Reliable name survives and thrives

9 November 2009 | By James Smith, Fund Strategy contributor

Baillie Gifford was founded in 1908 to run the Scottish Mortgage investment trust. The group has £53 billion under management, spread across its Oeics, investment trusts and institutional business.

Baillie Gifford endured its 2008 centenary amid some of the worst markets in living memory, proving quite exceptional in the business world by avoiding redundancies.

Much of this is down to the partnership structure, with the firm owned and run by 32 of its senior executives.

Ken Edwards, the sales and marketing director, says this is an ideal model to withstand the peaks and troughs of markets, with no outside shareholders demanding results or cost cutting. “Our partners are free to run the business as they believe best for clients, which may involve slowing down or speeding up depending on conditions,” he adds.

At the end of September, the firm had £53 billion under management, down from £55 billion at its absolute peak before the market crash. Of this, £45 billion is spread across international clients and UK pension funds, with the group first branching out into the latter space during the 1970s. Clients include eight of the world’s 20 largest pension schemes and four of the 20 biggest in Britain.

Baillie Gifford started life in 1908 to manage the Scottish Mortgage investment trust and still maintains this contract today. It remains best known for this investment trust business and is Britain’s third largest player in this area. But Edwards stresses the group is just as focused on the open-ended side and teams work across disciplines.

As part of a move to increase its retail profile, Baillie Gifford listed Oeics on Skandia/Selestia at the start of 2007, followed by FundsNetwork that December and Cofunds last July. In previous years, the group was reticent to go onto platforms as they showed little appetite to list investment trusts and it had to be sure business coming through justified the fees.

 

“As we have focused equally on Oeics and investment trusts, our natural niche has been the discretionary end of the market among fee-charging advisers,” adds Edwards.

“Platforms have traditionally been much more for Isa/Pep clients but are currently shaping up for retail distribution review [RDR] changes and should start to list investment trusts in due course. With the RDR set to abolish initial commission, that will remove one of the long-term hurdles in the closed-ended space and hopefully have a material impact on flows into the sector.”

He estimates about a quarter of the firm’s retail business comes via the platform route.

Looking at performance across the Oeic range, Baillie Gifford had 25 funds with a three-year record to November 2, six of which boast first-quartile numbers. These include the flagship Emerging Market offering as well as the International fund, both of which are also top-quartile over 12 months.

Of the remaining funds, eight are second quartile, five in the third and six fourth.

Numbers are equally solid over a year, with 10 out of 28 vehicles ranking first quartile and four second.

So far this year, the various emerging market funds have dominated inflows, taking about a fifth of gross sales, against 17% for bond vehicles and 13% into the American offering. Asia and emerging markets remain the main sales push, although the recently launched Greater China fund has got off to a slowish start in asset gathering, if not ­performance.

“Initial feedback has been that investors remain cautious on China-only products and prefer to invest in broader emerging market mandates,” he adds.

“Our own emerging market business has increased significantly since July, with performance largely driven by the China story, and we expect the single country offering to gain traction as investors grow more comfortable with the region.”

Many fund buyers and advisers are long-term advocates of the group’s emerging franchise, highlighting the record of Gerald Smith, deputy chief investment officer (CIO) and team.

Darius McDermott, managing director of Chelsea Financial Services, says he continues to develop a relationship with Baillie Gifford’s sales team as the group builds its retail presence.

“Baillie Gifford has historically been more of an institutional group but moved into the platform space in 2007, marking greater interest in the retail side of things,” he adds.

McDermott says the group still has no presence on Chelsea’s buy list, with its biggest area of strength, emerging markets, only meriting two spots. “We have emerging funds from Ignis Hexam and Lazard on our list but if we did include more from this sector, Baillie Gifford would certainly be pushing for inclusion,” he adds.

“We have rated Gerald Smith for several years and the group’s emerging team is clearly flying at present, with two of the sector’s top three funds over 12 months.”

 

In the past, McDermott says Baillie Gifford’s lack of standout British equity funds has been a problem, with the Income portfolio on Chelsea’s relegation list last year. This fund is first-quartile over a year however, with Patrick Edwardson continuing to drive improved performance.

Elsewhere, McDermott highlights Baillie Gifford’s traditional expertise in fixed interest, with a smattering of solid performers. Surprisingly, he notes the group’s Corporate Bond fund, listed in the Investment Management Association’s (IMA) Strategic Bond sector, has dropped into Chelsea’s relegation zone after a poor spell of performance.

Figures show the fund as fourth quartile over three years and third over 12 months, although the High Yield Bond ­sister product ranks second and first quartile respectively. Edwards says the Corporate Bond product can hold up to a third of its portfolio in high-yield paper, hence its Strategic Bond listing, and suffered from a position in financials throughout last year.

“We held our nerves on this and have been proved right this year, with a strong bounceback,” he adds. Over three months to end October, the fund is ninth out of 65 in the Strategic sector.

Elsewhere in the range, Edwards flags up the American fund under Mick Brewis, second quartile over three years, boasting one of the few 20-year records in this space.

Meanwhile, Edwardson also started up a Diversifed Growth vehicle this year, which sits in the Specialist sector. This portfolio invests across assets, with a mandate to limit the risk of extreme falls if market sentiment turns.

It has proved extremely popular in the initial institutional push and Edwards says the group may increase retail focus in time.

Outside its Oeics, Baillie Gifford manages some of the oldest and best-known closed-ended vehicles in the market. Apart from Scottish Mortgage, it also has Monks, Saints (Scottish American Investment Trust), Edinburgh Worldwide, Pacific Horizon and two Japanese offerings.

”It seeks out the best companies irrespective of where the stock is quoted”

Tim Cockerill, head of research at Rowan, highlights Scottish Mortgage’s long-term record, citing the fundamental approach to stock selection.

“It seeks out the best companies irrespective of where the stock is quoted - Petrobras of Brazil has been the largest holding for years as it is seen as the best global integrated oil stock,” he adds.

In general, he sees Baillie Gifford as the epitome of Scottish common sense in investment terms, although acknowledges the firm might be too conservative for some.

“While the approach across funds differs, there is an underlying fundamental long-term approach to stock selection looking for quality companies with strong management and earnings growth,” he adds.

“Despite the conservative tag, they manage funds investing in emerging markets, European small companies, China and Japanese small caps. This shows you can have exposure to higher-growth areas that carry more risk through a fundamental process rather than a trading mindset.”

Cockerill adds the group’s key weakness lies in British equities — smaller companies aside — with mainstream income and growth funds failing to excel.

“Otherwise they have always struck me as a reliable group, perhaps not one to occupy the top spot but a firm that quietly delivers consistent returns,” he says.

View Baillie Gifford’s fund returns over one and three years