Great year for Monks as seven holdings more than double. Over the year to 30 April 2017, Monks’ net asset value total return was 40.0% compared to a total return of 31.0% for the World Index (in sterling terms). The share price total return for the same period was 53.9%, with the discount narrowing to 0.6%. The one year net asset value performance ranks it third out of 23 AIC Global sector peer trusts. The Board is recommending that a single final dividend of 1.25p should be paid for the year, compared to a total of 1.5p last year. This is the minimum required to maintain investment trust status, reflecting Monk’s priority which is capital growth.
Talking about the results, the managers said “Our approach is to focus on a range of the world’s best businesses and to hold them for several years, often through political and economic cycles and uncertainties. The long-term revenue and profit growth potential of our investments dominates our analysis, as opposed to guesswork surrounding variations in global GDP, interest rates or politics. Indeed, one of the strengths which defines successful businesses is their ability to adapt and evolve in the face of changing external circumstances, with the best managers also having the ambition and vision to exploit new opportunities as and when they appear. Such companies should over time contribute greatly to social and economic development; they are the wealth creators and we as their shareholders can profit from their efforts. The bulk of our investments produced revenue and profit growth in line or ahead of our expectations during the reporting period.”
29 of the fund’s holdings appreciated by more than 50% in sterling terms during the year and 7 by more than 100%. These big winners come disproportionately from two of their favourite growth areas: Platform businesses and Technology companies, notably those involved in semi-conductors. Among the Platforms, big contributions came from long-term holdings including Amazon which is now its largest holding, MercadoLibre and Alibaba (respectively the leading Brazilian and Chinese ecommerce platforms), Naspers, a South African based internet investor, and MarketAxess which is an electronic bond trading platform. They say that the diverse nationality of these companies demonstrates that geography was not a big influence but rather similarities in business model and scale, alongside secular changes in behaviour enabled by the internet and the development of mobile services, were the key success factors. Despite very strong share price appreciation they made no sales of any of these holdings but rather added to Alibaba and Naspers during the year as they continue to believe such companies are capable of substantial further growth.
Broader technological progress is also driving demand for advanced electronics and in particular for the semi-conductors which enable everything from mobile phones to industrial automation, medical diagnostics and treatments and electric (and eventually autonomous) vehicles. They say that the semi-conductor industry has historically proven highly cyclical and unpredictable but they believe that significant consolidation across several strands of the industry will result in more dominant leaders and more rational behaviour, particularly as it relates to new capacity and pricing. Combined with a rapid uptick in demand based on this wide range of new applications, this should produce significant future profits and a more positive assessment of the companies involved. They think that the strong share price performance of holdings such as Nvidia, Teradyne, Samsung Electronics and Veeco, each of which more than doubled in the year, along with Rohm and TSMC suggests that this process has begun, though as with the Platform winners, they believe there is considerably more to go for.
Strong relative share price performance was delivered across a broad spread of holdings including financials such as Sberbank, First Republic and HDFC (respectively Russian, American and Indian banks); industrials such as Renishaw, Atlas Copco, CRH and Lincoln Electric; and consumer companies including Royal Caribbean Cruises. The only notable negative contributors to performance, both of which remain in the portfolio, were Myriad Genetics (medical diagnostics) and Novo Nordisk, the world leader in diabetes treatment. Both fell victim to pricing pressures as regulators and competitors combined to try to get US healthcare costs under control but they believe each has technical leadership which should enable a better long-term outcome.
Performance was also helped by gearing, with borrowed funds invested in the equity markets contributing approximately 1.7% to returns for the year. They put the equity gearing in place in two stages following market weakness in late 2015 and early 2016. They say that they have been waiting patiently for an opportunity to take the level of borrowings to what they consider the long-term norm of 10% of shareholders’ funds. The market’s strength has dissuaded them from taking out further borrowings for the time being but they remain alert to opportunities and they have scope within our existing bank arrangements to move quickly should the chance arise.
MNKS : Great year for Monks as seven holdings more than double