Monks Investment Trust: August 2023 update

• Spencer Adair and Malcolm MacColl are seasoned investors, and both joined Baillie Gifford over 20 years ago
• The managers look for companies across three growth categories: stalwarts, rapid, and cyclical growth
• The trust has performed well since Baillie Gifford’s Global Alpha team took control in 2015, but has had a period of weaker performance as growth investing has struggled

How it fits in a portfolio

Monks Investment Trust aims to deliver long-term growth by investing in companies at various stages of growth. The managers invest anywhere in the world, including higher-risk emerging markets, but they tend to invest more in developed regions like the US and Europe. The trust could be a building block for an adventurous investment portfolio or work well alongside other investments in unloved ‘value’ companies with recovery potential. Investors in closed-ended funds should be aware the trust can trade at a discount or premium to the NAV.

Manager

Spencer Adair took over as lead manager in May 2021 following the retirement of veteran manager Charles Plowden. Adair worked closely with Plowden having been deputy manager since 2015 and involved with the Global Alpha team since launch in 2005. Adair joined Baillie Gifford as a graduate in 2000 and became a partner in 2013. During his career he has worked across a variety of different teams including Japan, Europe and the UK.

Malcolm MacColl has been deputy manager since 2015 and worked with Adair for over 15 years. MacColl also joined as a graduate in 1999 and has been mostly focused on North American companies. Following Plowden’s retirement, MacColl was named joint senior partner at Baillie Gifford.

The managers are part of the Global Alpha team which includes fellow partner Helen Xiong and three analysts, one of whom is solely dedicated to Environmental, Social and Governance (ESG) analysis.

The managers also use a team of ‘scouts’ who are dedicated analysts, with at least 10 years’ experience, looking for investment ideas for the trust. These ideas are then discussed amongst the managers and key analysts. The managers also benefit from the wider resource available at Baillie Gifford which consists of over 100 investment professionals.

Process

The managers invest in companies that fall into one of three growth categories – ‘stalwarts’ that are already dominant in their industry and should keep steadily growing, ‘rapid’ often early-stage and innovative companies with big potential, and ‘cyclical’ companies whose growth tends to be tied more to the strength of the economy. They invest both in large companies and higher-risk smaller companies.

A fourth category – ‘latent’ growth – was also used to form part of the trust. These businesses tended to be more out-of-favour with recovery potential. After in-depth analysis of the trust and its four categories, the team found the latent growth portion had tended not to contribute as much to performance. As a result, they’ve decided to focus on the remaining three categories, which now each make up a greater portion of the trust.

The managers have recently sold some of the rapid growth companies from the trust. This portion has decreased by 9% through a combination of share prices falling and selling names where the operational progress has been below expectations. This includes US technology company Twilio, home fitness business Peloton and Chinese social media and music company Tencent Music Entertainment.

The growth stalwarts category has become the largest part of the portfolio increasing to just under 37%. New investments include semiconductor company Analog devices and US healthcare company Elevance Health. The mangers also have seen an opportunity to be counter-cyclical and add to media and advertising company Meta.

The cyclical growth category also increased and now makes up around 33% of the trust. The managers believe that the worlds infrastructure needs to be rebuilt to cope with more people and a change in energy mix. The managers therefore added power management company Eaton and drainage solutions company Advanced Drainage Systems.

As a global trust, the managers can invest anywhere in the world, but they currently find the most opportunities in North America with nearly 55% of the trust invested there. The other half is spread across developed markets in Europe, the UK and Asia and higher-risk emerging markets such as China. In terms of sectors, the managers invest most in technology, consumer discretionary, financials, and industrials.

The managers also invest in higher-risk unlisted (private) companies that aren’t listed on a stock exchange. Around half of their exposure is through the Schiehallion Fund, an investment trust managed by Baillie Gifford that invests in later-stage private companies, which currently makes up 2% of the trust. The managers won’t invest more than 10% of the trust in unlisted companies.

The managers use gearing (borrowing to invest), which can boost gains but also increases losses, so is a higher-risk approach. At the end of July gearing stood at 6%. They can invest in derivatives too which, if used, also adds risk.

Culture

Monks Investment Trust was established in 1929 and is part of the FTSE 250 index. The trust is managed by Baillie Gifford, an independent private partnership founded in 1908. It's owned by its partners, who work full time at the firm. This ownership structure means senior managers have a vested interest in the company, and its funds and investment trusts, performing well. Both Adair and MacColl are partners at the firm. We think this has helped cultivate a culture with a long-term focus, where investors' interests are at the centre of decision making. We also like that fund managers are incentivised in a way that aligns their interests with those of long-term investors.

While most of the ideas added to Monks Investment Trust are sourced from senior analysts, Adair also encourages more junior analysts to present ideas. This could encourage an open and collaborative culture.

ESG integration

All of Baillie Gifford’s funds are run with a long-term investment horizon in mind – they see themselves as long-term owners of a business, not short-term renters. So, assessing whether society will support, or at the very least, tolerate, the business model over the long term, and whether management will act as good stewards of shareholders’ capital is an important part of the investment process.

Dedicated ESG analysts sit with and report into their respective investment teams, and the firm’s ESG efforts are supported by a dedicated climate team, an ESG Services team (responsible for voting operations and ESG data) and an ESG Client team (responsible for ESG-related client communications). Individual investment teams are responsible for voting and engagement for the companies they invest in. Investment in controversial weapons is prohibited across the firm.

The firm reports all its voting decisions and provides rationale in situations where it voted against management or abstained, in a detailed quarterly voting report. There is also a quarterly engagement report which details the companies engaged with, and the topic discussed, and further engagement case studies are available on the website. All this information is brought together in the firm’s annual Stewardship Activities report.

Cost

The ongoing annual charge over the trust’s financial year to 30 April 2023 was 0.43%. Investors should refer to the latest annual reports and accounts, and Key Information Document for details of the risks and charging structure. If held in a SIPP or ISA, the HL platform charge of 0.45% per annum (capped at £200 per annum for a SIPP and £45 for an ISA) also applies. The platform charge doesn’t apply if the trust is held in a Fund and Share Account.

Investment trusts trade like shares, both a buy and sell instruction will be subject to the HL share dealing charges.

Performance

Monks Investment Trust has delivered mixed returns since the Global Alpha Team took over in March 2015. Over this period the trust’s share price has risen 139.86%* marginally behind the FTSE World Index which has grown 141.39%. However, the trust has outperformed the IA Global sector average which has grown 105.26%. Over this time the trusts NAV has grown 143.26%. Adair and MacColl were deputy managers during this time, and directly involved in the investment decision making process, so we think it’s fair to attribute this track record to both them and previous manager Charles Plowden. Past performance is not a guide to the future though and investments fall as well as rise in value so you could get back less than you invest.

Over the trust’s financial year to the end of April, performance continues to be tough. The trust’s share price fell 7.02% compared with a gain of 3.24% for the FTSE World Index and 0.58% of the IA Global sector average. While the managers’ growth-focused investment style has previously led to strong returns, the trust has struggled and fallen in value over the past year especially during 2022. Higher inflation and rising interest rates have put pressure on growth investing, as this erodes the value of cashflows expected to be generated further out in the future.

On the other hand, value-focused trusts, which invest in lowly-valued or recovering businesses, have typically performed better. Some economically sensitive areas of the market, such as oil & gas and commodity related businesses, which the trust tends to avoid, have also been strong.

While investment style has played an important part in the trust’s performance, Adair recognises there have been some individual stock-specific issues too. For example, the trust’s investment in the Schiehallion fund which invests in late-stage private companies was the largest detractor of performance. Elsewhere, investments in online luxury goods company Farfetch, internet performance and security company Cloudflare and cloud-based systems monitoring Datadog all detracted.

On the other hand, there were some stocks that performed well over this period. These include US insurance brokerage company AJ Gallagher, gene silencing treatment company Alnylam Pharmaceutical and South American ecommerce platform MercadoLibre.

The trust has long-term performance potential, but periods of volatility should be expected. As always, we suggest investors build diversified portfolios with exposure to a variety of investment styles, sectors, countries, and asset classes. Plus, you should regularly review your investments to make sure they continue to meet your needs and objectives.

Past performance is not a guide to the future. Source: *Lipper IM to 31/07/2023.

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