Right, let’s dive into the Monks Investment Trust annual results. It’s not the report shareholders were hoping for, is it? Against a backdrop of global market fireworks – largely courtesy of geopolitical flare-ups – the trust has posted numbers that feel decidedly lacklustre. The headline figures tell the story: a NAV total return (with borrowings at fair value) of just +0.1%, a share price total return of -1.5%, while the benchmark FTSE World Index steamed ahead at +5.3%. Ouch. That underperformance gap is impossible to ignore, especially for a trust with Monks’ ambitious growth mandate. Chairman KS Sternberg, stepping down at the upcoming AGM, didn’t mince words, calling it “clearly disappointing.” Let’s unpack why and what it means.
April’s Avalanche: The Tariff Tantrum That Crunched Returns
The year wasn’t a steady grind downwards. In fact, by February 2025, Monks’ NAV per share had clawed its way back to £15, matching its November 2021 peak. Hope was in the air. Then came April. President Trump’s ‘Liberation Day’ announcement of sweeping US tariffs, swiftly met with Chinese retaliation, triggered a severe market sell-off. Monks, with its inherent growth bias and significant exposure to global markets (particularly the US, its largest geographic allocation at 58%), was squarely in the firing line. The trust gave up nearly ten months of gains in a matter of weeks, hitting its lows for the year just shy of the 30th April year-end. This late-stage rout turned potential gains into flatlining results.
The currency story added salt to the wound. Trump’s pronouncements and murky US deficit plans weakened the dollar. Since Monks’ assets are globally diversified (many priced in USD) but its shares are sterling-denominated, this translation effect further dented reported returns for UK investors.
Discount Dynamics: The Buyback Blitzkrieg Continues
Facing a persistent discount throughout the year (closing at 10.1% on the fair value NAV, up from 8.5%), the Board doubled down on its capital allocation weapon of choice: share buybacks. They’re playing a long game here.
- Scale is Staggering: £321.1 million spent buying back 26.5 million shares this year alone. Zoom out: since January 2022, a colossal £727.1 million has been deployed, repurchasing 65.5 million shares – that’s 27.7% of the pre-programme share capital. This is one of the most aggressive buyback programmes in the global equity investment trust sector.
- Rationale Remains Sound: Buying shares below NAV directly boosts the NAV per share for remaining holders. It also provides liquidity. The Board firmly believes the underlying portfolio warrants a premium, or at least a negligible discount.
- A New Discount Target: Crucially, the Board signalled a strategic shift. While stopping short of a “zero discount policy” (valuing the structural benefits of being closed-ended), they explicitly stated shareholders should expect them to aim for a mid-single-digit discount (based on fair value NAV) in normal markets. This is a direct response to investor feedback demanding lower, less volatile discounts. Expect buyback intensity to potentially increase to achieve this.
Gearing, Costs & The Dwindling Dividend
Monks retains its structural advantage of using gearing (borrowing) to enhance long-term returns, aiming for a strategic 10% level. Net gearing stood at 8.9% year-end, up from 6.8% a year ago, reflecting increased conviction during market weakness. The weighted average interest rate on borrowings was a relatively modest 3.6%, a legacy of locking in cheap long-term debt – the Chairman ruefully noted they wished they’d borrowed more at those lows.
On costs, Monks remains fiercely competitive. The ongoing charges ratio edged down to 0.43% (from 0.44%), a testament to the tiered fee structure benefiting from scale. Keeping costs low is non-negotiable for compounding returns.
The dividend, however, took a sharp haircut. Slashed from 2.10p to a token 0.5p. Why? Monks is unapologetically focused on capital growth, not income. The dividend policy is simply to pay the minimum required for investment trust status. The drastic cut is a deliberate move to build “headroom” in the revenue account. This headroom is needed primarily because aggressive buybacks reduce the number of shares entitled to dividends. Retaining earnings allows more capital to be recycled into the portfolio and fuels the buyback engine. It’s a clear signal: total return via growth and discount management is the absolute priority.
The Managers’ Post-Mortem: Where Did The Wheels Come Off?
Spencer Adair, Malcolm MacColl, and Helen Xiong (the Baillie Gifford Global Alpha team) acknowledged the poor relative performance (-5.2% vs the index). They pinpointed two main culprits:
- The April Tariff Tsunami: As outlined, the US market slump (S&P down ~20% peak-to-trough Feb-April) disproportionately hit their largest absolute allocation.
- Healthcare Havoc: A cluster of healthcare holdings were significant detractors. Novo Nordisk (-51.1%) suffered despite leading drug trials due to perceived “disappointing” weight loss figures (22.5% avg vs expectations). Elevance Health (-24.5%), a major US health insurer, was hit by falling Medicaid rolls squeezing margins (seen as temporary by the managers). Moderna (-70.6%) was sold after repeated disappointments beyond Covid vaccines. Conversely, Alnylam Pharmaceuticals (+70.1%) was a bright spot.
Winners included emerging players like DoorDash (+40.6%, gaining significant US market share) and Sea Limited (+98.9%), alongside large holdings like Prosus (+29.9%) and Meta.
Navigating the Fog: The Three Pillars of Monks’ Strategy
Faced with “Knightian uncertainty” (where probabilities are unknown, unlike quantifiable risk), the managers reiterated their core navigation principles:
- Build Resilience: Focus on companies with robust fundamentals, low debt (20% net debt/equity vs index 50%), high profitability (39% gross margin vs 29%), and strong reinvestment (capex+R&D/sales 14% vs 11%). Diversification across 103 holdings and three growth categories (Stalwarts 35.7%, Rapid Growth 33.0%, Cyclical Growth 31.3%) is key.
- Retain Perspective: Ignore the noise, focus on structural shifts. ~25% of the portfolio is in AI enablers/beneficiaries (NVIDIA, Microsoft, Meta, plus new adds like Kokusai Electric, Disco Corp, Salesforce). They’re also positioning for electric/autonomous vehicles (holdings like CATL, Mobileye, Li Auto, new addition Uber).
- Remain Reward-Seeking: Use volatility to upgrade. They’ve reduced the portfolio’s valuation premium (forward P/E) vs the market from over 20% to 7%, while maintaining a significant forecast earnings growth premium (12.5% pa vs 8.6% pa). Examples include buying Nu Holdings (Nubank) on weakness.
Outlook: Fighting Fit in a Consolidating World
The Chairman struck a note of sober realism. The extended period of the S&P 500 beating its equal-weighted version (indicating narrow leadership) has been brutal for diversified active managers like Monks. While owning many winners, they held them below index weight. Crucially, Sternberg highlighted that Monks is now behind the index over five years. This triggers a deeper, more formal review by the Board, as per his previously stated 5-year assessment horizon. They’ll scrutinise personnel, process changes, and market dynamics.
The message is clear: Monks needs to be “fighting-fit.” The Board foresees a future with fewer, larger investment trusts, driven by platform economics and potential mergers. Their goal is for Monks to be a core growth holding and a consolidator, not consolidated. The aggressive buybacks and refined discount target are part of this positioning.
The managers, meanwhile, express confidence. Gearing is up, buybacks continue, and they believe the portfolio’s fundamentals – resilient companies, diversified growth drivers, attractive relative valuations – are primed for a recovery. They see the current uncertainty as the very environment where entrepreneurial returns (Knight’s “true profits”) are forged.
It’s a results announcement that lays bare the challenges of growth investing in volatile times. Monks took a significant hit from an unpredictable geopolitical event late in the day. The response is unequivocal: relentless focus on the underlying portfolio quality, aggressive capital allocation via buybacks to support the share price and NAV per share, a stricter discount target, and a steely determination to position the trust as a major player in the evolving investment company landscape. The next year, against that five-year underperformance backdrop, will be intensely scrutinised. The fightback starts now.
