Ton-up team at full throttle for retail

Edinburgh-based Baillie Gifford heads for its century with only a small fraction of its £53 billion under management in retail funds. Adam Lewis reports on its efforts to increase retail business.

Baillie Gifford will pass a landmark next year. The group will celebrate its centenary and over this time neither its name nor its partnership structure has changed. However, while its structure will continue unchanged, Baillie Gifford says it is committed to expanding its retail business.

The group was formed in 1908 to manage the Scottish Mortgage investment trusts and for many years this was its sole client. Ken Edwards, sales and marketing director at Baillie Gifford, says it was not until the late 1970s that it started to branch out into the institutional pension fund market.

While this venture has been a success, Edwards is wary that, as he puts it, “nothing lasts forever” and notes the demise of defined-benefit schemes. “We are building up our retail market presence to make sure we don’t have all our eggs in one basket,” he says.

At present, retail Oeics represent a fraction of Baillie Gifford’s funds under management, which total £53 billion. Most of the group’s assets are in institutional mandates and investment trusts. Its retail business of just £3.2 billion is spread across 26 Oeic and unit trust funds.

To help to expand the retail business, the group announced last week that 16 of its funds were added to the FundsNetwork funds platform. Edwards says the decision to join the platform was the next logical step in improving fund distribution.

“We already have our funds on Transact, we joined Selestia’s platform at the start of this year and we are also signed up to Nucleus, which is a full wrap service,” he says. “To join FundsNetwork we needed to be clear that we would get sufficient volumes of sales from intermediaries to justify the fees.”

Edwards adds that the group opted to join FundsNetwork before it joins Cofunds because of the platform’s advanced plans to add investment trusts to its offering. However, he adds that the group remains in close dialogue with Cofunds and one or two other platforms and will come to an agreement at some stage.

“Most of our historical marketplace has been with discretionary advisers fund of funds, stockbrokers and investment specialists,” says Edwards. “It has not been with the general IFA market. This is because the smaller IFAs don’t tend to buy investment trusts; in the past our route into the smaller firms has been via fund of funds, not the supermarkets.”

According to Morningstar, of Baillie Gifford’s 26 funds, 15 are ranked first or second quartile in their peer groups over one year to December 3, 2007. Of the 23 funds that carry a three-year track record, 14 are ranked in the top half of their sectors.

The group also manages eight investment trusts, and the performance of these is more impressive. Over one year, six of the trusts are ranked first or second quartile, rising to seven over three years. These eight trusts represent more than £4.5 billion of assets under management.

Gary Potter, fund of funds manager at Thames River, says it holds two of Baillie Gifford’s funds in its portfolios: the High Yield Bond fund managed by Ken Barker and Corporate Bond fund, which is co-managed by Barker and Stephen Rodger.

Potter says: “We have always been fans of Ken and the fixed income team. They have delivered good returns in their marketplace and have a good grasp of the bond sector. In the past we have also held the Pacific fund and in our days at our former employer in one fund we had a small holding in the America fund.”

The Baillie Gifford Corporate Bond is ranked fourth quartile over one year and third quartile over three years, but Edwards says this is because the fund is not being judged against its proper peer group. Since the fund holds 20% in high bonds, IMA guidelines dictate it sits in the Other Bond sector, rather than the UK Corporate Bond, which Edwards says would be a fairer comparison.

The Corporate Bond, with assets of £134m, is the group’s flagship retail offering. “Despite this summer’s credit crunch, our fixed interest funds have been one of our mainstays this year,” says Edwards. “This is because Ken and Stephen anticipated the problems early and were nimble with the funds.”

Edwards is aware, however, that there are areas the group needs to improve upon. In terms of British equity mandates, he says it is hoping to improve the performance of its large-cap and equity income funds.

Indeed, Fund Strategy revealed (October 15, page 7) that the group was planning to boost its equity income capabilities through the creation of a dedicated income team. Patrick Edwardson, manager of the £480m Scottish American Investment Company (Saints) and the open-ended £20m Baillie Gifford Income fund, heads the team. The team was created to improve the performance of its fund and enable the launch of global income funds.

Baillie Gifford Income is second quartile in the IMA UK Equity Income sector over one year and fourth quartile over three years.

Mark Dampier, head of research at Hargreaves Lansdown, says it has none of Baillie Gifford’s funds on its list of recommended funds, the Wealth 150. While noting the performance of the fixed-interest funds, he says he cannot identify one “must have” fund.

“If we had had a strong relationship with them in the past we might use them more, but as we have never had a close relationship they are not the first group we think about when it comes to adding new funds,” says Dampier. “Their partnership structure has proved successful, but the business has always been focused on institutional and investment trusts. They have never put the resources behind the retail funds to move that side of the business forward.”

Edwards says that in addition to being added to more fund supermarkets, Baillie Gifford plans to improve its IFA website and spend more time focusing on the fund of funds market. He adds that, given the volatility in markets, there is an expectation of more money to come into the group’s core sector strategy funds. “When markets become turbulent, people rush back to safety,” he says.

Indeed, despite all the volatility in global equity and bond markets this year, Edwards notes that 2007 will be the third most successful year in Baillie Gifford’s 99-year history. “We will not beat last year, but sales to date are close to the numbers we achieved in 2005,” he says.

Potter at Thames River says: “Baillie Gifford has always tended to be team focused, using a solid and consistent investment process. However, I have never been sure on their hunger and desire to get heavily into the retail business.”

Despite the group retaining several managers for a long time owing to the group’s partnership structure, Potter says some good managers have left in recent years, including Anja Balfour, Andrew Holliman and Alistair Way.

“If you are made a partner then you are fine,” Potter says. “This can often take some time to happen, and that may be the reason those managers left. However, there is a good working environment at Baillie Gifford, where the managers share a collegiate view on life. Overall, for what they do and how they do it, it is a pretty tight ship.”

Baillie Gifford is a global, independent investment management firm with £53.4 billion under management and advice at December 5. Founded in 1908, the firm is wholly owned and run by its 30 partners and offers a range of Oeics, institutional portfolios and investment trusts. The group’s investment philosophy uses a bottom-up approach, managing concentrated portfolios of long-term growth stocks. All investment staff are based in Edinburgh.

The best and worst funds for each group profiled in the Focus are now shown on a relative rather than absolute basis. Previously, the best and worst funds have been defined in absolute terms. But the percentile ranking of a group’s funds are now shown relative to their respective sectors.