Last year was one in 20, reckons Spencer Adair, manager of Monks, a time to cut holdings in winning stocks as valuations became stretched too highly. “I should have been more aggressive in trimming those,” he said.
A bias towards companies priced for high future earnings growth means Monks Investment Trust, the little brother of Scottish Mortgage, the former Baillie Gifford investment trust star, has been dealt a particularly bloody blow by rising inflation and the prospect of more aggressive interest rate rises. Over the 12 months to the end of April, the FTSE 250 constituent recorded a negative net asset value total return of 18.9 per cent versus a positive 6.1 per cent return for the FTSE World Index.
Growth-bias aside, two more factors sapped performance. One, exposure to loss-making companies, such as the online luxury goods retailer Farfetch, which account for roughly 13 per cent of the trust’s net asset value. Two, holdings in Chinese companies, which have suffered as a result of the clampdown on technology companies and broader concerns around the health of the world’s second largest economy.
Share price returns over the past 12 months have been poor for Monks, but less dire than that recorded by Scottish Mortgage. Why? While the latter runs its winners in a big way, Monks’ portfolio is more diverse, a consequence of the broader definition the managers attach to growth. Monks names the usual tech giants, such as Google-parent Alphabet, Tesla and Microsoft among its top ten holdings, but the portfolio also includes companies such as Ryanair, Rio Tinto and the building materials supplier CRH. Adair and his co-manager, Malcolm MacColl, seek companies with a chance of doubling in share price in the next five years.
Investing in Monks requires shareholders to hold their nerve. The economic outlook is shakier, which naturally adds more risk to investing in the stock market. It also means there is likely to be more pain for companies still valued for high future growth in the near to medium-term.
But the (almost) wholesale sell-off in global equity markets since the start of this year also brings with it the chance for investors to pick up quality stocks far more cheaply.
Where to find those? Not since the immediate aftermath of the 2008 financial crisis have the potential sources been so wide-ranging, Adair reckons, from companies whose earnings are more closely tied to the fortunes of the economy but that look better placed to survive a downturn, to those that were previously too pricey to buy into.
Adair puts software specialist Adobe in the latter category, a company with a strong balance sheet, a high level of recurring revenue and margins above 90 per cent, but which has halved in value since its peak.
Monks’ stock turnover is low, a trait shared by Baillie Gifford investment trusts, with the average holding time for companies of nine years. That can have its drawbacks, knowing when to cut losers adrift is hard. But so too, can be selling in haste, something investors in Monks shouldn’t do. The discount attached to the shares versus NAV has widened to 10 per cent, approaching the levels recorded after the 2020 market crash, narrower than the 15 per cent discount shares in Scottish Mortgage trade at. The latter runs its winners hard, which in the current downturn has inflicted more pain, but has also given it a more spectacular longer-term growth record versus the index. Backing Scottish Mortgage is riskier but could pay off more in the long-run for those with the stomach.
ADVICE Hold
WHY A wider discount reflects the likelihood of more pain in the near future, but the shares could re-rate over the longer-term
Telecom Plus
Soaring wholesale energy prices have levelled the playing field among suppliers but Telecom Plus has gained a relative advantage. With no price war raging, the energy, broadband and insurance supplier, which trades under the Utility Warehouse brand, stands a chance of competing against its larger rivals.
By bundling services together, Utility Warehouse offers customers a cheaper deal than if they signed up for them individually. That newfound edge is already seeping through to the bottom line. Speedier growth in new customers and a reduction in churn to just 3 per cent, versus a historical rate of about 10 per cent, saw customer numbers jump by a fifth during the second half of last year, equal to the rate of growth recorded during the previous five years combined.
Better growth in energy customers, the group’s bread and butter, saw adjusted profit guidance for this year raised to £75 million, ahead of forecasts and 21 per cent higher than last year. A forward price/earnings ratio of 24, only slightly ahead of the five-year average multiple of 22, does not adequately reflect better profit growth prospects.
Ofgem reforms could also prevent a return to the sort of aggressive discounting that allows loss-making companies to rapidly take market share. Co-chief executive Andrew Lindsay reckons the group can add another one million customers over the next four to five years, which would represent a compound annual growth rate of 20 per cent out to 2027, ahead of the 17 per cent anticipated by Numis. Analysts at the brokerage think compound annual adjusted pre-tax profit growth will mirror that rate of customer gains.
Bad debts are a caveat to profit growth remaining on course, but non-payments declined to 1.2 per cent of revenue last year.
A capital-light business model means that the utility provider has a record of generous cash returns. Stronger profit growth and a policy to pay out about 85 per cent of adjusted earnings raises the prospect of a higher dividend of 65p a share next year. Even after a 13 per cent rise in the share price since the start of this year, that represents a potential yield of 3.6 per cent.
ADVICE Buy
WHY Profits could accelerate if customer churn stays low and bad debts are kept in check
