Fresh thinking
Now in his third year as manager of Monks, Gerald Smith tells Heather Farmbrough about the thinking behind the way he runs the Trust
This interview took place on 7 August 2008
What a difference two years can make. Most of us look older, but the Gerald Smith who strides into the room in Edinburgh looks younger and more relaxed than he did when he first talked to Trust on taking over as manager of the £1bn Monks Investment Trust.
The relaxed demeanour is indicative of a successful year. Over the 12 months to the end of August 2008, the share price rose 7.2 per cent against a fall in the FTSE World Index of 1.9 per cent. Over a five-year period, performance is even better: a 115.2 per cent increase in share price with income reinvested, compared with 52.3 per cent from the FTSE World Index.
In the last year, there have been some very decisive changes. One of the most significant changes is in the way the Trust is run. Historically Monks has had a lead manager who has, with the agreement of the Trust's board, decided geographical asset allocation but delegated much of the individual stock selection to Baillie Gifford's specialist regional teams.
However, Gerald was realising that geography was less important than the stock selection. "I felt it was better to centralise the decision making," he comments. "And I hit on the idea of a decision making body of one - they do say you need an odd number of people on committees to make a decision!
"I'm not pretending I know everything about all the stocks we might buy in the world, so I am of course still reliant on my colleagues," he adds. "But I felt that, with having a more centralised decision making process, if I made a mistake it was my fault, and also I could look at the portfolio as a whole and say, 'that fits in with what we are trying to do' or 'that doesn't'. Over the last year in particular this has worked rather well because I have developed a fairly clear view of what is going on in the world."
What Gerald recognised was that the long profitable run of Western companies, particularly financials, was coming to an end - and that this would create problems for companies depending on Western consumers with heavy debts. Some of the Trust's borrowings were repaid, the gearing into equities was eliminated and bonds and cash were increased. He felt that the rest of the world, particularly emerging markets like China and India, was growing rapidly and therefore demand for commodities and raw materials would be robust.
He went through the portfolio with a highlighter and consulted his colleagues about any of the stocks that he felt were vulnerable to a global slowdown. He did this three times and kept and sold some each time. "I wouldn't say it was perfect, because I sold some stocks the third time round that I could have sold for more the first time but, because I had a clear idea about the kind of stocks I wanted to own it proved to be a useful process."
Eventually, Monks did not have any bank shares other than a holding in an Egyptian listed investment bank, EFG Hermes, and almost no consumer stocks. Gerald added to holdings in oil equipment services (the suppliers of deep drilling rigs to extract oil from increasingly difficult structures) and distribution, as well as in industrial engineering, oil and gas producers, mining and metals.
Gerald believes the effects of the credit crunch will last for some time, and that global growth will slow - but not by as much as some predict. Concerned about high inflation in China and other Asian emerging markets, such as Vietnam, he has built up holdings of short-term cash and bonds, including euro denominated floating rate bonds, conventional sterling corporate bonds, euro deposits, Swedish krona and Norwegian kroner and Swiss francs. He has used derivatives to hedge against any future rises in interest rates, which would knock the prices of the Trust's UK bonds (although he believes these are cheap relative to gilts).
Flexibility is one of the investment trust manager's great advantages. At the end of August 2008, 80 per cent of the Trust's assets was in equities while 11 per cent was in bonds, compared with 6 per cent back in August 2007. "I do have tremendous freedom but there is nowhere to hide if it goes wrong," says Gerald. "In my first year as manager of Pacific Horizon, it did very well and Monks not so well. Now it is the other way round. Knowing that can happen keeps your feet firmly on the ground."
Like Pacific Horizon, Monks isn't a benchmark-driven trust. Monks aims to produce an absolute return so it is ideal for a private investor looking for an actively managed portfolio tucked away for the long term. "It's not about worrying whether I am three points behind the FTSE, but more about asking what is a sensible thing to do and where can we generate the returns?" says Gerald.
"We've made one unquoted equity investment in a shipping company, we've hedged a bond portfolio and changed the balance of the portfolio to reflect some strong views, creating the room to make the most of any market turmoil. As well as this, we can invest almost anywhere in the world. That's great fun compared with many institutional portfolios where you are hemmed in by range restrictions and can't have too much cash."
Stock market investments and any income from them can fall as well as rise and investors may not get back the amount they invested. The views that are expressed in this article should not be taken as statements of fact and no reliance should be placed upon these when making decisions about investment. They should not be considered as advice or a recommendation to buy, sell or hold a particular investment. The information on investments included here does not constitute independent investment research and therefore it is not subject to the protections afforded to independent research. Monks can make use of derivatives for investment purposes as well as for hedging or risk reduction purposes.
Trust editor Heather Farmbrough is a journalist who contributes to various financial magazines.
Back to top
