Manager focus: Gerald Smith
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Gerald Smith, the manager of the Monks investment trust at Baillie Gifford, has cut cash levels by 12% and sold 5% of his bond holdings since April, while selectively allocating to equities.
By the end of September, 84% of the investment trust was invested in equities compared with 67% in April and 15% in bonds, down from 20%. The trust is now almost fully invested, whereas in April the manager held 13% in cash.
Over the past couple of months, Smith has added 7% to the Asia Pacific region, 6% to other emerging markets, 3% to Europe, 2% to America and 1% to Japan.
Some of his recent purchases include Healthspring, an American healthcare provider, BIM Birlesik Magazalar, a Turkish food retailer, BM&F Bovespa, a Brazilian stock exchange operator, and Naspers, a South African media company. He also bought DNO International, a Norwegian oil company, Cemex, a cement producer in Mexico and Sino-Forest, a forestry company listed in Canada.
“The Japanese economy is not growing very much, but demand for Japanese prime property is still high”
Gerald Smith
Smith is also considering property. The trust has no direct property exposure but invests in Real Estate Investment Trusts (Reits), including Japanese Reits. “It is quite an attractive market,” he says. “The Japanese economy is not growing very much, but demand for Japanese prime property is still high.”
He says he is “puzzled” by the valuations on which British premium property is trading, and sees more attractive opportunities in continental Europe.
The trust’s biggest holding is the Baillie Gifford Pacific fund. At the end of September it made up 7.7% of the trust. However, Smith says he recently reduced the position and is considering replacing it with some direct holdings in the region. Smith says the Pacific fund offers an opportunity to invest in some areas where it might otherwise be difficult to get exposure.
Monks holds American and Brazilian index-linked government bonds. Hedging is in place, and Smith does not take currency views — except on the Brazilian real. “We like the currency and therefore are deliberately taking a positive view,” he says.
One-third of the portfolio is invested in emerging markets. “Although lots of the stocks are quoted elsewhere, the main drivers behind their growth are emerging markets,” he says. “In reality, nearly half of our portfolio is invested in emerging markets.”
Rolls Royce, for example, is one of these holdings. “It is a company with quite poor short-term prospects but a good long-term story,” says Smith. He expects its aviation business to benefit from increased air travel from and to emerging markets countries — in particular China.
He also expects Banco Santander, with large operations in Latin America, to be a long-term success story.
While the portfolio went into the downturn without exposure to banks, Smith recently added to holdings in the sector. He bought Goldman Sachs, for example, expecting the group would have fewer competitors after the crisis.
His temporary holding in HBOS was less of a success. “I didn’t appreciate how bad their loan book was,” he says. “Lloyds didn’t appreciate that either.”
Lloyds bought HBOS in September last year after its rival’s funding dried up. It left Lloyds with £10 billion of losses, most of which the group attributed to HBOS.
“We anticipated the financial crisis but not the scale or knock-on effects,” he says. Yet Smith is now more optimistic, mainly because credit markets have been revived and the success of economic stimulus measures is becoming apparent.
Economic and corporate data is “generally encouraging”. However, he adds that there are also reasons for concern, including inflation risk and government indebtedness, as well as the opacity surrounding the timing and consequences of the withdrawal of stimulus.
Stefanie Eschenbacher is a guest of Baillie Gifford in Edinburgh
