Like most global managers, Nick Griffin has long found the investment opportunity in China enticing, having used Chinese megacaps as key pillars in his portfolios.
But by May, the chief investment officer of Munro Partners didn’t have a cent of the firm’s $6.1 billion in funds under management invested in the world’s second largest economy.
“The maths for investing in China are incredibly compelling, and we thought Alibaba was the Amazon of China, and Tencent was a video gaming champion,” he says. “But in the process of analysing those companies, we overlooked the issues within the country.”
When the Chinese government decided to halt the record $52 billion dual-listing of Ant Group last November, Griffin was alerted by stop losses that the firm’s key holdings in Alibaba and Tencent needed to be reviewed as their valuations plummeted.
“The more we looked at those positions, the more we realised that the facts had actually changed because in China, you don’t have the power to change what the government wants to do,” Griffin recalls.
“There’s a system of checks and balances in countries like Australia, the US and even India, but in China, you don’t have that and that really came to the fore. These companies were being investigated, fined, paying the fine and thanking the regulator in the space of six weeks.”
He lost all confidence in where the earnings of these companies were going. “We couldn’t forecast it, so it didn’t matter how cheap they got. So we chose to step to the sidelines.”
Between January and May, Griffin reduced the Munro Global Growth Fund’s exposure to China, avoiding most of the devastating sell-off that resulted from the government’s regulatory crackdown on big tech.
This helped the long-short fund return 16.1 per cent in the year to October 31. The Munro Concentrated Global Fund, which is a long-only strategy, returned 19.2 per cent over the same period.
Another key positional change Griffin has made is building Munro’s exposure to high-performance computing and, more specifically, semiconductors.
Chipmaker Nvidia has been the fund’s best performing stock this year, and TSMC and ASML have been key contributors over the past few years.
All these companies have passed the test that Griffin applies when he screens stocks.
“For every stock that goes into the fund, we build a pack which has to prove mathematically that the company’s earnings will double within five years, and generally, the share price will double too,” he says. “That’s our north star, earnings growth drives stock prices.”
This is the reason why he continues to hold large positions in Microsoft, Amazon and Alphabet.
“Our models still say that Amazon’s EBITDA can double from here, and it’s reasonably easy to forecast that because we know e-commerce and cloud computing penetration will continue, and Amazon is number one in both, and it’s unlikely anyone will catch them,” he says.
“The other companies continuing on this path are Microsoft, where you can quite easily forecast a doubling in earnings, and Google, which is a little bit harder, but you can get their earnings to double in five years.”
Griffin sold a position in Apple five years ago and recalls being shaken out of Tesla during the pandemic. Although he has bought back into Tesla, it’s still not as large a position as the fund manager would like.
“The share price never gives us a chance to get in where the risk-reward is at a point where we’d be comfortable,” he says.
About 20 per cent of the global fund is invested in what Griffin describes as “decarbonisation enablers”, as Munro attempts to capitalise on the climate change thematic that it has declared as the biggest investment opportunity since the internet.
“Ultimately we’re trying to identify the big structural changes in the world and identify the big winners,” he says.
“The biggest change that is about to happen is decarbonisation – it’s going to take 30 years, cost more than $US30 trillion, so that’s trillions and trillions of dollars in revenue that will go to companies that help decarbonise the planet.”
Last month, Munro launched its Climate Change Leaders Fund, which has effectively turned the global fund’s 20 per cent exposure to the climate thematic into a standalone strategy.
The sub-categories that the climate fund is exposed to include clean transport, through holdings in Tesla and Infineon, and energy efficiency through Trane Technologies. It also has positions in Orsted and Vestas under the renewables theme, and Ball Corporation and Darling Ingredients for exposure to a circular economy.
Griffin is presenting at the Sohn Hearts and Minds Conference this year, where legendary investor Charlie Munger, Warren Buffett’s right-hand man, will also present.
Griffin has an impressive track record at the conference. Last year, his stock pick was meal kit delivery service HelloFresh, the year before it was TradeDesk, and in 2018, he pitched Amazon.
It means he’s feeling the pressure to pick another winner this year.
“The reality is, there’s real money for charity involved with these stock picks, so you do feel the pressure to give a really good idea,” Griffin says.
“We spend a long time thinking about our pick, and this year we’re planning to pitch a stock that we like to call the hidden hero of climate.”
Griffin began his journey in financial markets as a graduate at CFS in Sydney, which was the fund’s management arm of the Commonwealth Bank, but before long, he caught the travel bug.
“I did what many Australians do and decided to throw away a perfectly good opportunity and put a backpack on and go travelling around the world,” he recalls.
Griffin decided to settle in the Scottish capital Edinburgh, where he met his wife and started working as an oil and gas analyst at Deutsche Bank.
“I spent a lot of time in Scotland and got to meet many of the great Edinburgh fund managers, including groups like Baillie Gifford, Walter Scott and Artemis,” he says.
“If you look at Edinburgh as a city, it’s the size of Geelong or Newcastle, yet it runs trillions and trillions of dollars in funds under management, and has an amazing history.”
Having been back and forth between Australia and Scotland, Griffin decided in 2015 that there was a gap in the local market for a global growth investment firm.
“We felt Australia had lots of great value investors, but it didn’t have many global growth investors. So the name Munro is a homage to the [investment managers] in Scotland that we think do this best in the world,” he says; a Munro is a Scottish mountain.
Through his time in Scotland, Griffin learned the art of fly-fishing which he does in Tasmania. He also enjoys boat racing, cycling and early morning swims at Elwood beach.
“A big part of being a fund manager is you’re always ‘on’ because there’s always something that’s about to happen,” he says. “So when you pick a hobby, it’s usually something that completely occupies your brain.”
This article was originally posted by The AFR here.
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