Monks’ musings

Capital is at risk

It’s easy to chuckle at the hyperventilation in articles in the Pessimists Archive, a fascinating online repository of the history of moral panics, hysteria and technophobia that so often accompany new technologies. The quotes refer specifically to the dangers of hydroelectric power development, corrupted floppy disks, and the Sony Walkman. They reflect a natural bias in human nature which is hardwired for pessimism. From an evolutionary perspective, this makes sense – it’s safer to assume the worst about the unfamiliar. However, as long-term growth investors, Monks deliberately adopts an optimistic stance.

A brightening outlook

The Monks portfolio is showing a promising outlook based on recent earnings estimates, which have seen a notable increase. The forecast for earnings growth over the next three years is higher than that of the market index. The portfolio continues to invest heavily in innovation without compromising on long-term quality, as evidenced by a higher ratio of research and development spending to sales. Additionally, the companies within the portfolio carry less debt relative to their equity compared to the market average and maintain higher gross margins.

Execution and acceleration 

This acceleration in forecast earnings growth reflects our investee companies' financial and cultural adaptability. While the market may be good at pricing in a change in the macroeconomic weather, it is much less willing to reflect on the potential for companies to trim their sails accordingly. As a result, where companies have shown evidence of disciplined execution, resulting in accelerating revenue growth and margin expansion, it has come as a surprise. The share price has been forced to play catch up, particularly when the starting valuation was low.

There are good examples of this across the portfolio. We could point to Amazon, where operating margins have inflected sharply, reflecting efficiency gains now coming through from elevated levels of investment over the last few years. Likewise, Shopify has recovered its mojo, shedding its experiment with logistics to refocus on its “main quest” of making commerce easier for everyone. A leaner, more focused Shopify is already being rewarded with continued revenue growth in the mid-20s and a dramatic increase in profitability.

But it is perhaps Doordash that provides the clearest example of the underappreciated benefits of a tougher macro environment. A long record of near-flawless execution has enabled Doordash to gobble up almost two-thirds share of the online meal delivery market in the US. We could also point to several others, including Meta (which we added to twice last year), CRH and Ryanair.

Opportunity

We have remained on the front foot throughout recent bouts of market volatility and have been able to invest in some exceptional growth companies at attractive prices. Examples include:

• Block, which owns two complementary payments ecosystems. The first is Square, a hardware and software solution that offers commerce tools for small merchants, and Cash App, a consumer finance app that allows consumers to spend, send, save, invest, and increasingly shop
  
  
• Pinduoduo, China's third-largest ecommerce platform with over 900 million users. Its key differentiator has been to redefine ecommerce as a socially driven experience, which has attracted a previously underserved demographic
  
  
• LVMH, the luxury goods powerhouse. Beyond the 75 individual brands, including Dior, Fendi, Stella McCartney and Kenzo, as well as the eponymous Louis Vuitton, our thesis is that LVMH has built a ‘luxury engine’. Its model resembles a flywheel, where LVMH has become a superior owner of luxury brands, able to take advantage of the benefits of scale, sharing best practices in areas like distribution, and reducing the fashion risk inherent in any individual brand

Powerful structural trends

The bedrock of Monks’ approach is to seek diversified exposure to deep structural trends. Our investee companies are either pioneering or disproportionately benefiting from powerful long-term currents of change. These secular shifts include, for example, the need to upgrade ageing infrastructure, decarbonise the economy and better meet the needs of ageing populations. Meanwhile, the development and adoption of powerful new artificial intelligence tools remains in its infancy. Years of patient research in healthcare are bearing fruit with more personalised and effective treatments and disease prevention. Opportunities also exist for companies to address structural bottlenecks in critical resources, cloud infrastructure and logistics networks. Multi-decade forces such as these should help our portfolio sustain its superior growth outlook and provide ample reasons for optimism.

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This communication was produced and approved in January 2024 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.  

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