Marlin – June 2019 Quarter Newsletter

1
Notable Returns for the Quarter
in local currency
Market Overview
Global equity markets notched up solid gains in the June quarter
despite a brief interruption in May when President Trump escalated
trade tensions with China. The rally in the US propelled the S&P 500
Index to record highs during the quarter and its best first half year
in 22 years. Stocks rose despite mounting fears of an economic
slowdown, with markets taking comfort from accommodative
comments from Federal Reserve Chair Jerome Powell who said
he is monitoring trade developments and prepared to cut interest
rates if the environment deteriorates. An agreement at the G20
summit late in the quarter between President Trump and Chinese
President Xi Jinping also soothed markets as they committed to
get the troubled trade talks back on track.
Marlin had gross performance of +5.2% for the June quarter,
while the adjusted NAV return was +4.5% and the benchmark
return was +3.5%.
Market exuberance
Despite the muted global economic backdrop, we are starting to
see signs of excess in parts of the market, driven in part by lots of
capital chasing returns in a low interest rate environment.
The US initial public offering (IPO) market has sprung to life in
recent months. A host of new listings has seen a group of unicorns
(start-ups with a $1 billion+ valuation) including Uber, Lyft, Beyond
Meat and Luckin Coffee list on the stock market. A busy IPO
schedule can highlight investor over exuberance, with owners of
these businesses taking the opportunity presented by elevated
valuations to sell shares and take money off the table. One of the
common threads in many of these IPOs is that the businesses are
generally still loss-making and some are yet to prove they have a
viable business model. The percentage of loss-making US IPOs is
now back to levels seen in 1999.
There are areas of risk-taking and excess in other parts of the equity
market as well. We have been witnessing increasing debt levels
in certain sectors, with companies borrowing to fund acquisitions
or simply to repurchase shares. One side-effect of the scramble
for yield by investors is that some corporates are playing the
game of borrowing money in order to pay unsustainable dividend
yields, which can be rewarded with a higher share price (at least
temporarily). This has led to high debt levels among smaller
businesses and in low growth sectors like manufacturing and retail,
as a lack of organic growth forces them to take elevated risks. On
the other hand, many of the largest and most profitable businesses
like Apple, Microsoft and Visa have little or no debt.
The hunt for yield has also driven some of the traditional defensive
parts of the market, like utilities and consumer staples companies,
to valuation levels that we think are extreme.
ADIDAS
+27
%
CERNER
CORPORATION
+24
%
ESSILOR-
LUXOTTICA
+20
%
HEXCEL
CORPORATION
+17
%
CORE
LABORATORIES
-28
%
All of these dynamics mean investors really need to pick their
spots in the current market. We believe that longer-term it will pay
to avoid the excesses we are seeing in the IPO market. We also
believe investors should avoid companies that are simply growing
by borrowing at low interest rates and investing in questionable
projects or repurchasing shares. To make matters even more
complex, investors should be wary of some of the more highly-
priced consumer staples and utilities stocks, as their defensiveness
may prove illusionary at these high valuation levels. After a 10 year
bull market there are clearly some areas of exuberance investors
need to navigate carefully.
Portfolio positioning and recent changes
Despite the difficult market backdrop, we are comfortable with the
portfolio and how it is positioned. Most of the companies in our
portfolio are high quality businesses with limited or no debt. They
are also generally experiencing steady organic growth and have
valuations that we view as reasonable.
As discussed in last quarter’s newsletter we are spending more of
our time looking for businesses with defensive characteristics given
we are getting further through the economic cycle. At the margin
we are trying to add more of these businesses to the portfolio and
reduce our exposure to our more cyclical investments.
We added US discount retailer Dollar Tree to the portfolio during
the quarter, which fits firmly with this theme. Dollar Tree sells a
mix of everyday products at a fixed price of $1, with the catalogue
including items ranging from bread and eggs, to pencils and plastic
cups. The company caters to low and middle-income consumers
with stores normally placed close by a Walmart or a grocery store
to help drive store traffic. Dollar Tree still has significant room to roll
out stores across the US and we like its counter-cyclical properties,
which were exhibited when the business continued to grow in the
GFC despite the difficult retail environment.
To make room for Dollar Tree we sold our holding in online
travel agent Expedia. While we still think Expedia is a well-run
company in a growing industry, its business is highly cyclical and
it also faces continued risks from Google pushing further into
online travel booking.
Quarter Update Newsletter
31 March 2019 – 30 June 2019
MLN NAV
$
0.96
1
DISCOUNT
2
6.1
%
as at 30 June 2019
SHARE PRICE
$
0.90
¹
As at the date of this Newsletter the Marlin Global year end NAV has yet to be audited, and therefore it may change.
2
Share price discount/(premium) to NAV.

Performance
as at 30 June 2019
3 Months
3 Years
(annualised)
5 Years
(annualised)
Company Performance
Total Shareholder Return+12.0%+15.3%+11.8%
Adjusted NAV Return +4.5%+15.4%+10.6%
Portfolio Performance
Gross Performance Return+5.2%+19.5%+14.5%
Benchmark Index¹+3.5%+12.5%+12.5%
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 1.9%
ChinaAlibaba Group5.6%
Tencent Holdings4.0%
FranceEssilorLuxottica3.2%
GermanyAdidas4.8%
Fresenius Medical Care4.4%
Ireland Icon3.7%
United StatesAbbott Laboratories4.6%
Alphabet8.7%
Cognizant Technology Solutions 3.0%
Dollar General4.4%
Dollar Tree3.1%
Ecolab1.9%
Edwards Lifesciences 2.2%
Electronic Arts3.3%
Facebook5.8%
Hexcel Corporation 3.5%
LKQ2.4%
Mastercard5.0%
PayPal 5.3%
Signature Bank3.8%
TJX Companies4.8%
Tyler Technologies2.0%
United Parcel Service2.7%
Zoetis 2.8%
Equity Total96.9%
New Zealand dollar cash0.9%
Total foreign cash1.3%
Cash Total2.2%
Forward Foreign Exchange0.9%
TOTAL100.0%
Portfolio Holdings Summary
as at 30 June 2019
Company News
Dividend paid 27 June 2019
A dividend of 1.95 cents per share was paid to Marlin
shareholders on 27 June 2019, under the quarterly distribution
policy. Interest in Marlin’s dividend reinvestment plan (DRP)
remains high with 39% 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.
Another change we made to the portfolio was to switch one of
our current software holdings, Cerner, for another US software
player called Tyler Technologies.
Tyler Technologies is the leading provider of software to the
local government sector in the US. The specialised nature of this
software has resulted in hundreds of regional software players
that provide some solutions, but none with the broad coverage
and scale of Tyler (ERP, finance, billing and collection, HR, payroll,
justice/courts, public safety, appraisal and tax).
Local authorities are well behind the software adoption curve
in the US and two-thirds of local authorities are still maintaining
old in-house systems or using legacy systems that are no longer
supported by competitive vendors. Most of these government
entities will need to upgrade over the next 10 years and drive
Ashley Gardyne
Senior Portfolio Manager
Fisher Funds Management Ltd
18 July 2019
steady growth for Tyler. Despite being the industry leader, Tyler
only has 13% market share and we see continued market share
gains and margin expansion over the long term.
Tyler has a longstanding management team and a great track
record, having grown revenue at close to 15% per annum and
earnings per share by over 20% per annum over the last decade.
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us at enquire@marlin.co.nz