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Monks: the out-of-favour investment trust I can't let go

The Monks investment trust is never going to shoot the lights out but it's not going to crash and burn either, says James Carthew.

 
Monks: the out-of-favour investment trust I can't let go

The worst-performing generalist investment trust in net asset value (NAV) terms over the past year also happens to be the one I have most money invested in: Monks .

It is not that it has been a complete disaster, just that it has barely moved in a year, while the average generalist is up by 10%. To compound the problem, its discount has widened by about 7% over this time.

Monks has been managed by Gerald Smith since May 2006. In April 2011, he became chief investment officer at Baillie Gifford. Monks’ benchmark is the FTSE World Index. It holds a mix of shares and bonds, but the bond portfolio has been reduced over the past year.

In keeping with the Baillie Gifford's house style, the investment approach is based on long-term stock selection, and this determines the asset allocation.

The portfolio is more diversified than many of its stable mates, notably Scottish Mortgage and Edinburgh Worldwide , with 133 holdings and the top 10 accounting for 21% of the fund. In a period where investors have sought out defensive stocks and yield plays, Monks’ focus on investing for growth has been out of favour.

Mixed results

Baillie Gifford is cautious on markets for the reasons you would expect. In particular, it does not think politicians have the guts to tackle eurozone, UK and US government debt.

The European weighting is low. It thinks many banks are still undercapitalised, a view recently echoed by Bank of England governor Mervyn King, and Monks is underweight financials.

The manager still believes in the long-term bull case for emerging markets, and this is reflected in the portfolio. He sees the situation in China as a cyclical rather than a structural slowdown but has lower exposure to Asia than many funds in the group.

The biggest investment, 3.1% of the portfolio, is in IP Group (IPO.L), a fund that invests in early-stage technology as joint ventures with a number of UK universities.

IP had a great run as its share price tripled over a year on the back of good news from a number of its holdings. Since July, however, the share price is down by about 20%.

IP is just one of a number of holdings in investment companies in Monks’ portfolio, including Doric Nimrod, Burford, Juridica, Biotech Growth Trust and Better Capital. Together they account for 10% of the fund.

Other holdings in the top 10 include power provider Aggreko (AGGK.L), which was doing well before a recent profit warning hit the share price; Samsung Electronics, another good performer but not a huge position in the portfolio; OdontoPrev, a Brazilian dentistry firm that has been outperforming a lacklustre Brazilian equity market; and Eldorado Gold, a Canadian gold mining company with operations in China and Turkey.

Interestingly, given how well received its results were, it has also been building a position in Facebook. Monks had a poor experience with a couple of Chinese investments last year. It got badly caught out by Sino Forest and what used to be a big holding in Vision Opportunity China.

Derivatives strategy

Monks uses derivatives to help manage its levels of borrowing, or gearing. In June this year, its £40 million debenture loan charging 11% matured and this has cut the fund’s interest bill substantially. It still has a 6.375% £40 million debenture that matures in 2023, however. Monks also had two short-term £40 million facilities with Scotiabank.

The fund was about 9% geared at the end of September but in recent weeks it reduced its effective gearing to around zero, repaying one of the £40 million Scotiabank loans, mostly from existing cash, and using derivatives to offset the other borrowings.

It has also been using derivatives to protect the portfolio from sharp drops in markets. Last summer it sold futures in UK, US and European indices, and in February 2012 switched the US futures contracts into contracts on the Brazilian and Hong Kong markets.

The managers reckon this strategy benefited the fund by 1.2% in the year to end April 2012. Of course, when markets are rising, this strategy is a drag on performance.

Monks is a decent size, valued at £767 million. The discount now is 14.7%, which is at the upper end of its range over the past five years. To tackle this problem, the fund has been buying back and cancelling shares but could maybe be more aggressive in this policy.

Monks aims to generate capital growth and the dividend is just a by-product. Consequently, the level of the dividend has fluctuated over the years. It yields 1.3% – the average for its peer group is about 2.4% – not good when investors are paying up for income. However, the total expense ratio at 0.6% is well below the average for the peer group, which is closer to 0.8%.

I will hang on to my holding. It will not shoot the lights out when markets recover but it won’t be crushed if they take a turn for the worse. Since I can’t make up my mind which is more likely, it seems sensible to sit tight.

James Carthew is a director of Sapient Research 

25 comments so far. Why not have your say?

Alan Anderson

Nov 06, 2012 at 13:01

This is the second connection to Baillie Gifford in the last week. Last week it was someone gushing about their American department.

I rowed over to Monks IT because it was flying the same flag as Scottish Mortgage Investment Trust. I climbed aboard and then found there was no one on board. When I looked over the stern of the ship I could just make out the faded name - 'Marie Celeste' - overpainted with 'Monks Investment Trust'.

James, it's nice of you to try and give me some hope but when the markets go down, Monks goes down. When the markets go up, Monks goes down.

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PHMH

Nov 06, 2012 at 13:46

I acquired a holding in Monks I/T in 1992 - cost £1952. At yesterday's close the investment is valued at £9838 so the share price has increased by 404% over twenty years and I am getting dividends of 6.5% on my original investment. This seems to bear out what James Carthew has to say about it: certainly steady but pretty unspectacular!!

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Alan Anderson

Nov 06, 2012 at 14:05

It's just not going to work PHMH. I bought 2 years ago. I am not sure it's even going to break even again. As for the dividend!! Back in the mists of time . . .

If it drifts closer to shore, I'm going to swim for it.

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JohnW

Nov 06, 2012 at 14:34

I've been looking at my holding over the last few months. Do I sit it out or dump it?? It's far and away the worst performer in my portfolio over the last 18 months, and is really not earning it's keep.

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Francis Wilkinson

Nov 06, 2012 at 15:20

Since there are many cross holdings with Scottish Mortgage and Mid Wynd, and the same overall management one would expect Monks to have it's day and the greater discount makes me continue to believe in the value. One tends to do better overall being contrarian in these things.

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Alan Anderson

Nov 06, 2012 at 15:56

As PHMH pointed out, timing has a lot to do with it. But over the last 2 years my building society account has thrashed Monks - and the capital is protected. So if the capital has shrunk in Monks and it is not their intention to pay much in the way of dividend, for me the question is what's the point in Monks?

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Alex Peard

Nov 06, 2012 at 16:11

I also have a substantial holding in Monks built up through their savings plan. I stopped the regular savings scheme some years ago in favour of Scottish Mortgage to diversify. At that point Monks was doing better than SM. I'm still in profit with Monks but annoyed at missing out on the better gains elsewhere.

If the discount narrows, which Baillie Gifford can manage, I think I'd look to move out.

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Francis Wilkinson

Nov 06, 2012 at 16:43

re. what is the point. The point is to forget short term performance and realise that there is a potential for meaningful capital appreciation in a spread of well researched , discounted assets with the backing of proven management.

The probability in my view is that two years down the line it has a good chance of outperforming inflation unlike a building society account-but if you need to be liquid stick to the latter.

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Richard W Green

Nov 06, 2012 at 16:59

You have to go back to the early part of 2008 to see Monks outperforming. Of the two main BG trusts Monks is meant to be the capital performance trust whilst SMT is the more income orientated. However, I'm sure to the embarrassment of all at BG, SMT consistently outperforms Monks (and pretty well all of the other major generalist trusts). The question is why? They both have the same resources, but different boards and manager. It seems both ludicrous and illogical, but the independence of the two trusts is undeniable, which I guess is small comfort to the shareholders of Monks.

They must know internally where Monks is going wrong and clearly they have the ability to turn things round. I'm glad I hold SMT (for the income orientation) rather than Monks, but I wouldn't give up on Monks just yet. Monks has a more flexible structure to outperform than SMT (and just about everyone else). Why they don't is a constant mystery to me and I guess infuriating for their shareholders.

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Francis Wilkinson

Nov 06, 2012 at 17:14

Richard Green is spot on. You can bet your life that the motivation of those managing the Monks portfolio is such now that they will be hell bent on dealing with recent relative underperformane-there's no pressure like peer pressure allied to pride and self respect!

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JohnW

Nov 06, 2012 at 17:46

Well, my patience is wearing thin. Monks did quite reasonable when I first brought it but It has been under performing for the last two years. I realise my overall portfolio has done quite reasonable,but that is not the point. I wont be doing anything until the new year, but mentally I have this as my cutoff point.

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Brian Stafford Garthwaite

Nov 06, 2012 at 18:16

Have invested with BG for some years and have been very pleased with their performance. They take a long term view so there can be times when their trusts may underperform.Gerald Smith has a very good track record,He works closely with Malcom Mcphee who manages Mid Wynd which has had a superb run in recent years. I am considering buying Monks. I have no connection with BG other than as a small investor.

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Richard W Green

Nov 07, 2012 at 10:14

I looked closely at the major shareholdings of both Monks and SMT in 2011. What struck me was how little they had in common - maybe around 6 holdings. But the really big difference was that the 10 largest holdings represented 38% of SMT's portfolio, but only 18% of Monks. The proportions for the top 20 were 53% for SMT against only 29% of Monks. My conclusion was that SMT really backed the stocks that they believed in, whereas Monks was much more cautious. I think one of the great dangers of fund management is that you can so diversify risk that you no longer perform.

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Mark Poulter

Jan 19, 2013 at 12:51

One of the troubles in my view with BG is that they are too small a group of people and if they under perform then there is no one to take the decision to move the manager on. They just accept the poor performance as bad luck. I find that the house magazine purports to demonstrate deep thinkers but the reality of life is that however much you dress up a fund as "cautiously managed" there comes a point where one has to say that the fund is failing. Other fund groups move the manager at that point but I think that BG cannot easily move their top man out. I have been a very long term holder of Monks but sadly think that it is not showing sufficient judgement in recent years and I am no longer convinced that I they will manage my money well. As always, whats done is done, and one must take a view of the opportunity for this investment now. A 14% NAV if frankly ridiculous and could of course be dealt with quite quickly if they wanted to do so. In a market that seems currently to be looking up, if BG do not show some performance in this quarter then I can no longer afford to stay with them. They sadly show some of the characteristics of the old Foreign and Colonial IT which after a very good run years ago, lost the plot and never recovered it. Come on Mr Ferguson, must do better.

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JohnW

Jan 19, 2013 at 13:08

Well, after several years of under performing, just before Christmas I did as I threatened and sold both Monks and Mid Wynd. It has to be said that when we invest the bottom line is money, and if it's not producing any then there is no point in holding it. I may go back if it turns the corner, but I'd need some convincing.

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Richard W Green

Jan 19, 2013 at 15:24

I hold SMT rather than Monks, primarily because I need a secure and growing dividend, not because I'm particularly bright at picking performing managers. The total return over 5 years for SMT is +18.8% and for Monks it's -2.2%. Baillie Gifford have loads of talent as we can see from SMT. The problem with Monks is that it just hasn't recognized that we have been in a bull market for 4 years. Now that may be down to the manager, or it may be down to the board, or possibly a bit of both. Someone knows the answer, but not me. Moving the manager may not be it, as Mr Abramovich has found at Chelsea.

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Alan Anderson

Jan 19, 2013 at 16:01

Just shut up everyone. The price is rising. It may even break even for me in a few days/weeks/months and then I can get out. So shush.

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Mark Poulter

Feb 22, 2013 at 11:46

Re " re. what is the point. The point is to forget short term performance and realise that there is a potential for meaningful capital appreciation in a spread of well researched , discounted assets with the backing of proven management ".

I think that we all know the theory. The trouble is how long does one disregard short term underperformance before concluding that it is long term underperformance? Citywire tells me that on 5 year share price Monks delivered 9% growth, The top decile of the global growth group delivered about 100%. The 20 years that someone quoted is also just to long and masks all sorts of ups and downs along the way. Ones house has probably done a lot more that 400% in 20 years.

As someone else said, if it comes close to shore I think that I will swim for it. The time has come, F&C Global Smaller companies.

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Alan Anderson

Feb 22, 2013 at 12:09

Yes, Mark Poulter, it was me. I threw myself over the side a few days ago and made a miniscule gain on paper. It has since risen again but after two plus years it's such a relief to be out. I shall keep my eye on it just out of curiosity!

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Mark Poulter

Feb 22, 2013 at 14:10

Sadly I have just jumped as well. Sadly, as they have been held for a good number of years and did well originally but you hold the faith and hold the faith until you can hold it no longer, rather like Fidelity Global Special Situations!

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Francis Wilkinson

Feb 22, 2013 at 15:11

I agree that one has to look past immediate history. Knowing the caliber of the people at Baillie Gifford-I have confidence that the Monks team will be busting a gut to compete with the likes of Scottish Mortgage-and at around 9% bigger discount they seem to me a decent bet given the quality of their portfolio.

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Alan Anderson

Feb 22, 2013 at 16:14

Francis, I know you are a strong supporter of Monks, so may it now soar gut-bustingly upwards and prove me wrong!

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Mark Poulter

Feb 22, 2013 at 16:48

Indeed, sod's law may apply but I tend to assume that an organisation like Baillie Gifford would have been "busting a gut" for the last 5 years to try to improve performance rather than just deciding to do so now. So sadly I conclude that they are not up to it. Further, referring to my original post, I do not think that they have the style to replace a manager who has demonstrated that he is no longer on top of the situation but just allow it to drift on.

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JohnW

Feb 22, 2013 at 19:24

Monks really did quite well for me, reaching a peak of £3.68 on 3/5/12. I then started to fall until just before Christmas 2011, when there was a brief rally, reaching £3.44 on the 2/3/12. From then on it was down hill until I sold up in December last year. Yes, Gerald Smith may yet get back on track, and if he does I may well buy back into it, but I would want to be convinced first. OK, my little bit of money is nothing to a big trust like Monks, but it's a lot of savings to me.

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JohnW

Feb 22, 2013 at 19:25

That should have read "Monks really did quite well for me, reaching a peak of £3.68 on 3/5/11."

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