Munro only runs absolute return funds. Its portfolio managers follow an index-agnostic strategy that aims for meaningful absolute returns through the investment cycle, with a focus on preserving capital. Munro’s flexible investment mandate allows its managers to dynamically manage market and currency exposure to protect clients’ capital and enhance long-term returns.
At Munro, investing is a process of covering the globe and continuously meeting with management teams. With an ‘on the ground presence,’ Munro’s founding partners built a strong 12-year performance track record on the back of averaging 400 company meetings a year, assembling a focused 1,000-stock universe, and owning a network of over 3,000 key contacts.
The portfolio managers at Munro are growth investors. Of the 20,000 listed corporations in the world, many profess to be growing, but only a small portion actually grow independently of the broader economic cycle. This is where the Munro investment process focuses. Its research process has been designed and honed over 12 years to successfully sift through the world’s listed corporations to find sustainable growth trends that are underappreciated and mispriced by the market.
Munro runs a comprehensive and disciplined investment process that seeks earnings upside/downside visibility, valuation multiple upside/downside and catalyst visibility. In addition, the portfolios are managed within clear risk parameters and a disciplined drawdown management framework.
The investment process generates a high-hit rate of performing ideas and allows them to be appropriately sized and monetized over long periods. Concentration on stock and sector is important, while risk management and rigorously eliminating underperforming positions is crucial in generating strong absolute returns and outperformance over multiple market cycles.
Munro identifies sustainable growth trends that are underappreciated, misunderstood and mispriced by the market. With in-depth industry expertise, Munro leverages its global access and prides itself in recognizing key “areas of interest” (AoIs), as well as second and third derivative trends often over looked by the markets. Its proprietary research process quickly identifies key winners and losers, and quantifies upside and downside, while giving time to price target.
The philosophy is based on three overriding principals:
1. Earnings growth drives stock prices
Companies that consistently earn more than the year before are generally rewarded with higher stock prices over time.
2. Sustained earnings growth is worth more than cyclical earnings growth
Consistent growth, independent of cyclical factors and above the peer group, is generally valued at higher multiples than otherwise.
3. The market will often misprice growth and its sustainability
Consensus earnings estimates often underestimate growth, and pegging to market multiples will often underestimate the sustainability and cash generation capacity of that growth. This allows for opportunities to invest in stocks well below their intrinsic value.
Idea generation process
Ideas are generated from a combination of top-down thematic and bottom-up views. The team identifies medium to long-term structural themes and the resulting investment trends, and distinguishes between trends that are well understood and priced in by the market, as well as those that are underappreciated and overlooked (AoIs).
The research process is a vital ingredient. Constant interaction with corporate management, independent consultants, industry networks, sell-side research and the private equity community all contribute to identifying new AoIs and new investment opportunities.
Munro maintains a generalist research approach across all sectors and markets, with the flexibility to focus resources on areas of greatest opportunity. Analysts act as stock and AoI ‘champions’ when contributing to portfolio construction.
The team has amassed a deep internal stock knowledge database of over 800 stocks, and actively mines this universe for fundamentally driven investment opportunities.
Qualitative tests: Munro looks for five key company characteristics to gauge whether a listed company is likely to benefit or lose from a particular growth trend and whether that will be sustained over an extended period of time.
|GROWTH||Exhibit faster earnings; EBITDA or revenue growth versus peers and growing total addressable market (TAM)|
|ECONOMIC LEVERAGE||Exhibit pricing power or economic leverage to improve margins|
|SUSTAINABILITY||Exhibit ability to sustain growth due to scale, position, intellectual property and/or locational advantages|
|CONTROL||Exhibit strong management ownership and incentives|
|CUSTOMER PERCEPTION||Exhibit strong customer reviews and rapid adoption|
Quantitative tests: Munro uses three valuation-based tests to quantify earnings upside/downside, multiple upside/downside and time-based catalysts. Ideas graduate from the universe to the portfolio based on the relative upside generated from these tests.
|EARNINGS UPSIDE/DOWNSIDE||Build in-house valuation model, and bull and bear-case scenarios|
|MULTIPLE UPSIDE/DOWNSIDE||Corporate characteristics score to determine appropriate earnings multiple and price target|
|CATALYSTS||Map catalyst calendar, and timing and magnitude of re-ratings|
Qualitative and quantitative tests combine to build a high-conviction, index, region and sector-agnostic portfolio where capital preservation is driven by a top-down view of market risks and hedging possibilities.
|AGGREGATE PORTFOLIO RISK|
Risk management and capital preservation are integral parts of Munro’s investment philosophy and portfolio management.