Baillie Gifford Managed has made its home at the top of the IA Mixed Investment 40-85% Shares sector: not only is the fund the single best performer over the past decade, it is also in the top-three over three and five years as well.
Performance and rank of fund vs sector and peers
Source: FE Analytics
However, the fund – described by manager Iain McCombie as “a one-stop shop for Baillie Gifford’s best ideas” – has benefited from a record bull run and the group's emphasis on growth stocks in a period when this style of investing has vastly outperformed.
Over the extreme long-term, however, value as a strategy tends to outperform growth and many fund managers believe it is only a matter of time before this theme reasserts itself.
So, what would McCombie do if the style fell out of favour and the fund started to underperform? The answer, he said, is simple: nothing.
“We are growth investors and the fact is that over the long term, we have demonstrated outperformance of two percentage points per annum after fees,” the manager explained.
“And we like to give our holders the comfort that we are not going to change if we have a bad year.
“We have had performance falls in the past and we know the right thing to do is stick to your growth strategy and not try to chop and change, because that is how you get that permanent loss of capital.”
Looking at the situation from a business point of view, McCombie said it would make no sense to ditch the growth strategy when the style is out of favour, as it would just mean the market is offering a bad price for a company with good growth potential.
“I’m not saying it’s comfortable when you underperform, but hopefully you understand that’s what we do,” he continued.
“We don’t worry about the short term and if you do, then don’t invest in our fund. We only worry about outperforming over the long term, so five years-plus.
“It may not be for everyone and that’s fine, but don’t come in to the fund without understanding what we are trying to do and its long-term focus.”
McCombie described Baillie Gifford Managed as a balanced fund, making it suitable for someone who wants to increase the value of capital over the long term, but finds a 100 per cent allocation to equities “a bit too racy”.
He added there are no “bells and whistles” in the non-equity part of the portfolio, which currently accounts for around a quarter of assets under management – it is just in bonds and cash, which hasn’t changed since the fund launched 31 years ago.
“We think these asset classes are going to complement each other,” he continued. “The equities will provide the growth, while the bonds give some income and help dampen down the volatility on the fund.”
While some people have questioned the wisdom of holding cash while interest rates remain close to record lows, McCombie said it is there for its “optional value”: when markets experience an enormous crash every decade or so, this gives him the opportunity to buy in at depressed valuations.
The fund’s exposure to each asset class is reviewed by a dedicated team at Baillie Gifford on a quarterly basis. McCombie said the mixture remains fairly constant as the group does not claim to have an advantage when it comes to asset allocation – instead, 90 per cent of the fund’s long-term outperformance comes from stockpicking.
McCombie said the fund’s major strength here is that each regional team manages its own portfolio in an autonomous way.
“That is an important point,” he added. “So, the fund managers get together on a quarterly basis and we talk about what we have been up to and where we think the flow of money is. And we will allocate the money to where we think the buying opportunities are.
“It is not about national pride in the area you are covering, it is about doing the right thing for the client. And therefore if you ask for the money, generally you will get it. And if you can’t find a use for the money, you give it back.”
The managers are bottom-up investors and take no view on what the market will do over the next five to 10 years. The only key theme they look for is long-term growth – meaning companies that can increase their earnings over the next five or 10 years.
McCombie said one question in particular he asks all of the regional managers that should give investors “a flavour of what we are about” is: “If the market were closed for a decade, so you couldn’t change a stock, what companies would you own?”
As an example, he said Helen Xiong, who co-manages the Baillie Gifford American fund and US Growth Trust, picked Amazon.
“Why is that? Well this is a business that keeps finding new markets to grow into,” he continued. “And what we think the market has always underestimated is that long-term focus on what the management team is trying to do.
“The market may say, ‘well it looks expensive and it doesn’t earn much’. But this business is quite revolutionary in taking a long-term view and it is the right thing to do. And if you had just been worried about the short term, you would have missed a wonderful investment opportunity.”
Amazon is something of a favourite at Baillie Gifford – it is the top holding in six of the firm’s open-ended funds and three of its closed-ended ones. This has certainly worked in the group’s favour – the stock has doubled in value over the past year – but while defying the doom mongers has become something of a habit for Amazon, is there a danger that Baillie Gifford is over-exposed? McCombie doesn’t think so.
“If you take the managed fund, Amazon is 1 per cent of assets,” he said. “I think that is the important point. Even though it is the biggest holding, you have quite a diversified portfolio. I think for a managed fund, that is what you would expect.
“Looking at it another way, am I concerned that other Baillie Gifford funds own it? Well no, because we’re not worried about what other people do, we are worried about what is right for our own portfolio.
“If we no longer think it is the right thing, we won’t own it. But if that gives you some very unique growth opportunities, why wouldn’t you want to own it?”
Performance of fund vs sector over 10yrs
Source: FE Analytics
Baillie Gifford Managed has made 173.16 per cent over the past decade, compared with 88.91 per cent from its sector. The £3.6bn fund has ongoing charges of 0.43 per cent.