the MGGF in AUD.
= FX Contribution
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MUNRO GLOBAL GROWTH FUNDAugust 1 to December 31 basis points attribution of the MGGF by investment category.
-150 -100 -50 0 50 100 150 200 250 300 350 400
FX
Long
Short
Hedging
Munro Global Growth Fund Attribution(bps)
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MUNRO GLOBAL GROWTH FUNDAugust 1 to December 31 basis point attribution of the MGGF by stock and by region.
Top 5 Performers Bps
Thor Industries 103
Antofagasta 56
First Republic Bank 52
Blue Prism 51
Camping World Holdings 46
Bottom 5 Performers Bps
Activision Blizzard -40
Las Vegas Sands -32
Ubisoft Entertainment -29
Canadian Pacific Railway -26
Square Enix Holdings -26
-100
-50
0
50
100
150
200
250
Regional Performance(bps)
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KEY INVESTMENT THEMES FOR 2017
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INVESTMENT PROCESS – IDEA EVALUATION – QUALITATIVE TESTS
Key winners / losers
AoI’s
Qualitative tests: Munro looks for 5 key company characteristics to gauge whether a listed company is likely to benefit or lose from a particular growth trend and whether that will be sustained over an extended period of time.
Qualitative factors
Corporate Characteristics Score (winners and losers)
GROWTH• Faster earnings, EBITDA or revenue growth vs peers• Growing ‘Total Addressable Market’ (TAM), and
expanding market share
ECONOMICLEVERAGE
• Sufficient pricing power or economic leverage toimprove margins
SUSTAINABILITY• Ability to sustain growth due to scale, position,
intellectual property or locational advantages –search for signals in corporate dividend policy andhistorical earnings volatility
CONTROL • Significant management ownership, incentives and“skin in the game”
CUSTOMER PERCEPTION
• Beneficiary of strong customer reviews and rapidadoption to out-pace economic activity
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Quantitative factors
Long positions must rate highly in at least 2 of the 3 quantitative factors, with the potential to double within 1-3 years
Short positions must rate highly in all 3 quantitative factors, with the potential to fall 10-20% within 6 months
INVESTMENT PROCESS – IDEA EVALUATION – QUANTITATIVE TESTSQuantitative tests: Munro uses three valuation based tests to quantify earnings upside/downside, multiple upside / downside and time based catalysts. Ideas graduate from the universe to the portfolio based on the relative upside generated from these tests.
EARNINGS UPSIDE /
DOWNSIDE
• Build in-house valuation model and bull and bear casescenarios
• Set bull and bear price targets• Based on corporate meetings, channel checks across
the supply chain and peer group, broker andindependent research, and consensus expectations
MULTIPLEUPSIDE /
DOWNSIDE
• Use the corporate characteristics score to determineappropriate multiple target and relative multipleupside /downside vs other scored companies and themarket
CATALYSTS • Map catalyst calendar, and timing and magnitude ofre-ratings
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THEME 1: OUTDOOR ACTIVE
AoI WinnersSub - Trends
OUTDOOR ACTIVE
OUTDOOR EQUIPMENT
OUTDOOR ACCESSORIES
TRAVEL COMPANIES
POTENTIAL OUTDOOR ACTIVE LOSERS
The emerging nature of outdoor active lifestyle has created opportunities for equipment and accessory providers, recreational vehicle makers, component makers and travel companies. Consumers are increasingly taking outdoor holidays that are filled with sports, fitness and exercise as opposed to traditional resort style vacations and long distance travel.
RECREATIONAL VEHICLES
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Increased leisure time and a focus on experience over assets mean consumers are spending more on outdoor active equipment and outdoor active holidays. Caravans or towable RV’s are the unexpected beneficiary.
OUTDOOR ACTIVE IS THE NEW WAY CONSUMERS TAKE HOLIDAYS
New form factors and higher end content is appealing to younger consumers with RV’s also used for a wide range of uses.
Caravan’s are the only piece of leisure equipment to now exceed their 2008 peak, growing at 14.5% p.a. since 2009
98% 96%
75%
66%59% 60% 58%
54% 54% 54%
38%
19%
116%
102%
72% 72%67%
62% 61% 60% 60% 58%
42%
19%
0%
20%
40%
60%
80%
100%
120%
140%
Percentage of previous peak demand 2001- 2008
2014 2015
Source : RW Baird Equity Research
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KEY STOCK IDEA: THOR (LONG)Thor Industries is the largest producer of Motorhomes, caravans and recreational vehicles in the US. The company has been formed via a collection of acquisitions and was founded in 1980 by the Thomson and Orthwein families when they acquired Airstream.
Key Stock ThorKey Details Market Cap: USD 4.76bn
Listed: United States Revenue 2016: USD 4.6bn
QualitativeTests
Growth: The RV market has grown at 15% per annum since 2009, with 2016 on track to be a 10%+ year. Total registrations for motorhomes is now at its previous peak while caravans is now through its previous peak. Industry bodies suggest growth of 1-3% per annum but demographic shifts to younger consumers suggest growth will be higher. Economic Leverage: Margins have grown consistently this cycle to a new peak. Jayco acquisition is initially dilutive, however margins from mix to smaller sizes is positive. Tax rates coming down. Sustainability: Ultimately a cyclical business however the consumer demographic is evolving, broader participation on the back of overseas travel becoming more difficult / more dangerous. Urban pressures, consumers desire to get 'off the grid' . Stocks can re-rate. Control: Family ownership down to 3%Customer Perception: Very high. Vehicles hold their resale value very well and hence consumers tend to buy the best and trade it in.
QuantitativeTests
Earnings upside: Jayco acquisition drives meaningful upside to consensus estimates via synergies and bringing Jayco to the group margin. Volume outlook is being meaningfully under appreciated. Tax benefits for the consumer and the company not being accounted for yet by consensus. Multiple upside: Stock trades on 15.2x blended 12 forward EPS and we see it at least holding this multiple, and potentially increasing if a cycle acceleration is priced in. Catalysts/Sizing: Earnings results, capital markets day, new coverage.
Outcome Stock discovered: July 2016, stock has increased 42% since discovery.
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152535455565758595
105115
24m
Fw
dEP
S
Shar
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(USD
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Share Price (LHS) 12m Fwd EPS (RHS)
C
EPS increased 27% since discovery
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152535455565758595
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Multiple has expanded 15% since discovery
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THEME 2: CONNECTIVITY
CONNECTIVITY
ARTFICIAL INTELLIGENCE
FOUNDRY
SILICON & DRAM/NAND
ANALOG CHIPS
NETWORK
AoI WinnersSub - Trends
Connectivity between devices, cars and the cloud is growing at a exponential rate. Data generated by all these connected devices can now be analyzed and interpreted in real time by emerging artificial intelligence applications. This is now an ‘Arms Race’ to connect and interpret the global economy on a real-time basis and as such we look to the ‘Weapons Manufacturers’ in silicon and network providers as the key beneficiaries of this trend.
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Connected cars, homes and emergence of solid state drives should power a new semiconductor cycle, not to mention Artificial Intelligence which TSMC sees as a $15bn opportunity alone.
A SANDSTORM IS BREWING...
Since 2000, the demand for silicon wafers has increased for certain products, in mobile phones it has increase 7-fold.
0 5 10 15 20
LCD TV's
Mobile Infrastructure
Media Tablets & Tablet PC's
Switches, Hubs, Modems etc.
SSD
Household
Automotive
Other (printers, game consoles,…
Industrial
Desktop, Notebook & Server PC
Mobile phones/Smartphones
Wafer Demand (bn cm^2)
2015 2000
Source: Siltronic Investor Relations
Emerging technologies in the car, home, cloud and Solid State Drives suggest growth is broadening and becoming less cyclical.
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KEY STOCK IDEA: MICRON (LONG)Micron is a pure commodity producer of DRAM (Dynamic Random Access Memory) and NAND flash memory which makes up the core memoryfunction of PC’s, Mobile phones and Servers. Micron is the 3rd largest producer globally behind Samsung and Hynix of Korea in an industry that is now significantly consolidated.
Key Stock MICRON
Key Details Market Cap: $24.8bnListed: USA Revenue 2017E: $17.6bn
QualitativeTests
Growth: Market demand is growing at 20-25% per annum for DRAM and NAND growth of 40% per annum. Growth has been strong for a long time, key upside is in pricing. Economic Leverage: Significant consolidation has left the DRAM market with just three players who are currently showing capital discipline in the face of rising demand. Sustainability: While growth has been sustainable, pricing disciple has not been sustainable historically, making Micron a highly cyclical company. However at the margin the broadening of demand across verticals, combined with better industry discipline suggests better through the cycle growth going forward. Control: The company does not have a founder with significant shareholder control. Management alignment is strong. Customer Perception: Highest amongst the peer group, which gives it a slight advantage versus peers in qualifying for Automotive applications and hyper scale cloud players.
QuantitativeTests
Earnings upside: Earnings expectations at $2.50 for the next 12 months and could rise to $4.00 over the next 18 months just to reach the peak of the previous cycle in 2014. With potential to move beyond this number.Multiple upside: Stock trades at just 9x earnings, which gives zero credit for any changing industry dynamics. Catalysts / Sizing: Earnings results, peer results.
Outcome Investment made : Dec 2016
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MUNRO GLOBAL GROWTH FUNDConclusion
Five months return to December 31: Positive returns since inception +2.2% but we have underperformed the MSCI World AC Index Net AUD +7.2%, partly due to less currency gains, but also due hedging loses and the strong rally in value stocks seen since the US Presidential election.
Capital: We remain positively disposed to markets and hence maintain a reasonably high equity exposure. We believe the shift to inflationary fiscal policies over monetary accommodation can drive better growth and hence improved earnings for equities.Inflation implications for interest rates will also drive money out of bonds and towards equities over time.
FX: We see upside for the USD versus the AUD, but do not have a strong view on other currencies versus the AUD, consequently the fund remains predominately hedged back to AUD (65%) with a 35% holding in USD. Importantly as an absolute return fund the MGGF is unlikely to fully unhedge its currency exposures due to the potential for large capital losses in an area outside our core expertise.
Stocks: We remain confident in the earnings growth of our investments and we expect share prices to track earnings growth over the longer term. Since growth is now improving, the universe of growth stocks is now expanding again for the first time in many years, consequently we need to remain vigilant on the price we pay for growth when we find it.
THANK YOU
Munro Partners (Australia)Level 1980 Collins StreetMelbourne VIC 3000+ 61 3 9290 [email protected]
Munro Partners (United Kingdom)Ground Floor
7 Melville CrescentEdinburgh Scotland EH3 7JA
+ 44 131 503 0016 www.munropartners.com.au
