– Andrew Macken & Chris Demasi

 

 

After a very strong December quarter last year, 2024 has commenced with another solid quarter to the end of March. This continued strength has probably surprised a few people. But remember, history shows that in any given quarter, there is basically a 1/3 chance that markets will fall – and a 2/3 chance they will rise. So best not get too caught up in quarter-to-quarter movements: some will be up, some will be down – but over the long term, history shows that equities will do very well.

We continue to observe dispersion in performance across different sectors – as well as between individual companies within the same sector. We think this situation is the inevitable outcome of a few major structural changes – in fields like technology, finance, and geopolitics – affecting businesses in ways that are unprecedented.

Complex change of this nature can continue to present great investment opportunities going forward. And ultimately, our approach is to try to identify and own the high probability winners in some of these structural transformations. And we really try to focus on those which are competitively protected. And of course, those which we think remain underappreciated by the market. If we do this, we think superior compounding will result over the long term.

In terms of the quarterly earnings that were disclosed by Montaka’s investee companies over recent weeks, we thought they were generally strong. We continue to remain highly optimistic for substantial growth in earnings power for these businesses over time. And, importantly, we believe the extent of the growth that is coming for Montaka’s businesses remains underappreciated by the market today.

Economic Environment

It is clear that the US economy – the world’s largest – remains quite strong. We see this in the aggregated data, where government investment is strong and consumer expenditures remain resilient. And we see it almost across the board in company revenues and earnings. Of course, something as complex as the US economy is not uniform. There are pockets of weakness, particularly in the consumption by lower-income households. Here, we are seeing credit stresses build, weakness in discretionary retail, and a substantial uptick in retail ‘shrink’ (aka shoplifting).

On the trajectory of US inflation, we continue to see supportive indicators of deceleration. Blackstone, the world’s largest alternative asset manager, disclosed that they are seeing inflation already running below the Fed’s 2% target, based on their more than 230 portfolio companies and 12,000 real estate assets. Walmart too disclosed in recent weeks that their like-for-like US inflation was about 1% in the December quarter, decelerating from nearly 3% the prior quarter.

The Fed held its policy interest rate steady in March, though disclosed an anticipation of three rate cuts before the end of the year combined with a reduction in the rate of its balance sheet contraction. Lower interest rates are, of course, beneficial for equity returns in general.

Portfolio Changes

We added two small tactical positions to Montaka’s portfolio during the quarter. These were uncovered as a result of our quarterly analysis of a much broader range of businesses and industries than those represented in Montaka’s portfolio. We undertake this extra research to gain important learnings into different pockets of the economy. And sometimes it also leads to new investment opportunities, like it did this time.

We re-established a small tactical position in AI chip designer, AMD, after learnings that the ‘AI wave’ that has commenced is already much larger than was previously anticipated – even by industry insiders. What’s interesting about AMD is that their AI chip has only just been released in the last few weeks – meaning that any backward-looking analysis of company earnings includes nothing of the most important demand source for the company’s future: AI chips. In October, the company forecast their AI chip revenue could be US$2 billion in 2024. Just 92 days later, this forecast had to be revised up to US$3.5 billion due to overwhelming customer demand. We see a high probability that future earnings forecasts for AMD will need to be revised up substantially further over time.

We also established a small tactical position in Kyndryl Holdings the world’s largest outsourced manager of mission-critical information systems for enterprise customers. We provide some detail on this investment in the Quarterly Letter, so I won’t go into it here. But this one is really an opportunistic situation where we see a very high probability that the company’s future earnings power will be a lot higher than it was in the past – and that this too remains underappreciated today.

Beyond these two new tactical positions, the only other small portfolio composition change during the quarter was the exit of our very small residual position in Apple. We had substantially reduced the size of Montaka’s investment in Apple in late 2020 on valuation grounds and this has not improved today, in our assessment, relative to other opportunities we see.

We ended the March quarter with 81% of Montaka’s portfolio invested in ‘compounders’, 11% in ‘outliers’, and 6% in tactical opportunities. The exposure breakdowns of each of these are shown in the chart on the screen. And you can also find a copy of this chart in the Quarterly Letter for your reference.

By way of reminder, the bulk of Montaka’s portfolio typically doesn’t move around too often. We only added one new compounder positions in all of 2023, for example. This was the addition of LVMH last October during its temporary stock price weakness. For those interested in going deeper on our investment thesis on this extraordinary business, I’d encourage you to review Lachlan’s case study, provided in the Quarterly Letter.

Outlook

Looking out to the remainder of 2024 and beyond, we remain generally optimistic for fundamental reasons. The businesses owned by Montaka continue to make progress on meaningful new growth opportunities/adjacencies and we believe these remain substantially undervalued. At the same time, the US economy remains surprisingly strong, inflation appears to be under control, and interest rates will likely start falling. These are attractive conditions for investment.

Against this general optimism for the prospects of Montaka’s portfolio, we are monitoring the US political situation in the lead up to the general election in November. The outcome will have broad implications for fiscal policies, regulatory policies, trade policies, rule-of-law issues, and geopolitics (with second-order implications for many other countries and alliances around the world). The outcome is also highly unpredictable at this stage, so we continue to monitor and consider potential scenarios.

So I’ll leave it there for now. On behalf of the entire Montaka team, we thank you for your ongoing support, trust and patience. And we welcome your feedback – we’d love to hear from you.

 

 

 

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Podcast: Join the Montaka Global Investments team on Spotify as they chat about the market dynamics that shape their investing decisions in Spotlight Series Podcast. Follow along as we share real-time examples and investing tips that govern our stockpicks. Click below to listen. Alternatively, click on this link: https://podcasters.spotify.com/pod/show/montaka

 

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