Sophie Earnshaw of the Baillie Gifford China Growth Trust (BGCG ) underlined her ESG-friendly approach to stock selection as she reassured investors that not only was the trust not affiliated with the Chinese government, but it was also positioned for growth. 

Speaking at a private investor forum, the manager of the £133m heavily derated trust’s 59-strong portfolio was very selective, largely consisting of listed and private companies that are not linked with the government or are strictly monitored through Baillie Gifford’s engagement programme.

‘All our companies are on a significantly improving trend which we monitor via our engagement programme,’ said Earnshaw (pictured below). ‘Our approach to China is very selective; we’re running a concentrated portfolio, the vast majority of which are private and therefore not affiliated with the Chinese government.’

She continued: ‘This concentrated approach and our ability to be selective means we can avoid any companies that are substandard when it comes to ESG.’ She noted that it was ‘one of the reasons why we think index investing in China doesn’t work particularly if you’re concerned about ESG’.

Earnshaw struck a bullish tone in her outlook on China, noting that two of the three main drivers of weak performance across Chinese equities –the government’s ‘zero Covid’ policy and heavy-handed regulation – had been resolved, while geopolitical tensions remain.

The manager was not disparaging of the restrictive measures, noting that unrestrained growth in areas such as education and internet platforms meant intervention was required. 

However, there has been positive moves by the Chinese government in recent months towards signalling regulation and making it more transparent. 

This culminated in July’s support package for the private sector, providing market access and a level playing field with state-owned enterprises, which was designed to quash concerns that Xi Jinping is no longer supportive of entrepreneurs, Earnshaw said.

Regulation hit several of the trust’s investments, including internet platform and TikTok owner ByteDance, the trust’s sole private company and the third-largest position at 6.1% of assets.  

The Edinburgh-based asset manager celebrates its third anniversary since winning the mandate with shareholder returns down 40% to date, the third-worst of Baillie Gifford’s 13 investment trusts, according to Morningstar data.

While not the primary index listed on the factsheet, the MSCI China index fell 32% over the same timeframe. During the three years to the end of July, the trust’s MSCI China A Shares benchmark fell 17%.

Betting on consumer spending

Earnshaw and co-manager Roderick Snell will be hopeful for better returns soon and said they have positioned the trust to capture the delayed consumer spending of the growing middle class, with its Covid reopening 18 months behind Western countries.

Consumer discretionary companies make up 26% of assets, with ecommerce giant Alibaba and beverage company Kweichow Moutai the largest and fourth-largest positions in the trust at 7% and 5.1% weightings respectively, according to the July factsheet.

Over the year, the pair bought a range of companies that are exposed to China’s development over the next decade, such as factory automation equipment manufacturer Dongguan Yiheda and battery manufacturing company Jiangsu Azure.

Weak valuations presented an opportunity to add to companies including Alibaba and China Merchant’s Bank, while they sold a number of lower conviction holdings such as music streaming group Tencent Music and video sharing website Bilibili.

‘One of the reasons we’re confident in our future performance is that the opportunities for growth investors in China have remained remarkably consistent during this period of volatility,’ Earnshaw said in a recent portfolio update.

Gearing, or borrowing, sits at 4% and the current share price of 216p is a 12% discount to last week’s net asset value. 

Performance hit across Baillie Gifford 

The China trust is far from alone in terms of performance. Baillie Gifford’s growth style of investment has seen all of its trusts heavily impacted apart from global equity income trust Scottish American (SAIN ).

Only the private equity trust Schiehallion (MNTN ) and global smaller companies trust Edinburgh Worldwide (EWI ) have done worse, with respective shareholder losing 49% and 43%.

Three years of pain for shareholders

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Trust	Ticker	3-year returns	Benchmark
Schiehallion Fund	MNTN	-48.93	None
Edinburgh Worldwide	EWI	-43.20	S&P Global Small Cap
Baillie Gifford China Growth Trust	BGCG	-40.21	MSCI China All Shares
Baillie Gifford Shin Nippon	BGS	-33.96	MSCI Japan Small Cap
Baillie Gifford US Growth	USA	-33.87	S&P 500 Index
Baillie Gifford European Growth	BGEU	-23.58	FTSE Europe Ex UK
Scottish Mortgage	SMT	-23.55	FTSE All World
Baillie Gifford Japan	BGFD	-13.23	TOPIX Total Return
Keystone Positive Change	KPC	-12.93	MSCI AC World
Monks	MNKS	-11.92	FTSE World
Baillie Gifford UK Growth	BGUK	-6.62	FTSE All Share
Pacific Horizon	PHI	3.18	MSCI All Country Asia ex-Japan
Scottish American	SAIN	26.11	FTSE All World

Source: Morningstar, as at 11/09/2023