Investors may wish to consider the recently overhauled Monks’ portfolio to provide core global equity exposure and to sit alongside the popular Scottish Mortgage investment trust, according to Innes Urquhart Winter Flood Securities analyst.
Baillie Gifford’s Scottish Mortgage is consistently one of Trustnet’s most searched for investment vehicles and at £3bn is the largest investment trust in the Association of Investment Companies with an impressive long term track record.
While its management and strategy are highly-rated, it has a high potential for volatility which Urquhart says could be dampened down with a larger allocation to another Baillie Gifford portfolio; Monks which has a more which has a more which has a more diversified portfolio and has recently undergone a wholesale change.
The recent major revamp of its management, strategy and portfolio mean Charles Plowden is portfolio manager, supported by FE Alpha Manager Spencer Adair and Malcolm MacColl as deputy portfolio managers.
They replace Gerald Smith and Tom Walsh, who were involved in the management of Monks since May 2006 and January 2013 respectively.
“Performance has been disappointing for quite some time. It is a good example of an investment trust board being an advantage of the structure,” Urquhart said.
Performance of trust versus sector and index over 10yrs
Source: FE Analytics
“They have a very well-regarded and experienced team that they are able to bring in. It is a positive development and you can see that in the share which since it has been announced has seen the discount narrow.”
“We like Scottish Mortgage very much but it [Monks] is better for core exposure. You would expect Scottish Mortgage to be quite volatile and there will be times when the manager’s view is at odds with the market while Monks is a more measure approach. You will be more comfortable having a larger holding in Monks than in Scottish Mortgage. It is a more core product and a more diversified portfolio.”
“We believe that Monks offers core global equity exposure and a more measured approach than that offered by Scottish Mortgage. Its size also means that it offers good liquidity and ongoing charges are relatively low at only 0.57 per cent.”
Scottish Mortgage has been headed by Baillie Gifford’s James Anderson since April 2000 making him one of the longest-running investment trust managers as well as being one of the most highly regarded.
The trust is a concentrated portfolio of companies focused on high growth, mostly in the US and China, with a large sector bet on technology. Disruption and economic rise of China are major themes Anderson plays and he has made some very choice early stage investments in the likes of Amazon and Alibaba which have since rocketed up in value.
Its largest holdings include the likes of Illumina, Baidu, Amazon, Facebook, Google and Tencent.
According to FE Analytics, since Anderson took over the trust it has returned 272.65 per cent, more than 200 percentage points greater than the IT Global sector average and almost three times the gain in the FTSE World index.
Performance of trust, sector and index since April 2000
Source: FE Analytics
However, the graph shows it has gone through considerable periods of volatility including a loss of almost half the portfolio’s value in Anderson’s in his first three years. Although this was followed by huge outperformance.
Urquhart says Monks new portfolio will continue to comprise around 100 holdings and approximately 80 per cent of it has already having been repositioned along the lines of Baillie Gifford's Global Alpha strategy.
“The fund will now be managed on the same lines as Baillie Gifford's Global Alpha strategy which has an £20bn assets under management. Charles Plowden has headed the Global Alpha team from its inception in May 2005, since when the two other managers have also been involved, and it is now his sole investment management responsibility.”
“Ultimately it is expected to have 80 ‐ 85 per cent commonality with the Global Alpha strategy. The Global Alpha Strategy has a strong performance record and a well-resourced investment team. Global Alpha has 14 stocks in common with Scottish Mortgage, accounting for 16 per cent of assets.”
“In our view, the intention to differentiate the investment trust from the equivalent open‐ended fund is positive, while the fact that access to the strategy is limited should be positive for Monks’ discount. Since the changes were announced the discount has narrowed from 14 per cent to 8 per cent, however, we see scope for this to narrow further.”
Plowden has run his open ended strategy, the £800m Baillie Gifford Global Alpha Growth since 2010, over which time it has returned 78.65 per cent and has beaten the MSCI World and average IA Global sector fund’s return.
Performance of fund, sector and index since 2010
Source: FE Analytics
Monks IT is currently geared at 3 per cent. It currently holds 34 per cent in the US, 11 per cent in the UK, 9 per cent in Japan while the rest of its equity exposure is spread across Europe and the emerging markets. The trust also has around 7 per cent in the bond market.
However, Monks’ current positioning may change over the short-term as the new managers put their own stamp on the portfolio.