Fund Research

Monks Investment Trust

13 December 2018 View latest version

Disclosure – Non-substantive Research

This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. With this commentary, Kepler Partners LLP does not intend to influence your investment firm's behaviour. 

Summary

Investment objective

Monks Investment Trust aims for long-term capital growth which takes priority over income. This is pursued through applying a patient approach to investment, principally from a differentiated, actively managed global equity portfolio containing a diversified range of growth stocks.

Group/Investment

Monks

Ticker

MNKS

Management Company

Baillie Gifford

Manager Name

Charles Plowden, Spencer Adair and Malcolm Maccoll

Association of Investment Companies (AIC) Sector

Global

12 Mo Yield

0.2%

Dividend Distribution Frequency

Semi annual

Latest Market Capitalisation

£1,682,719,604

Latest Net Gearing (Cum Fair)

7%

Latest Ongoing Charge Ex Perf Fee %

0.52

Shares Outstanding

 217,968,859

Discount % (Cum Fair)

2.2

Daily Closing Price

772p

The principal aim of Monks is to deliver long-term capital growth, through a differentiated, actively managed global equity portfolio. The managers utilise a rigorous bottom up investment process, seeking out growth stocks which they envisage will offer above average earnings growth. In order to achieve this a long-term view is taken, ensuring that the fundamental attributes of the company are given ample time to drive returns.

Diversification is a key attribute of the portfolio, and constituents are split into four growth categories based on the type of growth that the managers anticipate the company delivering. Investments are also split into three broad holding sizes allowing the managers to back their judgement in the stocks for which they have greater conviction, and to embrace the potential for asymmetry of returns through positions in higher risk/return stocks.

Although the portfolio has an extremely high active share (92%), since the new managers took over the portfolio in 2015, the performance has been largely in line with the peer group and the FTSE World. With that said, trust has been able to pull away from the benchmark (+10.9% outperformance) and the peer group (3.6%) over the full three and a half years. Over 2018 (as with most trusts) the company has generated strong returns for the majority of the year, before losing most of the gains at the latter end of the year. More specifically, over the 11-month period, trust has delivered 0.1% returns, marginally behind both the FTSE World (+0.6%) and the Morningstar IT Global peer group (+1.3%).

Currently Monks is trading at premium (2.7%), relative to the sector weighted average discount of -2.6%.

Kepler View

There are plenty of points that draw us to Monks Investment Trust. Firstly, the diversified, multi-cap approach to growth investing is unique within the Ballie Gifford stable. Alongside this, the strong network of Baillie Gifford and established, committed team means that their bottom up, best ideas approach is one that has all the appropriate resources necessary for identifying successful companies. Holding 128 companies in a relatively unconcentrated manner means that some of the “punch” relative to stablemate Scottish Mortgage is perhaps lost, but in the context of current market volatility this isn’t necessarily a bad thing.

This is a unique global portfolio, managed by a highly experienced and sought after management team, which in our view justifies a small premium to NAV.

Bull
Bear
Well diversified, growth orientated portfolio
Trading on a premium
Decent performance track record over the medium to long term
Struggled to outperform the benchmark and peer group, in particular over the short term
Low charges

Portfolio

The principal aim of Monks is to deliver long-term capital growth, through a differentiated, actively managed global equity portfolio. The managers undertake a rigorous bottom up investment process, identifying a wide range of growth stocks which they believe will offer above average earnings growth in the future. This involves taking a long-term perspective on their holdings, giving company fundamentals adequate time to drive returns. This long-term approach is also sought out in the management of the underlying companies, where they hope the management of market expectations does not precede the ultimate growth of the company.

Macro-economic factors do not phase the managers, nor does the index (FTSE world) in which the performance is benchmarked against. This agnostic approach means that the trust has a very high active share (92%), and the managers state that the returns can vary significantly in comparison to the peer group.

The portfolio, which includes stocks with a range of different growth profiles, will typically contain 100+ stocks. Investments are held in three broad holding sizes: the highest conviction holdings, which will typically be close to 2% each, average sized holdings, which will be around 1% each, and the incubator holdings, which represent 0.5% of the portfolio each. This allows the managers to back their judgement in the stocks for which they have greater conviction, and to embrace the asymmetry of returns through 'incubator' positions in higher risk/return stocks.

The managers also split their holdings through their differentiated approach to growth, focusing on the type of growth that they anticipate the company to deliver. As can be seen below, this helps offer balanced exposure across different markets and types of opportunity.

Exposure to growth stocks across markets

Source: Baillie Gifford

All holdings fall into one of four growth categories, outline below, which assists in the goal of diversifying growth drivers.

Stalwart

The stalwarts are comprised of companies which the managers believe have a durable franchise. This means that they will typically deliver robust returns and profitability, regardless of the macroeconomic conditions. The team anticipate that these types of company will deliver c.10% p.a. earnings growth, usually through their competitive advantage due to their dominant local scale, customer loyalty or strong brand.

An example of a stalwart company is Pernod Ricard, the global spirts business. Pernod has excessive market share within the fast-growing Asian markets, including China and India. Alongside this, the company has a clear focus on innovation, helping to drive increasing returns going forward.

Rapid

The rapid category includes companies that are in the early stages of their business life cycle and have vast growth opportunities. The team anticipates these companies to offer earnings growth between 15-25% p.a. and to attack existing profit pools or create new markets.

An example is Meituan Dianping, which the managers describe as China’s ‘everything app’. The company has a significant market position in the food delivery industry and delivers an astonishing 20 meals per second, equating to over 27 million orders a day. The market for the app is immense and continues to grow at an increasing pace. Monks has been an investor for the past three years, even whilst it was an unlisted company, showing increasing faith in the management team.

Cyclical

The cyclical category includes companies that are subject to macroeconomic and capital cycles, with significant structural growth prospects. As one might anticipate, the earnings will be more volatile then say the stalwart category, but the managers anticipate the subset to deliver between 10 and 15% p.a through a cycle. An example of this type of company is Orica, a provider of explosives and services to mining industry. The company sits within a consolidated market but has been leveraging the mining capital cycle. There are also considerable supply side barriers to entry, which protects the business from competition.

Latent

The final category is comprised of the latent companies. These companies have a specific catalyst that will drive above average earnings in the future. Currently, these companies are trading at historically low levels and are considered out of favour. This is typically due to delivering unspectacular returns in recent periods, but with the management having clear reasons to anticipate earnings growth accelerating beyond market expectations over time.

An example of a latent company is IIDA, the Japanese house builder. Currently, the sector in which IIDA resides is extremely out of favour and this has led IIDA to trade on a subdued valuation. However, the company operates in a particular niche within the market, typically selling their developments to couples who are purchasing their first house. Rather than being exposed to a decreasing Japanese population, the company is exposed to an increasing 20-30 population that stands to benefit from the reflationary environment.

Allocation to growth categories


Stalwart
Rapid
Cyclical
Latent
Total portfolio
FTSE World
Valuation (leading P/E over next 12 months) (X)
17.7
28.7
14.4
10.9
17.4
14
Forecast earnings growth (next 12 months) (%)
13.4
30.7
12.9
11.2
16
10.3
Historic earnings growth (5-year trailing p.a.) (%)
13.8
21.7
14
12.6
14.8
10.4
ROE (next 12 months) (%)
17.7
16.4
17.3
10.8
14.8
16.2
Debt/Equity (%)
53.4
-23.7
16.3
28
17
46.7

Source: Monks

In common with other Baillie Gifford-managed investment trusts, the managers are able to invest in private companies. However, the team’s approach is quite different to the likes of Scottish Mortgage and BG US Growth Trust. The team will only invest in companies that they expect will IPO in the short term. They also expect exposure to such companies to remain relatively small as a proportion of the overall portfolio. As such they expect unlisted holdings to be around 2% of NAV, and only have authority to have a maximum of 4% of NAV allocated privately.

In terms of outlook, the managers remain optimistic for the long-term opportunities of the companies within the portfolio. In particular, the managers retain great enthusiasm for the prospects of growth within Asia and hold what they believe to be many exciting technology and consumer companies across the region. With this said, the managers recognise that there are plenty of headwinds going into 2019, and having experienced a ten-year bull market, it appears that a correction may be on the horizon. Alongside this, the managers are worried about the possible impact of continued trade wars, particularly with their holdings within Asia. Nevertheless the managers will continue to focus on fundamentals and look for companies that have sustainable technology enabled business models. This will help to ensure that they are able to turn time and volatility to their advantage.

Gearing

The use of gearing is another differentiating factor for the trust, and looking across the AIC Global sector only half of the constituents choose to utilise it. At the time of writing the trust is 6% geared, and this has increased in recent times (one-year average: 5.7%). It is expected that gearing will be maintained in the range of -15% and 15%.

Gearing


Source: Morningstar

Returns

Although the portfolio has an extremely high active share (92%), since the new managers took over the portfolio, the performance has been largely in line with the peer group and the FTSE World. With that said, the managers have only had control of the portfolio since 2015 and the trust has begun to pull away from the benchmark (10.9% outperformance) and the peer group (3.6% outperformance) when one looks over the full three and a half years.

NAV Performance of new managers

Source: Morningstar

More recently, the markets have seen the return of volatility and a shift in market sentiment following steadily rising markets. As such the trust has underperformed the index and peers. The managers feel that this is far from unusual and believe investors should come to expect unpredictable swings in sentiment. It should also be noted that the managers readily accept that they are unable to time or forecast market moves, and instead place their focus on identifying and holding a portfolio of the best growth companies from around the world. They see retaining a long-term view that focuses on corporate fundamentals as the best way to produce superior returns.

One-year performance

Source: Morningstar

Nevertheless over 2018, as with most trusts, the company generated strong returns for most of the year before losing almost all the gains in the latter half of the year. As at the start of December, the trust has delivered 0.1% returns over an 11-month period, behind both the FTSE World (+0.6%) and the Morningstar IT peer group (+1.3%). As of the end of October, the managers had seen the platform business continue to perform strongly, including the likes of Amazon, Grubhub and Chegg. Additionally, the ‘long duration US companies’ have delivered decent returns, for example MasterCard. The main detractors have been the companies that offer exposure to the emerging markets, as these have encountered tremendous headwinds throughout 2018, principally from the trade war rhetoric between the US and China.

2018: Biggest contributors and detractors to end October 2018


Fund (avg weight) %
FTSE World (Avg weight) %
Contribution %
Amazon.com
4.3
1.4
1.1
Anthem
2.3
0.1
0.6
Abiomed
0.5
0
0.6
Chegg
0.6
0
0.4
Grubhub
1.0
0
0.4
Naspers
0.0
0.2
-0.7
Apple
0
2.2
-0.6
Alibaba
2.3
0
-0.5
Prudential
3.1
0.1
-0.5
Ryanair
1.3
0.0
-0.5

Source: Baillie Gifford

Dividend

Dividends are low on the list of priorities for the managers at Monks, and as stated in the investment objective, capital appreciation is the main goal as opposed to offering income. Currently the trust yields 0.2%, relative to the weighted sector average of 1.4.

Management

The trust saw a management change in March of 2015, and this has contributed to much of the change in sentiment towards the trust. Now at the helm of the portfolio are Charles Powden, Spencer Adair and Malcolm MacColl who are responsible for the “Global Alpha” team. As with other teams, all of the investment managers at Ballie Gifford share ideas across teams, but each team is ultimately responsible for the ideas in their portfolios.

Baillie Gifford was founded in 1908, and is now one of the UK’s largest independent active investment management firms. The company has £196.3bn funds under management (as of September 2018) and the team are able to draw on the vast resources of Baillie Gifford. Alongside this, the entire team has shares in the company, meaning that all interests are aligned.

Charles leads the team and was an investment manager in the Baillie Gifford UK equity team for over 20 years, notably developing specialist UK capabilities, and was latterly head of the team. Since its inception in 2005, Charles has headed up the Global Alpha Strategy which is current his sole portfolio management role. He became joint senior partner with overall responsibility for the investment departments in 2006. Spencer joined Baillie Gifford in 2000 and spent time working in the Fixed Income, Japanese, European and UK teams, before becoming an investment manager for the global alpha portfolio. He became a partner in 2013.

Malcolm joined Baillie Gifford in 1999 and has spent time in the UK Small Cap team and North American team. He has been a Global Alpha Investment Manager since the products inception and became a partner in 2011.

Discount

Currently Monks is trading at premium to NAV of 2.7%, relative to the sector weighted average discount of -2.6%. As can be seen below, the premium developed at the end of 2017 but has previously not been a regular feature of the trust. With the managers having taken over in 2015, it has taken a while for investors to build confidence in their approach. Now that the trust is trading on a premium (on average through 2018 the trust has traded at 2.7% above par), the board has been issuing shares from treasury.

Discount


Source: Morningstar

Charges

Currently the OCF for the trust is 0.52%. This is good value relative to the average within the Global sector of 0.75% and the weighted average of 0.6%. The annual management fee is 0.45% on the first £750 million of total assets, 0.33% on the next £1 billion of total assets and 0.30% on the remaining total assets. As of May, the management fee on the remaining total assets was reduced from 0.45%, to the current level of 0.3%.

ESG

Kepler Partners LLP considers this commentary to be a minor non-monetary benefit, as it:

1. Is intended to enhance the quality of service provided to you by us and is generic in nature;

2. Consists of short-term market commentary on the latest economic statistics and/or company results and/or information on upcoming releases or events;

3. Contains a brief summary of the author’s own opinion on such information;

4. Is not substantiated nor does it include any substantive analysis;

5. Reiterates the Kepler Partner LLP’s view on an existing recommendation or substantive research material; and/or

6. Is unlikely to impair your investment firm's compliance duty to act in the best interest of your client.

This report has been issued by Kepler Partners LLP for communication only to eligible counterparties and professional clients as defined by the Financial Conduct Authority.  Its contents may not be suitable for and are not to be communicated to or be relied on by retail clients. It is not an indication as to the suitability or appropriateness of investing in the security or securities discussed.

Past performance is not a reliable indicator of future results. The value of investments can fall as well as rise and you may get back less than you invested when you decide to sell your investments. It is strongly recommended that Independent financial advice should be taken before entering into any financial transaction.

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Fund History: Monks Investment Trust

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