Baillie gifford plays the loyalty card

Ken Edwards, head of intermediary sales at Baillie Gifford, says its partnership structure has been important in the group earning a reputation for low staff turnover. James Teasdale reports.

While Baillie Gifford is not one of the biggest fund management groups in the UK retail market, its presence in institutional markets puts it among the larger investment houses in Britain. The group’s total funds under management at September 30 stood just shy of £46bn, with institutional mandates accounting for more than 80% of these assets.

Within its retail offerings, Baillie Gifford’s assets are split roughly evenly between open-ended and closed-ended funds, with £4.5bn in its Oeic range and £3.9bn in investment trusts. The group is growing strongly too, having increased its total assets under management by almost 17% over the 12 months to September 30, with the Oeic range growing by more than 30%. Sales in 2006 are already more than 20% higher than last year. According to the Investment Management Association, the size of the group’s Oeic range puts it 33rd in the table of total funds under management for October 2006.

Half of the 26 Oeic funds with a one-year track record have posted above-median returns in their respective IMA sectors over the period, according to Standard & Poor’s. Performance over three years is stronger, with 15 out of 23 funds in the top half of their sectors, including eight in the top quartile.

Baillie Gifford’s sales efforts within the Oeic funds concentrate on the core markets of America, Britain and Europe. Ken Edwards, head of intermediary sales at Baillie Gifford, says: “When I joined [in 1998] we were well regarded in the retail space in emerging markets, Asia Pacific and Japanese equities. Ironically, on the institutional side our reputation was in the UK and Europe. The core sectors of UK, Europe and the US represent between 60% and 80% of all intermediary sales going back for more than 10 years. To make an impact in the retail market you need to come up with good stories in these areas.”

When equity markets get tough, Edwards explains, British investors tend to fly back home or move into fixed interest, with major discretionary advisers switching their asset allocations out of the riskier markets. A core sector sales strategy was implemented early in 2002 and fund sales into these sectors now make up about 50-60% of intermediary business, he says.

Popular funds include Baillie Gifford’s Japanese, Corporate Bond, High Yield Bond, American and British 350 funds, with the Oeic range growing steadily.

The British 350 fund aims to outperform the FTSE 350 index by 1-1.5% on an annual basis. Edwards says: “The fund is popular among key discretionary intermediaries that favour a barbell approach to investing. They will often use the British 350 fund as one of their core holdings, together with some more sexy satellite funds.”

Marcus Brookes, deputy head of multi-manager funds at Gartmore, says: “We invest in the American fund, run by Mick Brewis and his team. The fund has a growth bias and is quite a concentrated portfolio. It also tends to have quite a lot in mid-caps compared with the peer group. They are a well-resourced team with a phenomenal long-term record. Investors often ask whether American equity funds can be managed successfully outside of the US, and Mick Brewis has shown that it can be done. However, given the growth bias, performance this year has not been too great.”

Brookes has also invested in the Japanese fund in the past. “The fund has done well over the years, although they have had a few changes, including Anja Balfour leaving to join Framlington,” he says.

The Corporate Bond fund, managed by Kenneth Barker and Stephen Rodger, is also on Gartmore’s watch list. “We like the approach used and the flexibility of the fund to move in and out of high-yield bonds, as we are concerned with the level of leveraged buyouts in the markets,” Brookes explains.

With a three-year return of 116.7%, the Baillie Gifford Emerging Markets Growth fund is the top performer in absolute returns over the period. Managed by Gerald Smith and Richard Sneller, the £626m fund is the largest of the 17 funds that the group is actively marketing to intermediaries. Brookes says: “We have invested in the emerging markets fund but we no longer hold it. The issue is that it has quite a lot of assets rather than anything performance related.”

Other sizeable funds include the £467m British Smaller Companies, £447m Japanese, £349m Managed and £246m British 350 fund.

Mark Dampier, head of research at Hargreaves Lansdown, says: “We don’t use Baillie Gifford at the moment and have not done so in the past. Historically, it has always been strong in emerging markets and the Far East. Its UK funds are not that bad, but we do not think they are ‘top drawer’. They really need to be motoring to get onto our list.”

The worst performer over 36 months is the Overseas Bond fund, down 1.9% over the period. However, the portfolio is predominately made up of institutional money, having a higher minimum investment amount.

The group’s closed-ended offerings include some heavyweight and long-established funds, notably the £2bn Scottish Mortgage and £1bn Monks investment trusts. Baillie Gifford was also appointed as investment manager to the Edinburgh Worldwide trust in November 2003, and to the Scottish American investment company (Saints) in January 2004. Five of the eight investment trusts have a global investment mandate, with the remainder investing in the Asia Pacific region. The Pacific Horizon investment trust issued new shares in November. The trust was trading at a premium of 4.9% to net asset value on October 31.

Baillie Gifford’s investment philosophy focuses on companies with strong, sustainable competitive advantages, financial stability and strong real earnings growth potential.

Edwards says: “As a house we are bottom-up stockpickers, with a strong bias towards growth. Portfolio turnover tends to be low, as we take a three-to five-year view on stock selection. We back our judgement and, if the fundamentals are correct and we believe a company will deliver growth over the long term, we will stick with it.”

The investment approach has a strong team-based bias and key investment personnel do not see themselves as star fund managers, Edwards says. “It is about teams rather than individuals but it is not management by committee, because we have fairly concentrated teams providing an efficient decision-making structure,” he adds.

As with most investment houses, teams are split geographically, with separate desks covering America, Asia Pacific, Britain, Europe, emerging markets and Japan on the equity side, as well as a fixed interest team. There is also a global equity desk that runs international mandates, which takes the views from the regional desks but is ultimately responsible for decision-making on the portfolios. Each desk includes sector specialists, and investment teams run both institutional and retail mandates.

The firm is structured as a partnership and this has an important effect on staff retention, Edwards says. “We have a reputation for low staff turnover and being a partnership is a huge retention tool,” he explains. “Our staff have the incentive to do well, with the prospect of becoming a partner. It is difficult to offer better than partnership in an investment management group.” Richard Burns, a senior partner and the group’s chief investment officer, retired in April 2006. James Anderson, head of the global equity team and manager of the Scottish Mortgage investment trust, has taken over the CIO role. Charles Plowden, head of the UK investment team, has also been made a senior partner.

Brookes says: “We like the partnership structure as it does not tend to have as high manager turnover as other investment houses. We take a lot of comfort from the fact that fund managers are partners in the business.”

The split of retail business is about 80% on the discretionary side and 20% advisory. “We focus on the discretionary investment side, including private client stockbrokers, funds of funds and investment specialists,” Edwards says. “We are not huge on the advisory side and have not joined the major fund platforms.”

The fact that most fund supermarkets do not offer access to closed-ended vehicles on platforms is one of the main reasons for the group’s lack of coverage in this area. However, the Transact platform has been used by Baillie Gifford as it is the only true wrap proposition that offers investment trusts, Edwards says.

The group spends little time and money on advertising, although it does have an active marketing side selling investment trusts directly to the public. Edwards says: “Some IFAs perceive this as a disadvantage, but the partners do not see the need to advertise. For our main client base of fund of funds managers, discretionary investors and private clients, you can advertise all you want but it will make no difference to them.”

Dampier says: “It has more strength in retail markets than it had, but we are not sure whether it is taking retail markets seriously. We do not feel it offers a ‘must have’ fund.”

But Baillie Gifford appears to be content just as it is. “We just stick to our knitting and keep focused. I like to think of us as quietly successful,” Edwards says.

BAILLIE GIFFORD

is a global, independent investment management firm with £45.9bn under management and advice as at September 30, 2006. Founded in 1909, the firm is wholly owned and run by its 29 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.