Patience has proven less of a virtue for shareholders in Monks Investment Trust, the little brother of Baillie Gifford’s star fund Scottish Mortgage. The promise of high future earnings growth is less enticing as elevated inflation and aggressive interest rate rises have sapped risk appetites.
For FTSE 250 constituent Monks, a bias towards stocks priced for racy growth has resulted in an almighty comedown from the share price boom in the pandemic. The trust has recorded a 5.2 per cent slide in the value of its portfolio versus a fall of only 0.3 per cent in the benchmark it seeks to beat, in the latest six months. Investors are braced for further declines, with the shares priced at a discount to the trust’s net asset value of just 8 per cent.
A six-month underperformance of the FTSE All-World, in sterling terms, is not surprising for anyone who has taken a look at Monks’ holdings. Its top ten holdings include the US technology giants Microsoft and Google’s parent Alphabet, which have suffered a hefty sell-off. But it is businesses exposed to consumer demand that delivered the heavier blow, including high-end exercise bike maker Peloton and online used-car retailer Carvana. Those holdings have been ditched. Likewise, the trust has trimmed its exposure to Chinese companies, which account for 2.9 per cent of assets, down from 4.1 per cent at the end of April. The bulk of the turnover in stocks is done, according to Spencer Adair, its lead manager.
The question for investors now is whether the worst of the damage is over and if the discount embedded in the share price represents a buying opportunity. There remain impediments to the value of the portfolio recovering its former glories in the near term.
Monks has ditched some turkeys. But elsewhere, heavy share price falls have been seen as a value opportunity, with existing holdings in online fashion retailer Farfetch, South Korean ecommerce company Coupang and pet supplier Chewy increasing in recent months. But those companies remain at the mercy of consumer spending power.
The danger is that the drag on the trust’s performance from those companies is compounded. And even after the sell-off suffered by some of its holdings, the average forward price/earnings ratio for the portfolio stands at almost 20, versus a multiple of 15 for the benchmark. Growth stocks could remain out of favour while inflation is elevated.
Another way of looking at it? There are signs that the ferocity of inflation and efforts by the Federal Reserve to tame consumer price rises might both be easing. In October US consumer price inflation cooled to 7.7 per cent, down from 8.2 per cent in September. Markets are pricing in a lower peak in interest rates, which are now expected to top out in May at 4.93 per cent, from the 3.75-4 per cent current federal funds rate.
What’s more, Monks continues to suffer a less severe decline in the value of its assets than its larger peer, Scottish Mortgage, amid the shift away from speculative growth stocks. Why? While the latter runs winners in a big way, Monks’ portfolio is more diverse, a consequence of the broader definition managers attach to growth. As well as the usual tech names, Monks also names insurance company AJ Gallagher, building materials supplier CRH and budget airline Ryanair in its top 30 holdings.
Buying and holding stocks over multiple years in an attempt to benefit from compound returns is a shrewd strategy. Monks’ bias towards stocks with punchy valuations is riskier. This time last year it could point to a ten-year outperformance of the FTSE World index, but recent performance has eaten away at that lead. With inflation easing, there is the chance that the worst of Monks’ slide might be approaching.
ADVICE Hold
WHY The shares could recover some of their recent losses if inflation continues to ease
Moonpig
Moonpig is a natural victim of the downturn in consumer spending on non-essentials. Convincing customers to splash out on a personalised greeting card is a harder sell and people are trading down on gift purchases.
The result? The online greeting card company has cut sales guidance for this year to about £320 million, from the £350 million previously expected. Revenue over the latest six months was flat, even after lumping in the almost £12 million revenue generated by acquiring the gifting and experiences companies Red Letter Days and Buyagift in July. Trading conditions worsened in October and November; Royal Mail industrial action hasn’t helped.
Not surprisingly, investors have rebased their growth expectations. The shares now trade at 11 times forward earnings, far below a multiple of 42 recorded at the time of the group’s IPO in February last year. That is not enough to make the shares appealing for bargain seekers.
As is the case with companies attempting to execute on lofty growth ambitions, Moonpig has been spending big to capture market share. That is less palatable when macroeconomic conditions worsen.
Over the six months to the end of October, administrative and selling expenses rose by about a third, which was responsible for the halving in pre-tax profits during the period. That spending included additional staff and technology investment — hiring is due to slow but plans for more “discipline” around controlling costs elsewhere remain vague.
Yet Moonpig has been spending faster than revenue has been growing over the longer term, too. Over the three years to the end of October revenue increased 115 per cent but has been outpaced by a 147 per cent rise in selling and administrative expenses over the same period. Without reining spending in the group is more vulnerable to a worse slowdown in sales.
The interest bill will also rise this year. Finance costs are set to almost double during the second half, compared with the first six months, totalling between £14 million and £15 million for the financial year. Catalysts for the shares are hard to spot in the near term.
ADVICE Avoid
WHY A slowdown in sales and elevated spending could mean profit expectations are missed
