Buy into the right kind of growth and you can double your money in five years, Charles Plowden tells Merryn Somerset Webb. But what is the right kind?
Fund managers are very keen on defining their investment styles. They are value investors. They are growth investors. They are momentum investors. They are contrarian investors. That's not all bad. It's good to have ways to categorise them. The problem of course is figuring out what they actually mean by all these labels.
All value investors have different definitions of what real value is, for example. So the first question I ask Charles Plowden, who has been manager of the Monks Investment Trust for the past 18 months, is exactly what it is he means when he says the fund aims to "create long-term capital growth by holding a diversified range of growth stocks". What is a growth stock?
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For Plowden, it is one that will grow its earnings organically (that is, not by buying other companies) at an above-average rate (10% a year or more) over the long term. He measures potential growth in five-year periods (companies don't have to grow every year to be considered growth stocks) and that's that. To buy, all Plowden needs is to see "a plausible scenario where we can double our money in the next five years". It is, he says, the "broadest possible opportunity set".
Not all growth stocks are alike
That's straightforward, I think to myself. I think too fast. You can divide growth companies up into four different types, says Plowden. For example, "growth stalwarts" are reliable firms with a "repeatable process" such as beer, tobacco or food companies. Utility-like stocks. Nestl is an obvious example in this category. Pricey stuff, I say: all these defensive stocks have seen their prices soar in the past few years thanks to their promise of reliable long term income. Plowden agrees Monks has just sold Nestl having held it for 11 years and the stalwarts are down to around 20% of the portfolio.
So what fits into the category now? Diabetes care business Novo Nordisk might, says Plowden. Having been seen as "one of the world's most wonderful growth stocks for 30 years" it has now de-rated as a result of some short-term difficulties with pricing in the US. But that shouldn't last: "they've got a surge of new products about to hit the market over the next 12 months" and long-term growth should resume. "This is an opportunity to get into something that's having a short-term worry."
On to the next category: "rapid growth", which makes up around 40% of the portfolio. Think Amazon, Google and Tesla. These are companies that are embracing new technology and innovation and that have the "ability to scale immensely quickly growing at 25% per annum for ten years is not nearly as implausible these days, in our web-based world, than it was 20 or 30 years ago when you had to build a factory in each country". Just look at Facebook: "it's less than 15 years old and it's already global with 1.5 billion regular users".
Can he see another network taking over from Facebook? Part of the joy of technology firms is the fast march of technology, but that's also part of the risk for each firm (if you can get that big in 15 years so can someone else). Plowden isn't worried. "The scale is so huge that it's now very difficult for anyone else to compete." So much so that there is no longer any point in investing in the number two in these markets either: "Over the last year, we've sold out of eBay, which is clearly falling further behind Amazon, and we've sold out of Twitter, which is clearly falling further behind Facebook."
What would make him sell Amazon or Facebook? Any sense that it would be hard to double his money on them in the next five years. Clearly, as firms get bigger "size becomes a constraint you rub up against regulators and government and policy and there can also be social resistance". But right now both look fine.
Their markets are growing rapidly; they are scalable and, along with the likes of Google and Samsung, they are "the biggest investors in R&D in the world" at a time when most of the corporate sector is not investing. They are addressing potentially huge markets, whether it's artificial intelligence (AI), virtual reality, autonomous cars, healthcare or medicine.
This last point is the thing that "really sets them apart", says Plowden. Take Amazon and its AWS cloud-computing business. Five years ago no one much noticed it. It was, "if you like, a moonshot". Now it makes up 40%-50% of its valuation. The firm will come up with other businesses in a similar vein, probably to do with AI. "We don't know what they'll be but that's why we're backing them if you really want to make money in equities, you have to follow the ambitious."
I ask which stock he would choose if he could have only one to hold for ten years. He hums and haws a bit: there are a lot of good firms. But in the end he chooses a recent purchase Chinese online travel agency Ctrip. The Chinese are on the move and Ctrip has a 70% share of the still-immature online booking market. In five years' time "it could be four times the size it is today". Fingers crossed.
On to the third category of growth: "cyclical growth", that is, companies that can grow over the long term, but go through cycles. Here what Monks is looking for are firms with clever managers who recognise that they are in cycles and allocate capital appropriately: they hold back at the top of the cycle and spend at the bottom. Think "the opposite of the British banking industry: this did all its acquisitions in the early 2000s when everything was booming".
It looks to me, I say, as if you have found a way to fit every company in the world into one of your growth categories. No, says Plowden: we have found a way to "fit every growth company in the world into our portfolio". Growth, as he defines it, is "a broad church" and takes you beyond the obvious. Clearly.
Looking for latent growth
We move on to the last category: "latent growth". These firms are "effectively deep cyclicals" (or what some other investors might call value stocks). They are in industries that "have been awful for years, maybe decades, but where something is changing and the future will be much better". The thing to look for here is consolidation: "most consolidated industries are very profitable for the survivors".
Take Japanese non-life insurance: "17 players, 15 years ago, three players today with 90% of the market". Monks holds MS&AD Insurance. A similar dynamic has played out in semi-conductor testing: today there are only 2.5 players left. Here Monks holds the "one that makes profits consistently" US firm Teradyne. Another recent small purchase isVeeco Instruments, which is one of two firms making equipment for producing high-quality LED lightbulbs.
The other is heavily loss-making and on the way out, leaving Veeco with a "de facto monopoly" at a time when demand is growing at 100% a year. This is the kind of company that can give you an amazing return: you should benefit from the firm's return to profit, but also from the recovery in the valuation as other investors notice.
Plowden's co-managers fancy other growth types (Spencer Adair is into "blue-sky" growth and Malcolm MacColl likes a good stalwart), something that leaves him free to focus on his favourites. The investment decisions are made by all three as a group (two have to want to buy for an order to be placed), but the real benefit of working in a team is the "mix of personalities and skills" it offers. The approach seems to be working for Monks.
The trust had been underperforming under its previous manager, but is up around 20% in the last 18 months. Performance should be helped by its low ongoing charges (around 0.59%), by the use of gearing and by its aggressive growth strategies. However, readers should note that this not a low-risk fund: 47% of its holdings are in the US and nearly 4% is in Amazon, for example.
Factfile: Charles Plowden
Charles Plowden joined Baillie Gifford in 1983 after studying modern history at Oxford. He became a partner in 1988 and since 2006 has been joint senior partner with overall responsibility for the investment department.
He has managed the firm's Global Alpha strategy since 2005, while he and co-managers Spencer Adair and Malcolm MacColl took over running the £1.3bn Monks Investment Trust (which dates from 1929) in March 2015.
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