Rayner Spencer Mills Research (RSMR) is an independent research company specialising in rating, comparing and analysing the full range of funds and products available in the UK. The following extracts are from the firm's review of the Baillie Gifford Managed Fund, the full version of which may be read here
Fund and objectives
The Baillie Gifford Managed fund is a multi-asset fund investing in equities, bonds and cash. Interestingly, the fund does not invest in direct property, as Baillie Gifford believes it has no expertise in this area. Fund size as at the end of November 2014 was around £945m with approximately £3bn in wider multi-asset balanced mandates.
There is also £2.5bn in ex-bond portfolios, meaning the multi-asset team roughly look after £5bn. The fund sits in the Investment Association (IA) Mixed 40-85% sector, which is viewed as something to measure the fund against rather than a fixed point for asset allocation. The annual management charge, at 0.4%, is relatively low cost with an overall ongoing charge of 0.44%.
RSMR on the Mixed Investment 40-85% Shares sector
At the time of writing, the IA Mixed Investment 40-85% Shares sector contains 145 funds from approximately 90 different fund providers, thereby offering investors and advisers a significant number of investment choices. In addition, the IA sector definition allows for a wide variety of investment strategies within this sector. There are a small number of stated constraints, which are as follows:
* A maximum of 85% invested in equities, which includes convertibles
* A minimum of 40% in equities, which includes convertibles
* No minimum fixed income or cash requirement
* Minimum 50% invested in established market currencies (US dollar, euro, sterling), of which 25% must be in sterling
* The sterling requirement includes assets hedged back to sterling
Given the above, in theory, investment strategies could range from a 40% equity / 60% cash allocation through to a 85% equity / 15% ‘others’ (for example, commodities) / 0% cash allocation, and all connotations in between.
There are a variety of methods with which fund managers and fund management groups can implement their investment strategies, whether this be through an unfettered multimanager/fund of funds, fettered (only invest in internal funds) or directly invested approach. Also, the option of using passive and/or active investment strategies, both in terms of the overall asset allocation and the underlying investments, provides further investment strategy options, plus there are the more standard income and/or capital growth strategies.
All of these points mean it is important to fully understand a particular fund’s aims and objectives, overall investment strategy, investment process, asset class exposure, parameters and so forth before selecting an appropriate fund.
The fund’s objective is to deliver capital growth over the longer term – it is not managed rigidly against peer group asset allocations. It is designed to be a ‘one-stop shop’ for growth-oriented investors and reflects the Baillie Gifford belief that equities will deliver the best returns over the long term. Baillie Gifford looks to add value as a stockpicker across both equities and fixed interest to deliver above market returns. As the fund only invests in liquid markets, Baillie Gifford is able to manage the product with a relatively low investment fee.
Baillie Gifford believes equities will deliver the best returns over the long term but the firm recognises the volatility from a pure equity portfolio can be too high for some investors and so fixed interest – both government and corporate bonds and potentially emerging market debt – and cash are used to damp down volatility. This approach also gives investors diversification – a theme repeated across the construction of the whole portfolio.
Fund managers and team
Iain McCombie and Steven Hay have overall responsibility for the management of this fund but there is significant input received from the regional equity teams and managers and the Credit and Rates & Currencies teams that influences the allocations to each asset and sub-asset class. McCombie is more involved within the equity element of the portfolio while Hay is involved more with the fixed income element while also providing macroeconomic input.
Baillie Gifford has an investment team of more than 90 professionals broken up by regions. A large number of the fund managers joined the firm originally as graduates – the UK Equity, European Equity, North American Equity and Emerging Market managers have all spent their entire working career at Baillie Gifford. The firm takes a collegiate approach in general to client portfolios with the asset allocation for this fund based on team input and the regional managers deciding whether they want more or less money. All research in the firm is available to everyone.
There is no interference in stock selection decisions by the individual teams from the centre at Baillie Gifford. Managers are free to construct bottom-up portfolios as they see best, although because of the nature of the client base, individual stock positions rarely exceed 2%. The fund invests in companies, not markets.
Some of the key performance drivers for the fund will include how successful stock picking is within the portfolio and also certain style factors. The fund beta of 1.14 versus its IA sector is partly a result of its overweight position in equities versus bonds within the peer group. The risk team describe this position as pro-growth and anti-value when looking at stock names.
The team describe themselves as having an active approach to fund management but this does not mean high turnover – rather that the portfolio is significantly different from the index and is driven by stockpicking rather than macro or thematic calls. Another important point to note is the timeframe over which companies are assessed, which can be as long as 10 years. Baillie Gifford believes its willingness to be truly long-term means it can gain an edge over other managers that may react to short-term volatility or peer performance pressures.
Equity turnover is expected to remain below 20% over the medium term, although it could pick up from the current levels of around 10%. Typically, if the managers believe an investment case is unchanged, they will look to buy into stocks on weakness. The asset allocation policy-setting group will at times challenge managers to ask whether anything has been unfairly hit if there is a market sell-off. As there is always a certain amount of cash in the portfolio, it is relatively easy for team members on the equity side to get more money if they believe opportunities have come to light – perhaps after a market setback.
Rayner Spencer Mills Research comments
The fund’s objective is to deliver capital growth over the longer term. It sits within the IA Mixed Investment 40-85% Shares sector, although the managers do not tie themselves rigidly to comparing and managing the fund against the peer group. The fund has a low fee structure providing access to a large team of investment professionals and is designed to be a ‘one-stop shop’ for growth-oriented investors, reflecting the Baillie Gifford belief that equities will deliver the best returns over the long term.
The fund has a long track record going back to 1987 and, over that time, has outperformed both the FTSE All Share Index in the UK and the FTSE Actuaries Government All Stock Index. The IA sector average is below not only this fund but also below the same two indices. The managers try to use the opportunities created by volatility to enter investment positions cheaply.
Within equities, as a house Baillie Gifford portfolios tend to have high active share, as it is recognised that to beat the index it is necessary to be different from it. The bias in equities is for quality growth stocks, which are growing, durable businesses run by sensible people, which should outperform in the long run – Baillie Gifford is a long term-investor, not a speculator.
The fund has been a strong long-term performer within its sector, which reflects its exposure to equities and good stockpicking within that. Baillie Gifford has UK, Pacific (Asia and Japan), European, US and emerging market funds rated by Rayner Spencer Mills Research and so the strength of the stockpicking should not be a surprise.
We have a positive view on this fund and also on the ability of the team managing it to continue to deliver outperformance, as it draws on the strength and experience of highly rated investment teams in the different geographic areas. The fund has benefitted from its longer-term approach and has not panicked out of equities at the wrong time. It is managed in adherence with Baillie Gifford’s long-term bias to growth equities, reflecting their longer-term investment time horizons.