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Monks outperforms again as Douglas McDougall bows out

Monks outperforms again as Douglas McDougall bows out – Monks beat its benchmark over the year to the end of April 2019, returning 12.0% in NAV terms against 11.7% for the World Index. The share price total return for the same period was 12.7%. A single final dividend of 1.85p is being recommended, compared to 1.40p last year. The ongoing charges ratio fell to 0.50% from 0.52%, aided by the expansion of the fund (£12m worth of shares were issued to meet demand from investors).

Douglas McDougall, who managed the trust between 1984 and 1999 and has been a director ever since, is retiring at the AGM. Monks has had a pretty good track record over that time but, after a dip in performance, its management style needed a revamp in 2015. Since the change in investment approach implemented then, the NAV total return has been 76.8% against 56.7% for the performance benchmark. Over the same period the share price total return was 107.8%, benefiting from the closing of the discount to NAV. [A willingness to adapt to changing times has proved beneficial for Monks and is evidence perhaps that long-standing directors can be open to new ideas.]

Unquoted investments

The managers believe that a growing part of Monks investment opportunities consist of companies which are not yet listed and that investment in such private companies has the potential to enhance future returns, especially as more successful growth companies are remaining private for longer. The Board has increased the limit on private company exposure to 5% of the portfolio (from 2%) and has approved an investment of 2% of assets in The Schiehallion Fund, a listed Baillie Gifford managed vehicle dedicated to investing in late-stage high-growth private businesses. This will give Monks exposure to a wider range of investment opportunities in such businesses than would otherwise be the case. Schiehallion will not charge any fee on uninvested funds and the value of our investment will be excluded from calculation of Monks own fee.” [Baillie Gifford has been increasing the exposure to unquoted investments within its closed-end funds. In the wake of the Woodford debacle, it is important to point out that closed-end funds such as Monks are much better suited to owning unquoted holdings than open-ended funds.]

Extract from the manager’s report

During the year the Company’s net asset value (NAV), with borrowings at fair value, returned 12.0%, in line with the FTSE World Index at 11.7%.   The market’s behaviour was typical of any short-run ‘random walk’. Indeed, as any dog owner will know, the distance travelled and directions taken by a dog during its daily meanderings are of little consequence to the result, which is that both dog and owner arrive at the same destination at the same time. The dog has been distracted by many sights and smells along the way while the owner has stuck to the path and expended far less energy.

As investment managers, we identify with the dog’s owner and we stick to the path of a tried and tested investment philosophy and process which seeks to identify outstanding growth businesses, defined by long-term progress in profit and cashflows. The stock market is represented by the dog – it gets distracted by Mr Trump’s tweets, Brexit deliberations, economic statistics, commodity prices and all manner of other influences. When markets are choppy, as they have been, we remain firmly focused on company fundamentals.  In our view the return earned by Monks over the year was fully justified by the underlying growth delivered by the portfolio holdings.

Examples of strong performers included several well-known online technology companies. On average Facebook, Amazon, Netflix, Alphabet (Google), Baidu, Alibaba and Tencent (which we own through the South African media company, Naspers) grew revenues by 34% despite significant investment in the future.  These stocks accounted for 13.9% of total assets at the year end.

Over the past two years we have tended to reinvest some of the gains from these technology leaders towards newer, more specialist online operators. Many of these are also growing very rapidly, such as LendingTree (US financials services aggregator), MercadoLibre (Latin American e-commerce), Chegg (US online education) and Shopify.  Headquartered in Ottawa and founded by a German, Tobias Lütke, Shopify offers a platform for small businesses to sell their goods and services online. A sole trader can buy a domain name, create a website, take orders, arrange delivery and use Shopify’s back office accounting and inventory software to create an impressive online presence. Shopify is also increasingly attracting mid and large sized customers as it expands its capabilities with businesses such as Budweiser, Penguin Books and The Lady Gaga Official Shop using its platform.

A key attribute of the Monks portfolio is ‘balance and diversification’. Whilst online technology is exciting, we also value proven business models which we think won’t get disrupted by online revolutionaries. In Emerging Markets, we have seen impressive progress from Banco Bradesco (Brazil) and ICICI Bank (India). In the US, Visa and Mastercard are the rails on which so many financial transactions rest, and continue to prosper with both seeing 2018 earnings rise by more than 30%. Moody’s also fared well despite cyclical headwinds in its traditional bond ratings business, as Moody’s Analytics continued to grow steadily and is now incorporating data analytics to help companies understand and mitigate risks.

As always there were inevitably some holdings that produced less pleasing performance. Apache was hit by lower oil and gas prices and has not yet developed the infrastructure to get its large reserves from its Texan oil fields to market. Ryanair has made several gaffes, notably the piloting rota errors, which forced a strategic re-think of its decision not to employ unionised workers. Ryanair’s success in disrupting the European airline industry has been based on an unconventional approach with a relentless focus on low costs. Success brings responsibility to employees, customers and other stakeholders and we have engaged with the board on how best to get through the current growing pains.  A new chairman will arrive in 2020 and we believe the company is already demonstrating a more mature attitude.

To demonstrate that online technology companies do not all grow consistently in a straight line, Grubhub, CyberAgent and Zillow each had a more difficult year. Zillow has immense promise as a disruptor in the inefficient and expensive US real estate market but it continues to evolve as it seeks to find the optimal business model.  CyberAgent is also attempting to grow in new directions, through developing a totally new and original mobile TV service in Japan, whose route to profitability is as yet unproven.  Grubhub, which was among our very strongest investments in the previous year, suffered from an increase in competitive heat.

Over the last five years the share price of Prudential has been somewhat disappointing despite strong operational performance and we have used periods of weakness to build our position to a point where it is now one of our very largest holdings. Our rationale is simple: at least half of its value comes from its under-appreciated yet fast growing Asian operations; it trades on a significant discount to fair value; it is hard to disrupt with many years of growth potential ahead and it is well run. Prudential’s new business profits in Asia have compounded at 18% and 19% respectively over the last 5 and 10 years. It is interesting to note that Ping An and AIA, both of which are pure Asian insurance companies, were among our top contributors to performance over the past twelve months.”

MNKS : Monks outperforms again as Douglas McDougall bows out

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