James Anderson, the formidable former co-manager of Scottish Mortgage (SMT ) who is about to leave Baillie Gifford after 40 years, is unlikely to be quickly forgotten by his colleagues.

For European fund manager Chris Davies, who joined Baillie Gifford nearly 10 years ago, the presence of Swedish industrial company Atlas Copco in the £2.4bn Baillie Gifford European fund is a daily reminder of Anderson’s past achievements.

Before Anderson (pictured above) became famous as the head of Baillie Gifford’s long-term global growth team and lead manager of its flagship trust, he ran the European fund for 18 years from its launch in 1985. In this role he bought Atlas Copco two years later, a stock that is now the portfolio’s oldest holding, generating a total return of 8,194% for investors, according to Baillie Gifford.

Atlas Copco’s long run is a reminder for Davies – who has worked with co-managers Stephen Paice and Moritz Sitte for two-and-a-half years – of the importance of taking the long view at a time when the high-conviction approach Anderson pioneered is struggling.

Difficult year

The acceleration of a selloff in technology and other growth stocks since November has meant a painful 12-month period for the team’s investors. The open-ended European fund dropped 14.1% over one year to 31 March, severely underperforming the MSCI Europe index, which rose 6.3%, to leave it close to the bottom of its 114-strong sector.

Baillie Gifford European Growth (BGEU ), the £350m trust that Davies has also worked on since joining the team in September 2019, has done even worse. Its shares have slumped 36% in the past year with an 8% discount to net asset value magnifying the 29% slide in its underlying investments, helped by 11% gearing, or borrowing, which increased the exposure to a falling market.

That’s galling for investors who endured the previous underperformance of the trust’s former fund manager, Edinburgh Partners, whose value approach was out of favour for years but would probably have done better since the vaccine rally of late 2020 started a rush towards beaten-up cyclical financial, retail and commodity stocks.

Nevertheless, Davies was upbeat about the potential for future performance when speaking to journalists at Baillie Gifford’s Edinburgh head office earlier this month, pointing to Apco’s stunning returns of how patience can pay off and the wisdom of holding on to your winners.

‘We are seeing a lot of opportunities in those businesses where profits may be somewhat postponed. Those are the businesses that seem to be really punished,’ Davies said.

Moritz Sitte and Baillie Gifford European fund managers hold a stock James Anderson first bought 35 years ago. 

The fund’s largest weighting is in digital platforms, with major holdings including Swedish music streaming giant Spotify, German meal kit company HelloFresh and British food delivery company JustEat, whose shares have crashed 45% this year.

Davies believed Spotify, which the team first bought in April 2018 according to Morningstar data, ‘will have a bit more power’ as its proportion of record labels’ revenue grows, putting it in a position to negotiate better terms than it has previously agreed on.

He also noted that its advertising revenues on services such as podcasts are ‘carved out’, with the company enjoying ‘all of the economics’ that will improve future returns.

‘I don’t think it will ever be a really high-net-margin business, but I think it will be decent,’ he said.

Transition story

The team’s most recent investment was in French cables business Nexans, bought in January to provide exposure to the utilities sector.

The company, whose shares are trading down 9% in the year to date, has a division in high voltage, including moving electricity from offshore wind farms onshore, and plans to ‘transform’ and focus on electricity alone.

‘It’s a transformation story, so what they’re saying is half of the business they’re gradually going to divest, whether by selling to trade buyers, a spin-off or some other corporate activity,’ Davies said.

Recent sales include the long-term holdings of personal care company L’Oréal, Swedish bank Handelsbanken and Investor AB, the holding company of the wealthy Wallenberg family, which he said were sold in favour of a ‘much more interesting’ opportunity set.

Both fund and trust have their largest country exposure to Sweden, where 25.4% of the European fund and 27.3% of the European Growth trust are invested. The Netherlands and Germany follow to together account for more than 30% of each portfolio.

However, the fund’s top three holdings are all Dutch: global internet group Prosus, the Euronext-listed company that holds South Africa’s Napster’s 29% stake in Tencent, the Chinese social media platform; semiconductor manufacturer ASML and chemical distributor IMCD.

European Growth shares a top holding in Prosus, alongside the unquoted Swedish battery developer Northvolt, which Scottish Mortgage also backs, and Dutch e-commerce payments company Adyen.

The open-ended fund’s long-term performance is stronger, with five-year annualised returns of 9.6%, that beat the 7.2% from the index and the 6.6% average European fund return up to the end of March.

Over the three years to 25 April that Baillie Gifford has mostly been in charge, the trust has generated a total shareholder return of 21.8%, beating the 18.4% from the index but just below the 23% average of its sector.