Monks laments ‘bruising’ underperformance period as managers reposition portfolio

In the six months to 31 October, the trust’s net asset value total return fell by 3.3% compared to 2.1% for the FTSE World index in sterling, while its share price total return was down 7.3% as the discount widened from 8.7% to 11.6% during the period.

Detractors from performance included fellow Baillie Gifford investment trust Schiehallion as its discount widened, as well as spirits company Pernod Ricard and cosmetics giant Shiseido, which were both impacted by weaker demand in China. 

Healthcare exposure also contributed to underperformance. However, the trust has benefited from the growth stocks November rally, and its NAV is up 9.3% compared to a 6.3% rise for the FTSE World index since 31 October.

Monks investment trust acknowledge ‘mistakes’ led to a ‘disappointing outcome’

Monk’s portfolio managers Spencer Adair and Malcolm MacColl said the investment performance of Monks’ portfolio in the first half of its financial year had been “disappointing”. 

They said this continues a “run of poor relative returns” that began two years ago, which they said has erased the “superior returns” delivered for shareholders since the firm’s global alpha team took over eight years ago.

“Rapidly rising inflation and the increases in interest rates that began in the first half of 2022 suppressed investors’ appetite for growth assets and precipitated sharp share price falls of companies held in the Monks portfolio,” Adair and MacColl said.

“The portfolio was too concentrated in rapidly growing, earlier-stage companies that bore the brunt of share price declines.”

Portfolio activity

The managers said they had “taken action” by selling holdings poorly positioned in an environment of persistently higher inflation and interest rates, while restoring greater balance across the portfolio’s three growth profiles: Stalwart, Rapid, Cyclical. 

Monks was active in taking new positions during the reported half-year, and new purchases during the period were categorised by three themes: ‘New Growth Frontiers’, ‘Infrastructure Upgrade’ and ‘Increased Return from Patience’.

Investments falling into the first category were largely semiconductor-related companies, which the managers consider to be the “picks and shovels” of the sector, such as Advanced Micro Devices, Nvidia and Samsung Electronics.

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The second category included beneficiaries of an infrastructure upgrade due to reshoring trends and increased spend on roads, energy and digital infrastructure, with heating and ventilation systems company Comfort Systems added to the portfolio.

Lastly, the latter category included new holdings such as outdoor goods manufacturer YETI Holdings and painting product maker Nippon Paint, which the managers consider attractively valued companies facing near-term headwinds “obscuring” their long-term growth potential.

Monks also sold some stocks on valuation grounds, such as Booking Holdings and Axon Enterprises, or where the growth outlook had diminished, including Deutsche Boerse, DENSO and Meituan.

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“We believe that good times are ahead for the portfolio,” the managers said.

“The inflation and interest rate environment is stabilising and we expect the portfolio to deliver substantially higher levels of earnings growth than the market.”

In a bid to narrow its discount, Monks has bought back approximately £300m of its own stock since the beginning of last year, when its shares moved from a premium to a discount.

The board said it intends to continue to buy back while the trust’s shares trade at a “substantial discount” to NAV and that it continues to evaluate the “range of alternative options at its disposal” to seek to address it.