MLN – June 2020 Quarterly Newsletter

1
SIGNIFICANT RETURNS IMPACTING
THE PORTFOLIO DURING THE
QUARTER IN LOCAL CURRENCY
The surge in global share markets in the second quarter provided a stark
contrast to the steep coronavirus driven declines in the first quarter. The
US markets led the bounce and posted its best quarter since 1998. The
flagship US S&P 500 Index climbed 20.0% for the quarter – but 39%
from its lowest point on 23 March. Most global markets followed the US
higher, with MSCI Europe up 11.1% and MSCI China up 14.4%. The
sharp rebound was driven by record monetary and fiscal stimulus, which
coincided with economic reopening in most markets.
Marlin gained 21.3% (gross performance) for the quarter, and the
Adjusted NAV was up 18.3% for the quarter. The global benchmark
gained 16.2% for the same period. Over the last 12 months Marlin’s gross
performance is up 19.8%, compared with our market benchmark which
was up 0.04%.
The strong get stronger, the weak get weaker
Unprecedented economic shutdowns have impacted some businesses
far more than others. In many instances this has led to strong companies
getting stronger, and weak businesses getting weaker. Some have failed
altogether, like rental car company Hertz and US retailer J.Crew.
In our last quarterly update we gave the example of how coronavirus
would hasten the demise of many traditional retailers, while strengthen
ecommerce and online payments companies including our portfolio
holdings PayPal and Amazon. However, when markets are falling and
investors are panicking, stocks often get sold off indiscriminately and
drag down the prices of even the most resilient businesses. We saw this
in March, which gave us a good opportunity to add to our positions in
companies like PayPal, Amazon and Facebook.
We are now beginning to see real data on how lockdown has impacted a
wide range of industries, and this concept of the strong getting stronger
has played out even more abruptly than we anticipated.
The percentage of commerce conducted online took 10 years to go from
6% to 16%, but jumped to 27% in April. 10 years worth of change in just
eight weeks. This has provided rapid growth for Amazon, who had to
hire over 175,000 new employees just to keep up.
All of this ecommerce growth is also driving demand for digital payments,
as consumers look for a secure and simple way to pay. This saw
PayPal add a record 10 million new users in the first quarter. The surge
in ecommerce has led to an acceleration in digital payments adoption,
driving new users and increased engagement. Despite the slump in global
consumption in recent months, PayPal had its best day ever for payments
volume in May and the business continues to grow rapidly.
While some volumes may move back to brick and mortar retailers once
coronavirus fears subside, ecommerce and digital payment trends have
remained remarkably strong despite the end of lockdown. It appears that
the new online shoppers have found ecommerce to provide both value
and convenience, and have continued to shop online.
The theme of the strong getting stronger has undoubtedly helped our
portfolio this year and we think it will play an important role in the years
ahead. Economic growth is likely to be anaemic over the next few years.
Unemployment caused by coronavirus and the build-up of debt in the
PAYPAL
HOLDINGS INC
+82
%
FLOOR & DECOR
HOLDINGS
+56
%
STONECO LTD
+50
%
DESCARTES
SYSTEMS
+48
%
AMAZON.COM
INC
+42
%
economy will take a number of years to work through. In this environment
we believe businesses with their own secular growth drivers are well
positioned to thrive, which should favour many of the companies in our
portfolio.
Never let a good crisis go to waste
The last few months has seen us make more changes to the portfolio
than usual. We generally subscribe to the theory that you should simply
invest in a portfolio of great businesses, sit back, and let compounding
do the work. That said, every 5 to 10 years there is a market event
that presents compelling investment opportunities – which investors
shouldn’t let go to waste.
We added a handful of new companies to the portfolio this quarter. They
include a combination of smaller growth companies that we have followed
for a number of years (Floor and Décor and Stone Co) and more cyclically
exposed businesses (HEICO and Hilton) that sold off significantly in
February and March.
HEICO (+21% since addition) is a leading manufacturer of niche parts to
the aerospace and defence sectors. Its main focus is on the aftermarket
where it has 50% market share in third-party regulator-approved parts
(or ‘PMA parts’ using industry terminology). These parts can be used
in place of expensive Original Equipment Manufacturer components,
but are often 30% to 50% cheaper. This is an attractive proposition for
airlines, particularly in the current environment, and it has allowed HEICO
to outgrow the wider aerospace aftermarket for many years. We believe
HEICO will continue to outgrow the aerospace market longer-term as
penetration of PMA parts increases. The company has been led by the
founding Mendelson family for almost thirty years, who have created an
enviable track-record of consistent growth over this period.
Floor and Décor (+56% since addition) is a fast-growing US retailer,
with large format warehouses (roughly the size of a Bunnings) and an
exclusive focus on hard surface flooring. The company’s scale relative
to independent retailers and its direct procurement organisation allows
it to offer the industry’s broadest in-stock assortment at low prices. We
believe the company has the potential to dominate the niche hard flooring
category and we see a significant runway for future growth. They have
123 stores currently, but the potential for more than 400 stores in 10
years. Mom and pop retailers (50% of the market) cannot compete on
price or service and are likely to continue losing market share.
Hilton (+9% since addition) is one of the largest hotel brand owners
globally. There are 6,000 hotel properties associated with one of
company’s fifteen hotel banners, which includes Garden Inn, Hampton
¹
Share price discount to NAV (including the warrant price on a pro-rated basis & using NAV to four decimal places)
as at 30 June 2020
1 April 2020 – 30 June 2020
MLN NAVWarrant Price
$
1. 0 3
$
0 .1 0
$
0.98
Share Price
DISCOUNT
1
2.3
%

QUARTERLY NEWSLETTER

Navigating in a lower growth world
We are always cautious making market predictions. After all, no one was
picking that global markets would recover nearly all of the coronavirus
driven losses and rebound over 39% from March lows.
Caveats aside, we believe the combination of a weak economic backdrop
and elevated market valuations are likely to weigh on future market
returns. While equities are still likely to provide a material premium to the
returns from cash and bonds over the long term, investors should expect
lower than historical returns in the years ahead. In this environment, active
management and selecting the right companies will play an even more
important role than it has in the past.
PERFORMANCE
AS AT 30 JUNE 2020
3 Months
3 Years
(annualised)
5 Years
(annualised)
Company Performance
Total Shareholder Return+24.9%+19.5%+13.1%
Adjusted NAV Return +18.3%+15.3%+10.8%
Portfolio Performance
Gross Performance Return+21.3%+18.6%+14.5%
Benchmark Index¹+16.2%+6.1%+6.5%
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
Headquarters Company%
Holding
Canada
Descartes Systems 0.5%
China
Alibaba Group6.3%
Tencent Holdings5.3%
France
EssilorLuxottica3.0%
Germany
Adidas3.9%
Ireland
Icon3.6%
United States
Abbott Laboratories3.9%

Alphabet7.0%
Amazon.Com4.4%

Dollar General3.6%
Dollar Tree3.9%

Edwards Lifesciences 3.8%
Facebook7.1%
Floor & Décor Holdings1.5%
Gartner Inc3.6%
HEICO Corporation2.3%
Hexcel Corporation 3.6%
Hilton Worldwide Holdings3.5%
Mastercard5.0%
PayPal Holdings5.0%
Signature Bank6.1%
Starbucks1.7%
StoneCo3.2%
TJX Companies3.5%
Tyler Technologies1.4%
Zoetis 1.9%
Equity Total98.6%
New Zealand dollar cash0.6%

Total foreign cash1.1%

Cash Total1.7%
Forward Foreign Exchange(0.3%)

TOTAL100.0%
PORTFOLIO HOLDINGS
SUMMARY
as at 30 June 2020
COMPANY NEWS
DIVIDEND PAID 26 JUNE 2020
A dividend of 1.94 cents per share was paid to Marlin
shareholders on 26 June 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.
and Doubletree. As an asset-light franchisor Hilton typically takes a
percentage of the revenue from hotels that use their brands, as opposed
to owning the hotel properties themselves. This model helps insulate Hilton
in the current environment. Longer-term we see a long growth runway as
independent hotels increasingly look to join branded chains like Hilton.
Being part of a chain allows the hotel owner to charge higher room rates
and helps boost occupancy (via loyalty programmes and more marketing
clout). Hilton has 5% market share of global hotel rooms, but 20% share of
new hotel openings, highlighting that Hilton should continue to outgrow the
market as small independent operators lose share.
These are all high quality businesses. They have long-term structural growth
drivers and are gaining share in their respective industries. When we added
these companies to the portfolio we felt that the market was focussing too
much on the near-term challenges posed by lockdown, which allowed us
to acquire these businesses at what we consider attractive valuations.
Ashley Gardyne
Senior Portfolio Manager
Fisher Funds Management Ltd
20 July 2020
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