Half-year results from Monks show global investment trust taking different tack from stable mate Scottish Mortgage, trading profits in big online platforms for new positions in food delivery apps such as UK’s Just Eat and China’s Meituan Dianping.
What’s the difference between Monks (MNKS) and Scottish Mortgage Trust (SMT)? Both are global growth investment trusts investing shareholder assets across the world and both are managed by Baillie Gifford from Edinburgh, which inevitably means they share an interest in the technology giants of our day, most notably Amazon, the biggest holding in both funds.
But while the £7.3 billion, FTSE 100-listed Scottish Mortgage is famous for thinking very long term and for running its winners with nearly 10% of its assets in Jeff Bezos’ e-commerce behemoth, Monks, a £1.7 billion best-ideas fund is more pragmatic and cautious, taking profits to ensure its positions don’t get too big.
Today’s interim results from Monks highlight that Baillie Gifford’s ‘global alpha’ investment team led by Charles Plowden trimmed the position in Amazon (AMZN.O) twice in the six months to 31 October. Combined with two previous profit takings, the Monks managers have cut the amount of Amazon stock they own by a third since the middle of last year.
However, the continued strength of the share price - despite sharp falls in ’Red October’ and yesterday - mean Amazon’s weighting in the portfolio was unchanged at 3.6% over the half-year period.
Amazon and US healthcare company Anthem (ANTM.N) were Monks’ strongest performers in the six months reported, but their gains were offset by the sell-off in Asia. In particular the declines in Prudential (PRU), the UK insurer with a big, growing presence in the region, and Naspers (NPN.JSE), an unusual South African media company, whose shares are listed in Tokyo and owns a big stake in China’s Tencent (HKG:0700) hurt the portfolio.
As a result it produced a -0.9% total return on net assets, underperforming the FTSE World index which rose 4.5%. Longer-term performance is better with the company noting that since Plowden, Malcolm MacColl and Spencer Adair took over and overhauled Monks in March 2015, while the index has gained 46.7%, the portfolio’s net asset value has grown by 56%. A re-rating of the shares, which had done badly under the previous manager, has delivered an 82.4% total return to shareholders up to the end of October.
At a meeting in London yesterday MacColl told shareholders the trimming of the Amazon position was ‘not because we believe the story is over but that the market is starting to appreciate what we have appreciated about the company since 2006’.
Monks targets businesses that double in value every five years and that means Amazon ‘trying to create a $2 trillion business and that is difficult even with all those engines, and that is why it is the size it is in the portfolio’.
MacColl added that the ‘biggest outsize returns come from incubator holdings’, which the managers have added to using Amazon profits during the recent stock market falls.
Adair said the managers analysed whether their rapid growth stocks would still be able to double in value over five years following stock market turbulence ‘and there were a couple that absolutely could like Naspers’, which he said was ‘trading at a 50% discount despite one of the best 20-year records’. Its position had been lifted to 2.1%, he said.
Plowden added that they had ‘taken some profits from established winners’ in order to invest in ‘early stage companies in narrow verticals such as real estate, e-commerce and educational publishing.’
‘We are reducing the 3-4% holdings and reinvesting in the 0.5% holdings,’ he said. ‘Those are much more risky and may not be successful but they may be like Amazon 10 years ago. There has been a reloading and the rapid growth bucket [of stocks] has more 10-year potential now’.
One fifth of the trust is invested in online platforms but Plowden said it is ‘not all about the internet and technology’ and the managers have an equal amount invested in the ‘emerging middle class’ and the ‘major long-term growth trend in emerging markets’.
The trust has expanded its investments in Asian savings and life insurance by adding China’s Ping An Insurance (SHA: 601318), a 1.4% holding, alongside its stakes in Prudential and arch-rival AIA Group (HKG: 1299).
The managers said they try to pick ‘exceptional’ companies as these are the only way to add returns. Analysis of 90 years of returns for over 26,000 US companies revealed that 24,000 have ‘done no more than match the risk-free return’ of Treasury bills, said Plowden.
‘All wealth came from 4% of the companies and just 90 companies created 50% of wealth so that is why it is so important to focus on trying to identify the biggest potential winners, and if you think you have got one then stick with it long term.’
‘Amazon is entirely exceptional,’ said Plowden, adding that the trust has made 80-times its initial stake in the online shopping giant.
That is not to say there are not still opportunities in online platforms. In parallel with the Amazon trades, the managers also took profits in Grub Hub (GRUB.N), the leading US food delivery app, and recycled it into the UK’s equivalent, Just Eat (JE), now at 0.4% of assets.
What excited Adair though was a new, small 0.4% position in Chinese online food delivery service Meituan Dianping (HKG: 3690). Monks invested when the company raised over $4 billion in a Hong Kong flotation in September. This highlights another difference to Scottish Mortgage which is happy to invest in private companies before they list on an exchange and which backed Meituan around three years ago, as did Fidelity China Special Situations (FCSS).
Meituan is China’s equivalent of Just Eat serving 310 million customers in 2,800 cities and delivering 27 million meals a day on a fleet of 500,000 drivers. Adair described its scale ‘off the charts’ and 50-times bigger than Just Eat given it also owns the largest restaurant booking service in China, a leading online grocery store akin to Ocado, a bike rental business, and a hotel booking business.
‘It is growing at twice the pace of its global peers so the size differential is getting larger each year,’ said Adair.
‘At 50-times bigger than Just Eat it should be valued at $250 billion even before the other businesses are included, but today the enterprise value is a little over $30 billion. I’m not sure how the future will turn out but in 10 years looking at the top 10 winners list, Meituan Dianping has the chance to be a really big winner - the valuation is excessively pessimistic,’ he said.