Inside Monks Investment Trust

The Monks Investment Trust PLC adopts a long-term global equity growth strategy that draws on the broad research capabilities of over 100 investment professionals at Baillie Gifford. Stock selection is bottom-up with a focus on fundamental analysis. The trust, investing in around 100 stocks, is well diversified and very different from its comparative index. Stocks are picked on the basis of fundamental attractions, irrespective of location. Industry and regional exposure are a residual of the stock selection process. The focus is on companies that we believe could deliver above-average earnings growth. The portfolio is very different from the index with an ‘active share’ (defined as the percentage of the portfolio that does not overlap with the index) of approximately 90%. We are investors, not speculators. We expect annual turnover to normally be in the range of 20–33%, implying holding periods for at least three years on average.

Our core belief is that a company’s share price ultimately follows its earnings. For this reason, the trust invests in companies that offer the prospect of sustainable above-average growth. Over the long term, a portfolio of companies that achieves this earnings growth should deliver superior returns. We have an open-minded approach to growth; we recognise that companies grow at different rates, some more cyclically than others and we are also prepared to invest in companies with latent growth opportunities. We think our long-term investment perspective allows us to capture the more volatile growth from companies in a range of industries that other growth investors may overlook. We place all the stocks in the trust in one of four ‘growth categories’: stalwart, rapid, cyclical and latent, creating a differentiated and diversified portfolio with a high active share.

Our job, as long-term investors, is to look past short-term headlines and identify those businesses that can sustainably grow their cash flows and earnings at above average rates. This perspective allows us to place short-term news and events firmly in context, stick to our approach and add value over the long term, using gearing to take advantage of indiscriminate market weakness by purchasing equities at attractive valuations. This in part explains why we made very few changes to the portfolio as a consequence of the ‘Brexit’ vote nor undertook any knee-jerk reactions following Mr Trump’s electoral success in the United States.

Whilst picking individual stocks remains at the heart of what we do, there are three broad exposures about which we are enthusiastic. The first is Asian consumption; with around 100m consumers entering the Asian middle class every year, we believe there is a good deal of opportunity for companies in China and beyond to grow strongly. Second is the continued underlying growth of the US economy. The third exposure is related to companies that use technology and innovation to disrupt existing traditional business models – online businesses, the use of the cloud, better use of data which is being crunched by ever more advanced computers and the prevalence of mobile telephony; all are creating some major changes in the world to the advantage of many new emerging businesses.

We believe that the Monks portfolio is set to grow at an above average rate, even in an environment of only modest economic expansion.  The broad spread of investments ensures a natural diversification while the clear structure of the portfolio provides a framework which helps both analysis and decision making.  There will be periods when fundamentals are not reflected in shareholder returns, such as when our growth style is out of favour.  However, we remain confident that our process could create significant value for investors over the long term.

Finally a word on costs. We are keen to ensure that investor returns are not eroded through excessive costs. Monk’s annual management charge is 0.45% and the annual ongoing charges figure at Monks’ year end was 0.59%. We believe that investing in global growth stocks from different perspectives, along with the attributes of low-cost and long-term active portfolio management, results in Monks’ portfolio potentially being a suitable core investment around which an investor’s portfolio can be built.

The views expressed in this article are those of Charles Plowden and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. This article contains information on investments which does not constitute independent investment research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned. Investment markets and conditions can change rapidly and as such the views expressed should not be taken as statements of fact nor should reliance be placed on these views when making investment decisions.

The investment trusts managed by Baillie Gifford & Co Limited are listed UK companies. The value of their shares, and any income from them, can fall as well as rise and investors may not get back the amount invested. Monks invests in overseas securities. Changes in the rates of exchange may also cause the value of your investment (and any income it may pay) to go down or up.

Monks can borrow money to make further investments (sometimes known as “gearing” or “leverage”). The risk is that when this money is repaid by the Trust, the value of the investments may not be enough to cover the borrowing and interest costs, and the Trust will make a loss. If the Trust's investments fall in value, any invested borrowings will increase the amount of this loss.

Monks can make use of derivatives which may impact on its performance.

All information is current and is sourced from Baillie Gifford & Co unless otherwise stated.