Chairman’s Statement
Performance
During the year the net asset value (‘NAV’) total return, with borrowings calculated at fair value, was +17.6%. The share price total return was +19.1%, matching the FTSE World Index return of +19.1%. The second half of the year provided much stronger returns than the first half, with a NAV total return of +21.6% and a share price total return of +28.5% compared to +16.6% from the index. This is an encouraging return to positive relative performance after the last two years’ declines; but we are well aware that on a NAV basis, this is the third year of underperformance.
The Managers have been actively repositioning the Company’s portfolio, identifying growth equities with the characteristics to perform well even in the more challenging economic environment. The essential thesis of the Managers’ original investment approach is unchanged, but the experience gained in the last few years has refined its application, particularly focusing on valuation discipline.
Capital allocation
The Company’s shares traded at a discount to net asset value throughout the year. The Board has been active in buying shares in the open market. Having issued shares when Monks’ shares traded at a premium to net asset value, we believe that it is our obligation to be ready buyers at a discount. Buying the Company’s own shares at a discount to NAV enhances NAV per share for ongoing shareholders. Buybacks also improve short-term liquidity in the Company’s shares. We believe that the underlying portfolio is attractive enough for our shares to trade at close to or above NAV.
Over the course of the Company’s financial year, we bought 16.7 million shares, at an average discount of 10.4% and a cost of £172.9 million. Since we commenced this active programme in January 2022, we have bought back 39.0 million shares at a cost of £406.0 million; representing 16.5% of the Company’s issued share capital as at 31 December 2021 and one of the highest buybacks as a percentage of issued share capital in the global equity sector. At the year-end, the discount had narrowed to 8.5% (30 April 2023 – 9.7%). The Board will continue its buyback policy as a key part of its overall capital allocation.
Borrowings and gearing
Our investment trust structure allows gearing, which should enhance long-term returns. The Board’s strategic borrowing target is 10%. It is expected that effective gearing will be maintained in the range of minus 15% to plus 15%. Gearing rose moderately from 5.3% at the start of the year to 6.8% by the end as a result of obtaining new private placement debt and funding buybacks.
In December 2023, the Company issued four tranches of private placement debt totalling £73 million, three euro-denominated, and one in yen, across a range of maturities from 2030 to 2037. This was used in part to repay higher cost floating rate bank debt. The Company’s structural debt with a current weighted average interest rate of 2.74% is supplemented by a revolving, floating rate facility with National Australia Bank Limited which expires in November 2024. At the year end, £50 million (30 April 2023 – £75 million) of this £150 million facility was drawn. The Board values the flexibility offered by the bank loan and will consider a renewal of this facility later this year.
Management expenses
Monks remains competitive on fees and expenses: keeping fees as low as possible maximises the long-term returns to shareholders. The total ongoing charges ratio for the year to 30 April 2024 was 0.44%, up marginally from 0.43% in the prior year. The current tiered management fee scale should ensure that all shareholders will benefit from economies of scale as assets grow.
Earnings and dividend
Monks invests with the aim of maximising capital growth rather than income. All operating costs are charged to the Revenue Account. The Board’s policy is to pay the minimum dividend required to maintain investment trust status. Retained earnings are reinvested in the portfolio. In order to build in headroom for further buybacks that would reduce the shares in issue qualifying for dividends, the Board is recommending that a single final dividend of 2.10p be paid, compared to 3.15p last year, to ensure that the amount retained for the year does not exceed that permissible.
Addressing sustainability and fossil fuel investments
Many shareholders will be aware of the public debate surrounding investments in fossil fuels. The Board and the Managers take their stewardship responsibilities very seriously. Environmental, Social, and Governance (ESG) factors are intrinsically linked with long-term investing. The Managers embed the analysis of these factors into their core research when searching for high-quality growth companies. They are supported by a dedicated ESG analyst who assists with the ongoing stewardship of each holding; he is part of a wider team of more than 40 people. The objective is not to seek perfection but to focus on materiality and the direction of travel. Engagement can encourage responsible behaviour and meaningful change. The Company’s direct investments in businesses with fossil fuel related activities totalled 2.6% versus 4.8% for the index at the year end.
Engaging with portfolio companies
Throughout the year, the Managers regularly engage with portfolio companies. An interesting case study is the building materials company, CRH, which is the largest contributor to the portfolio’s carbon footprint. However, CRH’s products are essential for investments in our built environment, including new energy infrastructure crucial for the energy transition. The Managers have engaged with CRH about their carbon emissions for an extended period, playing a crucial role in the company becoming a leader in lower-carbon solutions and setting some of the industry’s most ambitious carbon reduction plans.
Importantly, if the Managers believe that insufficient progress is being made relating to important ESG factors, they will sell a stock. A recent example includes the miner Rio Tinto, where concerns regarding governance and the approach to environmental impact were not adequately addressed. The Company has since sold its holding.
The Board
The Board is cognisant of the need to ensure regular refreshment of its composition, whilst also maintaining continuity and corporate memory. In particular, we believe that succession should incorporate adequate handover periods. As part of this ongoing succession planning, the Directors reviewed the skills and experience of the Board; considered recent and anticipated developments in the commercial and regulatory landscape; and appointed Cornforth Consulting to commence the search for two new Directors. As a result of this process, the Board is pleased to welcome Randeep Grewal and Stacey Parrinder-Johnson, who were appointed with effect from 1 March 2024. They bring diverse investment industry experience and breadth of perspective to the Board. We expect their appointments to strengthen further its debate and challenge of the Managers.
Jeremy Tigue, who joined the Board in September 2014 will not offer himself for re-election at the forthcoming Annual General Meeting. Belinda Richards took over from Jeremy as Senior Independent Director in December 2023, and Claire Boyle will succeed him as Audit Committee Chair. We will miss his wise counsel and depth of knowledge; he has been a super colleague for all of us and a model non-executive.
My colleagues have asked that I remain Chairman after this AGM; and the Board will make an announcement about future succession plans in due course.
The Managers
The Board believes that Baillie Gifford is an impressive investment house, with excellent minds applied to finding the best way of profiting from the accelerating change in the global economy. We have continued to bolster the lead investment team, with Baillie Gifford’s joint managing partner Malcolm MacColl and partner Spencer Adair being joined by Helen Xiong as deputy portfolio manager. Helen is an investment manager in Baillie Gifford’s Global Alpha Team and a partner in the firm.
We are encouraged by the robustness of analysis of the portfolio, and its diversified distillation of Baillie Gifford’s best ideas. It is well placed to deliver superior returns to shareholders, whatever the short-run impact of inflation concerns, interest rates or geopolitical risk. It is encouraging that recent performance has improved significantly, and that the portfolio outperformed its comparative index in the second half of the year.
Outlook
The Board shares the enthusiasm of our Managers for the underlying portfolio. Although our portfolio is a growth portfolio it has very few loss-making firms. There are ideas from across the economy, not just in technology. We have very limited exposure to unquoted companies. The valuation premium over the market is quite narrow, on a range of measures, whereas the expected growth in revenues and profits for portfolio companies is much higher than the market’s overall growth rate. We are not reliant on a small number of big winners. We believe that Monks is the growth portfolio that all investors can consider to be a core holding.
Annual General Meeting
Shareholders who have been accustomed to attending the Company’s AGM for many years in the same venue should take note of a change of location. This year, the AGM will be held on Tuesday 10 September 2024 at the Royal Institution, 21 Albemarle Street, London W1S 4BS, at the slightly later time than previously of 11.30 am. We look forward to welcoming shareholders there.
In line with last year’s procedure, the Board intends to hold the AGM voting on a poll, rather than on a show of hands, so encourages all shareholders to exercise their votes at the AGM by completing and submitting a form of proxy. We recommend that shareholders monitor the Company’s website at monksinvestmenttrust.co.uk where any updates regarding the meeting will be posted. Market announcements will also be made in the event of any change to the scheduled arrangements.
Should shareholders have questions for the Board or the Managers, or any queries as to how to vote, they are welcome as always to submit them by email to trustenquiries@bailliegifford.com or call 0800 917 2112. For shareholders investing through a platform, the AIC guidance on how to vote shares in advance or obtain the documentation necessary to vote in person at the AGM, may be of assistance: theaic.co.uk/how-to-vote-your-shares.
KS Sternberg
Chairman
1 July 2024