A differentiated approach to growth investing: Monks Investment Trust

MNKS offers a differentiated approach to growth investing…by Jean-Baptiste Andrieux

Overview

 
Monks (MNKS) aims to serve as a core holding, providing investors with exposure to a diverse range of growth opportunities across the globe, including both developed and emerging markets.

The Portfolio is structured into three key buckets: rapid growth, growth stalwarts and cyclical growth. These categories reflect the types of businesses managers Spencer Adair, Malcolm MacColl and Helen Xiong seek – ranging from disruptors in high-growth industries to durable franchises that can deliver robust returns regardless of macroeconomic conditions, as well as businesses operating in more cyclical areas and with typically underappreciated growth potential.

The portfolio is currently slightly skewed towards rapid growth, the Managementteam having topped up their positions in some of the strong performers within this bucket, such as NVIDIA and DoorDash. They also introduced a new holding, Dutch Bros in the first half of the trust’s 2024 financial year, a US-based coffee chain that has experienced rapid revenue growth since 2019 and has plans for significant store expansion. Additionally, five new companies were added to the cyclical growth bucket in 2024, including Builders FirstSource and Norwegian Cruise Line Holdings.

As these recent additions suggest, MNKS has a bias toward small- and mid-cap companies relative to its benchmark and sector peers. The managers have identified companies in this segment of the equity market that are experiencing strong earnings growth but have been overlooked by the market, which has favoured tech mega-caps over the past two years. As such, MNKS has lagged its benchmark in 2023 and 2024, despite delivering double-digit returns in each calendar year.

Over the past 18 months, the managers have also aimed to increase conviction in what they consider their best ideas. As a result, they have been reducing the number of holdings, from 120 to around 100 by the end of last year, with 13 names sold in 2024 alone.

Analyst’s View

In our view, MNKS offers a diversified and differentiated approach to growth investing, with the strategy blending different types of growth opportunities, including companies operating in sectors not typically associated with this style of investment. This contrasts with other investment companies in the AIC Global sector sharing a similar factor bias, as these tend to focus specifically on either high-growth or quality-growth names. Nonetheless, MNKS remains a stylistic strategy and may underperform when growth stocks fall out of favour.

That said, central banks are expected to continue cutting interest rates in 2025, which could create a more favourable environment for the trust’s holdings, particularly its mid- and small-cap names, which are typically more sensitive to economic conditions. An easier monetary environment could also support a narrowing of the trust’s discount, as MNKS traded at a premium in the past when interest rates were lower, and the growth style of investing was in favour. As such, we believe that MNKS’s current Discount of 9.6% could present an attractive opportunity.

While MNKS delivered double-digit returns in 2023 and 2024, it struggled to keep up with its benchmark, as market returns were concentrated in a handful of stocks. However, the team assessed that much of MNKS’s benchmark’s Performance was driven by share re-rating, whereas the trust’s holdings demonstrated stronger earnings growth over the same period. As a result, the managers believe relative performance could improve if the market becomes more fundamental-driven going forward. Finally, the Portfolio’s valuation premium relative to the FTSE World Index halved over the two years to 31/12/2024, suggesting that it may now offer a more attractive entry point.
 

Bull

• Wider consideration of growth factor leads to potential differentiation
• Trust is trading at a wide discount versus its own history
• Relative performance could improve in a fundamental-driven market

Bear

• Has shown to lag when investment style is out of favour or market returns are concentrated
• More volatile than average sector peer
• Gearing can exacerbate performance on both the upside and downside

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Disclaimer

This is a non-independent marketing communication commissioned by Baillie Gifford. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.