Marlin Global – December 2019 Quarter Update Newsletter

1
Notable Returns for the Quarter
in local currency
Marlin Global had a strong year in 2019, with an adjusted net asset
value (Adjusted NAV) return of 32.2% for the calendar year, 7.6%
ahead of our global market benchmark, which gained 24.6%.
For the December 2019 quarter Marlin’s Adjusted NAV was up 1.8%,
2.8% behind our benchmark which was up 4.6%.
Few would have expected 2019 to be a bumper year for equities,
following a rocky end to 2018 when the US market plunged nearly
20% from its highs. Weak economic data, trade headwinds, the
threat of rising interest rates and worries over Brexit pointed to an
uncertain year in markets.
These threats were sidelined when the US Federal Reserve halted
interest rate hikes and changed tack. This Fed pivot and interest rate
cuts propelled markets higher, which were further supported by a
stabilisation in economic data and the unwinding of trade and Brexit
related uncertainties late in the year.
Against this supportive backdrop the US S&P 500 Index soared
+29% for the calendar year, its biggest gain since 2013. Major global
markets followed suit, including Europe (+22%), Japan (+18%), and
emerging markets (+15%).
Winners and losers for 2019
Despite the strong outperformance of the US share market, and
technology stocks in particular, our top performing investment in the
2019 calendar year was German sportswear giant Adidas.
Adidas (+61% for the year) continues to take market share in
its strategic growth markets in the US and China. Its shifting sales
mix towards the direct-to-consumer channel, including its own
ecommerce initiatives, helped push gross margins to record highs
and led to structurally higher profitability. The company’s product
innovation and success collaborating with influencers outside of
sport, such as Kanye West and Beyoncé, has also helped broaden
the brand’s appeal and is resonating with customers. One weak spot
in 2018 had been Europe where they saw strong competition from
a resurgent Nike, although recent results have shown accelerating
growth in this home market, further supporting Adidas share price.
While we don’t often invest in turnaround situations, Adidas is a
company we first invested in late in 2014 when it was suffering from
challenging trading conditions in emerging markets. This emerging
market backdrop, combined with weakness in its TaylorMade Golf
business (since sold), was dragging on its growth and supressing
profit margins.
Adidas is a good example of how investors can exploit market
mispricing if they are willing to invest despite short-term noise and
market volatility. We believed Adidas had a strong brand and that
the althleisure trend and shift to ecommerce would ultimately be
positive for brand owners like Adidas.
ALIBABA GROUP
+18
%
LKQ CORP
+11
%
ECOLAB INC
-9
%
HEXCEL CORP
-17
%
DOLLAR TREE
-23
%
Looking through the noise in this case proved rewarding, with
Adidas share price climbing from EUR56 to EUR292 per share since
we first invested (+420%).
Facebook (+57% for the year) was another top performer for the
portfolio in the 2019 calendar year. Many advertisers prefer and
find digital advertising more effective, and during 2019 US digital
advertising penetration marched steadily higher and finally passed
through 50%. Digital advertising is now a bigger part of corporate
ad budgets than TV, newspaper and radio combined.
While we are positive on the outlook for the company, we are not
blind to the challenges that it has. We believe Facebook must
continue to address the issues associated with running a social
network (privacy concerns, security, election interference etc). We
have spent a lot of time with the company over the past twelve
months discussing these issues and believe Facebook takes them
seriously and is investing in smart solutions.
There were a number of companies that dragged on performance
this year. As investors, we will get things wrong – mistakes are
unavoidable in this business. The key to success is to get more
decisions right than wrong (a good ‘hit rate’) and to continually
learn from our mistakes. This has been a real focus for us in recent
years and is something we continue to work on.
In particular, we have been trying to get better at exiting stocks
from the portfolio proactively - when we see first signs that a
company’s moat is narrowing, or when the dynamics that attracted
us to the company or industry start to deteriorate. This is often a
delicate balance and requires a lot of analysis and judgement -
because selling a great business too hastily if the problems end up
being transitory can result in significant foregone gains.
While there were no outright calamities in the portfolio this
calendar year, Cognizant (+0%), Core Labs (-17%) and Expedia
(+5%) underperformed the market and dragged on our results.
While there are specific lessons from each of these investments
(which we have now exited), in hindsight we gave these
businesses the benefit of the doubt longer than we should have.
Exiting earlier, when question marks first developed around our
investment thesis, would have improved our performance.
While there will be detractors from performance every year,
we were pleased that there weren’t any major blow-ups in the
Quarter Update Newsletter
30 September 2019 – 31 December 2019
MLN NAV
$
1.00
PREMIUM
1
(3.8
%
)
as at 31 December 2019
SHARE PRICE
$
1.02
¹
Share price (premium)/discount to NAV (including the warrant price on a pro-rated basis & using NAV to four decimal places)
WARRANT PRICE
$
0.08

Our investment style is well suited to this environment. We believe
businesses with strong secular growth drivers like Alphabet, PayPal
and Alibaba are well positioned in this world of lower economic
growth, inflation and interest rates. Regardless of whether global
economic growth is 1%, 2% or 3%, many leading businesses in
ecommerce, digital payments, software and online advertising still
have many years of double-digit earnings growth ahead. While
high starting valuations for many of these companies muddy the
picture, we think investors can still achieve good returns with a
carefully constructed portfolio. But investors will need to be picky.
Performance
as at 31 December 2019
3 Months
3 Years
(annualised)
5 Years
(annualised)
Company Performance
Total Shareholder Return+14.2%+20.4%+15.0%
Adjusted NAV Return +1.8%+17.3%+11.9%
Portfolio Performance
Gross Performance Return+3.4%+21.4%+15.8%
Benchmark Index¹+4.6%+11.5%+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 expenses, fees and tax,
»adjusted NAV return – the net return to an investor after expenses, fees and tax,
»gross performance return – the Manager’s portfolio performance in terms of stock
selection and currency hedging before expenses, 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 2.1%
ChinaAlibaba Group6.5%
Tencent Holdings4.8%
FranceEssilorLuxottica3.4%
GermanyAdidas4.7%
Fresenius Medical Care3.9%
Ireland Icon3.9%
United StatesAbbott Laboratories4.4%
Alphabet8.1%
Amazon.Com3.0%
Dollar General4.1%
Dollar Tree4.0%
Ecolab1.8%
Edwards Lifesciences 2.5%
Electronic Arts3.2%
Facebook6.1%
Hexcel Corporation 2.5%
Mastercard4.9%
PayPal 5.4%
Signature Bank4.9%
TJX Companies5.2%
Tyler Technologies2.5%
United Parcel Service2.9%
Zoetis 3.1%
Equity Total97.9%
New Zealand dollar cash0.5%
Total foreign cash0.4%
Cash Total0.9%
Forward Foreign Exchange1.2%
TOTAL100.0%
Portfolio Holdings Summary
as at 31 December 2019
Company News
Dividend paid 19 December 2019
A dividend of 1.99 cents per share was paid to Marlin
shareholders on 19 December 2019, 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.
portfolio. We believe that the move to high quality companies in
the portfolio, that we have undertaken over the last few years, has
helped in this regard.
We were also pleased with our hit rate during the 2019 calendar year,
with two-thirds of our portfolio companies outperforming the market.
Outlook and positioning
Central bank interest rate cuts provided a shot in the arm to global
equity markets in 2019, but also pushed valuations significantly
higher. In the US, the S&P 500 price-to-earnings ratio increased from
14x to 18x during the year, driving over 90% of the gain in the US
share market, with corporate earnings growing only a few percent
and contributing less than 10% of the gain.
After a 10-year bull market and valuations near 20-year highs
in the US, market returns will need to increasingly come from
earnings growth. Given these elevated valuations and a subdued
economic backdrop, we expect more moderate market returns in
the years ahead.
Ashley Gardyne
Senior Portfolio Manager
Fisher Funds Management Ltd
20 January 2020
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