New managers turn Monks around

Monks' board replaced former managers Gerald Smith and Tom Walsh with Baillie Gifford's global alpha team led by Charles Plowden in March 2015 following several years of underperformance. And over the past 12 months the trust has outperformed its peers, returning 27.16 per cent against the Association of Investment Company (AIC) Global sector average of 17.5 per cent. On a very short-term basis it has also outperformed its benchmark, FTSE World Index, returning more over one, three and six months.

Before the new managers took over last year the trust had lagged the FTSE World Index and its sector average for several years.

A lot has changed since the new managers took over and the trust is now more exposed to higher-growth companies likely to offer good returns over the long term. Over half of its holdings were sold in the months following the new team's appointment, and they now run it along the lines of the successful strategy used with the Baillie Gifford Global Alpha Growth (GB00B61DJ021) and Baillie Gifford International (GB0005941272) funds. These funds have beaten MSCI AC World Index by some margin over the long term, but are now closed to new investors. This means that Monks is the only way to get access to Baillie Gifford's successful global alpha investment strategy.

"The global alpha strategy, headed by Charles Plowden since its inception in May 2005, has delivered returns of 12 per cent per annum over the five years to 30 June, compared with 10 per cent per annum for the MSCI All World Index," says Emma Bird, analyst at Winterflood.

A key part of this strategy involves investing in high-growth, higher-risk stocks, which previously would not have been included in Monks, alongside lower-risk stocks with a steadier growth profile. Stocks are divided into four categories: growth stalwarts, rapid growth, cyclical growth and latent growth. Alan Brierley, director of the investment companies team at Canaccord Genuity, says the categories "ensure a diversity of growth drivers within a disciplined framework".

The trust is most exposed to rapid growth stocks - 34 per cent of assets - which its managers define as early-stage businesses likely to disrupt an established technology. Examples include Amazon, (US:AMZN), African media giant Naspers (US:NPN) and Alibaba (US:BABA).

The trust now also includes higher risk/reward stocks that have previously generated impressive returns for Baillie Gifford funds such as Scottish Mortgage Investment Trust (SMT). Stocks such as Facebook (US:FB) and Tesla (US:TSLA) are former successes from this category .

Monks is now moving torwads being an equity-only portfolio after selling its holding in the 0.635% US Treasury bond in October last year, which accounted for 5 per cent of assets, and using the proceeds to pay off borrowings. But its managers will continue to use gearing, aiming to maintain this at between 5 per cent and 15 per cent of NAV.

"Gearing and the sale of the Treasury bond should allow the fund to participate more fully in rising markets and we believe that Monks can outperform over the longer term through the team's stockpicking experience," says Ms Bird.

The changes mean Monks is less defensive than it used to be, and its discount to NAV of around 9.7 per cent is not as wide as the level of around 14 per cent it was at when its new managers took over.

But if it continued to perform better the discount could tightens further. And although less defensive, it is still potentially less volatile than funds such as Global sector peer Scottish Mortgage Investment Trust due to the types of stock it holds, and because it has 114 holdings against 49 for Scottish Mortgage.

So with a successful new management team and performance already improving, but a relatively wide discount to NAV, now could be a good moment to add Monks Investment Trust. Buy.

Source: Morningstar as at 23 August 2016

Cumulative share price total returns (%)

Source: FE Analytics, as at 23.08.16

Top 10 holdings

Source: Morningstar, as at 31.07.161

Geographic exposure

Source: Morningstar, as at 31.07.16