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By Rebecca Clancy | Published Jun 13, 2012

Monks investment trust in 'difficult and frustrating’ year

The £820.7m Monks investment trust has underperformed its benchmark in a “difficult and frustrating” year.

Baillie Gifford’s Gerald Smith, who runs the global investment trust, said the 12 months to the end of April had been frustrating for returns.

“We suffered from unexpected knock-on effects in places far from the epicentre of events,” he said.

According to annual results for the year to April 30, published last week, the trust’s investments incurred a total loss of 4.5 per cent in terms of its net asset value, while the share price declined 6.2 per cent.

The trust’s benchmark FTSE World index of global shares lost just 2.6 per cent over the same timeframe.

Mr Smith said a large contributor to the negative performance was the trust’s relatively high exposure to emerging markets and relatively low exposure to the US.

In July last year, the manager decided to hedge part of the portfolio against sharp falls in the market due to the mounting concerns surrounding the eurozone debt crisis.

He did this through sales of futures contracts based on the S&P 500, FTSE 100 and Eurostoxx 50 indices. He also bought call options on the same indices to “protect ourselves against the possibility of a large rise in markets”, effectively neutralising his market exposure.

Mr Smith said that while this strategy was successful when markets plunged in July and August last year it also had the effect of reducing his ability to participate in the strong recovery in the US stockmarket that has been seen since then.

It also “was not a perfect match for our portfolio as it did not include any emerging market indices in the hedge”, he said.

To amend this, the manager closed the S&P 500 index futures and options in February, and replaced them with positions on the Brazilian Bovespa index and the Hang Seng China Enterprises index, an index made up of Chinese companies listed in Hong Kong.

In addition, he said another “less successful strategy” was the addition of shares of gold mining companies last September and October. At that the start of September the price of gold was flirting with $2,000 a troy ounce.

Conversely, while the gold price has risen by more than 100 per cent in the past three years, shares in gold mining companies have remained on roughly at the same level as equity market concerns outweighed the momentum behind the gold price.

“We took the view that the divergence between the growing profits and cashflow of the miners and their falling share prices would ultimately be corrected as it was cheaper to buy gold reserves in the stockmarket than to explore for them on the ground,” the manager said.

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