Ask a Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In part 2 of this edition, Sam Granger, Founder of Equanimity Partners, reveals why these 2 leading international shares recently made it into the Equanimity High Conviction Fund.
Motley Fool: In part 1 of our interview, you mentioned that the Australian market is looking quite expensive for high-quality businesses, and you’re finding better risk/reward profiles overseas. Which international shares look to deliver strong performance?
Sam Granger: New high conviction positions initiated in the fund over the past year include German listed meal kit business HelloFresh SE (ETR: HFG) and subscription streaming service Netflix Inc (NASDAQ: NFLX).
Both businesses are led by exceptional founders, have long runways for growth, and are inexpensive relative to our estimate of their future earnings power.
MF: What else stood out for you in regards to HelloFresh?
SG: HelloFresh has carved out an extremely strong market position in a highly profitable niche of the massive global grocery market. HelloFresh entered the fund about 6 months ago.
What attracted me was their market dominance. They’ve got really strong market share and are actually taking further share from competitors while achieving industry-leading margins. In terms of outlook, the grocery market is huge. And HelloFresh still has a very low penetration of households, and they’re only taking a very small percentage of the grocery budget of those households. So they can grow users and they can grow revenues per user in that massive market.
MF: And what else about Netflix looks particularly strong?
SG: Netflix provides a remarkable customer value proposition with access to $15 billion worth of content spend for a $12 monthly subscription. We believe this provides them with substantial scope to grow subscribers and revenue per subscriber over the next 5 to 10 years. Their cost base is largely the fixed cost of content and therefore we expect high incremental margins.
Netflix has been a small position in the fund for a couple of years. We’ve long admired the business model and founder CEO Reed Hastings. After some share price weakness surrounding a period of softer subscriber additions, we took the opportunity to substantially scale up our position in June this year.
MF: Which sectors are you likely to avoid in 2022?
SG: We avoid sectors where we don’t think we have a good handle on the key long-term value drivers of the businesses. This includes resources, oil and gas, and biotechnology. We have a very strong bias towards simple businesses, ideally offering products we use in our everyday lives, because we believe this limits the unknown unknowns in investing.
We’re also avoiding putting new capital to work in sectors where valuations have gotten ahead of business fundamentals. As an example, we’ve historically had quite large and profitable positions in enterprise software but are increasingly finding these valuations stretched.
MF: If the market closed tomorrow for 5 years, which stock would you want to hold?
SG: I would say Microsoft Corporation (NASDAQ: MSFT). It’s a business we’ve owned for 2 years and remains the largest position in our fund. When we purchased Microsoft, it was trading at market multiples on near-term forward earnings for a demonstrably better than market business.
Microsoft stands out for the quality of its revenue streams and the diversity of its earnings drivers. It has 2 enormous growth businesses in its Office productivity software and Azure cloud computing service. Both of these benefit from substantial customer lock-in and economies of scale.
On top of that, it owns a cash cow in Windows and a collection of very high-quality, fast-growing smaller businesses including LinkedIn and various gaming assets.
MF: What are your thoughts on Bitcoin (CRYPTO: BTC) and the rise of cryptos in mainstream financial circles?
SG: We have no investments in Bitcoin or crypto more broadly. There is clearly a huge amount of speculative activity in the space and as students of financial history, it’s hard not to see the parallels here with some of the great manias of the past.
That being said, we do think that it’s important to stay open-minded on new and potentially disruptive technology, particularly from a risk perspective. We are slowly learning about the space and watching to see if real-world applications for crypto emerge so that we can assess the impact this might have on the business models of various listed businesses.
If you missed part 1 of our interview with Sam Granger, you can find that here.
(For more information about the Equanimity High Conviction Fund go here.)