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Anyone who thinks growth investing consists of simply loading up on a few mega-cap tech giants will be shocked by some of the companies in Monks’ portfolio.
A Swedish oat milk producer? An American specialist in surgically implanted contact lenses? A female-friendly dating app? These businesses don’t fit the digits-and-data growth stereotype, but they too hold big profit potential, according to Monks manager Spencer Adair.
“What we’re trying to achieve is a portfolio of the best global growth ideas from every corner of the world,” he says. “We want to identify them early, hold them for a long time and let compounding work its magic.”
The key, he says, is recognising that a few big digital platforms no longer hold a monopoly on hyper-growth. The range of double-digit growth companies has broadened, and Adair has cast his net wider to capture as many of them as possible.
This is reflected in the Trust’s commitment to upstart businesses. In 2015, Monks devoted about 26 per cent of its portfolio to what it called ‘rapid-growth’ companies – young enterprises with a chance to change the world and expand quickly. These holdings, now called ‘disruptors’, make up half its holdings.
Monks has broadened its view of what drives expansion. Like many growth portfolios, its holdings used to reflect two megatrends. One was the power of tech giants to disrupt traditional media and retailing. The other was the potential for surging consumption in emerging markets to propel favoured brands to new heights.
The problem is that these trends are maturing. They’re unlikely to repeat the eye-popping results of their earlier years. To find new sources of growth, Monks has veered away from internet titans towards “earlier-stage, less certain, much more disparate, much less correlated growth drivers”.
At the end of 2021, the disruptors in Monks’ portfolio spanned more than 30 of these growth drivers, or themes. Some are no surprise – the shift to electric cars, for instance. Others include attempts to combat dementia, improve education and speed the shift to a more plant-based diet.
Among the more than 60 stocks that Monks classifies as disruptors are STAAR Surgical, which seeks to replace laser eye surgery with implantable contact lenses, and Denali Therapeutics, which is working on Alzheimer’s drugs. Online education pioneer Chegg, and plant-based milk producer Oatly and Elon Musk’s SpaceX aerospace venture also appear, as does Bumble.com, a dating app.
“These are totally different industries and totally different companies with totally different challenges and business models,” Adair says. “What they have in common is a rapid growth rate that can be sustained for a long time.”
Adair contends that the emphasis on upstart businesses actually reduces risk. By spreading bets among more diverse companies, he can reduce the possibility of any single setback hitting overall results. “We’ve made that section of the portfolio substantially less risky despite having more invested in it,” he says.
The half of the portfolio invested outside the disruptors area provides additional resilience. The bulk is in what Monks now calls ‘compounders’ – established, dependable companies that can expand profits at 10 per cent a year for the next couple of decades. The rest are ‘capital allocators’: companies investing in out-of-favour areas, readying for a comeback when the business cycle swings back.
“You can’t be certain any one company will succeed,” Adair says. “We try to spread our growth drivers as widely as possible – among different industries, different technologies, different regions – so that in the long run we have multiple factors that can drive success.”
Adair’s strategy for Monks will be tested in the years and decades to come. In the meantime, any manager whose portfolio spans both oat milk and space rockets can speak with authority on how variety brings opportunity, and with it, more chances of success.
This article first appeared in the Spring 2022 issue of Trust, Baillie Gifford’s bi-annual investment trust magazine. To register for a free copy, delivered to your door or to your inbox please visit bailliegifford.com/trust.
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