Gerald Smith, the manager of the Monks investment trust, explains why he stands by the fund’s weighting in emerging economies despite their diminishing performance in the past year.
The Monks investment trust is a global vehicle with more than £1 billion in assets under management. Like many large generalist trusts, it has a history dating back to 1929 when, along with the Friars and Abbots investment trusts, it was founded by Sir Auckland (later Lord) Geddes.
Its first investments included large holdings of railway and energy companies in America, Australia, Britain, Germany, and South America, and also investments in Chinese government bonds and Hungarian bonds.
Baillie Gifford took over the management of all three companies in 1931 and Monks became a founder member of the Association of Investment Trusts the following year. In 1968, the three trusts were merged into Monks.
Gerald Smith of Baillie Gifford, who manages the trust, says the position he has stuck to for much of the past year has been wrong in terms of short-term market performance. However, he continues to feel it is the right thing to do.
The trust has a heavy weighting in emerging markets, which last November started to underperform developed markets. (IT continues below)
Nevertheless, Smith says any problems, such as inflation pressures, are cyclical, whereas in developed markets they are rather more deep-seated and structural.
“There’s more of a structural headwind in developed economies. People are worried about overheating in emerging economies, but we’ve stuck with that,” he says.
The trust has a particularly large position in Brazil and significant exposure to China through Hong Kong-listed stocks.
“China has been out of favour but companies remain very attractive,” says Smith.
“If markets go up, there’s exposure to risk of loss if companies don’t go up. We can cap that loss by buying call options.”
As markets fell, he also bought further call options. These transactions have reduced effective gearing to 92% of shareholders’ funds.
“People say isn’t that a bit complicated? But in terms of the portfolio it’s simpler,” says Smith.
“We can leave the portfolio alone and just adjust [these other instruments]. We can carry on owning the stocks we like but adjust it like that.”
At the moment 18.3% of the trust is invested in British equities, with 17.2% in North America, 17.0% in Asia Pacific and 15.7% in emerging markets. There is some fixed income exposure, with net liquid assets and bonds making up 12.5% of the portfolio.
In terms of market capitalisation, Smith says there is no formal policy. “We don’t hold many of the largest companies, so you could say there’s an anti mega-cap bias, but it’s not full of micro caps.”
He says the risks of a less favourable outcome for markets have risen but has added stocks such as Mitsui in Japan, an iron ore company, which he says in the long run will prove to be strong.
Seadrill, a Norwegian stock, which at 2.8% is the largest position in the trust, has also been increased.
“The things I’ve added are reasonably economically sensitive, but some of these things are getting to slightly silly prices and there are some difficult times ahead of us.”