While multi-asset managers look to incorporate ever-more complex asset classes in their portfolios, the Baillie Gifford Managed funds sticks to a straightforward approach. Iain McCombie, Investment Manager, Baillie Gifford Managed Fund speaks to Cherry Reynard.
The current vogue is for multi-asset funds to focus on the ‘multi’. Wary that correlations between asset classes have increased, some managers may seek to include as many different types of asset as possible, from infrastructure, to private equity, to gold. The Baillie Gifford Managed Fund stands in notable contrast, instead relying on a straightforward mix of equities, bonds and cash.
While this may seem old fashioned, it has proved effective, with the Fund currently top quartile over one, three and five years. “It is not bells and whistles, but we don’t think you need bells and whistles,” says co-manager Iain McCombie. He also notes “we don’t believe you need to pay over the top for a fund-of-funds approach when you can invest in our Managed Fund.”
McCombie says the team’s approach on behalf of the Managed Fund is “simple but not easy” and should provide a degree of long-term resilience. The Fund has a structurally larger position in equities compared with other asset classes as, “we believe that, in the long run, share prices follow fundamentals and therefore you should expect equities to do best. That said, we recognise that investors want diversification and for that, bonds and cash are useful.”
This means the team tends to be looking to bonds for their diversification characteristics, while the cash element dampens down volatility. It also gives McCombie versatility in certain market conditions. “Over the longer term, 90% of our returns come from stock-picking rather than asset allocation, but cash can help when there’s an opportunity.” This may only happen once a decade, but it can be important in preserving returns when it does.
Experienced Stock-Pickers
In its 30+ years of life, the Fund has weathered plenty of storms – from Black Monday in 1987, to the UK’s withdrawal from the Exchange Rate Mechanism in 1992, the bursting of the technology, media and telecoms (TMT) bubble in 2000 and the Global Financial Crisis of 2008. This has not changed McCombie’s view that ultimately stock-picking, rather than asset allocation, is the best way to deliver long-term returns for investors.
Baillie Gifford’s investment managers are given the freedom to deliver their best ideas. Stock-picking is decentralised, handed to regional experts within Baillie Gifford. The overall geographic split of the Fund is decided at a quarterly meeting, where the regional managers will talk about where they are finding opportunities and their level of conviction. As such, the Fund will have a natural tilt to those areas where the managers are finding more ideas and have more conviction. The split between bonds, equities and cash is decided separately.
A recent example of this has been in emerging markets, notably in Asia, where the team is finding some good opportunities, particularly as markets have fallen. The asset allocation moves won’t be dramatic, but will evolve over time.
Investing for Growth
The Fund is, to some extent, a distillation of the overarching Baillie Gifford company philosophy. Its top holdings include companies such as Amazon, Netflix and Alphabet – high growth, global companies. McCombie says: “We like disruption companies such as Spotify, which are using data to understand their customers better. We think there is a huge opportunity for those technology companies with a clear edge and a market-leading position.” Six of the top 10 holdings are currently in technology stocks, but companies such as BHP Billiton still make an appearance showing that the group is not wedded to big tech.
In contrast, the team has been selling down consumer staples such as Nestle. McCombie says: “It is not a bad company, but its growth profile is not very exciting and investors are paying a high price. It has done very well over the long term, but it is struggling to grow now.”
The team takes a flexible, global approach to the fixed income side. At the moment the portfolio has a high weighting in emerging market debt. McCombie is trying to find individual ideas that can bring value and diversification. The yield on the Fund is currently 1.8%, but this is an outcome rather than a target. UK bonds currently make up just 1.9% of the portfolio, while cash and derivatives sit at 6.9%.
Baillie Gifford has had a strong run as its growth style has been in favour. McCombie admits that growth investing falling out of favour is one of the greater risks he faces, “it has been a good place to be. That said, if it does have a weaker patch, we are not going to change our approach. We have got a style that we think works for the long term. Our clients want the reassurance that we’re not going to change our approach through volatile markets and we’ll stick to our style. We identify companies showing above-average growth fundamentals and own them for as long as we can.”
Greater complexity isn’t always the answer. While other managers may focus on incorporating ever-more eclectic asset classes into their multi-asset ranges, the Baillie Gifford Managed Fund will continue with its ‘simple but not easy’ blend of traditional asset classes. As such, it is refreshingly predictable.
Important Information:
For financial advisors only, not retail investors. All data is as at 30 June 2018 unless otherwise stated. As with any investment, your clients’ capital is at risk. Past performance is not a guide to future performance.
This article contains information on investments, which does not constitute independent investment research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned.
The views expressed should not be taken as fact and no reliance should be placed upon these when making investment decisions. They should not be considered as advice or a recommendation to buy, sell or hold a particular investment.
This information has been issued and approved by Baillie Gifford & Co Limited who are authorised and regulated by the Financial Conduct Authority (FCA).
Article taken from Hub News Issue 39 - Autumn 2018
