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Investment trusts: I'm hanging on to Monks after makeover
James Carthew is holding on to his stake in the poorly-performing Monks investment trust in the hope new management can turn it around.
About three years ago I wrote about the Monks (MNKS ) investment trust. It had been a disappointing investment for a while then and I was mulling whether to reduce or even sell my investment. In the end, I decided to hang on.
Over the past three years, Monks has generated an annualised increase in net asset value (NAV) of 10.5%.
It is certainly not been the worst global growth fund I hold – that honour goes to Personal Assets (PAT ), whose defensive stance has translated into an annualised return of 2.1% over the past three years.
Monks’ return is a long way behind that of stablemate Scottish Mortgage (SMT ) however, which leads the peer group with an annualised return of 21.1% over three years.
When I wrote about it late in 2012, Monks’ manager, Gerald Smith, was cautious on markets. He had taken off the fund’s gearing and had been using futures to protect against market falls.
The market wasn’t falling however and, over the course of the six months to the end of April 2013 (Monks’ year-end is April) the fund got left behind by the rising market, underperforming the FTSE World Index by 3.7%.
A new deputy manager, Tom Walsh, was brought in to help Smith. Over the fund’s next financial year, things improved a little and it was outperforming its benchmark. I was still a bit uneasy about it however and, in October 2013, I sold about two-thirds of my holding.
In February 2014, things took a turn for the worst, and Monks ended up underperforming the index by 1.6% over the year to the end of April 2014. The next 12 months saw the trust underperform its benchmark again, this time by 5%.
This was blamed on an overweight to the UK and the fund’s oil and gas exposure. I was starting to wish I had sold the whole lot.
The board talked to the larger shareholders. They ascertained that investors liked Baillie Gifford but had lost faith in the management team. The board instituted a review of the fund’s management arrangements. At the end of March this year, Monks announced that Charles Plowden would take over responsibility for managing the fund from Smith. Plowden was given two deputies in the form of Spencer Adair and Malcolm MacColl; all three are partners at Baillie Gifford.
The new team manages Baillie Gifford’s Global Alpha Strategy . This emphasises ignoring benchmark weightings (which Smith also did), focusing on growth (again no change here), and patience, being prepared to wait for investment ideas to play out rather than reacting to market moves, which translates into low turnover. Smith’s turnover wasn’t particularly high either.
Where things differ in the investment approach is in the new team’s classification of holdings by the type of growth they are delivering. These are ‘growth stalwarts’ (stocks with durable franchises and robust profits), ‘rapid growth’, ‘cyclical growth’ and ‘latent growth’ (stocks where they can see a catalyst to growth that isn’t reflected in the valuation).
Early days, bright start
The highest conviction ideas merit just a 2% initial weighting in the portfolio, ensuring that the trust is pretty diversified. It is a stock-picking portfolio but the managers also identify investment themes within it and take ideas from across Baillie Gifford’s business, drawing on the expertise of their extensive team of analysts.
All of this makes it quite easy to see the likely drivers of performance within the fund – which I like – and the in-built diversification ought to help reduce the volatility of the portfolio.
They turned over about half the fund as they repositioned the portfolio to align with the new investment strategy.
Monks’ discount back in 2012 was 14.7%. Today it is 12.7% which is not much of an improvement and, on this basis, it ranks fourth quartile in its peer group. They have bought back an awful lot of shares – well over £100 million worth over the past few years.
Baillie Gifford will be hoping that improved performance for Monks can arrest this shrinkage. Having said this, Monks is still a decent size with a market cap of £881 million.
Over the past six months, its NAV performance ranks eighth of the 38 funds in its peer group, which is not a bad start for the new team – although I am sure they would agree that six months is too short a time to judge whether the new strategy is working.
The Global Alpha Strategy has a fan base though, and currently, if you are a new investor, the only way of accessing it is through Monks as the main fund is closed to them.
All in all, the developments are quite encouraging. I’ll be hanging onto my holding in Monks – and might even top it up again.
James Carthew is a director at Marten & Co. The views expressed in this article are his and do not constitute investment advice.
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by Daniel Grote on Sep 23, 2016 at 17:01