MLN – December 2018 Quarterly Update Newsletter

1
Notable Returns for the Quarter
in local currency
I am currently on a research trip to China, digging into some
potential investment ideas and keeping up with the state of play
in the Chinese economy. As it turned out, China was the worst
performing global share market in 2018, and perhaps the timing
of my trip is fitting given these difficult market conditions have
recently spread well beyond China. In the most recent quarter we
have witnessed significant declines in most global share markets,
and while market volatility can be unsettling, it can also offer up
attractive investment opportunities. This is why I decided to travel
to China so early in the new year.
Throughout most of 2018 Marlin’s only investment in China was
Alibaba, (the world’s largest ecommerce platform) which we
have held since 2015. However, we used market weakness in the
fourth quarter to add a second Chinese investment to the Marlin
portfolio, Tencent Holdings, (the social media and gaming giant)
which we discuss in more detail below.
Review of markets
In the December quarter, global equity markets recorded the worst
quarterly performance since 2011, with our global benchmark
falling 15.2%. The declines have been caused by weaker global
economic data, ongoing US-China trade tensions, and interest rate
hikes by the US Federal Reserve spurring concerns that economic
growth may have peaked. Against this backdrop the Marlin
portfolio delivered a gross performance loss of 15.6% broadly in
line with the broader market in the fourth quarter.
Market declines in the fourth quarter resulted in all major global
equity markets ending the year in negative territory. For the
calendar year, the US market performed the best, falling only
6.2%, while China (-24.6%) was the worst performer having been
hit by both slowing economic growth and trade concerns. Whilst
it was a challenging year in many respects, the Marlin portfolio
held up significantly better than the broader market, with gross
performance of 0.4% in the 12 months to 31 December 2018,
compared with our global benchmark which fell 8.4%.
Our take on market volatility and the current
investment opportunity set
With the declines we have seen in the most recent quarter, it is
clear that some investors are getting jumpy. Newspaper headlines
echo this sentiment and warn that further losses may be looming.
The extreme volatility we have seen in US share markets since
mid-December, (with markets often down 2% to 4% one day, and
up 2% to 4% the next day) is a helpful reminder of the futility of
trying to guess where markets may go next week or quarter. At
times like these it is more important that investors monitor what
is in their control - their behaviour - and make sure investment
decisions aren’t clouded by emotions and are made adopting
CORE
LABORATORIES
-49
%
FRESENIUS
MEDICAL CARE
-38
%
ELECTRONIC
ARTS INC
-35
%
LKQ
CORPORATION
-26
%
DESCARTES
SYSTEMS
-23
%
long-term thinking. While the share market has delivered strong
returns for investors over the long run, the market has always been
characterised by periods of solid returns, punctuated by periods of
stress and volatility.
What allows some investors to generate better long-term
performance than the pack is not somehow magically avoiding
periods of higher volatility, but holding the right companies in their
portfolio over the long-term. Disciplined investors can benefit from
heightened volatility and the knee-jerk reactions of other investors.
We believe the steep declines we have seen in certain parts of the
market have materially improved the investment opportunities
that are currently available. While the market has fallen on growth
concerns, the global economy continues to grow and some
companies are benefitting disproportionately. As I write this from
China (where the economy has slowed), consumers are still seeing
their living standards improve and are out spending. In fact, retail
sales in China are growing at double the rate of more developed
countries. Chinese ecommerce companies, like our portfolio
company Alibaba, are growing even faster as consumer spending
moves online.
In the recent market correction many high growth stocks have
fallen by more than the market, and this creates an interesting
dynamic in our opinion. Since 2005 almost all corporate earnings
growth globally has been driven by the technology sector. This
means that there are large parts of the market (like consumer
staples and utilities) where companies aren’t really growing much
at all. Despite this, nervous investors have been piling into these
defensive sectors in recent months to take cover. We believe this
short-term behaviour has left a number of the growth companies
we follow attractively priced relative to their earnings prospects.
Examples in our portfolio that we have added to recently
include Alphabet (Google’s parent company), TJX Companies,
MasterCard, Alibaba and PayPal.
New portfolio holding
Another example of an opportunity being presented by market
turbulence is Chinese company Tencent Holdings. Tencent is a
company we have followed for quite some time, but it has often
been fully valued. Recent weakness in the Chinese market finally
Quarter Update Newsletter
1 October 2018 – 31 December 2018
MLN NAV
$
0.86
WARRANT PRICE
$
0.05
DISCOUNT
1
1.7
%
as at 31 December 2018
SHARE PRICE
$
0.83
¹
Share price discount/(premium) to NAV (including warrant price on a pro-rated basis)

Performance
as at 31 December 2018
3 Months
3 Years
(annualised)
5 Years
(annualised)
Company Performance
Total Shareholder Return(10.6%)+9.3%+10.4%
Adjusted NAV Return (16.2%)+5.6%+6.2%
Portfolio Performance
Gross Performance Return(15.6%)+9.1%+9.7%
Benchmark Index¹(15.2%)+6.9%+9.2%
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, adjusted NAV return,
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 after fees and tax,
»adjusted NAV return – the net return to an investor after fees and tax,
»gross performance return – the Manager’s portfolio performance in terms of stock
selection and currency hedging before fees and tax, 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 adjusted net asset value, adjusted NAV return, 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 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, New Zealand
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 2.4%
ChinaAlibaba Group5.7%
Tencent Holdings3.5%
FranceEssilor International3.4%
GermanyAdidas3.1%
Fresenius Medical Care3.4%
Ireland Icon3.0%
United StatesAbbott Laboratories3.2%
Alphabet7.9%
Cerner Corporation3.5%
Cognizant Technology Solutions 3.6%
Core Laboratories1.8%
eBay 2.4%
Ecolab3.7%
Edwards Lifesciences 2.4%
Electronic Arts3.4%
Expedia2.8%
Facebook4.0%
Hexcel Corporation 3.9%
LKQ3.3%
Mastercard5.0%
PayPal 6.3%
Signature Bank3.7%
TJX Companies5.0%
United Parcel Service2.5%
Zoetis 2.4%
Equity Total95.3%
New Zealand dollar cash1.5%
Total foreign cash0.9%
Cash Total2.4%
Forward foreign exchange
contracts
2.3%
TOTAL100.0%
Portfolio Holdings Summary
as at 31 December 2018
Company News
Dividend paid 21 December 2018
A dividend of 2.07 cents per share was paid to Marlin
shareholders on 21 December 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.
gave us the opportunity to add Tencent to the Marlin portfolio at
an attractive price, (with its share price having falling more than
40% from its peak).
Tencent is China’s largest online gaming company and leading
social network, with leading positions also in digital payments,
music & video streaming, and cloud computing. Tencent’s WeChat
app is the largest social media and messaging platform in China,
with over a billion users on the platform and average usage of
over an hour per day. WeChat provides much broader functionality
than western social media platforms. In addition to providing a
Facebook equivalent newsfeed, WeChat also allows users to read
the news, shop online, check bank balances, pay utility bills, watch
videos and make in-store & online payments.
Tencent also has a dominant position in the Chinese online
gaming market, with over 55% market share. It distributes a mix of
its own titles and licenced third party content and has built up a
Ashley Gardyne
Senior Portfolio Manager
Fisher Funds Management Ltd
18 January 2019
number of strategic partnerships with global gaming companies,
(including EPIC, the publisher of hit game Fortnite).
Its online gaming and social media businesses are highly cash
generative and this cash flow is being reinvested in new growth
areas including its video and music streaming services (like Netflix
and Spotify) and its mobile payments business Tencent Pay (like
PayPal). Tencent also recently announced its collaboration with
Paramount Pictures on two new up and coming films, Bumblebee
and Top Gun. Tencent is run by its visionary founder Pony Ma, and
we see many years of growth ahead.
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newsletters electronically please email
us at enquire@marlin.co.nz