Monks Investment Trust has endured a bruising 18 months, with its holdings severely marked down as interest rates have risen. Now, however, the managers of the former market darling say that the “ruthless weeding” of its portfolio is done.
The FTSE 250 fund, managed by the Edinburgh-based Baillie Gifford and a smaller stablemate of Scottish Mortgage, was wrongfooted by the extent of financial tightening in the wider economy and was pushed to rethink investments in companies more vulnerable to higher rates, rampant inflation and weaker consumer spending.
A style shift among investors is not to blame, though. Disastrous share picks including Carvana, the American used car retailer, and Peloton, the company behind the lockdown exercise bike craze, also wiped out returns. Last year, it sold twenty stocks in its portfolio, an elevated amount for a manager known for holding stocks for five to ten years.
What now? Anyone expecting a flight to safety would be wrong. In fact, Monks plans to allocate capital away from more established names such as Microsoft and MasterCard to those more closely tied to the fortunes of the economy and earlier-stage businesses, which the managers reckon are capable of delivering higher growth. The idea is to take advantage of the sell-off in more cyclical stocks, which it hopes will perform over the long term. These include Entegris, an American semiconductor specialist, and PoolCorp, America’s largest supplier of pool maintenance products.
Right now, just under 40 per cent of Monks’ assets fit into the “growth stalwarts” bucket, which typically means established brands that deliver profit even in difficult times. There’s room to reduce that allocation by between five and ten percentage points over the next year to eighteen months, the managers think, as well as to steadily increase gearing by up to four percentage points from a present historically low level of 6 per cent.
The drip-sale of Chinese stocks that started 18 months ago has been paused, partly a reflection of China’s reopening post-Covid but also of a change in the tone of rhetoric from Beijing. Direct and indirect holdings in Chinese companies now account for just under 10 per cent of assets, higher than the 7 per cent weighting at the end of October. Higher gearing can amplify losses.
The 12-month slide in the value of Monks’ assets stood at 6 per cent at the end of February, against a 3 per cent gain by the FTSE All-World Index, the yardstick it attempts to beat. That’s disappointing, but is less catastrophic than the near-28 per cent decline suffered over the year to the end of October, against a fall of only 2 per cent from the index.
Some of that narrowing in the gap against the benchmark is a function of the scale of sell-off in many of Monks’ portfolio. But if interest rates are nearing their peak, then the damage wrought by the shift away from lavishly valued stocks might be in the past. Monks’ working hypothesis is that big economies are past the bulk of rate increases.
Shareholders may also feel more at ease as, unlike Scottish Mortgage Investment Trust, Monks is a long way from brushing up against the limit of its exposure to private companies. Unlisted holdings account for only 2.2 per cent of assets. That rises to a mere 4.4 per cent if you include its stake in The Schiehallion Fund, another Baillie Gifford fund that invests in private companies but is itself listed on London’s main market.
A tightening in liquidity means that growth will be harder to come by for funds such as Monks, but the worst of the pain for investors might be over.
ADVICE Hold
WHY The worst of the fall in assets might be over if rate rises are near their peak
Impax Asset Management
Points of difference that justify a higher fee are getting harder to come by for active asset managers. Impax Asset Management has been able to lay claim to specialising in sustainable investment before it was popular enough for mainstream money managers to really chase the cash being allocated to greener strategies.
The Aim-traded group’s own record on growth might convince some investors that it is worthy of stumping up more for the stock. The shares have long traded at a premium to rival stocks, even if that has narrowed to just under 21 times forward earnings in light of the market turbulence.
Net inflows amounted to £326 million over the first three months of this year, representing 6 per cent organic growth, in spite of the market chaos unleashed by the banking crisis earlier in 2023. That is indicative of a more consistent record of growth. Over the past three years, the fund manager has incurred only a quarter of net outflows, in contrast with other asset management companies, such as Abrdn and Jupiter Fund Management. Impax is not as closely tied to the fortunes of the domestic economy, either, with about 80 per cent of its assets outside Britain.
Weaker stock markets are likely to hit revenue growth this year, which with cost inflation and new hires — including staffing a recently opened office in Tokyo — are expected to hit the margin. Analysts at Berenberg have forecast an underlying cost-to-income ratio of almost 65 per cent this year, up from about 61 per cent over the past two years, before a return to form next year.
Impax reckons it has the capacity to increase assets under management by at least 60 per cent to between $80 billion and $100 billion, or £64 billion to £80.4 billion at present exchange rates, simply by adding more clients to its existing strategies. Net cash of £52 million means there is also firepower for more acquisitions, which are more likely in fixed-income or private markets, where it has only a fledgling presence. If Impax can sustain its organic expansion record, the stock should regain more of its growth premium.
ADVICE Buy
WHY Consistent organic growth deserves a higher valuation
