The £2.7 billion Monks Investment Trust (LSE: MNKS) sits in the shadow of its £13 billion Baillie Gifford-managed stablemate Scottish Mortgage (LSE: SMT). However, it boasts a strong record, it is less concentrated – no holding exceeds 5% of total assets – and unquoted investments account for just 6% of the total. So it offers an interesting, lower-risk alternative to SMT.
Indeed, over five years, Monks’ investment return has been 26% against 11% for SMT, and over three years, 47% against 51%. In the last year, helped by its higher exposure to private equity, SMT has moved ahead – returning 17% against 10% – but Monks has outperformed most other global trusts over one and three years.
Monks delivers global growth
“Growth doesn’t have to come at the expense of resilience,” says deputy manager Helen Xiong, who will take over when Spencer Adair retires this year after 26 years in charge. “The US market multiple of earnings is high relative to its history, but that doesn’t mean it’s expensive. It is more concentrated than it has ever been, with the S&P’s top ten accounting for 40% of the index’s value, but giant companies are still growing at double-digit rates. Twenty years ago, the largest companies were mature and facing diminishing returns to scale.”
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The portfolio is divided into three sections: rapid growth, stalwarts and cyclical growth. Rapid-growth companies are usually founder-led and expanding into new markets, so execution is critical.
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Take food delivery group DoorDash, which has expanded into the UK recently by buying Deliveroo. Its rival JustEat is owned by Prosus, the fifth largest holding in the portfolio, but the bulk of Prosus’s value comes from owning 23% of Chinese tech giant Tencent.
Stalwart growth companies such as Mastercard and Disney are established, durable businesses that are self-funding and growing at 10-15% per annum. Meanwhile, cyclical growth companies are capable of double-digit growth in the long term, but not evenly. When profits fall at times, companies should continue to invest, as budget airline Ryanair did during the pandemic. “Its valuation premium hit a historic low of 10% recently despite growth expectations much better than the market,” says Xiong.
“We look for internal drivers of growth rather than macro-driven ones.” Yet Monks is prepared to be opportunistic. “A strong rally in poor quality value companies gave us the opportunity to buy growth companies at good valuations recently, such as MSCI, Games Workshop and Keyence.”
Monks's long-term focus
Xiong is refreshingly honest about mistakes. “We have been wrong on Novo Nordisk,” she admits. “Our thesis that obesity would change from being a lifestyle to a more complex metabolic problem was right but we were wrong on execution.” Uber has been “a great product but not a great business” – although that may be changing as “other robotaxi operators will want to use the simplicity of the Uber network”.
As with all Baillie Gifford funds, Monks focuses on stocks for the long term rather than prognostications about the market or the economy. The portfolio turnover is just 20% annually. Borrowings for investment purposes are 8% of net assets, indicating little concern about a “bubble” in growth stocks or AI.
“I don’t believe AI is a bubble,” says Xiong. “It has the potential to change more of the global economy than the mid-teens percent of the economy accounted for by the internet. The growth rate and quality of the largest companies justifies their valuation, rightly a little higher than the market.”
For those who want global growth, but are nervous of SMT – or have enough exposure to it – Monks remains an attractive alternative.
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