Profile: Why Baillie Gifford’s Squires continues to bet on Europe

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Europe might be seen as a risky bet for many investors in the uncertain post-Brexit world but Baillie Gifford’s James Squires keeps his hopes up for the region.

“Most people seem to be fairly negative on Europe particularly in light of the Brexit vote but if we look at the region, growth is on an improving trend, unemployment is falling and monetary policy is stimulative,” he says.

Last week the International Monetary Fund downgraded its projections for growth in the euro area, expecting 1.6 per cent growth this year and 1.4 per cent in 2017, down from estimates of 1.7 per cent for both years.

Meanwhile, in May, European equity funds saw the largest outflows compared to other regions, at £507m, according to the Investment Association numbers.

But Squires says: “Valuations in the equity market are relatively attractive and you’ve got a low starting level of corporate profit margins, so if you package that together there are some good fundamental drivers in place that can translate into good market returns.”

Within Baillie Gifford’s £68.36m Multi-Asset Growth fund, 23.5 per cent is allocated to equities, with Europe being the largest regional allocation at 7 per cent.

The team is exposed to Europe through the Baillie Gifford European fund, which is 6.6 per cent of the fund.

Squires says: “Our approach is never to bet the ranch on one thing happening, like Brexit, but we look across a lot of very interesting asset classes and put together a mix of asset classes, which will go up and down at different times but that will pay well.”

The growth fund was launched in December last year, and is managed by Baillie Gifford’s five-strong multi-asset team, led by Patrick Edwardson.

Squires joined the multi-asset team in 2008, but joined the company in 2006, initially working in Baillie Gifford’s North American equity and fixed income teams.

The team invests mostly in funds and direct holdings and takes a top-down, absolute return approach, applying a similar investment process to the firm’s £5.9bn Diversified Growth fund, which soft-closed in 2013.

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The diversified fund was closed “to protect investors” as it accessed a few asset classes that were “less liquid”, Squires says.

The attention to liquidity is highlighted by the current property exposure in the fund, which is only through Reits rather than physical real estate assets.

Squires says: “Our macro view has not changed substantially after the vote but obviously there have been some valuation changes and we are far more likely to respond to those valuation changes. Some property has got cheaper; some Reits now suggest capital falls of 20 per cent and 30 per cent in some circumstances.”

Currently the fund has an 8.4 per cent exposure to property through both UK and European Reits, including British Land, and all providing daily liquidity. The fund has a “basket” of 25 Reits in total, which are all considered equally in terms of exposure.

He says: “Our approach is not about single Reits but about the fact that we think property is interesting, we think there is something about the real rental yield that you can get and the inflation protection on property is very interesting. We think UK and Europe are less far through the cycle than the US, with particular attractive valuations at the moment given the volatility.”

Alongside European equities and property, the team also looks at infrastructure, precious metals and currencies to find diversification.

Squires says: “Infrastructure is a great diversifier and it makes money for us every year. It is probably one of the best performing asset classes this year on a global basis.”

Of the fund’s annual returns of 4.5 per cent, almost 1 per cent of it came from infrastructure investing, he explains.

Squires says: “Within infrastructure we own public credit partnership funds, renewable energy, electricity transmission and gas distribution companies.

“All of these are core assets that are critically important to the country economy in which they are based and that means they tend to get paid on an availability base, which means there’s not a lot of linkage to economic demand.”

The manager also sees platinum as a success story among precious metals as well as currency investing, especially in the time after the Brexit vote.

Squires says: “Active currency has been one of the biggest contributors to our fund and we have our specialist currency team that helps with research. The position also helps us hedge our portfolio on some of the downside scenarios that we’ve seen.

“We’ve been long yen and short yuan, which has helped us hedge against Chinese weakness, and we’ve been long dollar and short sterling to hedge against Brexit. In this way we made sure the portfolio was able to deliver the returns from the good opportunities that we see in a low volatility fashion.”

Squires admits the market is still reacting to the EU referendum vote but he continues to believe the global economic outlook is going to adjust to the change and offer opportunities.

He says: “We were already reasonably positive on the global outlook [before the vote] and we will remain reasonably positive on the outlook in the next months. Brexit is a very localised event and may well have significant impacts in the UK, although we don’t know that yet.

“While we don’t know the effect in the UK we can say that there has been a big global response for this so far. Lower yields in government bonds around the world, or policy easing are some examples but there is definitely something up elsewhere that is providing good stimulus and good boost to growth.”