Ensuring that a portfolio holds a diverse mix of stocks benefitted from different growth drivers is key to investment success, according to the managers of the top-performing Monks Investment Trust.
After taking over management of the Monks Investment Trust in March 2015, Baillie Gifford managers Charles Plowden, Spencer Adair and Malcolm MacColl have set about restructuring the closed-end fund to reflect the team’s existing Global Alpha Growth strategy.
The Baillie Gifford Global Alpha Growth fund has delivered a 48.91 per cent return over the past three years, compared with a 43.22 per cent gain for the benchmark MSCI World index.
“Growth investing is not the only way to make money, but in our view it is the very best,” said portfolio manager Plowden.
Since taking over the trust, the team has continued to pare back residual holdings, which now account for just 1.3 per cent of the investment trust portfolio.
The team focuses on earnings to identify the companies with the potential to display strong growth.
“Share price is tied to earnings growth,” Plowden explained, adding that companies with the fastest growing earnings forecast outperform on average by 9 per cent, while those with the slowest earnings growth underperform by 8 per cent.
“Successful equities can make many multiples of investment,” the manager said.
“We have made over 40 times our money on Amazon. Successful investment is not about avoiding the losers but doing everything we can to keep the winners in the portfolio.”
Gearing in the trust remains at 6.5 per cent having deployed cash in September 2015 and in January 2016, but the management has the ability to increase this further towards its long-term target of 10 per cent.
Since taking over the trust’s discount has narrowed further to around 8 per cent from 14 per cent and management have been keen to put greater emphasis on marketing the fund to retail investors.
Monks Investment Trust discount/premium to NAV
Source: FE Analytics
Factoring in earnings growth expectations to its growth strategy, the team have identified four types of companies: growth stalwarts, rapid growth, cyclical growth and latent growth.
Plowden says the portfolio currently includes around 110 stocks and is well diversified, with a third dedicated to rapid growth segment, including a number of online companies such as Amazon, Naspers, Google holding company Alphabet and Alibaba.
Growth stalwarts make up 21 per cent of the Monks portfolio and include companies such as insurance group Prudential and software firm SAP.
Elsewhere, cyclical growth holdings include Royal Caribbean Cruises, microchip manufacturer TSMC and First Republic Bank. Latent growth stocks make up a 15 per cent segment and include building materials firm CRH and MS&AD Insurance.
The realignment of the trust to the team’s global growth approach has also paid off; since the managers took over, Monks Investment Trust has the IT Global sector’s second best performer with a 29.18 per cent total return over one year, compared with a gain of 18.26 per cent for the sector average.
Performance of Monks Investment Trust vs benchmark and sector over 3yrs
Source: FE Analytics
Key to the portfolio construction has been the team’s long-term perceived drivers of long-term growth including technological innovation, US domestic growth and Asian consumption.
Deputy portfolio manager MacColl says the US economy continues to demonstrate strength, highlighting the natural optimism and the benefits from the shale oil boom more recently.
Among the team’s top picks is Kirby, the largest inland barge operator in the US and an example of emerging quality growth – one of its key themes for 2016.
MacColl says the US firm has benefited from the shale oil boom and increased infrastructure spending to support transportation, particularly in the chemicals market.
The team also favours companies at the vanguard of technological innovation, representing around 40 per cent of the portfolio, particularly online platforms such as the trust’s largest holding Amazon. The third long-term driver of growth, Asian consumption, also continues to play out says MacColl.
Another firm backed by the Baillie Gifford team and playing on both of its longer-term key drivers is Chinese online travel agency Ctrip, which recently acquired flight comparison site Skyscanner.
According to the team, consolidation in the industry has transformed the landscape, while Ctrip’s position in a large and
“We think [there will be] a big step up in the margin profile,” added MacColl. “Margins in the online travel markets are only a fraction of those in the West.”