Staying power of Baillie Gifford

Baillie Gifford’s long-term approach applies to its staff as well as its investments and the group’s performance record across its range of funds is among the best available.

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It used to be a running joke that people knew they worked in the City if they had sat at the same desk for 20 years, but worked for 10 different companies. The rollercoaster of mergers and acquisitions may have slowed for asset managers, but it is still an important consideration for fund selectors. Over time, Baillie Gifford has remained steadier than almost any other, retaining its independence for over a 100 years.

Baillie Gifford is unashamedly long term in its approach and that applies to its staff as well as its investment approach. People join and they stay. Also, at a time when the ability to make quick decisions is fashionable, it is happy to take its time over its investments. In its Edinburgh home, it has long held out against the Wall Street vogue for quarterly earnings numbers, short-term investments and performance-chasing.

The group started in 1908 as a partnership between Colonel Augustus Baillie and Carlyle Gifford. It began life managing the investments of a group of Scottish entrepreneurs, who had seen an opportunity in lending money to rubber plantation owners ahead of the surge in global demand for rubber created by the advent of Henry Ford’s automobile.

The investment approach has developed since then, particularly in recent years, but the group has always taken an active, stockpicking approach. James Budden, director of retail marketing and distribution at Baillie Gifford, says: “We are, at heart, growth investors looking for superior earnings growth. But the key difference is that we are long-term. Turnover on our portfolios is around 20 per cent, so we hold stocks for an average of five years.”

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The majority of the group’s assets under management – about 90 per cent – are institutional and this shapes product development. Budden says: “The open-ended funds were launched as a consequence of institutional demand for pooled products, not because certain asset classes happened to be sexy. We do not launch into fad markets. For example, our emerging market debt fund was launched because institutional clients wanted a fund in that area, but we felt it was a long-term story, so we also launched it into the retail market.”

There was a similar situation with the group’s Global Equity Income fund – this was a reconstruction of an UK income fund. Budden says: “We felt the mandate had more relevance on a global basis. We also had expertise in the area.”

Although the group is known for its investment trust capability – housing some of the best-performing global growth stalwarts, such as Monks and Scottish Mortgage – all its recent launches have been open-ended. Its last closed-ended launch was Japan-specialist trust, Shin Nippon. However, the group make no distinction between the two parts of the business and the sales team market both types of product to their clients at the same time.

Baillie Gifford’s core market on the retail side continues to be the discretionary and wealth management groups and top-end investment advisers. However, Budden says that the group hopes to gain more traction with IFAs through platforms. He adds: “The managed fund offering is particularly strong.”

The group’s biggest sellers remain its high yield and corporate bond funds, plus its US fund managed by Mick Brewis. Capacity has become an increasing problem for corporate bond funds and at £171m, the Baillie Gifford Corporate Bond fund, managed by Stephen Rodger, is a relative minnow. The group runs about £2bn overall in its corporate bond strategies, compared with £20-30bn for some of the large insurance groups. The group considers this an important advantage, meaning it does not get caught up in some of the liquidity problems currently experienced in the corporate bond market.

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The Diversified Growth fund has been another success story for the group, particularly among defined contribution schemes. It is now over £2bn in size. It blends a variety of different asset classes to provide a smoother, more consistent total return and has been a strong long-term performer. In fact, in spite of its reputation as a stockpicking house, Baillie Gifford has made a success out of its asset allocation-focused funds in general.

Its institutional business means that Baillie Gifford has had to do relatively little to adapt to the requirements of the RDR. It has lowered the minimum investment level on its institutional share classes, but has otherwise had to make few adaptations for the shifting legislation.

The group wins much support among fund selectors. Tim Cockerill, the head of research at Rowan Dartington, says: “We like Baillie Gifford for a number of reasons. They are independent and therefore control their own destiny. Their turnover is very low as a consequence. They are naturally conservative, which is an approach to managing money that I like. Also, their funds have done a good job.”

At the moment, he holds the Japan and Japan Smaller Companies funds. He also uses their Corporate Bond and Diversified Growth funds. He adds: “I like that they take longer over their decision-making. It means that they tend to make fewer mistakes.”

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Gavin Haynes, investment director at Whitechurch Securities, says: “Baillie Gifford has a strong culture. The partnerships structure lends itself to low turnover of managers and stability. Many of the managers are also partners, which aligns their interest with those of their investors.”

He likes their investment trust range, particularly on the international side. He uses Scottish Mortgage, which is aggressively managed and Monks, which is more defensive. He also uses the US funds: “Mick Brewis has built up a very good track record in what is a notoriously difficult market for stockpickers.”

The group’s long-term performance record across its funds is among the best available. Only six out of its 34 open-ended funds are not top quartile over three years. Admittedly, the group has a quality bias and that has been in favour over the past few years, but it does suggest that the process is robust.

The weakest area has been emerging markets, with the two global emerging market funds relatively lowly-ranked in the emerging market sector. Partly this is a result of the group’s growth bias, at a time when emerging markets have been generally out of favour and defensive companies have made the running. The group has made some recent changes on the emerging market desk. Richard Snell remains in overall control, but Claire Hindley joined in the summer. Responsibilities have also been re-shuffled, with Joe Faraday and Tom Record stepping down from management of the Asia fund.

This is a rare change. Most fund managers join Baillie Gifford, are trained in its style and process, so when they accede to management of a fund, there are few surprises and therefore few changes. Analysts are encouraged to move from desk to desk in their early years to give them as broad a perspective as possible. It can be tempting to dismiss Baillie Gifford as staid, but its stability and consistency are reassuring for investors in uncertain times.