Monks 27 March 2023

The managers of Monks Investment Trust (LON:MNKS) aim to deliver long-term capital growth through a well-diversified, actively-managed, global equity portfolio. Rigorous bottom-up analysis is at the heart of the investment process, with the managers, Spencer Adair and Malcolm MacColl, looking to identify growth companies with above-average earnings’ growth. The team takes a long-term view on their holdings, believing that patience, as well as their resolute focus on fundamentals, will give them an edge in delivering strong long-term returns.

Diversification is a key characteristic of the trust and the managers split holdings into three categories, depending on the anticipated growth. Holdings are also divided into three broad holding sizes, which allow the managers to embrace the potential for asymmetry of returns through positions in stocks with higher risk/return characteristics. In the team’s view, in the coming decade, growth will be much more evenly spread across different companies, which will suit their style of investing in a broadly-diversified Portfolio.

Since the new managers took over the portfolio in March 2015, MNKS has delivered good outperformance, which was magnified in 2020 and 2021. However, during 2022, the trust has underperformed, such that over the tenure of the managers, MNKS NAV performance has been in line with world equities (see Performance section). This has clearly been with higher volatility and beta.

As a result, in the significant shift of market sentiment towards growth companies, and trusts exposed to them, MNKS shares experienced a savage derating during 2022, from which the shares have not yet recovered (see Discount section). At the time of writing, the shares trade at a discount to NAV of 12%.

Monks has plenty of characteristics that continue to make it an attractive vehicle for investors looking for exposure to growth companies around the world. In particular, the managers’ focus on diversification, together with their long-term view on investment, marks it out. This is a pure stock-picking trust. So, in our view, it is encouraging that, as we discuss in the Portfolio section, the team undertook their portfolio ‘weeding’ exercise so rapidly in March 2022. This was when it became clear that the global economic and political backdrop had changed so rapidly.

Certainly, 2022 has likely been a humbling experience. Since the managers took over the running of the trust in 2015, MNKS is now only in line with world equities and has experienced a higher volatility trajectory to get there. That said, it has performed better than its peer group. The managers seem optimistic that their companies, which are showing earnings’ growth increasing faster than that of the market, are less cyclically-exposed, have stronger balance sheets and should deliver over the long term.

Monks has seen its discount widen dramatically. The trust has low levels of gearing, a liquid underlying portfolio and a team who are highly experienced at taking the long view. The board continues to buy shares back, which may have stabilised the discount to some extent. At the time of writing, the shares trade at a discount to NAV of 12%, which may prove an attractive entry point for long-term investors, especially if inflation and interest rate worries subside.