After Baillie Gifford last year followed up a decade dominating the performance tables with more blistering gains during the coronavirus pandemic, backers and sceptics alike are asking themselves: can the Edinburgh firm extend its market-leading run in 2021 or is now the time to take profits?
2020 proved a more than vintage year for the partnership as lockdowns imposed in response to the Covid-19 contagion ushered in years of growth almost overnight for its favoured technology stocks, driving valuations to eye-watering levels.
Stand-out performances in the group’s stable came from Scottish Mortgage (SMT ), its global flagship, which sealed its position in the FTSE 100 and its status as the UK’s largest investment trust with a 110% total shareholder return that swelled its market value to £18.5bn.
Scottish Mortgage’s growth was stunning but its investment returns were outpaced by the open-ended Baillie Gifford American fund which soared 122% to £7.1bn, and its £944m sister trust, Baillie Gifford US Growth (USA ), which delivered a spectacular 134%, the best of any London-listed closed-end fund.
Though those numbers alone might make some rush to take profits, this is no flash in the pan. Anyone who resisted the urge to trim their holding in Scottish Mortgage could have made ten times their money in the past decade.
While big bets on Amazon (AMZN.O) and especially Tesla (TSLA.O) were key drivers for those US and other global strategies, the firm was also there or thereabouts on the leaderboards when it came to funds and investment trusts spanning Europe, Asia Pacific and China.
But amid the roll-out of vaccines that will revive the economy and signs that inflation is creeping up with bond yields - an indicator of where interest rates are going - on the rise, there are reasons to believe Baillie Gifford may soon need to prove its mettle in a very different macro-economic environment. With that in mind, investors are questionning how long Baillie Gifford’s dominance can go on.
‘They’ll find the next Tesla’
Nick Wood, head of investment fund research at wealth manager Quilter Cheviot, cautioned against the idea the firm was about to endure a spell of weaker performance just because the gains had run hot for so long. Pre-pandemic, there were similar calls that the gap between the ‘growth’ companies – which are its métier – and cheaper ‘value’ stocks had grown so large a snapback was inevitable.
‘I think we could have had this conversation 12 months ago and the conclusion we might have drawn would have proven to be very inaccurate,’ said Wood.
A similar point was made by Michael Paul, Wood’s counterpart and head of fund research at wealth manager Brewin Dolphin.
‘In general we believe Baillie Gifford are exceptional “growth” investors, and as a result we will continue with them and their strategies over the coming years. Style rotations are notoriously difficult to predict and over recent years have been relatively short-lived, making them even more difficult to trade,’ he said.
Among investment trusts, US Growth, Scottish Mortgage and fellow global ‘best ideas’ fund Monks (MNKS ) remain on Quilter’s buy list. Wood (pictured) said there had been ‘no softening of conviction’ on these strategies.
‘We trust in their investment process and [that] they will know when an opportunity has reached its limit, whether that’s because of valuation, [because] of long-term growth runway, they’ll find us new opportunities: the next Amazon, Tesla, what have you,’ said Wood.
Despite the favourable conditions they have enjoyed, he continues to see evidence of an ‘edge’ at the firm, listing its consistently long-time horizon, relationships with universities and high ‘active share’ as proof that its fund managers pay little heed to stock market indices for their investment ideas.
However, Wood added that it was important for investors to look ‘under the bonnet’ and make sure the strong performance of Baillie Gifford funds had not left them over-exposed to one theme, particularly if holding multiple funds, which could have big bets on the same stocks. Monks, Scottish Mortgage and US Growth trust all share large stakes in Amazon, for example.
2021 will be tougher
Jason Hollands, managing director of wealth manager Tilney and its Bestinvest website, said there were reasons to believe this year would be a tougher one for Baillie Gifford.
Since Pfizer (PFEN.N)’s announcement of a coronavirus vaccine breakthrough in November, there has been evidence of an incipient rotation towards cyclical and out-favour sectors of the stock market like banks and industrials. Rising bond yields – with US 10-year Treasury bond yields crossing 1% for the first time since March – are another boost to that ‘reflation’ trade.
‘I think if that continues you might see 2021 as a year where more value-tilted managers have a better run than they have done for some time. In that environment, you might see that out-and-out growth houses aren’t over the short term top of the pops,’ he said.
Hollands added that a potential pitfall of Baillie Gifford’s fairly uniform style was performance across the board could turn dramatically if markets shift in that way, meaning ‘you can go from zero to hero’.
He gave the example of Invesco, the value-based funds group which has struggled for five years as its approach fell out of favour with the market and its stock picks came under fire. Its mounting difficulties culminated last year with the departure of fund manager Mark Barnett (pictured) in May, with assets in the two biggest UK equity income funds he ran having declined from £23.7bn when he took them on in 2014 to £4.9bn.
In 2020 Invesco also lost the mandate for Edinburgh (EDIN ) and Perpetual Income & Growth, the investment trusts he ran, while last month the firm saw Keystone (KIT ) switch to Baillie Gifford, where it will be remodelled in the shape of the firm’s rapidly growing £1.6bn Positive Change fund.
‘It is possible that you can slip from having everything looking brilliant to suddenly having a tougher patch across a number of products,’ said Hollands.
The Bestinvest MD said he still rated the likes of Scottish Mortgage as a great option for the long term and would not advocate selling out on a one-year view.
However, he added that a lot of investors had ‘loaded up’ their portfolios with growth managers like Baillie Gifford in recent years, or equally with more quality growth options like Fundsmith Equity .
‘If your portfolio’s full of these types of strategies, there is a case for actually balancing out your ticket,’ he said.
More Invesco parallels
Premier Miton fund manager Nick Greenwood also drew a potential parallel between the rampant success of Baillie Gifford and Invesco’s own high-flying period, including the firm winning Edinburgh from Fidelity in 2008. Greenwood runs the Miton Global Opportunities (MIGO ) trust, which itself invests in other trusts and has previously been a backer of its Asia top-performer Pacific Horizon (PHI ).
‘The number of investment trusts that are moving to Baillie Gifford is a bit of a worry, because it reminds me of a few years ago when they were all moving to Invesco. It’s just a sign it’s completely consensus at the moment,’ he said.
Anecdotes of private investors asking if they should only own Baillie Gifford funds rang further alarm bells for Greenwood.
In December Baillie Gifford dominated the list of the most bought funds on Interactive Investor, claiming seven of the stockbroker’s top 10 spots, while the American fund also knocked Fundsmith Equity out of first place for the first time since 2018.
Greenwood said he believed in Baillie Gifford’s ability to pick the dominant companies of the future, even if some might take years to grow into their high valuations. As such, he recommended investors with long-time horizons stick with the firm, though there could be short-term challenges if markets change tack.
The risk of a snapback is greater on the group’s investment trusts whose shares can become unduly expensive when investor demand pushes their price above their underlying asset value.
Greenwood said the whopping 30% premium reached by the China Growth trust at the end of last year had been ‘quite dangerous’, but reflected a ‘short-term squeeze’ more than any wider issue. He pointed out that the more modest single-digit premiums across most Baillie Gifford trusts also reflected their increasing level of unquoted investments, such as privately owned tech companies, where the market could be pricing in growth not yet formally reflected in their valuations.
Easy to say ‘take the profits’
Raj Basra, chief investment officer (CIO) at Tacit Investment Management, said Baillie Gifford had grasped the drivers of growth that have eluded most investment managers in recent years.
‘They clearly understand digitisation and the technology cycle better than most. They’ve clearly put a lot of time and effort into understand those cycles, which does stand them out,’ he said.
London-based Tacit has backed Scottish Mortgage for the last decade and continues to do so in the two higher risk of its four investment strategies .
Basra rejected the idea that the trust was overly-reliant on single bets like Tesla, pointing out while half its assets were concentrated in 10 top stocks, including the electric car maker, it was still a diversified portfolio. It holds a further 24 publicly quoted stocks that account for another 30% of assets with the remaining 20% in around 40 unlisted stocks such as Ant, the Chinese financial services group whose stock market flotation was blocked last month in a dispute between its founder Jack Ma and the country’s authorities.
Given SMT fund managers James Anderson and Tom Slater are buy-and-hold investors, the 10 times return over a decade indicated how high the hit rate had been across the portfolio, Basra believed.
While he acknowledged investors could ‘easily have a very painful period’ in the short term, whether from valuations shifting or a tightening of anti-trust competition law hitting key holdings, other factors were in Baillie Gifford’s favour. For example, with interest rates likely to remain at near-zero lows in much of the world there was little risk of a rise in borrowing costs crimping the expansion of Baillie Gifford’s growth stocks and its strong run.
‘Everybody naturally in investing is always looking to say, take the profit, take the profit. I actually think with the Baillie Gifford approach, you actually are rewarded for letting your winners run,’ said Basra.
‘Now at some point that will work against but I think it will only work against if you have interest rates rising to 2% or 3%, which at the moment you just couldn’t see with [current] debt levels.’
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