By Mark McSherry
Baillie Gifford’s £2.8 billion Monks Investment Trust plc has reported “an encouraging return to positive relative performance” for the year to April 30, 2024.
Monks said its net asset value (NAV) total return was +17.6% and share price total return was +19.1% — matching the FTSE World Index return of +19.1%.
“The second half of the year provided much stronger returns than the first half, with a NAV total return of +21.6% and a share price total return of +28.5% compared to +16.6% from the index,” wrote Monks chairman Karl Sternberg.
“This is an encouraging return to positive relative performance after the last two years’ declines; but we are well aware that on a NAV basis, this is the third year of underperformance.
“The managers have been actively repositioning the company’s portfolio, identifying growth equities with the characteristics to perform well even in the more challenging economic environment.
“The essential thesis of the managers’ original investment approach is unchanged, but the experience gained in the last few years has refined its application, particularly focusing on valuation discipline.”
The biggest holdings of the fund during the year included cement and aggregates manufacturer Martin Marietta Materials, Microsoft, Meta Platforms, Amazon.com, Elevance Health, Ryanair, building materials firm CRH, Moody’s, Indian energy conglomerate Reliance Industries, seminconductor manufacturer TSMC and US food delivery platform DoorDash.
Monks said it sold its holding in miner Rio Tinto because “concerns regarding governance and the approach to environmental impact were not adequately addressed.”
The fund’s direct investments in businesses with fossil fuel related activities totalled 2.6% versus 4.8% for its index at the year end.
Over the course of the financial year Monks bought back 16.7 million shares at an average discount of 10.4% and a cost of £172.9 million.
Since the fund commenced this active buyback programme in January 2022, it has bought back 39 million shares at a cost of £406 million, representing 16.5% of the company’s issued share capital as at December 31, 2021, and one of the highest buybacks as a percentage of issued share capital in the global equity sector.
At the year-end, the discount had narrowed to 8.5%. Monks intends to continue its buyback policy.
Monks invests with the aim of maximising capital growth rather than income. Its policy is to pay the minimum dividend required to maintain investment trust status. Sternberg wrote: “In order to build in headroom for further buybacks that would reduce the shares in issue qualifying for dividends, the board is recommending that a single final dividend of 2.10p be paid, compared to 3.15p last year, to ensure that the amount retained for the year does not exceed that permissible.”
The managers of Monks — Malcolm MacColl and Spencer Adair — wrote: “The past year in financial markets may best be described as a ‘game of two halves’. The first was a cagey and nervous affair. The dominant narrative was uncertainty relating to the prospect of a US recession.
“The second half was much more encouraging. Against a backdrop of growing optimism as inflation stabilised and central banks paused interest rate increases, investors continued to recognise the transformational potential of artificial intelligence (AI).
“This manifested most obviously in the share prices of some of the world’s largest technology stocks (several of which we own within Monks). Equity indices rallied, driven by these companies, and, in some cases, hit new highs.
“Similarly, the second half of our financial year delivered markedly stronger results than the first. A net asset value (NAV) total return of +21.6% (the index delivered +16.6%) compares strongly to the first half of the year …
“The Global Alpha team (at Baillie Gifford) has managed Monks for nine years. Over this period, the fair value NAV total return has been +166.6% (share price +175.6%) compared to the comparative index (FTSE World) which returned +170.8%.
“In the twelve months to the end of April, the portfolio underperformed the comparative index (FTSE World) by -1.5%, delivering a NAV total return of +17.6% (share price +19.1%) against the index total return of +19.1%.
“Our insurance and healthcare holdings were among the largest detractors from relative performance. The share prices of AIA, Ping An and Prudential (totalling 3.0% of the portfolio) fell by an average of -34% in the period.
“The lingering effect of the pandemic on the Chinese economy curtailed active selling opportunities (as sales force activity remains below pre-pandemic levels) and weakened consumer demand.
“We have sold our positions in Ping An and Prudential. We believe that AIA is best placed to take advantage of the significant structural long-term growth opportunity that remains in China (and across Asia more broadly), where the ‘protection gap’ is large.
“AIA is seeing demand return, is growing its salesforce once again (having cut back during COVID), and has recently been granted licenses in five new Chinese territories expanding its addressable market …
“We have sold Novocure (cancer treatment). Our central expectation was that it could successfully expand its addressable market by applying its tumour treatment field technology, designed to treat solid-state brain tumours, to cancers affecting other vital organs. Setbacks in recent clinical trials have negatively affected the probabilities of success and weakened our conviction in the investment case.
“The majority of the portfolio holdings are adapting and executing well. Several holdings have proven their adaptability by exerting exceptional pricing power and have been the strongest positive contributors to portfolio return.
“Martin Marietta (aggregates and building supplies) is a case in point. It has been able to increase aggregate pricing significantly (+14% year-on-year) and deliver record levels of profitability. It has been a similar story at CRH (cement and building supplies), which was the second-largest contributor to portfolio return.
“Elsewhere, Meta (social media) as one of our ‘Stalwart’ growth holdings, has unleashed the power of its advertising estate by leveraging its growing AI capabilities to improve its utility to merchants. This has driven demand for its advertising capacity and gradually improved pricing. In conjunction with sensible cost control and more disciplined growth spending, Meta has delivered a doubling of net income (+117%) year-over-year.
“Others have executed flawlessly. Rapid Growth holding DoorDash, the leading US food delivery platform, was the third largest positive contributor to the portfolio’s return.
“The company’s commitment to improving its offerings for consumers, merchants, and delivery riders (known as Dashers) has propelled monthly active users to a record high, alongside a significant increase in average order frequency.
“It now has almost two-thirds of the online meal delivery market in the US and grew revenues at +27% year-on-year. DoorDash is making strong progress in new markets too, including online grocery delivery, as it seeks to become the convenience platform of choice for consumers in the US …”