Profiting from change is the only constant

The value of your investment and any income from it can go down as well as up and as a result your capital may be at risk.

If there’s one thing that 2020 taught us, it’s that change is the only constant. Coronavirus, and the global lockdown which has accompanied the pandemic, has transformed the outlook for some industries utterly, while accelerating the pace of change in others. It’s a reminder that while an awareness and understanding of economic cycles of the past are critical for any serious active investor, comparisons with history can only be taken so far. “Reversion to the mean” is a useful concept in markets, but an overzealous application of the principle can blind an investor to the reality that throughout history, technological progress and unexpected events have rendered entire industries obsolete, while opening up new and highly profitable opportunities in areas that were once inconceivable.

Indeed, few things matter more to an investor. Change dictates supply, demand, corporate fundamentals, sales and profits. Moreover, it is well documented that in the long run, overall stock market returns are generated by a tiny minority of hugely successful companies that are able to stay ahead in a hyperdynamic world. Change is the oxygen that supercharges these outlier companies. And if anything, the rate of change is accelerating, with disruption posing a threat in some form or other across almost all major industries. Therefore, active investors who hope to outperform wider markets over the long term need to find a strategy that enables them to find and then stick with companies that have what it takes to stay on the right side of change. So how does The Monks Investment Trust approach this task?

One of the most important points to note about change is this: investing in change is not about predicting the future – it is simply about observing what is happening in the present. ‘Megatrends’ – such as the rise of China, digitalisation, the electrification of vehicles, the growth of ‘Big Data’ – play out over decades, not quarters. These are not ‘black swan’ events – they are ongoing processes, observable in real time. Nor does investing in change mean constant portfolio turnover (indeed, in The Monks Investment Trust, the average holding period is around five years).

Instead, we look for the most promising growth opportunities across four categories. There are “rapid” growth stocks, which are the kinds of companies that probably most readily spring to mind when thinking about the power of change. These are highly innovative, dynamic businesses creating new markets and disrupting existing industries. South Africa-headquartered internet giant and technology investor Naspers is a good example, investing across sectors from fintech to food delivery.

Then there are ‘stalwarts’ – companies whose dominance within key sectors means they should be able to grow even within the toughest economic conditions. Good examples today include Microsoft, with its role in technological infrastructure, or Mastercard’s power within the payments processing network. However it might also include a company like Spotify, with its potential dominance of music streaming.

The other two categories are ‘cyclical growth’ stocks – companies where investing at low valuations during advantageous turns in the economic cycle can produce strong returns; and ‘latent growth’ – those out-of-favour companies where catalysts, such as a potential change of management or strategy, exist to alert markets to their true potential.

The relative weights of the four categories will shift depending on both secular (long-term) and cyclical (shorter-term) changes. For example, in a weaker economic environment, stalwarts will come into their own, whereas during a recovery period, cyclical growth stocks may offer excellent opportunities.

The Monks Investment Trust uses this flexible but resilient framework to build a diversified portfolio of the most promising growth stocks from all around the world. To find out more, register here to watch our recent webinar, where Merryn Somerset Webb interviews Charles Plowden, manager of the trust, about our process, our portfolio, and about the outlook for the post-pandemic era.

Important information

Investment markets and conditions can change rapidly. The views expressed are those of the speaker, are not statements of fact, and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. No reliance should be placed on these views when making investment decisions. The Trust invests in emerging markets where difficulties in dealing, settlement and custody could arise, resulting in a negative impact on the value of your investment.

Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). The investments trusts managed by Baillie Gifford & Co Limited are listed UK companies and are not authorised and regulated by the Financial Conduct Authority. A Key Information Document is available by visiting www.bailliegifford.com

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