Monks (LON: MNKS) aims to generate long-term capital growth by investing in a differentiated and actively managed global portfolio of growth stocks. Over the last few months this has been a difficult place to be with the shares down 26.5% in the year to the end of May, which is a massive 34% behind its FTSE World benchmark.
Despite the recent struggles the managers have said that they are going to stick to their longstanding approach that had worked so well over the years. This is based on the identification and patient ownership of exceptional companies that have the potential to deliver attractive rates of earnings growth over the long-term.
As with Baillie Gifford’s other mandates, the portfolio is constructed using a strategy of unconstrained stock selection that means that it can perform very differently to the benchmark. The firm has a unique way of thinking about growth with the investments being divided into three different categories: rapid growth (40% of portfolio), growth stalwarts (34%) and cyclical growth (26%).
Portfolio process
Rapid growth stocks are normally early stage businesses with vast potential whose earnings are increasing by 15% to 25% per annum. The stalwarts tend to have durable franchises that can deliver robust profitability in most economic environments, while the cyclical growth holdings are subject to macroeconomic and capital cycles but have significant structural growth prospects.
Monks has a much more diversified portfolio than its bigger and better known peer Scottish Mortgage (LON: SMT) with the 21 highest conviction stocks each accounting for around two percent of the portfolio (47% of NAV).The typical position size of the next tier down is about one percent, with the 34 companies making up 32.3% of the assets, while the 60 incubator holdings are smaller and represent the remaining 20.7% of the fund.
At the end of May the largest weightings included: the Schiehallion Fund, a listed private equity fund managed by Baillie Gifford; Microsoft; Alphabet; Martin Marietta Materials; Moody’s and BHP Group. The main geographic allocations were the US at 54%, Europe 15%, Emerging Markets 12% and the UK eight percent.
A leap of faith?
The manager is reassured by the operational progress of the portfolio with sales across the various holdings forecast to grow at 17% over the next five years versus 10% for the wider market. They have also looked at the impact of rising inflation and believe that the fund is skewed towards businesses with a high degree of flexibility to cope with the surge in prices.
The sell-off has been brutal with the shares now back to where they were during the March 2020 Covid crash and they are currently trading at around a 10% discount to NAV. Investec has recently reiterated their buy recommendation, as they regard Monks as a core holding for investors looking to achieve a diversified exposure to Baillie Gifford’s best global ideas.
Despite the recommendation they warn that the macroeconomic storm of higher inflation and rising interest rates that has caused so much pain for growth investors is still some way from passing. In view of this the safest strategy would be to add it to a watch list and then gradually build your position over the next few months.