Finding the Few Winners: Munro’s Strategy for Long-Term Growth

This month, we interviewed Nick Griffin, Chief Investment Officer and founding partner of Munro Partners. He and his investment team are based in Australia and focus on U.S. and global equity.

Alfred: Nick, thanks for doing this. Can you tell our readers how you got into the investing industry and how long have you been doing it?

Nick: I’ve been in investment management for over 20 years now. It all started when I missed out on a grad role with one of the ‘big four’ accounting firms here in Australia, which pushed me to take a job with the Commonwealth Bank’s investment team. That led to a turning point, and I went on a backpacking trip that eventually shaped the direction of my whole career.

I ended up in London as an oil and gas analyst, then got sent to Edinburgh, which some would say is the home of U.K. funds management. That’s where I really got immersed in long-term investing, working alongside some of the oldest and most respected funds management businesses in Europe.

After a few years, I came back to Australia and managed a global fund at a local asset manager. Then, in 2016, I co-founded Munro Partners with a vision to build a distinctive, global growth-focused funds management partnership, inspired by those great Scottish fund managers.

Alfred: Can you describe your investment philosophy and process?

Nick: At Munro, we see the equity market as a landscape of few winners and many losers, and our focus is on uncovering those exceptional few. Our approach is specifically designed to identify these opportunities, and our competitive edge lies in our ability to consistently find the winners over the long term.

Our overarching view is that, to identify companies with consistent earnings growth, we need to focus on those companies backed by a structural change happening in the world around us, rather than the companies that grow purely due to cyclical fluctuations in the economy. When a company’s earnings are backed by a structural change, in our experience, this makes the earnings growth of that company more sustainable than the market thinks. This approach ensures a more repeatable path to sustained success in finding great growth companies.

Given we have the view that the equity market is full of lots of losers and very few winners, we manage concentrated portfolios of businesses that we think exhibit the characteristics to potentially be one of those next few winners.

Importantly, we actively manage our portfolios, and this means running a disciplined risk management process where every stock that falls by a certain threshold is reviewed by the team, with the intent to work out whether the facts have changed for the business or not.

Our philosophy and process can be summarised in three core principles:

1. Structural change is the key
2. Concentrated portfolios
3. Disciplined risk management

Alfred: In your opinion, what have been the major changes in the industry, say compared to 20 years ago?

Nick: The biggest shift in my 20-year investment career has been digitisation, or the digital revolution.

A simple way to think about it is that, 20 years ago, you'd get on a train and everyone was reading a newspaper. Now? Everyone’s glued to their phone. That shift created massive digital winners, and the key to understanding it was this idea of network effects, which seems obvious now, but it wasn’t back then.

When Google first IPO’d, there were a dozen other search engines, and it wasn’t obvious that Google would be the clear winner at the time. But, because it had no big visible ads and a better algorithm than its competitors, everyone started using it. More users meant better data, which meant better results, and suddenly Google had a 97% market share in search. That kind of growth won’t happen with a bank or a supermarket or many other traditional industries. So over time, these digital businesses scaled in ways no one predicted, and for a long time, people just couldn’t get their heads around how big they could get. And so, over the last 20 years, this digital revolution created these great digital winners. Now, fast forward to today, we think we are on the cusp of another big digital revolution which is artificial intelligence, which we anticipate will offer lots of investment opportunities over the next 20 years.

Alfred: There has been a lot of talk about AI, and most people are familiar with ChatGPT. What else is being developed?

Nick: We think that we haven’t seen the real ‘killer’ AI apps yet. Apps like ChatGPT and Perplexity are just the beginning, and we believe there’s a lot more coming, which is really exciting from both a productivity and investment point of view.

However, right now, we see the big winners as the hyperscalers that are building data centres for AI. That’s Amazon, Google, Microsoft, and now Oracle, since they host all the AI infrastructure. And underneath that, there's a myriad of private companies that are coming down the pipe that the hyperscalers, by providing the compute infrastructure, are enabling.

Power is another major theme. AI needs huge amounts of energy for it to work, so we see opportunities for companies in nuclear energy, power equipment suppliers, data centre builders, and even companies making liquid cooling systems to all benefit over time.

Alfred: How do you invest in this trend? Is the U.S. dominating?

Nick: Right now, most of the investable opportunities are in the U.S. If we think about the AI landscape, the hyperscalers investing in AI infrastructure are all U.S.-based companies, outside of the Chinese corporates, and these hyperscalers are either buying Nvidia chips as their principal compute supplier or partnering with companies such as Broadcom to design their own chips. There is an important company based in Taiwan called Taiwan Semiconductor Manufacturing Company, or TSMC, that plays a critical role in AI. TSMC is the company that physically builds the chips, and they are the leading player to do so, making them an important player in the AI opportunity.

Alfred: Is it too late to invest, given that we have already seen some big jumps in the likes of Nvidia and the Mag7?

Nick: We believe that we’re now firmly in the AI era, the next big technology shift of our lifetime, and we think it’s going to be even bigger than the mobile era. The capex, especially by the American tech giants, suggests that this cycle has a long way to go. We think that the money they’re investing indicates this isn’t a short-term boom but a multi-decade build-out.

Similar to the rise of the iPhone and the app ecosystem, AI apps are coming fast. We think there will be an AI app for everything, across every industry, and they need a powerful ecosystem to run on, which we believe can only be powered by Nvidia.

Nvidia is the hardware and software platform for AI. They make the chips and the software (CUDA), making it the core platform for AI. The more AI we use—and we think it's going to be a lot—the more Nvidia benefits. The vast majority of AI developers use CUDA, Nvidia’s software. If they don’t use CUDA, there is a risk they may lose competitive advantage, so most stick with Nvidia. That’s why they’ve got a huge market share, and it’s hard for us to see that dropping anytime soon.

From our recent visit to the U.S., it’s clear the big tech companies are just getting started. They’re building massive AI data centres to handle the explosive demand in computing. Every time you ask AI a question, it uses tokens to generate a response, and the number of tokens being used is exploding. There aren’t enough GPUs to keep up with the demand. And the more people lean into it, the more chips we're going to need. This is just an exponential explosion in computing requirements, which drives what’s known as the intelligence economy.

Alfred: Do you think AI will replace humans? How soon, and what jobs will be lost?

Nick: From our point of view, you should think about AI as a copilot or an assistant. It's not going to do your job for you; it's just going to make your job easier. And it's applicable across pretty much every industry in the world. Did you know that, because of digitisation, 60% of the jobs that exist in the world today didn't exist in 1940? And if you think, in 60 years’ time, 60% of the jobs that the future world will have don’t exist today.

Using AI as an assistant is productivity at work. Productivity equals high GDP per capita and high GDP per capita spent, so we ultimately think it’s a good thing.

Alfred: Outside of AI, what sectors interest you?

Nick: Climate change, we think, is a big opportunity for growth investment as we look out over the next several decades. We think there are big tailwinds coming together right now in an attempt to decarbonize the planet. Governments are focused on reducing emissions, investors are directing capital towards greener initiatives, and corporates are now setting science-based emissions targets. Our focus is on the companies that enable the world to decarbonize and can therefore grow their earnings because those earnings are backed by a big structural change. Because this is such a big area, we break it down into energy efficiency companies, clean transports, clean energy companies, and circular economy companies.

Security is another big area of interest for us. There’s been a clear shift toward more spending on defence and homeland security. Events like the Russia-Ukraine war and the Israel-Iran conflict have highlighted how important national defence is. Off the back of events such as these, President Trump has been pushing for NATO countries to ramp up their defence budgets. More recently, at the NATO summit, many countries committed to this spending level ramping up to 5% of GDP over time. On top of that, the worsening drug crisis in the U.S. is putting more pressure on governments to invest heavily in public safety.

We like Axon Enterprise in this space, who make tasers and body cameras for law enforcement. What’s interesting about body cameras is that they’ve shifted from just hardware to software by utilising AI. Their most recent software offering is called DraftOne, which analyzes video footage captured by the Axon body camera to draft police reports, reducing a mundane task that consumes hours of an officer’s day. The Fort Collins Police Department has claimed a 67% decrease in time spent by officers writing incident reports since deploying the technology. Just three months after the launch, DraftOne had already amassed over $100m of revenue pipeline, the fastest product in Axon’s history to do so.

Alfred: I have asked a lot of questions today and thanks very much for taking your time to share your thoughts.

Nick: Thanks very much for having me.