In the Trust’s half-year results, covering the period ended October 31, 2022, the company saw its net asset value fall 5.2%, more than its benchmark FTSE World, which fell 0.3%.
Since the last results in late April, the trust’s discount has widened from 3.5% to 4.8% and the total return on the share price has been 7.6%.
According to management, a combination of the war in Ukraine, rising inflation and the central bank’s rate hikes have “did little to ease investors’ nervousness” and as a result investment horizons have tightened and valuations have suffered.
For Monks and Baillie Gifford as a whole, this has taken the wind out of their innate focus on growth companies, particularly those with earnings several years out that managers said “remain unpopular.”
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The traditional investment approach of the fund house in general is long-term buying and holding over many years. However, this does not come at the expense of its ability to react to changing market conditions, which is why Monks has sold 20 positions and made nine new investments year-to-date.
In the report, management said the sales “reflected a proactive and reckless portfolio ‘weeding’ exercise.”
Overall, the team said it remains bullish on holdings, adding that amid market uncertainty it’s important to “renew” its beliefs with shareholders.
The sales cover a variety of stocks, divided into three groups by monks.
First up were companies that “have been materially challenged in an inflationary environment or are exposed to a decline in consumer demand.”
Companies such as home fitness and lifestyle provider Peloton, online used car dealer Carvana and telemedicine provider Teladoc were sold.
Peloton and Carvana are “disappointing short-lived holdings,” the team said.
The decision to sell Peloton was spurred by the team’s waning conviction in management after the CEO was forced to abandon mismanagement of the hardware side of his business and “grossly overestimated” demand for his famous exercise bikes.
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Carvana was sold due to its use of loans to sell used cars to consumers, which amid rising interest rates and weakening demand meant managers’ view of the stock’s likelihood of success “shrunk”.
The second selling group was Chinese stocks.
Positions in Brilliance China Automotive, KE Holdings, Tencent Music and Naspers – which holds a significant stake in Chinese gaming company Tencent – were all sold for different fundamental reasons, according to the Monks team.
Baillie Gifford has been bullish on China as a house for several years, with many of its global portfolios including some of the biggest names from that market.
Although China, like the rest of the world, is feeling the macroeconomic headwinds, some are partly self-constructed as the continued pursuit of its zero-Covid policy has dampened economic growth and socio-political tensions have escalated as a result of these policies.
In the report, Monks’ team commented on the “prevailing regulatory environment for private companies in China” and said it is “becoming increasingly difficult for private companies in China to achieve supernatural profits of the kind that we are seeking for Monks’ portfolio.”
It states: “Therefore, a more modest overall exposure to China better reflects our view of the potential upside.”
At the end of April this year, the trust had a 4.1% allocation to China, which has now fallen below 3%.
The last collection of selling stocks were companies “where the investment case worked or where we were disappointed with the execution ability of the management”.
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In the former, stocks like Hays, Page Group and ICICI Bank all performed well operationally and as measured by share price, but growth from their peers has weakened the investment case.
For the latter, companies like Lyft, Stericyle, and Vimeo “either didn’t meet our ambitions for their business or are operationally underwhelmed.”
The company’s management addressed any concerns about what appears to be a high number of portfolio changes. It said: “Shareholders should rightly challenge us when we seem to be going off course.”
The response was that “business operating conditions are changing” and maintaining “consistency in the investment approach, particularly during difficult times” was “utmost important”.
“We are confident that we own a collection of companies that should be well positioned to navigate a period of rising costs and potentially weaker demand,” the team concluded.