MLN – March 2020 Quarterly Newsletter

1
Significant returns impacting the portfolio
during the quarter in local currency
Dear shareholders,
It has been an extremely eventful quarter in financial markets.
Coronavirus has had extreme ramifications for millions of businesses
around the globe, who are having to deal with the implications of
government sanctioned lockdowns. The Marlin team is fully functional
and currently working from our respective home offices. We had
detailed and well-practiced business continuity plans in place and have
access to all required research and trading systems.
Market update
With coronavirus bringing much of the global economy to a sudden
halt, the pandemic has quickly escalated from a health crisis to one of
the most dramatic economic and market events in decades. Healthcare
workers, governments and central banks have sprung to work to
tackle both the pandemic and the economic ramifications, however
uncertainty reigns in markets as investors grapple with the ultimate path
to resolution.
Global markets plunged in the first quarter, with the US S&P 500 Index
falling 20% - its worst quarterly performance since 2008. Major global
markets followed suit, including Europe (-23%), Japan (-20%), and
emerging markets (-24%). While falling markets have pulled most stock
prices lower, the impact has not been uniform across all businesses - with
those in the travel & hospitality, banking and energy sectors hit hardest.
Marlin’s gross performance was down -10.7% during the quarter,
compared with of our global market benchmark which was down -20.2%.
Marlin’s adjusted NAV return for the quarter was down -9.5%.
Safety first, with an eye on new opportunities
Our primary focus at the moment is on safety and capital preservation.
This means updating our work on the financial strength and liquidity
position of each of our companies, and assessing how they will weather
a protracted economic downturn. After spending the last month on
this exercise we are as confident as ever in the financial strength of our
portfolio companies. A large number of our portfolio companies have
significant cash holdings (like Alphabet, Facebook and PayPal), and all
of them are highly profitable. Those with some debt have relatively low
gearing and limited repayment requirements in the next few years.
Our secondary focus, which will become a higher priority in the weeks
ahead, is to use the market declines to identify the most compelling new
investments to add to the portfolio. We have a watch list of companies
we have long admired, and the recent market sell-off now means many
of these are trading at significantly more attractive valuations.
Performance and the impact of coronavirus
The biggest contributors and detractors to portfolio performance
this quarter were companies that were impacted (both positively and
negatively) by coronavirus or its impact on the economy.
Starting with the negative side of the ledger, the two worst performers in
the portfolio this quarter were aerospace supplier Hexcel and Signature
Bank. We have spoken with both of these companies in recent weeks.
While they are in industries feeling the brunt of the coronavirus impact,
we feel confident in their ability to weather the storm and outgrow their
respective industries longer-term.
Hexcel is one of only three providers of carbon fibre composites to
aircraft manufacturers like Boeing and Airbus. While aircraft production
will be reduced significantly in the near-term, Hexcel managed well
through prior periods of weakness in the aviation sector (9/11, SARs and
the global financial crisis) and a lot of the company’s cost base is variable
and can be reduced quickly in response to falling demand. With no debt
HEXCEL CORP
-49
%
SIGNATURE
BANK
-41
%
ADIDAS AG
-29
%
ESSILOR
LUXOTTICA
-28
%
DOLLAR TREE
INC
-22
%
repayments due until 2024, and undrawn credit facilities available, we
believe the company has ample liquidity. Longer-term Hexcel’s growth
story remains compelling - aircraft manufacturers will continue to add
more carbon fibre to new aircraft to reduce weight, fuel costs and carbon
emissions.
Signature Bank fell with the broader banking sector on concerns that
lower interest rates will reduce bank net interest margins. While Signature
Bank is not immune to this interest rate environment, we like the business
because of its conservative lending standards and strong growth profile
compared to peers. A large portion of its lending is backed by real estate
(at conservative loan-to-value ratios of circa 60%) and during the financial
crisis the company reported loan loss rates that were a fraction of large
US banks like Wells Fargo and Bank of America. Signature Bank was
viewed as a relative safe haven in the global financial crisis and it saw
deposit growth jump significantly in 2008 and 2009. We see Signature
Bank weathering the storm well and ultimately benefiting from strong
deposit and loan growth as they continue to hire new commercial
banking teams.
On the positive side of the ledger, Dollar General and Amazon
contributed significantly to our performance.
We added Dollar General to the portfolio last year due to its defensive
nature and the fact that its sales hold up well in weak economic
environments. They have been an unexpected beneficiary of coronavirus,
with high consumer demand for basic food and household items ahead
of lockdown driving a jump in sales. While this is just a short-term spike,
we would expect Dollar General to benefit from the broader economic
fallout and higher unemployment – with many consumers trading down
and shopping at lower priced discount retailers.
Amazon’s ecommerce business has also been a significant beneficiary
of high demand for household necessities and a preference for
delivery. Demand has been so high that Amazon are trying to hire an
additional 100,000 workers in fulfilment and delivery. Longer-term we
see the potential for these recent changes in consumer behaviour to
accelerate the trend towards online shopping. Particularly for categories
like groceries, which until recently have gained limited traction online.
Amazon’s cloud business is also likely to be a long-term winner as
coronavirus has highlighted the benefits of companies having their IT
infrastructure and software hosted in the cloud.
Strategy and recent portfolio changes
The current environment is presenting more compelling investment
opportunities than we have seen in quite some time. To capitalise on this
environment we are methodically reviewing our existing holdings and
working our way through our watch list of investment ideas - to ensure
we are invested in the companies we think will deliver the best returns for
clients over the next five to ten years. While in many cases these will be
the companies we already hold – like PayPal and Alphabet – we are likely
to add fresh companies to the portfolio in the coming months.
We added to a number of our high conviction holdings during the
quarter, including Amazon, Edwards Lifesciences, Facebook and PayPal,
and we also added two new companies to the portfolio – Gartner and
Quarter Update Newsletter
1 January 2020 – 31 March 2020
MLN NAV
$
0.89
DISCOUNT
1
7.5
%
as at 31 March 2020
SHARE PRICE
$
0.81
¹
Share price (premium)/discount to NAV (including the warrant price on a pro-rated basis & using NAV to four decimal places)
WARRANT PRICE
$
0.04

portfolio in March it had fallen almost 40% from its highs. We believe
the market is overreacting to these short-term developments. They have
ample liquidity to cover store closures for a significant period of time,
and they have already managed through coronavirus in China, with 95%
of stores already back in operation. While it may take the US longer
to get back on its feet than China, most of us will still have our coffee
addictions when this is all over.
Final thoughts
Coronavirus is a frightening pandemic that also has serious economic
and market ramifications. But society has faced other serious challenges
before. Pandemics, world wars, oil and inflationary shocks and financial
crises. Every time we are in the midst of these events the path to
normality is highly uncertain. During the global financial crisis no one
knew what the path to recovery looked like, or what actions would be
needed by governments and central banks. But eventually we got there -
through trial and error - until the right solutions were found. It will be the
same with coronavirus. The path from here is uncertain, but we will get
through this crisis like the ones before it.
We remain confident in the prospects of our portfolio companies.
The portfolio contains a hand-picked collection of the world’s best
businesses, which we believe will ultimately weather the storm and
continue to grow strongly in the years ahead.
Performance
as at 31 March 2020
3 Months
3 Years

(annualised)
5 Years
(annualised)
Company Performance
Total Shareholder Return(19.3%)+12.2%+9.7%
Adjusted NAV Return (9.5%)+10.9%+8.5%
Portfolio Performance
Gross Performance Return(10.7%)+13.8%+11.7%
Benchmark Index¹(20.2%)+1.5%+5.7%
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
Headquarters Company% Holding
CanadaDescartes Systems 3.2%
ChinaAlibaba Group5.8%
Tencent Holdings5.3%
FranceEssilorLuxottica3.3%
GermanyAdidas4.6%
Ireland Icon4.2%
United StatesAbbott Laboratories5.0%
Alphabet8.3%
Amazon.Com4.9%
Dollar General4.8%
Dollar Tree4.0%
Edwards Lifesciences 4.4%
Facebook7.2%
Gartner Inc1.1%
Hexcel Corporation 2.7%
Mastercard5.4%
PayPal 6.2%
Signature Bank4.9%
Starbucks1.1%
TJX Companies4.8%
Tyler Technologies2.6%
Zoetis 2.1%
Equity Total95.9%
New Zealand dollar cash4.8%
Total foreign cash0.1%
Cash Total4.9%
Forward Foreign Exchange(0.8%)
TOTAL100.0%
Portfolio Holdings Summary
as at 31 March 2020
Company News
Dividend paid 27 March 2020
A dividend of 2.04 cents per share was paid to Marlin shareholders on
27 March 2020, 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.
Starbucks. We funded these new investments by exiting our holdings in
Ecolab, Fresenius Medical Care and Electronic Arts.
Gartner is a leading research, consulting and advisory company. Its
information technology research service is seen as a must-have at most
large corporates and is used by 75% of Fortune 1,000 companies. Gartner
provides IT industry research to help businesses make critical decisions
(such as the selection of new software vendors), or to simply better
understand current best practice in areas like cyber-security or cloud
deployment. The company has a strong track record of growth, with
its earnings per share growing by 13% per annum over the last decade.
We see this growth continuing, with over 100,000 businesses globally
that could use Gartner’s services, of which just over 13,000 are current
customers.
Starbucks is the undisputed global leader in specialty coffee. It has over
30,000 coffee stores globally, to which it is adding another 2,000 stores
each year. Starbucks has a strong brand, as well as high customer loyalty
and repeat purchase behaviour. Despite being a 50 year old chain, they
continue to rollout new stores globally and have extremely good store
economics - with high profit margins and returns on new store openings.
Starbucks also has a compelling growth story in China, where they
currently have 4000 stores but believe they can ultimately have as many
stores as they do in the US (15,000).
We invested in Starbucks in the midst of the market falls in March. The
company’s operations have been temporarily impacted by coronavirus,
with Starbucks recently closing its US stores, having previously closed
most of its Chinese stores for a number of weeks. The company’s share
price had been hit hard by the closures, and when we added it to the
Ashley Gardyne
Senior Portfolio Manager
Fisher Funds Management Ltd
20 April 2020
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