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Monks outperformance driven by strong fundamentals

Monks (MNKS) has announced its annual results for the year ended 30 April 2021, during which its chairman, Karl Sternberg, says that strong fundamentals drove impressive increases in revenues across a range of portfolio holdings. During the year, MNKS provided an NAV total return of 55.5%, and a share price total return of 53.1%. Both of these are considerably ahead of the FTSE World Index, which it says returned 33.9%.

Six years since management change

Six years have now passed since the change in investment approach was implemented in March 2015, which represents an opportunity to take a view of the long-term strategy of the Company. Since the end of March 2015, the NAV total return has been 184.1%, well ahead of the return of its comparative index (the FTSE World) at 107.6%. Over the same period, the share price total return is even higher at 229.9%.

Performance – contributors

The last 12 months have been exceptional for stock markets, with May 2020 coinciding with the early stages of a very strong recovery from the bottom of the pandemic sell-off. Of the top ten positive contributors to performance, in sterling terms, two rose four-fold (Tesla and Sea Limited), one rose three-fold (Farfetch) and three more rose two-fold (Meituan Dianping, Trupanion and Zillow Group). The top ten also featured established winners, Alibaba (through SoftBank), Amazon, Shopify and Alphabet.

MNKS’ managers say that the portfolio has prospered from owning these stocks and many others which are beneficiaries of commerce moving online. They think the move from bricks and mortar to digital will take many years so many of these companies are still in the early stages of penetrating vast new markets.

Tesla was the most significant contributor to 12-month performance. Despite factory shutdowns during the pandemic, the company increased production by over 30% to 500,000 vehicles. MNKS’ managers say that it will soon have capacity to manufacture 1.5 million vehicles in California, Berlin and Shanghai and it is building a plant in Texas that will be the main production location for the Tesla Semi (truck) and Cybertruck (pickup). Whilst traditional auto makers are now producing electric vehicles at scale, the managers think that Tesla’s technology lead is very significant and there are interesting options around solar power and autonomous driving where Tesla also has a leading edge.

The consistent theme in the remainder of the top ten positive contributors is the move online. As noted, these are a combination of established ecommerce companies (Amazon, Shopify, Alphabet, Alibaba via SoftBank) as well as companies in niche or emerging areas of virtual consumption. Sea Limited is a gaming, ecommerce and payments company operating in South East Asia. Sea has backing from Tencent which operates similar platforms in China. MNKS’ managers have been invested in Sea for over a decade through Naspers. Luxury goods companies have traditionally been cautious about selling products through online portals but the pandemic may have changed that as many of their traditional distribution routes (airport duty free, travel) have been closed. A beneficiary of this trend has been British-Portuguese portal, Farfetch which the managers say has quickly established itself as the online luxury shopping destination.

The top contributors are rounded off by China’s largest food-delivery and local services company Meituan Dianping, a company that provides medical insurance for pets in Trupanion and another US company which is disrupting the domestic property market – Zillow.

Softbank is a Japanese holding company that was purchased last year when it was trading at around a 50% discount to its net asset value. At the time of the purchase, MNKS sold down some of the stake in Alibaba to buy the SoftBank position reflecting the significant cross holding (Softbank owns a large chunk of Alibaba). The managers say that this trade has worked well as the discount to net asset value for SoftBank has narrowed considerably whilst at the same time Alibaba has suffered from regulatory concerns and the cancellation of the valuable Ant Financial IPO. Monks also holds a small stake in Ant Financial which continues to be private. Towards the end of the year, the managers trimmed the position in SoftBank, having seen the share price almost double in just over 12 months.

Performance – detractors

The managers say that the portfolio was fortunate to have very little exposure to the front line of the pandemic – travel, oil and gas, traditional retail and property. The top ten detractors from performance are an eclectic group. They include two large Japanese financials, Sumitomo Mitsui Trust and MS&AD Insurance whose potential insurance losses have led us to sell during the period and two companies exposed to commodity prices in Kirby (a US inland barge operator, also sold) and Orica (explosives). There are a number of disruptive Chinese companies – the recently purchased Li Auto (which the managers hope could turn out to be China’s Tesla), Brilliance Automotive (the manufacturer and distributor of BMW cars in China) and Ping An Health and Technology (a telemedicine company). The managers have high hopes for telemedicine; most simple medical problems can be diagnosed quickly and efficiently via an online consultation and Ping An uses a significant level of artificial intelligence to aid the on-screen doctors.

The remaining significant detractors are LendingTree (US online financial services, which suffered a pause in activity during lockdowns), Just Eat Takeaway (which we sold as it was ceding market share) and a newer purchase, Oscar Health. The latter is a disruptive health insurer, which the managers say is using insightful and personal data to better price its customers’ risk. Oscar’s customer base rose by 75% in 2020.

Portfolio Changes

The most significant changes over the longer term have been the reduction in the Cyclical Growth category and increase in Rapid Growth companies. At April 2015, Rapid accounted for around 22% and has now increased to 52%. Cyclical started at 31% six years ago and is now around half that level (16%). In the last 12 months, portfolio turnover remained the same at 16%. In total there were 30 new purchases and 24 complete sales, with the activity being weighted to the first six months of the period (i.e. May-October 2020) when the opportunities of the pandemic sell off were at their most significant.

The managers say that the growth in the weight of Rapid growth companies has been the result of a number of moving parts:

  • First, over time they have reduced MNKS positions in the mega-platforms notably Alibaba, Amazon, Alphabet, Facebook, Tesla and Visa.
  • Second, some of the proceeds of these reductions have been re-invested in a new wave of digital companies, so in payments rather than owning Visa MNKS now has Adyen and Stripe. The managers sold SAP as an incumbent software company and purchased a number of digital ‘natives’ which they say don’t have the baggage of legacy businesses which could act as a brake on growth – these include Twilio (customer communications), Cloudflare (web performance and security), Datadog (monitoring of cloud software platforms), and Snowflake (data platforms and analysis). The managers say that the cloud is one of the most important technology leaps since the personal PC became mainstream in the mid 1980s. New online entrants looking to disrupt traditional businesses now have very low barriers to entry, as a key raw material in data and storage can be rented cheaply from day one. They think that these companies have huge growth opportunities if they can go on to dominate in their respective niches.
  • Third, also within the Rapid Growth category, the managers have continued to add healthcare stocks. These include Moderna (mRNA technology), Exact Sciences (molecular diagnostics), Staar Surgical (implantable lenses), Oscar Health (insurance), and Certara (biosimulation in drug discovery). The managers also sold one successful healthcare investment, Seagen (formerly Seattle Genetics) as its price reached their estimate of long-term fair value.
  • Fourth, the managers have purchased some fast-growing personal consumption and entertainment businesses such as Bumble (online dating), ByteDance (the owner of TikTok), Wayfair (online furniture), Epic Games (computer games such as Fortnite), Tencent Music Entertainment (China’s Spotify) and IAC/Interactive. The latter is a holding company headed by Barry Diller, who has a strong history of incubating and then spinning off successful online companies. Current holdings include ANGI (home services such as plumbing, lawncare), and Vimeo (a video platform).
  • The fifth and last factor has been share price performance. The managers say that such significant gains, even when accompanied by fast revenue growth, do lead them to consider the balance of the portfolio and, since early 2020, they have been looking to identify a more diverse set of exposures. These include the purchase of high-quality Stalwart companies which they have admired for a long time and where the pandemic sell-off provided an entry point. They are household names in adidas (branded sportswear), Estée Lauder (cosmetics) and S&P Global Inc (formerly Standard and Poors, a financial ratings agency).

The managers say that, after a crisis, capital gets withdrawn from certain industries, and so they have sought out companies that can improve their market positions and emerge stronger. These include Lyft (ride sharing), Bookings Holdings (the dominant online travel agent), Rio Tinto (mining), and Wizz Air (a low-cost airline mainly operating in Eastern Europe). They have also added to Ryanair which the portfolio has owned for many years and they believe will benefit from a further retrenchment of its competitors.

In terms of sales, Kirby and Orica have been exited and they have also sold MRC Global and DistributionNOW (both suppliers to the energy industry), and Ferro-Alloy Resources (a Vanadium miner). GrubHub and Just Eat Takeaway were sold as the managers settled on Doordash as being the potential winner in food delivery. Sales also include companies whose shares have done well and are now more expensive in the context of their fundamentals such as earnings per share – Chipotle Mexican Grill, and Waters (scientific instruments), for example.

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