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As with any investment, your capital is at risk. Past performance is not a guide to future returns. This transcript was created with the assistance of AI. Ian Horne (IH): Hello and welcome to this programme for Baillie Gifford, the latest in a series of webinars where we talk to the managers of the business’s investment trusts. My name is Ian Horne and I’m representing Citywire. Today I will be talking to Michael Taylor, co-manager of the Monks Investment Trust, about the portfolio and how he runs it. Michael and I will be in discussion for about half an hour. After that, it will be time for me to put your questions to him. With that in mind, make sure you send in your questions via the Q&A box. Please feel free to send in questions throughout the broadcast, and I’ll make sure to select the best ones. Michael, welcome and thank you for joining us. In a nutshell, what are you going to be sharing with us today? Michael Taylor (MT): I’m going to be talking about what we’re trying to do with Monks, and why it is a fantastic time to be doing it. In essence, we are a growth investor that takes a broad interpretation of growth, and this is an environment where a broad interpretation of growth is exactly what you should be doing. We are seeing growth opportunities from the likes of mines and one type of company to cutting-edge chip companies on the other. So lots to go for and an exceptional time to be a broad growth investor. IH: Brilliant. Sounds upbeat, Michael. So thanks for being here. Let’s start with the market backdrop, which you’ve kind of touched upon there. I mean, markets have been strong over the past 12 months, but you’ve mentioned in a recent letter that they’ve also been more volatile and more narrative-driven than in the past. What do you mean by that? MT: The index has certainly done well. The absolute returns on offer at the moment have been pretty strong, but it’s clear that we are in a market dominated by thematic swings. And what I mean by that is we’re seeing groups of stocks become correlated and moving in very pronounced fashions alongside one another. So if you go back to the autumn of last year, we had hawkish comments from the Fed that caused all growth stocks to move down in parallel, regardless really, of how that company was doing. If you then go forward a few months, the narrative changes and then it was all about who is an artificial intelligence winner, who is an artificial intelligence loser. So when Anthropic released Claude Code, late January, February time, a whole host of companies sold off at once in the software space because they were perceived to be at risk of disruption. And this kind of thematic swinging to and fro can be good or bad, depending on the perception at the moment. And I’ve got an example I’d like to give you that illustrates this. This is a company called Datadog that we own at Monks, and they make observability software. So if you’re an enterprise, it monitors your data estate, allows you to understand how you’re using software products. And in the autumn, this was trading around $180, $190. Then we get those hawkish Fed comments, sells off to $140. Roll forward. Then we get Claude Code. The perception becomes that this is at risk from disruption. So $140 sells down to $100. Why couldn’t ChatGPT, OpenAI do this themselves? Then the news emerged that ChatGPT had tried to do it themselves, and they had failed and were in fact a significant customer of Datadog. So Datadog then moves from the AI losers camp into the AI winners camp, and it goes from $100 share price to about $270 at peak, outperforming the market by over 100 percent. Now, contrast that to how the company was actually performing. In the three quarters since last autumn, revenue growth has been about 30 percent. About 30 percent, about 30 percent. Gross margin has been about 80 percent, about 80 percent, about 80 percent. Now stock prices can and do anticipate future changes to a business, but it seems that Datadog is executing pretty well and has a convincing story as to why it’s an AI winner. But because of the market we’re in, it’s thrown around in share price terms. Now, that kind of volatility can be pretty uncomfortable, but for long-term stock pickers, it can be a chance to outperform. It can be a real opportunity. What you need is conviction in the stocks you hold, understand why you hold them, and then the patience to look through some negative news flow and the optimism to imagine what could go right. IH: Yeah, absolutely. So in an environment like that, how do you distinguish between signal and noise? And perhaps just as importantly, how do you communicate that to people? MT: Yeah. So I think it goes back to that point about understanding your businesses and what your long-term investment case is based on, and then being able to stress test it, because I actually think the market is not stupid. There are a lot of things going on at the moment. Claude Code, for example, does make it easier to enter into an industry. You’ve got to understand what the particular advantage of your case is and whether the new information actually relates to it, or it’s a more generalised fear. So for us, it’s not about hunkering down and just holding what you own tight. It is about understanding the competitive advantage, the long-term dynamics of the particular businesses that you own. IH: Great stuff. And your recent commentaries also argued that returns are coming from real earnings growth, rather than the market warming up to growth stocks. So can you elaborate on this, please? MT: Yeah. So whilst there have been these thematic swings, the index has marched upwards. And what is interesting, as you say, is the driver of that has been profit growth. And not just that profits have come through. It’s that profit expectations for the index have risen as well. In fact, growth expectations today are approaching their highest level since the start of the relevant index in the 1990s outside of periods of recessionary recoveries. But what’s quite interesting about it, from an index point of view, is that it’s very narrowly driven. So, the huge increase in artificial intelligence spending that we’re seeing has lifted profits, in particular in the IT and the materials space. And in the case of the index, about 70 percent of profit growth is coming from just those two sectors. The question is how enduring will that be? And are there pockets of differentiation within the IT sector within that AI spending? So within that context, I think it is a great time to be a flexible growth investor. So I do think there are some really exciting opportunities within artificial intelligence, but we don’t want the portfolio to be simply a one-way bet on the rate of AI adoption investment. In fact, we think the market’s intense focus on that one theme casts a long shadow. So there are other areas where there is growth, powerful, consistent long-term growth that is underappreciated. So that is particularly exciting for us. When I think about Monks today, I think we’re positioned within the best bits of the artificial intelligence world, but we’ve also got plenty beyond that. IH: Yeah, absolutely. And AI, as you suggest, seems to swing between fear and optimism, doesn’t it? Depending on where you’re sat and what you’re doing. I mean, would you say that the broader market mood is swinging back towards growth now? MT: So it has been. The market has been rewarding growth where it finds it intense. Those stock prices have gone up. But it’s back to that point that it’s because there is an increase in earnings. It’s not like there is a furore around companies in the AI semiconductor space that has led to a multiple or a valuation rerating. In fact, it interests me how much commentary there is and worry there is about the current moves in markets. It’s a sort of generally disliked bull market. That’s one perception that I have. And now that is not a good or a bad thing. I think you have to take the valuations where you find them. But I do think that leads to opportunities. If you are able to sort of look through the commentary about what themes are in favour, what themes are not, have a real sense of what you are looking for and have a long-term perspective. IH: Great stuff. Let’s move the conversation now on to concentration risk, because the index itself is becoming more concentrated. But so too, it appears, is Monks. Your top 10 stocks account for roughly a third of the portfolio and are heavily weighted to a few US and Taiwanese giants like TSMC and NVIDIA, Alphabet, Amazon and Microsoft. So how much do these core holdings influence the general outlook of the fund? MT: Sure. And it’s absolutely right to point out that increased concentration, and that has been a big change in markets over the last decade. Indeed, over my career, the top five holdings in the index, if you go back to 2016, they were about 11 percent. Today they are over a quarter. But what is almost more interesting to me is not just that increased concentration, but what those companies look like. So if I go back to the start of my career in 2007, the biggest index constituents are companies like ExxonMobil or Johnson & Johnson or GE. And there are great things about those companies, but they’re not quite as interesting to the growth investor as NVIDIA or Alphabet or Amazon. And in particular, what I’m getting at is the likes of an Exxon or a Johnson & Johnson experience decreasing returns to scale. So as Exxon gets bigger, for it to grow, to find more and more barrels of oil, that’s an expensive endeavour. But for a company like NVIDIA, as it gets bigger and as its profits swell, it can invest that into its ecosystem, into its research and development, and it experiences increasing returns to scale as a result. So those businesses that you mentioned, they’re extraordinary. They have that wonderful dynamic. I described their strong competitive positions. They target large markets. So we want exposure to those companies. We’re very interested in them for the quality of the business and the trends they give you access to. However, it’s also worth pointing out that on an absolute basis, those stocks, they matter a lot. But on a relative-to-the-index one, they’re less important to Monks. So our top 10 so-called active positions are very different in that cohort. You have companies like Royalty Pharma, which is a business that creates and buys royalties on drugs around the world, and so doing invests in biotechnology, or Martin Marietta, a seller of gravel in the United States, or SpaceX. So it’s a bit different from that perspective. And just to reiterate, what we’re trying to do at Monks is take a broad interpretation of growth to be flexible. So it’s important to us that our large active positions have a balance of distinct growth drivers, and that helps us manage those concentrations that you’ve alluded to in the index. IH: Yeah, absolutely. And that concentration, I mean, there’s a rationale for it, isn’t there? Do you expect that to be the case in the medium to long term as well? MT: I think so. I think those large tech companies have very pronounced advantages. They have unique positions within the industries that they target. They’re growing pretty quickly, and they’ve got lots and lots of money. So if we’re moving towards a world increasingly dominated by artificial intelligence, it seems likely to me that their ability to deploy cash flows into that world, to buy scarce chips and open data centres, means that they’ll remain central or increasingly central to the global economy. There’s an interesting debate to be had about the quality of those businesses. They’ve gone from, in a number of cases, quite asset-like search engines or social media companies, and into very much asset owners, capital-heavy companies. And that probably merits a different multiple at the same time. If they can earn a return on that capital and they can deploy lots of it, then that’s a pretty attractive proposition. So one wants to be there. IH: Absolutely. But you’ve helped me segue into the next question rather helpfully, Michael. Thank you. I mean, you have recently stated elsewhere as well, as you said, growth is becoming more capital intensive, and that means energy, copper, chips, banks. So for a manager known for asset-like scalable businesses, that’s perhaps a noticeable shift. Is this a change in what the Monks Investment Trust fundamentally does, or a tactical tilt that you’ll eventually reverse? MT: Monks is targeting growth where growth appears. And the reason that we have become broader is that the opportunity set before us at the moment is broad. It is notably broadening, perhaps broadening more than at any point in my career. And it’s worth taking a step back and analysing what is actually going on here. And first of all, note the scale. The amount of money being deployed by the large American hyperscalers is kind of mind-boggling. So you go back a couple of years, their capital expenditures are about $250bn, 2025 more like $400bn, 2026 looks like it’s going to be $750bn. And that could be going to $1tn next year. And that is before you get increased investment from a sovereign perspective. Or the Chinese hyperscalers haven’t really started spending it. So at the moment in the world, a lot of money is being deployed. And it’s not just artificial intelligence. There is defence, rearmament spending, and electrification is another trend that uses a lot of physical stuff. And arguably the global and regionalisation of supply chains. It’s a lot of money being spent and it is being spent on physical kit. That itself is different. So if you go back maybe 10 years, the likes of Google or the likes of Meta were generating a lot of cash flow, but they didn’t really have a way to spend it particularly. So what they ended up doing was doing lots of M&A, and then they started doing buybacks and so on. Now they seem to have a productive outlet for their capital, and it seems to be generating a return. If you look at the acceleration of core Google Search, if you look at the improved performance of Meta’s advertising business. So in my view, a lot of money is being spent. There is economic rationality as to why it is being spent and it is going on physical things. And the reality is that the supply chains that create those physical things can only expand so fast. And so mines can only expand production so fast. Semiconductor chip manufacturers can only expand capacity so quickly. So these bottlenecks are appearing in that world and is turning companies that haven’t really looked like growth businesses into growth businesses. We think they are going to experience some really quite – or are experiencing currently – profound earnings growth. So I would say, no, this is not a tactical tilt or a fundamental change in the way that Monks has done things. If you go back through the history of the trust, we have indeed invested in similar companies before, but it is a reflection of where we are seeing growth in the world. IH: Absolutely. You’ve made a strong case there for the need for more infrastructure plays, more physical investment for sure. Is there an element to which some of this is psychological as well, where physical infrastructure feels like a safer investment? Because we’re entering this age of AI and everything becoming obsolete very quickly? MT: Yeah, I’m not sure psychological safety is always what we’re getting at here, because some of these companies, they don’t necessarily feel like growth investments because, you know, they have not particularly grown their earnings in the last decade. So you’re sort of being forward-looking by moving towards them. And then it is fair to say in a number of these cases they are tied up with the AI trade. And if you’re somewhat nervous about the momentum in that space, then psychologically it can be difficult. IH: You mentioned bottlenecks, and let’s discuss some of those. So can you talk us through some recent additions to the portfolio and how you determine whether or not a pinch point will provide the longer-term growth opportunity that you’re looking for? MT: Okay. A recent addition to the portfolio is a copper miner called Freeport-McMoRan. And when we talk about bottlenecks, we’re talking about two things. Right. So we’re talking about demand. On the one hand, we want to be positive that that will be growing. But then it’s this supply question as well. We don’t want supply to expand at a similar or a faster rate and destroy the pricing in the industry. So why might this be the case for copper? Well, on demand point of view, essentially any significant growth trend out there today requires lots of copper. And so we’ll talk about artificial intelligence and data centres. They require lots of copper wire. We might talk about electrification of many things, but notably electric vehicles. An electric vehicle requires far more copper than an internal combustion engine. Defence, lots of copper, and infrastructure investment more broadly does need a lot of copper. So demand story is a pretty powerful one. What about the supply? Well, I think this is a really interesting part of it. And it’s why Freeport-McMoRan becomes a great growth company. And it’s my belief, and evidenced by meeting miners in the industry, that this is a sector that has been underinvesting. Copper miners have not been investing in greenfield expansion and organic expansion at anything like the rate they should have been to maintain production. Instead, they’ve been paying out lots of dividends. So I think there is not much in the way of a pipeline of new copper mines about to come on. The price of copper, whilst it has run up, is still below the level that would actually incentivise the opening of new mines. But if you wanted to, even if you wanted to open a new mine, it will probably take you a decade to do the geology, to get the permits, to negotiate with the government, the region that you’re in. It’s a long process to bring supply on. Meanwhile, existing corporates, ore copper grades are degrading, so you’re getting less out of the rocks, and climate change is making it harder to get what you do have to market: landslips, weather events and so on. Within that attractive supply picture, we’ve got Freeport-McMoRan. It’s one of the only large US miners with a strategic asset for the US, which is helpful. It has interesting technology around leaching, which allows it to get more copper out of its cast-offs, its rubble, than otherwise would be the case. So we expect it to grow its production meaningfully but to lower its unit costs. But the bigger picture is one of powerful demand, a really quite restrained supply picture and an advantaged company within that. So even within a picture where the copper price has moved up, we think there’s potentially quite a lot more to go. And this particular business is exceptionally well positioned. IH: Great stuff. And you’ve made a really good point there on bottlenecks, not just on timing, but also how, you know, the way in which you choose to invest in that bottleneck, which I think is quite interesting. Obviously there are different scenarios out there. Are there any that you’re currently following where you believe a bottleneck is emerging but haven’t quite invested yet? MT: Yeah, an interesting one is power and power supply to the data centre market. So data centres are enormously power hungry because of the advanced compute that’s in them. And the grid that supplies the data centres traditionally with power cannot expand to meet the data centre needs. So data centre providers are having to find other ways to power their data centres that do not mean connecting to the grid. In reality, that’s turbines, and turbines of all forms. So we can see a powerful demand picture. There is huge demand for power. The question is, is there a bottleneck in supply? And potentially, yes, because it is difficult to make turbines. It is hard to get capacity at the moment. The hyperscalers would be expanding more quickly than they are if they could get access to power. It’s one of the rate limiters on that industry. So there could be a potential from a limited number of companies that make these enormous turbines, and that could be a supply bottleneck. What you’re weighing up, though, is could this problem be solved within our time horizon? And at the moment you’re seeing things like companies that traditionally have purchased turbines for, or produce turbines for, ships or planes or even sort of backup generators for homes, diverting their capacity towards data centres. So it’s a question of weighing it up. How meaningful is that supply response versus how large the demand might be? And is the product the kind of earnings growth that we’re looking for? IH: Yeah. And something you touched upon there is bottlenecks that can disappear when supply catches up to the problem. So how do you monitor situations like that? And can you highlight a position that you previously held and perhaps still do hold where a bottleneck has been disappearing over time? MT: I’ll go through a couple of different ones quickly, and I don’t want to linger too much on commodities, but we have over time invested in lithium because of our enthusiasm for electric vehicles. That is a market that has experienced pronounced price spikes and then pronounced price drops. The last time that happened a few years ago was the result of Chinese capacity coming online. It’s a sort of strategic asset, so perhaps an irrational basis for some of it, but that is a way in which a bottleneck that we thought was there got wiped out. A couple of different examples. We’ve been a long-standing investor in a company called Elevance Health. This is a medical health insurance business in the United States. And the bottleneck there is the sheer – there’s a lot of demand from an ageing population, second, unhealthy obesity problems. The bottleneck is actually being able to respond to that demand and treat it because the network, the system, is so complicated. So Elevance Health and its peers had an expertise in doing that, meeting those complex needs and having pronounced market shares in local markets that allowed them to respond. The question we’re mulling over is how does that change in a world of GLP-1s? A significant proportion of Americans are already on those weight-loss drugs. They are probably going to get healthier. Diabetes will probably become less common. What does that mean for a bottleneck provider or solutions provider like Elevance Health? Just one more. One that we’re interested in tangentially is the fashion market, because fashion is a way of creating almost a synthetic bottleneck. So you generate demand for a brand of some form, and then you provide the supply to it. The question is, what happens if you provide excess supply? Now, the luxury companies of the world have had a pretty tough time of it relatively in recent years. Chinese market has been difficult, for example. So we’re sniffing around there. Could there be an opportunity for great long-term growth businesses? But there is the potential for there to be something of excess supply. So if I look at a company like Gucci, say, I wonder if Gucci has really tripped itself up by essentially solving its own bottleneck, becoming a bit too ubiquitous. So bottlenecks can be resolved in a number of different ways, and it really pays to be attentive to what is changing. IH: Brilliant. Thank you. And quickly, for those of you that have sent some questions in, I’ve seen we’ve got some really good ones. I’m going to push that Q&A part just a few minutes back to accommodate for the brief drop in the feed there, and likewise we’ll run a bit later at the end as well. So Michael, back to you. Turnover has risen as you reposition. What’s your discipline for not overtrading? MT: Yeah. So you’re right, Ian. Turnover has ticked up. But it is within our long-term historic range. It’s a little under 30 percent on an annualised basis. And I think when the world changes, you have to change too. And your portfolio has to change. And so historically when our portfolio turnover has ticked up, that has been in more volatile periods. And at the moment we have volatility in business fundamentals and we have volatilities in the markets. What businesses are doing and what their opportunities are, are changing. What their share prices are is changing as well. And I think as you look back, periods of high historic turnover tend to have correlated to good strong prospective returns. But, you know, it’s important to understand what we spent that turnover on. We have repositioned in those bottlenecks we think are attractive. And we have not become obsessed with artificial intelligence, but made sure we have improved our steady compounder exposure. Those are the sort of more dependable growth businesses, and we’ve tried to take advantage of the volatility where it’s popped up. So a number of different avenues where we’ve been trading, and then the final part there is we’ve taken profits in a number of companies that have done very, very well. IH: Yeah. And you mentioned you have to respond to the market. But what gives you confidence that you’re adapting rather than just chasing the latest narrative? MT: Yeah. So I think you’ve got to have that long-term view of the fundamentals of your companies, and you’ve got to ask yourself some pretty searching questions of what has changed and what’s not changed. I think a great example of this is in the software sell-off in February and March. So on the one hand, you could have reacted to that by saying, “Oh gosh, the narrative has changed,” and you get out of any software or any capital-light business, wholesale sold. Or you could have gone the exact opposite direction and said, “I was right in the first place. The market is wrong. I’m doubling down.” I think both of those extremes don’t make sense. What you’ve got to do is go back to your companies and say, what is changing here? So on the one hand, we did move on from some companies that we thought are now fundamentally challenged. For example, we sold our position in Salesforce.com, the customer relationship software, because it’s a compelling product. But you are now in a position where you conceivably could vibe-code up a rival to it. In fact, we have seen Salesforce’s own salespeople sort of do that in meetings with clients. So it seems to us that it’s likely their competitive position is weaker than it was. But for some companies, that just isn’t true. And the key for us is to sort of orientate yourself towards the long term, is to ask, does this software business sell more than just lines of code? And there are a couple of examples, and several examples in our portfolio, of companies that do. To give one example, we added during that software sell-off to a company called Samsara. What Samsara does is provide physical boxes. It provides hardware that you can put on vehicles or assets on a construction site that gather data, that analyse that data, to allow you to understand how your assets are being used. Can you use them more efficiently? And one of its big customers that had recently was a school bus operator. Can you predict maintenance of the bus? Can you optimise routes? The market sold that off because it said, “Hey, that’s data analytics, AI can do that.” We saw and were like, no, that doesn’t make sense. That is a company selling code and also bits of hardware. A chatbot is not going to sell you bits of hardware. So an opportunity there. The key is orientate yourself on your businesses such that you can tell the companies where a justification is there, there is a reason why they have dropped, and companies where there isn’t and there’s an opportunity. IH: Yeah, absolutely. And you’ve kind of covered off my next question there actually by talking about AI. But what, in your view, gives a company a defensive moat against AI? Could you single out a few? I mean, you kind of have just there, but could you point out another portfolio company perhaps that exemplifies your approach? MT: So if we return to that question, what could I be selling that is not just lines of code? I could be selling hardware like Samsara, or I could be selling trust. So another company we added in the software sell-off was a business called Adyen. This is a Dutch payments company, and now that sold off. The market assumed that it had become easier to replicate a payments network. But I think the kind of businesses that use it, small and medium-sized enterprises, what they’re actually buying is surety and the ability to accept payments from new jurisdictions, the guarantee that the money will actually arise and the ability to plug in the same payment solution across the various bits of your business. That is a lot of trust and faith that I think you’re unlikely to place in a new entrant into the market. So we added to Adyen. Another thing that you could be selling is simply the fundamental plumbing of a company, the coordination almost between lots of different parts. So we added to Shopify. This is the Canadian e-commerce business that allows small and medium-sized merchants, again, typically and larger ones now, to sell online. And that company’s tendrils are through a business. So from the storefront online that allows you to take orders, to inventory management systems, to marketing, actually being able to move away from Shopify would be extremely difficult. So I guess the broad message here, Ian, is that we at Monks believe that life is about to get more difficult for your median software business. There are going to be new entrants and AI software. AI products are expensive to provide. But we don’t invest in the median software business. Our companies are selling trust, they’re selling coordination, they’re selling fundamental plumbing. IH: Brilliant. Michael, I’ve got at least one more question for you, but let’s go to those audience questions now because we’ve had a lot sent in. The first one we’ve got is: how is Monks distinguished from what seem to be rather similar other Baillie Gifford funds? MT: So I think the first point there is that our interpretation of growth is broad. So perhaps the questioner is referring to a trust like Scottish Mortgage. And Scottish Mortgage invests in the transformational companies of tomorrow and got in early to SpaceX because it could see that being able to lower the cost of orbital flight was going to open up all these different businesses. It takes a very long-term view and thinks very broadly. These are rapidly growing disruptive businesses. We do do that. That is a significant part of our portfolio as well. We invest in SpaceX, but we also take a broader view. So we’ll invest in rapid growth. But we’ll also invest in what we call stalwarts. These are steadier companies that are compounding perhaps at 10, 12, 15 percent, but we think can do that for a really long time. And we’re also adding on top of that more cyclically growing businesses, the kind of commodity companies I’ve mentioned that are going up and down. Question is, why would you do that? Well, we think that the overall portfolio adds up to something that has a more steady risk and reward profile than something like a Scottish Mortgage or an Edinburgh Worldwide, and that has a place in core asset allocations. We think the final point to mention is our private company exposure is a bit less than some of our other trusts. So we’re about 10 percent, and that’s what you can expect from us. Whereas, say, a Scottish Mortgage might be closer to 30 percent. Of our 10 percent, about half comes from the Schiehallion Fund, which is another Baillie Gifford stablemate that invests almost entirely in private companies. IH: And actually has just been mentioned by another question here, which is: did you reduce Schiehallion when it recently traded at a large premium? MT: We have reduced Schiehallion as we manage that private company exposure. We’re also conscious of we own SpaceX directly, and there is SpaceX in Schiehallion as well. So you’re looking at your look-through exposure to specific names, but it still remains one of our largest positions, if not our largest position, because we think it gives you fantastic assets within its own portfolio, many of which are large scaled companies that would have been listed companies in a different era, but chose to stay private longer. IH: Brilliant. And SpaceX has come up a number of times now, if you’re at liberty to discuss it. What are the terms of your SpaceX lock-up? And the second part of this question, sorry I didn’t give you the full question there: what are your valuation thoughts at $200 a share? MT: So as a pre-IPO investor, we are locked up and cannot sell immediately. And whether we do or not over time will be related to that second question. And I actually think a lot of the discussion and analysis of SpaceX misses the point in quite a fundamental way. So often the valuation work that you will see will say, okay, here’s Starlink. That’s a business with this many users and this much revenue per user. What could that get to? And therefore we’ll value Starlink. And then we’ll say, what could the defence bits of SpaceX be worth? And then perhaps we’ll go on and we’ll maybe even talk about data centres in space. I think to properly understand SpaceX, which Baillie Gifford has tried to do since first investing nearly 10 years ago, is that what it is offering is the ability to lower the cost of getting things into orbit, and that unlocks markets for which it is hard to estimate today what the potential is. It is, you know, outlandish what SpaceX has already achieved. And that is the mindset that you have to have for thinking about what it could achieve. So just to put some numbers around it, I think before SpaceX entered the market, the cost of getting something into orbit per kilogram, something like $6,000. They have got that down to $500 or $600, I think, and it’s going lower. And that trajectory downward unlocked things like Starlink. So they could send up satellites much more cheaply than previously, and therefore that business developed. When we were initially – the investment case for SpaceX initially was not about specific forecasts and metrics for a Starlink. It was more about what could be achieved. So then you have to ask the same question today. What could be achieved? And if you get that per kilogram cost down further and further, what if it got down to $100? What if it got down to $50? Could you do manufacturing in space? Could you do data centres in space? Because up there, power is free. And that is one of the first – we discussed the big constraints down on the ground today. If we go into that world, then there is only one competitor and that is SpaceX. No one else is even really close, and that will be of tremendous value. And so it’s that kind of thinking and analysis that we’re doing when we’re judging SpaceX’s valuation at $125 or at $200. IH: Brilliant. Thank you. So moving on from SpaceX, you mentioned infrastructure and defence spending, but which defence companies do you currently hold in the portfolio? MT: We own a company called AeroVironment in the portfolio, and this is a drone-making business. So they started off in reconnaissance drones, but as time has gone on, they have moved into so-called loitering munitions, which are more weaponised versions of the technology. And that at the moment is as far as we’ve got. And the reason we’ve not gone further than that is we are looking for profit growth here, pronounced profit growth over time. And when you look at any defence company, many of them are amazing technology businesses and they’ve got extraordinary products, but they tend to have a very limited number of customers. Often if, say, it’s an American business, it’s just one customer, and that customer will limit the rate of return you can make. And so that has to be factored in when you’re talking about the potential for growth. And it’s also a field which is changing a lot at the moment. I think many of us will have been surprised at how Ukraine has fared in a conflict with Russia, and in doing so, they have changed the environment for defence companies. They have become masters at producing enormous numbers of very cheap drones, and it’s changing the way that warfare is done. And so when you’re thinking about investing in a traditional defence company, you have to factor in, okay, I’ve got a very large customer limiting my returns, and I’ve got a changing backdrop now for how battle is done. That is not to say we won’t go further in that space, but it makes the analysis a little bit more nuanced than your typical growth business. IH: Brilliant. Thank you. And another question we have here is: why should anyone invest in Monks rather than a passive global index tracker? MT: I think at the moment, if you look at Monks, you versus an index are getting superior growth. So our companies will grow faster. Our portfolio is forecast to grow faster on an earnings basis and on a revenue basis at the same time versus the index. Our companies have higher margins. They have a better return structure. I think their balance sheet is better. They’re investing more in R&D. So they are higher quality, higher growth, higher quality. And what is remarkable is that at the moment, you are not being asked to pay much or any of a premium versus the index’s valuation. So I think at the moment Monks is roughly the same, marginally more on a PE basis, valued the same as the index for superior growth and superior quality. But remember the points earlier about taking a broad interpretation of growth. If you look at the index today, it strikes me as pretty risky, right? So 70 percent, as mentioned earlier, of its growth is coming just from IT and materials. Now that is material for Monks as well, but it is meaningfully less for us than the index. Our growth is more likely to come from healthcare or from interesting technology companies outside of artificial intelligence, or from wonderful businesses like Games Workshop in the UK that are totally idiosyncratic. So I think with Monks, not only are you getting the growth, the quality and the valuation, I think you can make a convincing argument that the diversity behind the growth actually is better with Monks. IH: Brilliant. And we’ve got an interesting question here. Bearing in mind you’re relatively new at Monks, correct, Michael, which is: I’m hearing your Marathon capital cycle background coming through here. Does that not sometimes clash with Baillie Gifford’s asymmetric growth investing that tends to be more buy and hold? MT: Absolutely not. You’ll be interested – whoever has looked at my background, thanks. Thank you for that. So I spent seven years at Marathon Asset Management. And the style there is capital cycle investing. But what’s interesting about capital cycle investing is it is neither growth nor value. It is just encouraging you to look at the supply side. And actually, I think that is something that Baillie Gifford has done extremely well historically. So it wasn’t just that we understood that e-commerce was going to be a big deal. It was that we understood the company that would win within that context, that would dominate. The supply side was Amazon. And as it happens, quick factoid – I can’t believe it’s taken me this long to mention it – but I was the first investor at Baillie Gifford to meet Tesla when it was a $1.2bn weird little company in California, and we got excited about electric vehicles. Yes, but we got excited about Tesla specifically because of what we could see on the supply side. So Baillie Gifford has done that, I think, very well. And actually, historically, if you go back in time at some of the big Baillie Gifford products, like Long Term Global Growth, they were invested, say, 20 years ago in big iron miners or in oil and gas producers, because that’s where the opportunity sets were at the time. And perhaps you had an industrialising China, which was consuming lots of commodities. So I think Baillie Gifford does have a rich heritage in investing with a supply-side focus. Both Marathon and Baillie Gifford are private partnerships, and both take a long-term view. And I actually think there is a lot of overlap, and it’s very much complementary experience, not something in opposition to. IH: Brilliant. Thank you. Two more questions left now. They’re both going to come from me. The first one actually points to the point you just made there about idiosyncratic and uncorrelated holdings in the trust. So could you talk us through some more of those? Because I think it would be good to get a deeper understanding of your kind of stock-picking process. MT: Yeah, I think these kind of holdings are really important at the moment. And active management and indeed passive index investing is a pursuit that tends towards narrowness. So companies do very well. They become bigger as part of the index or part of your portfolio. And themes tend to grab the narrative. But as a portfolio manager, you have to have in your mind the broad characteristics of the whole, and companies that bring their own growth stories that are not correlated to other names in the portfolio add resilience. Diversification adds resilience, and they’re worth their weight in gold. So I mentioned Games Workshop there. This is a name that came from our UK team. I mean, one way to think about Monks is the best ideas of Baillie Gifford portfolio. So we’re pulling in ideas from all different teams. And this one came from our UK team. It’s a Nottinghamshire-based company, and it’s the owner of Warhammer. That is the desktop game with little painted figurines, and it’s an incredibly passionate community. The people, the hobbyists that play that game, believe in it profoundly. They are willing to invest a lot of time, a lot of money in it, and they become part of the lore of Warhammer. It’s the annals, the great story, the sweep, the arc. And so you’ve got this really, really loyal following of the Warhammer game. And there are opportunities to expand, there are upcoming TV shows that might expand the audience, and they’re rolling out across North America. And to go back to the point where if you chase fashions too much, that you can unwind your own bottleneck, that could happen to Games Workshop. But we really, really trust the culture of that company and the management team of it to be sensible stewards. And so if you can add in a Games Workshop into your portfolio, you build the resilience of that growth number. So when I look at our superior growth to the index, I am reassured that it has names like Games Workshop. Well, there are a few others I could mention, if you like, that build up to that position of resilience. IH: Great stuff. One final question, and that’s the portfolio’s valuation relative to the index is at a 10-year low. Why should investors read that as an opportunity? MT: I think it’s because what you are getting for that modest premium – in fact, it’s not actually a 10-year low. It’s an all-time low – is superior output to the index. So if you think about what drives returns over the very long term, it’s your earnings growth potential, some shareholder returns, but also your valuation. I think here you’re not going to get a valuation drag. If anything, it could rerate. But you are going to get superior earnings growth and you are going to get superior sales growth. And I think the point about quality is an important one as well. And if you have higher margins, cash flow, superior balance sheets and you’re investing more, that gives you a bit more flexibility because it’s on my mind that we do live in turbulent times. There is a technological revolution going on and that will change industries. There are geopolitical tensions. There are conflicts. The world is in flux and the market is volatile. The companies that we have collected together at Monks are exceptionally well placed, I think, to be able to navigate that because of their quality metrics. So you get that important quality, the diversity and resilience I talked about, the growth, and you’re not paying up for it. So it’s a great time to be excited about Monks. IH: Brilliant. Thank you, Michael. That is all we have time for today. So thanks again to Michael for your time and insights. And thank you to all of you who joined us and sent in questions. We have more sessions like this coming up from Baillie Gifford, so keep an eye out for those if you found today useful. Thank you and goodbye for now. The Monks Investment Trust plc Annual discrete performance to 31 March (%) <table border="1" cellspacing="0" cellpadding="0" width="623" class="MsoNormalTable" style="width: 467.3pt; background: white; border-collapse: collapse; border: none; mso-border-alt: outset windowtext .25pt; mso-yfti-tbllook: 1184;"> <tbody> <tr style="mso-yfti-irow: 0; mso-yfti-firstrow: yes; height: 14.0pt;"> <td width="151" style="width: 113.0pt; border: solid #CCCCCC 1.0pt; border-bottom: solid black 1.5pt; mso-border-alt: solid #CCCCCC .75pt; mso-border-bottom-alt: solid black 1.5pt; padding: 7.5pt 7.5pt 7.5pt 7.5pt; height: 14.0pt;">   </td> <td width="94" style="width: 70.85pt; border-top: solid #CCCCCC 1.0pt; border-left: none; border-bottom: solid black 1.5pt; border-right: solid #CCCCCC 1.0pt; mso-border-left-alt: solid #CCCCCC .75pt; mso-border-alt: solid #CCCCCC .75pt; mso-border-bottom-alt: solid black 1.5pt; padding: 7.5pt 7.5pt 7.5pt 7.5pt; height: 14.0pt;"> 2022 </td> <td width="94" style="width: 70.85pt; border-top: solid #CCCCCC 1.0pt; border-left: none; border-bottom: solid black 1.5pt; border-right: solid #CCCCCC 1.0pt; mso-border-left-alt: solid #CCCCCC .75pt; mso-border-alt: solid #CCCCCC .75pt; mso-border-bottom-alt: solid black 1.5pt; padding: 7.5pt 7.5pt 7.5pt 7.5pt; height: 14.0pt;"> 2023 </td> <td width="94" style="width: 70.85pt; border-top: solid #CCCCCC 1.0pt; border-left: none; border-bottom: solid black 1.5pt; border-right: solid #CCCCCC 1.0pt; mso-border-left-alt: solid #CCCCCC .75pt; mso-border-alt: solid #CCCCCC .75pt; mso-border-bottom-alt: solid black 1.5pt; padding: 7.5pt 7.5pt 7.5pt 7.5pt; height: 14.0pt;"> 2024 </td> <td width="94" style="width: 70.85pt; border-top: solid #CCCCCC 1.0pt; border-left: none; border-bottom: solid black 1.5pt; border-right: solid #CCCCCC 1.0pt; mso-border-left-alt: solid #CCCCCC .75pt; mso-border-alt: solid #CCCCCC .75pt; mso-border-bottom-alt: solid black 1.5pt; padding: 7.5pt 7.5pt 7.5pt 7.5pt; height: 14.0pt;"> 2025 </td> <td width="95" style="width: 70.9pt; border-top: solid #CCCCCC 1.0pt; border-left: none; border-bottom: solid black 1.5pt; border-right: solid #CCCCCC 1.0pt; mso-border-left-alt: solid #CCCCCC .75pt; mso-border-alt: solid #CCCCCC .75pt; mso-border-bottom-alt: solid black 1.5pt; padding: 7.5pt 7.5pt 7.5pt 7.5pt; height: 14.0pt;"> 2026 </td> </tr> <tr style="mso-yfti-irow: 1; height: 14.0pt;"> <td width="151" style="width: 113.0pt; border: solid #CCCCCC 1.0pt; border-top: none; mso-border-top-alt: solid #CCCCCC .75pt; mso-border-alt: solid #CCCCCC .75pt; padding: 7.5pt 7.5pt 7.5pt 7.5pt; height: 14.0pt;"> Share Price  </td> <td width="94" style="width: 70.85pt; border-top: none; border-left: none; border-bottom: solid #CCCCCC 1.0pt; border-right: solid #CCCCCC 1.0pt; mso-border-top-alt: solid #CCCCCC .75pt; mso-border-left-alt: solid #CCCCCC .75pt; mso-border-alt: solid #CCCCCC .75pt; padding: 7.5pt 7.5pt 7.5pt 7.5pt; height: 14.0pt;"> -17.5 </td> <td width="94" style="width: 70.85pt; border-top: none; border-left: none; border-bottom: solid #CCCCCC 1.0pt; border-right: solid #CCCCCC 1.0pt; mso-border-top-alt: solid #CCCCCC .75pt; mso-border-left-alt: solid #CCCCCC .75pt; mso-border-alt: solid #CCCCCC .75pt; padding: 7.5pt 7.5pt 7.5pt 7.5pt; height: 14.0pt;"> -12.7 </td> <td width="94" style="width: 70.85pt; border-top: none; border-left: none; border-bottom: solid #CCCCCC 1.0pt; border-right: solid #CCCCCC 1.0pt; mso-border-top-alt: solid #CCCCCC .75pt; mso-border-left-alt: solid #CCCCCC .75pt; mso-border-alt: solid #CCCCCC .75pt; padding: 7.5pt 7.5pt 7.5pt 7.5pt; height: 14.0pt;"> 18.7 </td> <td width="94" style="width: 70.85pt; border-top: none; border-left: none; border-bottom: solid #CCCCCC 1.0pt; border-right: solid #CCCCCC 1.0pt; mso-border-top-alt: solid #CCCCCC .75pt; mso-border-left-alt: solid #CCCCCC .75pt; mso-border-alt: solid #CCCCCC .75pt; padding: 7.5pt 7.5pt 7.5pt 7.5pt; height: 14.0pt;"> 1.4 </td> <td width="95" style="width: 70.9pt; border-top: none; border-left: none; border-bottom: solid #CCCCCC 1.0pt; border-right: solid #CCCCCC 1.0pt; mso-border-top-alt: solid #CCCCCC .75pt; mso-border-left-alt: solid #CCCCCC .75pt; mso-border-alt: solid #CCCCCC .75pt; padding: 7.5pt 7.5pt 7.5pt 11.25pt; height: 14.0pt;"> 20.9 </td> </tr> <tr style="mso-yfti-irow: 2; height: 14.0pt;"> <td width="151" style="width: 113.0pt; border: solid #CCCCCC 1.0pt; border-top: none; mso-border-top-alt: solid #CCCCCC .75pt; mso-border-alt: solid #CCCCCC .75pt; padding: 7.5pt 7.5pt 7.5pt 7.5pt; height: 14.0pt;"> NAV </td> <td width="94" style="width: 70.85pt; border-top: none; border-left: none; border-bottom: solid #CCCCCC 1.0pt; border-right: solid #CCCCCC 1.0pt; mso-border-top-alt: solid #CCCCCC .75pt; mso-border-left-alt: solid #CCCCCC .75pt; mso-border-alt: solid #CCCCCC .75pt; padding: 7.5pt 7.5pt 7.5pt 7.5pt; height: 14.0pt;"> -9.4 </td> <td width="94" style="width: 70.85pt; border-top: none; border-left: none; border-bottom: solid #CCCCCC 1.0pt; border-right: solid #CCCCCC 1.0pt; mso-border-top-alt: solid #CCCCCC .75pt; mso-border-left-alt: solid #CCCCCC .75pt; mso-border-alt: solid #CCCCCC .75pt; padding: 7.5pt 7.5pt 7.5pt 7.5pt; height: 14.0pt;"> -7.8 </td> <td width="94" style="width: 70.85pt; border-top: none; border-left: none; border-bottom: solid #CCCCCC 1.0pt; border-right: solid #CCCCCC 1.0pt; mso-border-top-alt: solid #CCCCCC .75pt; mso-border-left-alt: solid #CCCCCC .75pt; mso-border-alt: solid #CCCCCC .75pt; padding: 7.5pt 7.5pt 7.5pt 7.5pt; height: 14.0pt;"> 20.1 </td> <td width="94" style="width: 70.85pt; border-top: none; border-left: none; border-bottom: solid #CCCCCC 1.0pt; border-right: solid #CCCCCC 1.0pt; mso-border-top-alt: solid #CCCCCC .75pt; mso-border-left-alt: solid #CCCCCC .75pt; mso-border-alt: solid #CCCCCC .75pt; padding: 7.5pt 7.5pt 7.5pt 7.5pt; height: 14.0pt;"> 0.0 </td> <td width="95" style="width: 70.9pt; border-top: none; border-left: none; border-bottom: solid #CCCCCC 1.0pt; border-right: solid #CCCCCC 1.0pt; mso-border-top-alt: solid #CCCCCC .75pt; mso-border-left-alt: solid #CCCCCC .75pt; mso-border-alt: solid #CCCCCC .75pt; padding: 7.5pt 7.5pt 7.5pt 7.5pt; height: 14.0pt;"> 17.5 </td> </tr> <tr style="mso-yfti-irow: 3; mso-yfti-lastrow: yes; height: 14.0pt;"> <td width="151" style="width: 113.0pt; border: solid #CCCCCC 1.0pt; border-top: none; mso-border-top-alt: solid #CCCCCC .75pt; mso-border-alt: solid #CCCCCC .75pt; padding: 7.5pt 7.5pt 7.5pt 7.5pt; height: 14.0pt;"> FTSE World Index </td> <td width="94" style="width: 70.85pt; border-top: none; border-left: none; border-bottom: solid #CCCCCC 1.0pt; border-right: solid #CCCCCC 1.0pt; mso-border-top-alt: solid #CCCCCC .75pt; mso-border-left-alt: solid #CCCCCC .75pt; mso-border-alt: solid #CCCCCC .75pt; padding: 7.5pt 7.5pt 7.5pt 7.5pt; height: 14.0pt;"> 14.9 </td> <td width="94" style="width: 70.85pt; border-top: none; border-left: none; border-bottom: solid #CCCCCC 1.0pt; border-right: solid #CCCCCC 1.0pt; mso-border-top-alt: solid #CCCCCC .75pt; mso-border-left-alt: solid #CCCCCC .75pt; mso-border-alt: solid #CCCCCC .75pt; padding: 7.5pt 7.5pt 7.5pt 7.5pt; height: 14.0pt;"> -0.7 </td> <td width="94" style="width: 70.85pt; border-top: none; border-left: none; border-bottom: solid #CCCCCC 1.0pt; border-right: solid #CCCCCC 1.0pt; mso-border-top-alt: solid #CCCCCC .75pt; mso-border-left-alt: solid #CCCCCC .75pt; mso-border-alt: solid #CCCCCC .75pt; padding: 7.5pt 7.5pt 7.5pt 7.5pt; height: 14.0pt;"> 22.5 </td> <td width="94" style="width: 70.85pt; border-top: none; border-left: none; border-bottom: solid #CCCCCC 1.0pt; border-right: solid #CCCCCC 1.0pt; mso-border-top-alt: solid #CCCCCC .75pt; mso-border-left-alt: solid #CCCCCC .75pt; mso-border-alt: solid #CCCCCC .75pt; padding: 7.5pt 7.5pt 7.5pt 7.5pt; height: 14.0pt;"> 4.8 </td> <td width="95" style="width: 70.9pt; border-top: none; border-left: none; border-bottom: solid #CCCCCC 1.0pt; border-right: solid #CCCCCC 1.0pt; mso-border-top-alt: solid #CCCCCC .75pt; mso-border-left-alt: solid #CCCCCC .75pt; mso-border-alt: solid #CCCCCC .75pt; padding: 7.5pt 7.5pt 7.5pt 7.5pt; height: 14.0pt;"> 19.4 </td> </tr> </tbody> </table> Source: Morningstar, FTSE, total return in sterling Past performance is not a guide to future returns.  Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2023. 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Monks Investment Trust: the bottlenecks driving growth

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About the speaker

About the speaker

Michael Taylor

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