Baillie Gifford: Hold or Fold? Is It Time To Make Big Profits?

After Baillie Gifford dominated the performance tables for a decade last year and had more successes during the coronavirus pandemic, supporters and skeptics alike are wondering: can the Edinburgh company extend its market-leading run in 2021, or now is the time to make profits take with you? ?

2020 was more than an old year for the partnership as the bans imposed in response to the Covid-19 contagion ushered in years of growth for preferred technology stocks almost overnight, propelling valuations to staggering levels.

Outstanding performances in the group’s stable came from Scottish mortgage ((SMT), its global flagship, which sealed its position in the FTSE 100 and its status as the UK’s largest investment trust with a total return of 110% of shareholders that increased its market value to £ 18.5 billion.

Scottish Mortgage’s growth has been staggering, but its investment returns have been exceeded by the perpetual companies Baillie Gifford American Fund which grew 122% to £ 7.1 billion. This was topped off by its £ 944 million sister trust, Baillie Gifford US growth ((United States of America), which returned a spectacular 134%, the best of all closed-end funds listed in London.

While these numbers alone could put you in some rush to take profits, this isn’t a bolt in the pan. Anyone who resisted the urge to reduce their stake in Scottish Mortgage could have made ten times their money in the past decade.

While big bets on Amazon (AMZN.O) and specially Tesla (TSLA.O) As the main driver for these US and other global strategies, the company was there or in the rankings when it came to it medium and Investment trusts across Europe, Asia Pacific and China.

With the introduction of vaccines that will revive the economy and the signs that inflation is rising and bond yields – an indicator of rising interest rates – are rising, there are reasons to believe that Baillie Gifford will soon have to prove his ability in a completely different macroeconomic environment. With that in mind, investors wonder how long Baillie Gifford’s dominance can last.

“You will find the next Tesla”

Nick Wood, head of investment funds research at wealth manager Quilter Cheviot, cautioned against the idea that just because its funds were hot for so long, the company would suffer underperformance. Prior to the pandemic, there were similar calls that the gap between the “growth” companies – which they do – and the cheaper “value” stocks had grown so large that a snapback was inevitable.

“I think we could have had this conversation 12 months ago and the conclusion we may have reached would have been very imprecise,” said Wood.

A similar point was made by Michael Paul, Wood’s counterpart and head of fund research at investment manager Brewin Dolphin.

“In general, we believe that Baillie Gifford are exceptional ‘growth investors’ and so we will continue them and their strategies for years to come. Style rotations are notoriously difficult to predict and have been relatively short-lived in recent years, making them even more difficult to trade, ”he said.

Investment trusts include US Growth, Scottish Mortgage, and other global “Best Ideas” funds Monks ((MNKS) stay on Quilter’s purchase list. Wood (pictured) said there was no “conviction weakening” with these strategies.

“We trust your investment process and [that] You will know when an opportunity has reached its limit, whether this is due to the evaluation. [because] On the path to long-term growth, they will give us new opportunities: the next Amazon, Tesla, what have you got? Said Wood.

Despite the favorable conditions they enjoyed, he continues to see signs of an “advantage” for the company, citing the consistently long-term time horizon, university relationships and high “active stake” as evidence that the fund managers care little pay attention to stock market indices for their investment ideas.

Wood added, however, that it is important for investors to look “under the hood” and ensure that the strong performance of the Baillie Gifford funds has not overexposed them to any topic, especially if they hold multiple funds that are big bets could be the same stocks. Monks, Scottish Mortgage, and US Growth, for example, all trust Amazon.

2021 will be harder

Jason Hollands, managing director of asset manager Tilney and its Bestinvest website, said there were reasons to believe this year will be tougher for Baillie Gifford.

Since Pfizer (PFEN.N) announced its breakthrough in coronavirus vaccines in November. There was evidence of an incipient rotation towards cyclical and adverse sectors of the stock market such as banking and industrials. Rising bond yields – the yields on 10-year US Treasuries surpassing 1% for the first time since March – are another boost to this “reflation trade”.

“I think if this continues, 2021 could be seen as a year in which more value-minded managers have a better run than they have in a while. In this environment, you could see that growth houses through and through are not the top of the pops in the short term, ”said Hollands.

He added that one potential threat to Baillie Gifford’s fairly uniform style was that performance could change dramatically across the board if markets shift in this way, meaning you can go from zero to hero.

He cited the example of Invesco, the value-oriented fund group that has struggled for the past five years as its approach has fallen out of favor with the market and its stock selection has come under fire. The mounting difficulties culminated with the last year Fund manager Mark Barnett retires (Pictured above) in May, when the assets of the two largest UK equity funds he operated fell from £ 23.7bn when he took over in 2014 to £ 4.9bn.

In 2020, Invesco also lost the mandate for Edinburgh ((EDIN) and Perpetual Income & Growth, the investment trusts he operates. Last month saw the company too Keystone ((KIT) Counter after Baillie Giffordwhere it is being remodeled in the form of the company’s rapidly growing £ 1.6 billion Positive change Funds.

“It’s possible that you can go from looking brilliant to suddenly tougher patches for a range of products,” said Hollands.

Bestinvest’s executive director said he still considered Scottish Mortgage a great option long term and would not advocate selling out for a year.

He added, however, that in recent years many investors have “loaded” their portfolios with growth managers like Baillie Gifford or as well with higher quality growth options such as Fundsmith Equity.

“When your portfolio is full of such strategies, there is a reason to actually balance your ticket,” he said.

More Invesco parallels

Premier Miton fund manager Nick Greenwood also drew a potential parallel between the rampant success of Baillie Gifford and Invesco’s own high-flying period, including the company that won Edinburgh from Fidelity in 2008 Miton Global Opportunities ((MIGO) Trust that invests in other trusts and was previously a supporter of its Asian top performer Pacific horizon ((PHI).

“The number of investment trusts moving to Baillie Gifford is a bit worrying as they remind me of the years ago when they all moved to Invesco. It’s just a sign that there is full consensus at the moment, ”he said.

Before Keystone and Baillie Gifford China Growth ((BGCG), formerly Witan Pacific, the company also won theirs European growth ((BGEU) Trust from Edinburgh Partners in October 2019.

Anecdotes from private investors asking if they should only own Baillie Gifford funds raised more alarm bells for Greenwood.

In December Baillie Gifford dominated the list of the most bought funds at Interactive Investor, which claimed seven of the broker’s top 10 spots, while American fund Fundsmith Equity overtook the top spot for the first time since 2018.

Greenwood said he believes in Baillie Gifford’s ability to select the dominant companies of the future, even if it could take several years to get to their high ratings. For this reason, he recommends that long-term investors hold on to the company, although there could be short-term challenges if markets change direction.

The risk of a snapback is greater with the Group’s investment trusts, whose stocks can become excessively expensive if investor demand drives their price below the underlying asset.

Greenwood said the whopping 30% premium the China Growth Trust hit late last year was “quite dangerous,” but more than any other problem, it reflected “short-term pressures”. He noted that the more modest single-digit premiums at most Baillie Gifford trusts also reflect the increasing number of unlisted investments, such as private tech companies, where the market may be pricing in growth prices that are not yet formally reflected in their valuations.

Just to say: “Take the winnings with you”

Raj Basra, chief investment officer (CIO) at Tacit Investment Management, said Baillie Gifford captured the growth drivers that have escaped most investment managers in recent years.

“You understand digitization and the technology cycle better than most of the others. You obviously put a lot of time and effort into understanding these cycles, which is what sets them apart, ”he said.

London-based Tacit has supported Scottish Mortgage for the past decade and continues to do so under the two higher risk of its four investment strategies.

Denied the idea that trust was too reliant on single bets like Tesla, Basra pointed out that half of his fortune was concentrated in its top 10 stocks, including the electric car maker, yet has a diversified portfolio. It holds an additional 24 listed shares, which make up an additional 30% of its assets. The remaining 20% ​​is made up of around 40 unlisted stocks like Ant, the Chinese financial services group whose IPO was blocked last month in a dispute between its founder Jack Ma and the country’s authorities.

Given that SMT fund managers James Anderson and Tom Slater are buy-and-hold investors, the 10x return over a decade shows what the hit rate has been across the portfolio, Basra said.

Although he admitted that investors “could easily have a very painful phase” in the short term, be it due to valuation shifts or a tightening of antitrust competition law, which affect important holdings, other factors speak in favor of Baillie Gifford. For example, with interest rates expected to remain near zero lows in much of the world, there is little risk that the cost of borrowing will rise, hampering the expansion and surge in Baillie Gifford’s growth stocks.

“Everyone who invests, of course, always tries to say, take the profit, take the profit. I actually think that with the Baillie Gifford approach, you will be rewarded for letting your winners run, ”said Basra.

“Now this will work against you at some point, but I think it will only work against you if interest rates go up to 2% or 3%, which you just couldn’t see right now.” [current] Indebtedness. “

Baillie Gifford: Hold or Fold? Is It Time To Make Big Profits?

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