Three moves against the crowd

Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Gerald Smith, manager of the Monks Investment Trust, Baillie Gifford & Co.

The Monks approach to investment is unconstrained. The FTSE World (measured in pounds sterling) is the comparative index for measuring performance, but no reference is made to it when choosing the portfolio. So strong investment views are expressed. Times of great uncertainty and dysfunctional markets create opportunities, and Monks is quite likely to move against the crowd.

Currently, by selling index futures, Monks is reducing gearing and trimming back its market exposure. However, it still seeks to add value via the selection of individual equities and bonds. Some of the latter have equity-like characteristics, such as a fund that invests in securitisations and a Brazilian government index-linked bond.

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There has been quite a lot of good economic news recently. In the US, third quarter GDP has been revised up, final demand growth is rising twice as fast as originally estimated, and business investment has risen for six quarters in a row. In Germany, the IFO Index (which measures the business climate and outlook) is at a post-unification high. German car-makers are putting on extra shifts and cancelling Christmas holidays. Combine this with the long-term growth trends in China and other populous but hitherto economically underdeveloped countries, add in another round of quantitative easing (QE), and the outlook seems more inflationary than deflationary.

So why is Monks cutting back its gearing? Expectations are high and some of the long-term growth trends are already incorporated into prices. Risks and dangers remain, including the possibility of US municipal and state financial crises; California looks every bit as bad as Greece. A less obvious risk is that good news for the economy may be bad news for markets, as it makes monetary tightening more likely. Monks recently took a contrarian position in Japan, a deeply out-of-favour market, by buying call options on the Nikkei index. Japan may be in long-term decline, but there can be rallies, possibly strong ones, along the way, and valuations are not stretched. The most obvious catalyst would be a weakening of the yen, as there is a reasonably good fit between the performance of the Japanese market and the dollar-yen rate. This makes sense as the Japanese economy is driven by exports.

Monks has a large exposure to oil and oil-services firms. These companies are now ordering new rigs and the market is turning up in terms of day rates. One of the largest equity holdings overall is Seadrill (Oslo: SDRL), with a major attraction being its very modern fleet of rigs and a strong position in deepwater drilling. The most modern equipment is at a premium following the Deepwater Horizon disaster and Seadrill is well placed to benefit from current industry trends.

A recent investment with great potential and a bit of a long shot is Nanoco Group (LSE: NANO). Nanoco makes quantum dots. These are highly versatile semiconductors that have potential applications across various sectors. The company holds a number of commercial agreements with its partners and is in the process of scaling up its production capacity. Nanoco differentiates itself with its unique technology to mass produce non-toxic quantum dots. This is a high-risk idea; the risk/reward ratio is attractive.