MLN – September 2023 Quarterly Newsletter

1
Markets impacted by the reacceleration in medium and
long-term interest rates
Marlin ended the quarter down -4.0% (gross performance) and the adjusted net asset
value (NAV) return was down -4.3%. This compared with our global benchmark which
was down -2.6%.
Global market backdrop
After a strong start to the year and the September quarter, global equity markets
sold off around 10% towards quarter end as medium and long-term interest rates
reaccelerated. US bond yields as a proxy for global interest rates are making fresh 16-
year highs. This was concerning for investors because US inflation peaked way back in
October 2022 and has since fallen by two thirds from 9% to 3%. However, remember,
medium and longer dated interest rates are not just a function of inflation, they are also
a function of growth.
US economic data in particular has been surprising on the upside for a couple of
months now. The recession everyone feared didn’t materialise and the US printed
2.5% GDP growth for the 2nd quarter, a long way from recession. On the face of it,
that is good news and should generally drive higher corporate earnings. Forecasted
US corporate earnings, which had been cut sharply earlier in the year, are now being
upgraded sharply (+5-10% from the lows) as demand has held firm and the consensus
forecast is for a “soft landing”. Year ahead earnings expectations remain unusually
volatile as COVID aftershocks continue.
However, this reacceleration in growth and interest rates may prove to be reflexive - the
combination of the lagged impact of the sharp central bank rate hike cycle over the last
12 months, plus the added stress of the recent move higher in medium-term borrowing
rates for corporates and consumers, will likely blunt the growth recovery the market has
become excited about.
This caused a reversal of the trends we have seen in the last few months – the biggest
outperformers became the biggest underperformers and vice versa. The US, Nasdaq
and global growth stocks underperformed. Europe, the UK, China, and global value
stocks outperformed. We saw that in sector performance too as the energy sector was
the top performer for the quarter, on the back of an almost 30% rise in oil prices. This
was partly due to better-than-expected demand (positive) but primarily due to lower
than expected supply as OPEC+ sharply cut output (negative). Banks also sharply
outperformed as yield curves re-steepened.
Portfolio update
Alphabet (+9%) reported better-than-expected earnings. The highlights were digital
advertising market growth and incremental monetisation benefits from artificial
intelligence software (AI). AI was the key theme at the company’s annual Google
Cloud Next conference. The conference showcased Google’s new AI technology and
partnerships, a new version of its custom-build AI chips, as well as AI updates to its
enterprise cloud service and software suite. Google has begun selling its AI-powered
tools for corporate Gmail accounts and other workplace software at US$30 per month,
on par with the price Microsoft is charging for its AI-powered Copilot within Office 365.
All three of our new additions (Danaher, UnitedHealth Group, MSCI) performed well
during the quarter.
MSCI (+10% for the quarter) reported Q2 earnings. MSCI beat expectations on
revenue and earnings, showing continued resilience in its core index business.
Management came out with very positive commentary and conviction on their
important growth segments, ESG and Climate, which grew better than expected
and were the source of stock weakness in the previous quarter. Impressively, MSCI’s
climate products grew at 70% in the quarter. Given the share price weakness post Q1,
management showed good capital allocation discipline and bought back $468m worth
of shares opportunistically. The positive stock market environment in 2023 to date has
seen MSCI’s asset-based-fee in-flows turn positive this year, and the segment grew
revenue 13% year-on-year (y/y) in the quarter.
Amazon (-3%) reported better than expected Q2 earnings at the beginning of August.
Amazon’s important cloud computing platform, AWS, showed positive signs of growth
stabilising after multiple quarters of pressure from customers optimising their cloud
spend, which has been a headwind to AWS’s growth. Amazon’s advertising business
continues to grow strongly (+22% y/y) and gain market share. Impressively, Amazon
outperformed margin expectations, with operating income growing 132% y/y as the
company gains efficiency in its expanded fulfilment and logistics network and expanded
margins. Guidance for the next quarters operating income was well above expectations,
resulting in estimates being upgraded quickly by the market.
Edwards Lifesciences (-27%) sold-off on a weaker than expected earnings update
alongside a wider decline in the medical device sector driven by GLP-1 (obesity drug)
concerns (the iShares Medical Device ETF was down -7% for the month and -14% for
the quarter), with one analyst describing sentiment on medical devices as the worst
it’s been since the global financial crisis of 2008. While Edwards increased its full-year
guidance during the quarter, the market was expecting a larger increase as surgical
procedure growth recovered post-COVID. Management believes this is simply a timing
issue due to the complex diagnosis and referral pathways for structural heart disease,
and that underlying demand is still strong.
But the bigger story for medical device companies this quarter was around obesity
drugs (also known as “GLP-1’s”) and the release of the SELECT clinical trial data which
showed that the Wegovy GLP-1 obesity drug reduced major adverse cardiovascular
events by 20% in obese people. So, not only do these drugs cause significant weight
loss (up to 15-20% in clinical trials), but also lowers the risk of heart disease associated
with obesity. Given obesity costs the US healthcare system an estimated US$173 billion
a year, a reduction in obesity levels could impact the healthcare companies that are
treating the downstream impacts of obesity, in particular medical device companies.
Quantifying the potential impact on individual medical device companies is challenging,
especially as any potential impacts are likely to be years away. And it is still not even
clear as to how widespread the uptake of these obesity drugs will be given the high cost
and potential side effects. That said, it is hard to believe this will not be a headwind for
healthcare companies. The market has already marked GLP-1s as a material headwind
for diabetes related companies, which are amongst the worst-performing medical device
names this quarter. By comparison, Edward’s replacement heart valves are used to treat
aortic stenosis, which is primarily a progressive disease, with prevalence and severity of
the disease increasing substantially as people grow older (it is estimated that one-in-
eight people older than 75 show moderate to severe aortic stenosis). Clinical evidence
linking diet or obesity to aortic stenosis is less clear, however.
We are watching this situation closely for any impact on our existing healthcare stocks (in
particular our medical device names Edwards and Boston Scientific), while also looking
for potential opportunities given the level of negative sentiment surrounding the sector.
Portfolio activity
We exited Dollar General (DG) during the quarter due to lack of clarity over its steady
state earnings and lower confidence in management. The company’s operations had
been optimised to run on a very lean labour force. COVID over-earning masked the
fact that there was insufficient labour to handle greater volumes of inventory throughput
and greater inventory complexity as the company added more discretionary and fresh
produce items. Competitors are taking market share from DG as insufficient labour in
the stores has weakened the customer experience. DG’s high operating and financial
leverage also puts the pace of its store rollout story at risk. We continue monitoring
US discount retail dynamics and await clarity on these issues. Meanwhile we redeploy
capital into better risk-reward opportunities elsewhere.
We exited homebuilder NVR during the quarter because we see better value elsewhere.
We bought NVR in May 2021. The company has since delivered a 15% p.a. return
vs. +4% return from the S&P 500. Our rationale to exit is around new orders and
profit margins which drive NVR’s fundamentals. NVR’s runway for new orders in the
company’s active development communities has shrunk in recent years. NVR gross
margins are at all-time highs given recent appreciation in house prices, and we see
downside risk to market consensus expectations for margins to remain at elevated levels
for the next 3 years. We put NVR back into the fishing pond and will continue monitoring
these dynamics closely.
¹
Share price premium to NAV (including warrant price on a pro-rated basis and using the net asset value per share, after expenses, fees and tax, to four decimal places).
as at 30 September 2023
1 July 2023 – 30 September 2023
MLN NAVPREMIUM
1
$
0.876.4
%$
0.93
Share Price
QUARTERLY NEWSLETTER
Sam Dickie
Senior Portfolio Manager
Fisher Funds Management Ltd
13 October 2023
Warrant Price
$
0.00

PERFORMANCE
as at 30 September 2023
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 a 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
Email: enquire@marlin.co.nz | www.marlin.co.nz
Headquarters Company
%
Holding
China
Alibaba Group3.2%
Tencent Holdings3.6%
Ireland
Icon6.2%
United Kingdom
Greggs Plc4.1%
United States
Alphabet7.4%
Amazon.Com8.5%
Boston Scientific5.2%
Danaher Corporation4.4%

Dollar Tree2.2%
Edwards Lifesciences Corp.5.3%

Floor & Décor Holdings4.0%
Gartner Inc6.4%
Mastercard5.5%
Meta Platforms Inc6.7%
Microsoft6.1%
MSCI Inc2.3%
Netflix2.5%
PayPal Holdings2.0%
salesforce.com5.7%
UnitedHealth Group Inc3.2%
Equity Total94.5%
New Zealand dollar cash0.9%
Total foreign cash1.8%
Cash Total2.7%
Forward Foreign Exchange2.8%

TOTAL100.0%
PORTFOLIO HOLDINGS
SUMMARY
as at 30 September 2023
COMPANY NEWS
If you would like to receive future
newsletters electronically please email us
at enquire@marlin.co.nz
Dividend Paid 22 September 2023
A dividend of 1.82 cents per share was paid to Marlin
shareholders on 22 September 2023, 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.
3 Months
3 Years
(annualised)
5 Years
(annualised)
Company Performance
Total Shareholder Return+3.0%+2.5%+9.3%
Adjusted NAV Return (4.3%)+2.0%+6.2%
Portfolio Performance
Gross Performance Return(4.0%)+4.3%+9.0%
Benchmark Index¹(2.6%)+8.5%+5.8%
1
Benchmark index : S&P Large Mid Cap/S&P Small Cap Index (hedged 50% to NZD)
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 percentage change in the adjusted NAV value,
»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 combines the share price performance, the warrant price
performance, the net value of converting any warrants into shares, and the dividends paid to
shareholders. It assumes all dividends are reinvested in the company’s dividend reinvestment plan,
and that shareholders exercise their warrants, (if they were in the money), at warrant expiry date.
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
marlin.co.nz/about-marlin/marlin-policies.
SIGNIFICANT RETURNS IMPACTING
THE PORTFOLIO DURING THE
QUARTER IN LOCAL CURRENCY
FLOOR & DÉCOR
-13
%
NETFLIX
-14
%
DOLLAR TREE
-26
%
EDWARDS
LIFESCIENCES
-27
%
DOLLAR
GENERAL
-38
%
FOREIGN TAX COMPLIANCE ACT (FATCA) AND COMMON
REPORTING STANDARD (CRS)
As a result of the New Zealand Government agreeing to participate in the exchange of information with other jurisdictions under the
Foreign Tax Compliance Act (FATCA) and Common Reporting Standard (CRS), Financial Institutions are required to undertake due dili-
gence to determine the account holders’ jurisdiction of tax residence. If shareholders have not previously self-certified, they will receive
a Tax Residency Self-Certification form from Computershare depending on when they first purchased their securities. Please ensure
you complete and return this important document if you have not already done so. For more information please visit the IRD website:
ird.govt.nz/international-tax/exchange-of-information/crs/registration-and-reporting or contact Computershare if you are unsure of
whether you have completed your form.