MLN – March 2018 Quarter Update Newsletter

1
1
S&P Large Mid Cap/S&P Small Cap Index (hedged 50% to NZD)
Notable Returns for the Quarter
in local currency
The Marlin portfolio gained 5.2% in the three months to 31 March
2018, 7% ahead of the benchmark index
1
which was down 1.8% over
the period. It was a volatile quarter for equity markets, and these
headline results mask the market stresses seen during the quarter.
We have talked previously about 2017 being a highly unusual
year for equity markets, with the US S&P 500 Index advancing in
every single month and the variability of returns at record lows
(as measured by the VIX index). We saw an abrupt reversal of
this theme in the first few weeks of February, when most global
markets fell dramatically and the S&P 500 Index declined by 10%
at one point during the month. After a brief recovery volatility
picked up again in March, with President Trump’s tariff proposals
sparking concerns of a potential trade war. The first quarter was a
good reminder that low volatility does not persist forever and is
continually punctuated with periods of stress.
WILLIAM
DEMANT
+35
%
BLACKHAWK
NETWORK
+25
%
EDWARDS
LIFESCIENCES
+24
%
AMAZON
+24
%
ADIDAS
+18
%
In the short-term markets often move more on sentiment than
fundamentals and the volatility in February came despite an
underlying environment of economic and corporate earnings
growth. The average US company in the S&P 500 Index grew
revenue 8% and earnings per share (EPS) at 15% in the final
quarter of 2017. This strength in growth surprised many, with
77% of companies in the S&P 500 reporting revenue above
analysts’ expectations.
The performance of the Marlin portfolio in the quarter was helped
by a relatively strong earnings season for our portfolio companies,
including William Demant and Edwards Lifesciences.
Hearing aid manufacturer William Demant was a standout
performer this quarter, returning 35%. The strong performance
of the company’s share price was underpinned by stronger than
expected organic growth. Organic growth came in the form of
hearing aid sales over the quarter which grew 10% on the back of
market share gains from its new Oticon Opn range of hearing aids.
Artificial heart valve manufacturer Edwards Lifesciences was up
24% this quarter. Not only did growth in its core trans-catheter
heart valves bounce back following reduced guidance last
quarter, but all segments saw acceleration in growth and 2018
guidance was increased.
The biggest detractor this quarter was the online travel agent
Expedia, down 8% for the quarter following fourth-quarter
results that were weaker than expected and growth guidance
for 2018 that disappointed the market. While room nights and
revenue continued to grow strongly, earnings were depressed
by investments that Expedia’s new CEO is making in sales staff
and IT related capex. While we certainly don’t want to gloss
over Expedia’s poor recent performance, we believe these
are important long-term investments that should position the
business better for future growth. We met Expedia’s new CEO in
San Francisco in February to discuss these investments and we
continue to monitor progress closely.
Other noteworthy news this quarter included eyewear manufacturer
Essilor receiving unconditional approval from US and European
regulatory authorities for its proposed merger with Luxottica to
create the world’s largest eyewear company. Subject to approval
from Chinese authorities, we expect the merger to close later this
year and believe there are significant synergies to be extracted
from the combined business.
We have made a number of changes to the portfolio this quarter,
exiting three positions and adding two. We exited the US based
digital gift card distributor Blackhawk Networks, following a
takeover by US private equity firm Silver Lake at a 27% premium to
where Blackhawk traded at 31 December. While we are sad to see
Blackhawk leave the portfolio, we believe the premium paid is fair.
Quarter Update Newsletter
31 December 2017 — 31 March 2018
MLN NAV
$
0.98
SHARE PRICE
$
0.84
DISCOUNT
14.1
%
as at 31 March 2018
100
80
60
40
20
0
01/03/1702/03/1703/03/1704/03/1705/03/1706/03/1707/03/1708/03/1709/03/1710/03/1711/03/1712/03/1701/03/1802/03/1803/03/18
VIX index and S&P 500 index
3000
2800
2600
2400
2200
2000
VIX (volatility) index S&P 500 Index
VIX Index
S&P 500 Index
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
-6.0%
2015Q42016Q12016Q22016Q32016Q42017Q12017Q22017Q32017Q4
-3.5%
-1.7%
-0.4%
2.6%
4.2%
7.3%
5.0%
5.5%
8.2%
S&P 500 revenue growth

Performance
as at 31 March 2018
3 Months
3 Years
(annualised)
5 Years
(annualised)
Corporate Performance
Total Shareholder Return+1.2%+9.9%+13.3%
Adjusted NAV Return+5.1%+10.3%+11.5%
Manager Performance
Gross Performance Return+5.2%+14.3%+15.5%
Benchmark Index
1
(1.8%)+12.5%+15.3%
1
Benchmark index: World Small Cap Gross Index until 30 September 2015 & S&P Large Mid
Cap/S&P Small Cap Index (hedged 50% to NZD) from 1 October 2015
Non-GAAP Financial Information
Marlin uses non-GAAP measures, including adjusted net asset value, gross performance return
and total shareholder return. The rationale for using such non-GAAP measures is as follows:
»adjusted net asset value – the underlying value of the investment portfolio adjusted for
capital allocation decisions,
»gross performance return – the Manager’s portfolio performance in terms of stock
selection and hedging of currency movements, and
»total shareholder return – the return to an investor who reinvests their dividends, and if
in the money, exercises their warrants at warrant maturity date for additional shares.
All references to including adjusted net asset value, gross performance return and total
shareholder return in this newsletter are to such non-GAAP measures. The calculations applied to
non-GAAP measures are described in the Marlin Global Non-GAAP Financial Information Policy.
A copy of the policy is available at http://marlin.co.nz/about-marlin/marlin-policies/
Disclaimer: The information in this newsletter has been prepared as at the date noted on the front page. The information has been prepared as a general summary of the matters covered only, and it is by
necessity brief. The information and opinions are based upon sources which are believed to be reliable, but Marlin Global Limited and its officers and directors make no representation as to its accuracy
or completeness. The newsletter is not intended to constitute professional or investment advice and should not be relied upon in making any investment decisions. Professional financial advice from an
authorised financial adviser should be taken before making an investment. To the extent that the newsletter contains data relating to the historical performance of Marlin Global Limited or its portfolio
companies, please note that fund performance can and will vary and that future results may have no correlation with results historically achieved.
Marlin Global Limited
Private Bag 93502, Takapuna, Auckland 0740
Phone: +64 9 484 0365 | Fax: +64 9 489 7139
Email: enquire@marlin.co.nz | www.marlin.co.nz
2
Headquarters Company% Holding
CanadaDescartes Systems 3.1%
ChinaAlibaba Group4.2%
DenmarkPandora3.6%
FranceEssilor International4.5%
GermanyAdidas3.9%
Fresenius Medical Care4.0%
Ireland Icon3.8%
United StatesAbbott Laboratories3.5%
Alphabet7.0%
Amazon.com2.4%
Cerner Corporation4.1%
Cognizant Technology Solutions 4.3%
Core Laboratories2.5%
eBay 3.8%
Ecolab2.9%
Edwards Lifesciences 3.2%
Expedia4.0%
Hexcel Corporation 3.5%
LKQ4.5%
Mastercard5.0%
PayPal 5.3%
Signature Bank3.9%
TJX Companies4.0%
United Parcel Service3.0%
Zoetis 4.5%
Equity Total98.5%
New Zealand dollar cash0.8%
Total foreign cash1.2%
Cash Total2.0%
Forward foreign exchange
contracts
-0.5%
TOTAL100.0%
Portfolio Holdings Summary
as at 31 March 2018
Company News
Dividend paid 29 March 2018
A dividend of 1.93 cents per share was paid to Marlin
shareholders on 29 March 2018, under the quarterly distribution
policy. Interest in Marlin’s dividend reinvestment plan (DRP)
remains high with 40% of shareholders participating in the plan.
Shares issued to DRP participants are at a 3% discount to market
price. If you would like to participate in the DRP, please contact
our share registrar, Computershare on 09 488 8777.
We exited William Demant following its strong performance, with
the company up 55% since we initiated the position in March last
year. William Demant is now trading at an elevated valuation and
we believe the market is overly optimistic about the momentum
of the company’s recent product launches and future market
share gains. We also exited Sarine, a supplier of equipment and
software to diamond manufacturers, due to concerns regarding its
longer term growth and the exposure to a volatile sector.
Our two additions this quarter were both in the retail space.
With the market focusing on the death of traditional retail due to
disruption from ecommerce, we saw an opportunity to invest in
two high quality retailers, Pandora and TJX Companies, both of
which contributed positively to returns during the quarter.
Danish company Pandora, renowned for its signature charm
bracelets, has transformed itself into one of the leading jewellery
brands globally, both in terms of brand recognition and sales.
Growth for Pandora is underpinned by continued store expansion,
new product lines, its online strategy, and an increasing
preference by consumers for branded jewellery – where Pandora
is a market leader.
Ashley Gardyne
Senior Portfolio Manager
Fisher Funds Management Ltd
23 April 2018
TJX Companies is an off-price retailer with presence in the
US, Canada, Europe and Australia. TJX’s business revolves
around the company selling branded clothing, such as Nike
and Ralph Lauren, as well as some homeware at a 20% - 60%
discount to a full-price retailer. TJX can sell inventory cheaper
than other retailers as it sources stock from store closures,
order cancellations and manufacturer overruns. In store, a wide
assortment of inventory turns over quickly, creating a ‘treasure
hunt’ experience, encouraging customers to visit stores regularly
as new and different brands arrive almost daily. TJX has a good
growth runway for new stores openings and growing sales at
existing stores.
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