Gerald Smith, the manager of the £683m Monks investment trust, predicted a recession last year – but still took a hit because his projections were too optimistic.
Smith remains cautious on the outlook for 2009, saying the trust’s policy on equity gearing is “fairly flat” and he is “suspicious of some of these stockmarket rallies”.
“Going into this, we were concerned about the banking system in the west,” Smith recalls. “So we managed to avoid some of the big falls you’ve seen in those areas. But the question is, where do you put your money?”
In 2008, “we thought people were being rather too pessimistic, therefore we were still fairly heavily exposed to the oil industry and other more economically sensitive stocks. We were geared to growth in China, India and Brazil,” he says.
He underestimated the impact of America’s downturn on the world, “because places like the US were becoming a smaller part of the global economy”.
Over the 12 months to the end of February the fund underperformed, with its net asset value (NAV) per share falling 40.5% against 30.2% for the index.
But moves towards more defensive holdings – including purchases in January of Kroger, the American supermarket chain, Medco Health, the American provider of subscription medicines, and Philip Morris, the tobacco company – have enabled it to outperform the index since the start of 2009.
The NAV fell by 5.7% in February, against 9.2% for the index, according to Baillie Gifford, which runs the fund. In January it fell by 4.2% against 8.4% for the index.
Despite the hit it took in 2008, the trust maintains its faith in emerging markets. It is 6.6% invested in Baillie Gifford’s Pacific fund, even though a fall of 47% for the fund in 2008 followed its 43.1% gain in 2007.
Monks has joined other British-domiciled global trusts in fleeing British stocks: less than 10% of the fund is now held in British equities.
Smith says: “We have rather more in sterling bonds than in UK equities at the moment. The UK has been one of the economies likely to be harder hit over a long period of time than the others, because of the importance of the financial sector relative to the economy, the housing bubble, consumer debt. But much of the stockmarket has little to do with the UK economy, so I don’t know which direction our weighting in the UK will go.”
Meanwhile, energy remains a key area of holdings. Monks’ top 10 include the Brazilian oil producers Petrobras and OXG Petroleo, Schlumberger, the global oilfield and information services company, and National Oilwell, the oil drilling components manufacturer.
Nestlé and Swisscom, the Swiss telecommunications firm, are also on the list, along with Goldman Sachs.
Figures from the Association of Investment Companies (AIC) make the trust appear more highly geared than most, at 13%. But Smith says Monks offsets its gearing with cash, which it will reinvest when he believes the market has bottomed.
“Our maximum gearing, if you just took the value of our loans, is 15%. We could be 115% invested,” he says.
But the trust’s gearing policy “treats both bonds and equities as risky assets … we would like our genuine cash holdings to more or less equal the value of our debts so we have no net gearing into risky assets,” he says. “We are trying to keep that flat, with 100% of shareholders’ funds invested in bonds and equities.”
Smith hopes to put some of the additional cash into the markets in future, but is sceptical of short-term rallies. “We have had these sharp rallies in the downturn: they’ve been quite violent but they’ve also gone away,” he says. “But the plan has been if the market falls further to put a bit of money to work.”
Holdings are set to remain fairly constant at 130. But as the recession continues, Smith argues the flexibility of global funds enables them to avoid the most disastrous areas.
“If [funds] have a narrow mandate then they have the excuse that ‘that’s all we were allowed to do’. But we’ve had the flexibility to be relatively light in equities and to choose where around the world we invest,” he says.