Monks hangs on as 25% slump halts six years of growth

Monks, the second global investment trust at Baillie Gifford, may be a low-fat version of the group’s full-on growth flagship, Scottish Mortgage, but shareholders have had to endure a similar gut-wrenching reversal in the past seven months.

Monks (MNKS ), the second global investment trust at Baillie Gifford, may be a low-fat version of the group’s full-on growth flagship, Scottish Mortgage (SMT ), but its shareholders have had to endure a similar gut-wrenching slump in the past seven months’ selloff.

Annual results today show Monks’ six years of strong performance since the £2bn portfolio was reorganised by former manager Charles Plowden in 2015, came to a crashing halt in its last financial year. Net asset value (NAV) plunged 18.9% in the 12 months to 30 April, with shareholders suffering a 24.6% fall, even with dividends included, as the shares fell to a discount to their NAV. By contrast, its benchmark, the FTSE World index, generated a 6.1% total return.

Nevertheless, the trust’s outperformance since Plowden’s overhaul so far remains intact with a total investment return of 147.8% up to April, underpinning a 163.6% total shareholder return over the period that beats the FTSE benchmark’s 128.9%.

The investment team, now led by Spencer Adair following Plowden’s retirement last year, are like their other colleagues at Baillie Gifford, daunted by the savage de-rating of growth stocks as inflation and interest rates rise, but sticking to their process, backed by the board.

‘Shareholders have experienced a sharp share price decline in the last year but it is at times like these that it is of utmost importance that the managers stick to their longstanding investment approach, which is based on bottom-up stock picking and a focus on growth companies,’ said the chair Karl Sternberg.

Sternberg said Adair (above) and co-manager Malcolm MacColl, believe their companies are mostly performing well, are financially strong and offer the best chance of beating rising inflation.

There are exceptions, however, with the duo reviewing Peloton, the Nasdaq-listed home fitness company, after its shares collapsed 91% to give it a mere 0.1% weighting in the portfolio. The pair only bought in last August and are clearly disappointed, but are waiting to see if new chief executive Barry McCarthy can turn Peloton around.

‘The company has significantly overestimated demand and committed too much capital to the production of its hardware [bikes]. This has undermined the prospect of future profitability,’ the managers complained.

Adair and MacColl have also been unimpressed by changes at Lyft, the ride-hailing app Baillie Gifford once believed could beat Uber, but have now sold. ‘We felt that the scale of ambition at Lyft – having once been to bring fleets of autonomous vehicles to market – has been curtailed.

‘This has been coupled with egregious stock-based compensation payouts which, in our view, are not appropriate given underwhelming operational process nor aligned with the long-term interests of shareholders,’ they said.

In China, where all their holdings tumbled in last year’s crackdown on internet companies, the managers are trying to remain open-minded to the risks and rewards, but have sold telemedicine disrupter Ping An Healthcare and Technology and reduced a position in Meituan, the delivery platform, where government intervention is limiting growth. 

However, they have retained faith in the bulk of their companies, and point out that only 13% of their listed investments are currently loss making.

In the UK, they say the 74% plummet in the shares of Farfetch, the online luxury goods marketplace, has ignored its doubling of volumes and revenues in the past two years. ‘The shares’ current valuation (1.1 times forward 12-month sales) appears to us to materially undervalue Farfetch’s opportunity not only in its core online marketplace, but in its “Platform Solutions” business, which enables brands and retailers to drive online growth.’

Although portfolio turnover remained low at 11%, the managers responded to ‘widespread and indiscriminate’ share price falls to make some new purchases, notably Certara, a bio-simulation software provider; Chewy, the online pet food distributor; analogue semiconductor manufacturer Analog Devices; Adobe, the creative software company; and Royalty Pharma, the life sciences funder. 

While acknowledging they could have minimised losses by cutting more positions, they said the trust approached the growth scare in prudent shape with gearing, or borrowing, of just 0.8%. Caution also had to be offset against the importance of remaining ‘patient and engaged shareholders’, they said. 

‘It is a natural tendency at times of turmoil and uncertainty for time horizons to contract. Our belief in the importance of patience means that we will continue to allocate our time to those areas of research which we think will be most impactful over the long term… In this sense, we remain forward looking and optimistic about the future,’ Adair and MacColl said.

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