Monks’ musings: the power of profit-driven performance

As with any investment, your capital is at risk.

Markets endured a stomach-churning rollercoaster ride in 2025. They navigated through periods of AI optimism and concern, tariff shocks and political uncertainty to deliver a third consecutive year of strong returns. The FTSE World Index delivered a positive return of 15.0 per cent. Monks’ share price rose by more, at 18.7 per cent, with our net asset value (NAV) increasing by 13.5 per cent.

Contrasting paths

The way we achieved this performance matters for the sustainability of returns. Quite simply, strong profit growth from great companies drove Monks’ gains, with a little help from a narrowing of the discount of the share price to its underlying NAV. The aggregate valuation of the portfolio didn’t move. Contrast this with the benchmark, where investors paid higher prices for the same level of profits, boosting its returns. Profit growth can compound over the long term, but valuation increases can’t go on forever.

Additionally, while the Trust’s growth was broad-based, the index’s was more unbalanced. Our top 10 contributors represented a diverse range of industries, including:

• Airlines – Ryanair
• Chipmakers – TSMC
• Advertising platforms – AppLovin
• Rocket companies – SpaceX

For the index, it was another year of narrowness in the US, driven by a few of the very largest companies. Internationally, traditional, slower-growing industries saw their prospects improve, including banks, miners and defence companies. These sharp changes in industry sentiment can happen in any given year, but again, over the long term, it’s the lasting and enduring growth that matters. We focus on finding the very best of those opportunities.

While this unbalanced rally meant market returns motored on, an unnerving cocktail of AI bubble fears, high valuations and economic uncertainty – exacerbated by fearful financial press headlines – is making investors wary. We’re confident we can navigate the concern.

That confidence stems from the belief that the strong profit growth, which has driven our returns, will continue. The portfolio’s expected growth over the next three years is 13.9 per cent according to investment bank analysts. That’s 3 per cent higher than the index.

We expect that level of profit growth to be resilient for two main reasons. Firstly, due to the superior quality of the Monks portfolio in comparison to the index. This is evident in Monks’ higher margins, lower indebtedness and better profitability. This quality means the portfolio is better positioned to weather future shocks.

Secondly, it’s because of the structural growth drivers that underpin our enthusiasm. We’ve written about four of them in more detail in our 2025 Research Agenda review. AI, unsurprisingly, is one we are optimistic about. We believe exceptional opportunities abound, but selectivity is key to avoid those where delivery won’t match high market expectations.

Themes of the future

We will adjust our view as new information emerges. For example, this quarter, we added to our holding in Google’s parent company, Alphabet, as the value of its custom-designed TPU (tensor processing unit) chips – used to train and power AI models at scale – became clearer. And we reduced our holding in the social media giant Meta because of a rapid ramp-up in its capital expenditure, increasing execution risks.

Healthcare is another topic where our rising enthusiasm differs from that of the market. This quarter, we added to our exposure by participating in Medline’s initial public offering (IPO). It is one of the largest healthcare providers and medical suppliers in the US, with an unmatched distribution network. We have also added to Thermo Fisher, another equipment supplier, targeting research and clinical labs. Demand from its customers continues to recover. Both broaden our exposure to innovation in the sector without taking on additional clinical risk on top of our existing pharmaceutical companies.

The third topic is on our largest regional overweight position: emerging markets (EM). One of the team’s investors, Mike Taylor, returned enthused from a trip to South America last year. His work has led to additions to Brazilian online bank Nu Holdings and ecommerce platform Mercado Libre. Nu and Mercado offer a materially better service than traditional rivals and a longer growth runway ahead than counterparts in developed markets. From disruptive tech platforms to luxury brands, we believe that the strong performance EM holdings enjoyed in 2025 can continue.

Lastly, we turn to companies consolidating industries through takeovers or expanding into new markets by opening new stores. This theme is more timeless than timely. In the past quarter, we added a serial acquirer to the portfolio in the building materials company QXO. Its chief executive, Brad Jacobs, has made 500 acquisitions throughout his career and views the fragmented and inefficient industry as ripe for his tried-and-tested playbook. We’re backing his expertise and experience, as we do with several other underappreciated consolidators in the portfolio.

Steadier stalwarts

In addition to addressing varied and distinct structural drivers, we continually reassess and refine our portfolio construction. The category of companies we call ‘growth stalwarts’ is intended to provide ballast by being dependable. Their durability should provide an anchor in stormier market conditions. However, recently, some of the constituents have fallen short of the steady and consistent growth levels we expected from them.

Last quarter, we sold Asian insurer AIA, Japanese endoscope maker Olympus and luxury conglomerate LVMH after they fell short of this high standard. We have replaced them with an upgraded group of consistent performers, including:

• Keyence – a leader in factory automation, with a high-margin service-based model 
• Games Workshop – the British maker of tabletop fantasy games, which has a devoted fan base 

Our work continues, and with quality stocks underperforming last year, the market may present us with more high-quality companies at attractive prices.

Positioning not prognosticating

We spend most of our time reflecting on how the world will evolve, but we don’t have a crystal ball. We assess the future with probabilities, not definitive outcomes. We don’t know if 2026 will bring further tumult for investors. And, unlike investment banks, we wouldn’t dare attempt to predict the index’s returns.

What we can do is set up the portfolio to deliver growth in as many potential outcomes as possible. The foundation for this is simple: excellent companies positioned to capitalise on a broad range of distinct growth drivers. This means higher growth with more resilience. The headline writers may be prone to pessimism, but we believe we have several reasons to be resolutely optimistic.

Performance source: Morningstar, FTSE, total return in sterling

Past performance is not a guide to future returns.

Important information    

This communication was produced and approved in January 2026 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.  

The Trust invests in overseas securities. Changes in the rates of exchange may also cause the value of your investment (and any income it may pay) to go down or up. 

This article does not constitute, and is not subject to the protections afforded to, independent research. Baillie Gifford and its staff may have dealt in the investments concerned. The views expressed are not statements of fact and should not be considered as advice or a recommendation to buy, sell or hold a particular investment.

Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). The investment trusts managed by Baillie Gifford & Co Limited are listed on the London Stock Exchange and are not authorised or regulated by the FCA. 

A Key Information Document is available at bailliegifford.com.

FTSE index data 

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