Global growth fund manager Munro Partners will have a difficult task choosing a single company to tip to an audience of industry heavyweights at the Sohn Hearts & Minds conference.
Global growth fund manager Munro Partners has a first-world problem: choice.
The firm has about $4.3bn in funds under management across four funds with separate mandates. The challenge is that there are thousands of investment options around the world and only a few dozen investment spots across its portfolios.
And this week, Munro partner and portfolio manager Kieran Moore must select a single company to pitch to an audience of industry heavyweights at the prestigious Sohn Hearts & Minds conference in Sydney.
Luckily, this is not the first rodeo for the Melbourne-based firm. Munro’s first tip at the annual conference – which raises funds for medical research – was global e-commerce giant Amazon.
“The way we think about the world is around areas or structural growth, within which then we go and try and find those bottom-up investment ideas,” Moore tells The Australian.
This means Munro prioritises investments in companies that are poised to win from massive structural changes, such as high-performance computing, decarbonisation and the digital enterprise.
The firm has over 20 of these areas, also including innovative healthcare and the emerging middle class consumer.
Amazon at about $US79 per share was a successful pick back in 2018 (shares closed at $US143 on Friday), but how will he choose the firm’s tip this year? Moore says he will approach it as he approaches all investment decisions in the firm’s portfolio.
“What we look for when we invest in something is to be able to prove, on the maths when we do our modelling, that it has the potential to roughly double its earnings over a five-year period,” Moore says.
After that, the next step is finding companies “where the market mispriced the sustainability of their earnings growth over a long period of time”.
With US bond yields hovering around 5 per cent, following a decade of near-zero rates, Moore acknowledges it’s been “a difficult period for growth investors”. He says, however, that the team at Munro tries not to get distracted by the day-to-day macro themes and focuses on finding secular growth. The fund lost 4.9 per cent in September, as valuations – particularly of technology stocks such as Amazon and Nvidia – were hit by higher rates, according to the most recent monthly report published on its website.
Amazon and chipmaker Nvidia each make up about 6 per cent of Munro’s Global Growth Fund. Amazon has recovered all of its losses, while Nvidia has been down for two consecutive months, but it has started to recover in November.
Moore addresses the market’s concern that demand for Nvidia chips has been pulled forward to today, increasing the risk of a decline in demand in the future.
“We don’t necessarily believe that,” he says.
Moore says Nvidia is extremely well-positioned to benefit from the roughly half a trillion dollars in value he expects to be created in the industry from the worldwide adoption of artificial intelligence. “We think the AI opportunity is going to be so big that it will be able to sustain the growth for a longer period of time. It really comes down to one simple thing, which is whether consumers like you and I are going to use AI applications more in our everyday lives. And we’ve got confidence in consumers using more and more of these products over time, which creates a longer runway for the companies that provide the solutions that enable those products to exist.
“Through their chips and their software, Nvidia effectively provides a far more complex, faster and more sophisticated computing solution that goes into data centres,” he says.
“When we use these AI applications in the future as consumers … those applications are being powered by data centres. Data centres around the world need to adopt … what’s called accelerated computing.”
Moore estimates that only about 14 per cent of all data centres are currently adopting accelerated computing power. And with a 70 to 80 per cent market share, Nvidia is the clear market leader in providing the solutions powering accelerated computing.
“What that whole story ultimately translates into is a really strong earnings growth runway for this company,” he says, as accelerated computing penetration moves to 30 or 40 per cent of all data centres in coming years. “We think the next half a trillion dollars in value that’s going to be created here is going to happen over the next 10 years. And Nvidia is effectively a critical player to enable that half a trillion dollars in value to be created.”
In a less visible part of the semiconductor supply chain, there is another company Munro loves called ASML Holding. It is listed in the Netherlands and is a favourite because its extreme ultraviolet lithography tools provide critical advanced chipmaking gear.
It was the firm’s pitch last year at the conference, and while it has had a tough ride this year (it’s down 11 per cent since the 2022 pitch) “it is what we call a hidden hero of the semiconductor market”, Moore says.
He explains the semiconductor industry has gone through a period of inventory corrections that is impacting the company, but remains convinced of its long-term prospects.
“Despite the fact that everyone thinks it’s cyclical, and it has been a victim of the macro conditions in 2023, in the long term, we are really confident in the earnings power of this company.”
This article was originally posted by The Australian here.
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