Trustnet Magazine Issue 10 September 2015 | Page 16

INVESTMENT STRATEGY

GETTING THE
GROWTH HABIT
James Budden says that while investors may think all growth is good, not all growth is
the same. Monks Investment Trust distinguishes between four different types

M

onks Investment Trust has
an intriguing provenance.
It was established in 1929
as one of three trusts, the other two
being Friars and Abbots. They began
life registered at Austin Friars in the
City of London, formerly the home
of Thomas Cromwell of Wolf Hall
fame. They were the brainchild of
Lord Geddes who became President
of The Board of Trade after World
War One and who also knew a
thing or two about investment. He
was also a friend of Carlyle Gifford.
Monks has been managed by
Baillie Gifford since 1931 and
subsequently gobbled up Friars and
Abbots in 1968.
Much more recently, in March
2015, Baillie Gifford’s Gerald
Smith handed over the reins
of management to Charles
Plowden, one of the firm’s senior

partners, who is supported by
fellow partners Spencer Adair
and Malcolm MacColl. Out went
Smith’s opportunistic growth
approach and in came Plowden’s
core growth strategy. What has
not changed is the company’s
objective and policy of investing
internationally to achieve capital
growth, which takes priority
over income and dividends. The
Plowden strategy now being
applied to the £1.1bn Monks
Investment Trust has been in

existence since 2005 and currently
invests some £20bn on behalf of
institutional clients worldwide. It
goes by the name of Global Alpha
but this strategy is now closed to
new investors. So Monks is the
only way to access the team.
The Global Alpha team’s
approach is quite distinctive,

BAILLIE GIFFORD

UNDERLYING GROWTH IS
CRITICAL, BECAUSE THE
TEAM BELIEVES SHARE
PRICES WILL FOLLOW
FUNDAMENTALS IN THE
LONG RUN
based on a differentiated, active
portfolio, a diversified range
of growth stocks and a patient
approach to investment. This
philosophy underpins its
ambition to outperform. The key
is finding the right companies. As
active investors, the team does not
try to track any indices, so returns
may vary considerably from those
of the index. The managers pay
less attention to where companies
are listed than where they
generate sales and profits.
Underlying growth is critical,
because the team believes share
prices will follow fundamentals in
the long run. In other words,
growth should drive returns.
You may think that all growth
would be good, but not all growth
is the same. Monks invests in
growth stocks from different
perspectives. The managers
distinguish between four different
kinds of growth and group the
companies in which they invest
accordingly.

1

STALWART GROWTH

2

RAPID GROWTH

3

CYCLICAL GROWTH

4

LATENT GROWTH

Stalwart growth companies include Schindler, the Swiss lift and
escalator manufacturer. These tend to have durable franchises that
may enable them to deliver robust profits in most macroeconomic
environments. The managers expect these companies to produce
earnings growth of about 10 per cent a year over the long term.
Rapid growth companies may be able to deliver double-digit or even 15
to 25 per cent profit growth in five years’ time. These are often younger
companies, growing fast by developing innovative technologies and/
or taking market share away from existing ones. They may create new
markets, or attack ones that already exist. Schibsted, the Norwegian
media group, has achieved rapid growth by divesting away from
traditional print media towards the faster-growing online classified
sector.
Despite having material growth prospects, some companies are
subject to the influence of macroeconomic or capital cycles, or even
both. These companies may benefit from the growth cycle and the
managers may feel the market is under-pricing them, perhaps due to
a lack of patience. The managers look for adaptable businesses with
management teams they trust, such as Swedish-based bank Svenska
Handelsbanken and commercial vehicle manufacturer Volvo.
Latent growth companies often have unspectacular recent operating
records. The managers usually buy these after identifying an aspect they
believe will allow above-average earnings growth and help cash flow to reemerge. They expect to make money in these stocks as the market begins
to anticipate higher earnings growth. Fiat Chrysler Autos and Carlsberg
fit into this category. If the managers buy the shares but later realise their
initial assumptions were mistaken, their portfolio framework provides the
structure to help them decide to sell and move on.
All this adds up to a distinctive and disciplined portfolio designed
to provide investors with a core element to their own portfolios.
Monks may have changed its clothes this year but it remains
devoted to the growth habit.

MONKS’ SHARE PRICE DISCRETE PERFORMANCE (%)
30/06/2010 - 30/06/2011
21.9

30/06/11- 30/06/2012

30/06/12- 30/06/2013

-7

10.5

30/06/13 - 30/06/2014
11.8

30/06/14 - 30/06/2015
10.4

Source: Morningstar, total return. Past performance is not a guide to future returns.

Important Information: All data is at 30 June 2015 unless otherwise specified. The Monks Investment Trust PLC is managed by Baillie Gifford & Co Limited and is a listed UK company. As a result, the value
of its shares, and any income from them, can fall as well as rise and investors may not get back the amount invested. Investments should be viewed as long-term. Investments with exposure to overseas
securities can be affected by changing stock market conditions and currency exchange rates.
Investment trusts are listed on the London Stock Exchange and are not authorised or regulated by the Financial Conduct Authority. The views expressed in this article are those of James Budden and should
not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed
on them when making investment decisions. This article contains information on investments which does not constitute independent investment research. Accordingly, it is not subject to the protections
afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned.
This article is issued and approved by Baillie Gifford & Co Limited (company registration no. SCO69524), which is the manager and secretary of seven investment trusts and based in
Scotland at Calton Square, 1 Greenside Row, Edinburgh EH1 3AN. Baillie Gifford & Co Limited is authorised and regulated by the Financial Conduct Authority whose address is 25 The North Colonnade,
Canary Wharf, London EH14 5HS.

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