Monks Investment Trust has reported results for the year ended 30 April 2022 and these show the effect of the selloff in growth style investments. Over the period, the NAV total return was -18.9% compared to a total return of +6.1% for the World Index. The share price total return for the same period was -24.6%. A single final dividend of 2.35p is being recommended, compared to 2.0p last year.
The current team has managed The Monks Investment Trust for seven years. Over this period, the total return has been +147.8% (share price +163.6%) compared to +128.9% for the World index.
8,808,550 shares (3.7% of the share capital) were bought back at a discount at a cost of £98m. The share price ended the year at a 4.4% discount to NAV.
The manager says that “Underlying the extreme shift away from growth towards value (the MSCI Value index has outperformed the corresponding Growth index by +15.5% in the four months to the end of April 2022), there have been two principal drivers of Monks’ underperformance. One relates to early-stage growth companies and the other, to Chinese businesses.
The recent environment has reflected a high degree of scepticism with regards to the future potential of companies yet to achieve sustained profitability and the probability that they will be able to earn attractive returns on their high levels of current investment. Excluding Monks’ investments in private companies, around 13% of the listed portfolio is currently loss making. Our work has provided reassurance that not only do a vast majority of the companies remain resilient, but that they continue to make strong operational progress, despite their share price travails. Among the most acute examples is Farfetch, the online luxury goods marketplace which has doubled volumes and revenues in the past two years. Despite this, it is among the largest detractors from performance (shares are down -74%). We continue to believe in the company’s path to profitability. The shares’ current valuation (1.1x forward 12m sales) appears to us to materially undervalue Farfetch’s opportunity not only in its core online marketplace, but in its ‘Platform Solutions’ business, which enables brands and retailers to drive online growth. A company which is of concern is our holding in Peloton (home fitness). The company has significantly overestimated demand and committed too much capital to the production of its hardware (bikes). This has undermined the prospect of future profitability. A new CEO in Barry McCarthy, formerly of Netflix and Spotify, is a move in the right direction, however this stock remains firmly under review and has been a disappointing holding since we purchased it in August 2021.
Share prices of a majority of Monks’ Chinese holdings fell sharply following the imposition of widespread regulation by central government. Holdings such as Alibaba (ecommerce and cloud computing), Meituan (food delivery) and Naspers and Prosus (which have look-through exposure to Tencent in social media and gaming) have fallen by between 50-70%. We seek to remain open-minded about the long-term regulatory implications. On the one hand, we believe that much of the regulation is likely to support businesses to be sustainable and operate with the grain of society (for example, some of the regulation supports social provision for the lowest paid workers). On the other, we seek to remain vigilant where there is evidence that the Chinese state is limiting the upside for private companies. We have acted where this has been the case in selling Ping An Healthcare and Technology (telemedicine) and reducing the portfolio’s position in Meituan. We continue to take signals from what we see at the corporate level and are actively reviewing other positions including KE Holdings (online real estate) and Tencent Music Entertainment in what is an uncertain situation.”
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