Monks Investment Trust underwent an overhaul in March this year, following the departure of Gerald Smith after nine years at the helm.
The £900m trust delivered what can only be described as a lacklustre performance over this time and was underperforming its average peer in the IT Global sector on three and five-year views when Smith stepped down.
Performance of trust vs sector and benchmark over 5yrs
Source: FE Analytics
However, when it was announced that Baillie Gifford’s Charles Plowden was set to take over the trust with his Global Alpha team, its hefty discount narrowed from 14 per cent to 9 per cent.
This sentiment seems to have slipped a few months down the line though, as the one FE Crown-rated trust it is now trading on a 12 per cent discount.
However, Plowden suggests the discount is pricing the trust as if he were a new fund manager but argues that it is now too high considering his long track record on Baillie Gifford’s institutional global alpha funds, which amount to a NAV of more than £20bn.
The manager also says that the moves he has made already within the portfolio are set to lead to long-term outperformance on a five-year outlook.
“We have a shorthand before a stock gets into the portfolio, and the shorthand is: ‘Can we double our money in the stock over the next five years?’ If we can’t come up with any scenario where we can double your money, we’re not interested,” the manager said.
As with many of Baillie Gifford’s open-ended and closed-ended vehicles, the trust’s stocks are divided into four growth buckets. These are stalwart, rapid, cyclical and latent.
The stalwart stocks, which are seen to be durable and dependent, account for 23.3 per cent of Monks’ portfolio, while the rapid growth and cyclical stocks have 30.7 and 31.9 per cent weightings respectively.
“The latent growth is the smallest bucket and we expect it to continue to be the smallest bucket,” Plowden said.
“A successful latent growth business will become a growth business and will be re-allocated. So the likes of eBay, Prudential, Royal Caribbean Cruises, all started as latent growth – they were priced never to grow again when we bought them [as part of the global alpha funds], but in each case we felt there was a growth story trying to get out.”
Two holdings in the latent bucket account for more than 2 per cent of the portfolio each – these are MS & AD Insurance and building materials company CRH. Smaller weightings include Fairfax Financial, Bank of Ireland and Samsung.
The manager says that Samsung is a good example of a stock that sits in a heavily-consolidated sector, which he says is a positive trait when choosing stocks.
There were around 12 major semi-conductor companies 10 years ago, he notes, and this number has since been reduced to just three industry leaders.
“Consolidated industries typically behave more rationally as there’s less competition and higher prices. They add new capacity incrementally rather than all at the same time. That’s how you get an industry that goes from being very bad to very good, when the number of players declines and there’s consolidation,” he explained.
Not only is the trust separated into growth buckets, stocks are also categorised via balance sheet analysis, risk and themes, although Plowden stresses that he is very much a bottom-up stock-picker.
Rather than referring to regional weightings based on where the company is listed, the manager and his team focus on where the main drivers of the company are based.
Because of this, the trust is divided into five thematic sections, and the largest of these is the ‘economically agnostic’ category, which makes up 37 per cent of the portfolio.
“This is not a play on geography or economics and it’s not a macro play, this is where we put out technology, our internet and our consumer staples, the ones that aren’t sensitive to the economy,” Plowden explained.
“We can invest in those without worrying or taking a view on whether the US economy is growing or shrinking or whether Japan is doing quantitative easing or not. This is because the future of those companies is entirely dependent on the success of their strategy and their products. It’s a secular shift.”
This section of the portfolio is further divided into sub-sectors – innovation, internet winners, stalwarts and idiosyncratic. Individual stocks that fall under these categories include the likes of Amazon, Coca Cola, Facebook and Tesla Motors.
The other areas of the portfolio are where the manager and his team are making conscious decisions in terms of region. The US re-emergence category, for example, makes up 24.1 per cent of the portfolio.
“We’ve had a positive view on America for about three years, we’ve tended to increase our exposure. We’ve actually not increased our exposure as much as we would have liked though, because while we were optimistic about America we couldn’t find the companies that met our criteria,” he said.
The other areas of the market that Plowden is spotting opportunities in are Europe and Japan, which make up a combined 15.4 per cent of the portfolio and are industrial plays, consumer plays, interest rate normalisation plays and Abenomics plays.
He believes that the outlook for these developed markets is becoming increasingly positive as the financial crisis of 2008 moves further into the distance and companies continue to recover.
“A lot of people are frustrated about the lack of momentum but, if you look at somewhere like Europe, the banks are rebuilding their capital. Everything is ready for a resumption of growth, I don’t know what the trigger will be but there are no structural obstacles and of course Europe has a weaker euro as well. We’re seeing Ireland, Spain, some of the fringe areas, beginning to get better quite quickly,” the manager continued.
“I’m not saying we’re mad keen on Europe but we’re finding interesting investments where things are getting better, and we have put a bit more money to work in Europe and in Japan as well, where we tend to take a positive view on the reforms.”
Plowden holds a similar weighting to Japan and Europe as he does Asia and Latin America, although he says a vast majority of this is now in Asian stocks.
This, he says, ties in with his belief that falling markets present an opportunity to choose high-quality individual stocks that have been muddied by short-term market noise.
It’s common knowledge that emerging markets have struggled in recent years and have been further wounded by the Chinese growth slowdown that led to August’s mass market sell-off.
Performance of indices since ’08 financial crisis
Source: FE Analytics
However, Plowden says that his weighting in the region is a play on consumption in Asia and its improving demographics as opposed to imports and exports or technology.
“Emerging markets have been the weakest of markets this year and we have been looking for opportunities to increase our exposure. We’re not running from emerging markets because they’re slowing, we are adding to emerging markets because we’re able to find one or two more long-term growth opportunities at reduced valuations. We’ll keep chipping away and buying more if the bargains keep appearing,” he said.
Over Plowden’s tenure, Monks Investment Trust has lost 5.37 per cent, underperforming its sector average and its benchmark by 4.23 and 0.4 percentage points respectively.
Performance of trust vs sector and benchmark over management tenure
Source: FE Analytics
The manager attributes this to the fact that former manager Smith held its £40m of borrowing in cash and Plowden is yet to move the money into shares.
Monks Investment Trust is geared 7 per cent, yields 1 per cent and has ongoing charges of 0.58 per cent.
