Baillie Gifford American: June 2020 update

Joseph Hill | Tue 30 June 2020

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• We like the managers long-term, disciplined investment process and think they are well equipped to succeed
• We think this fund is a great way to invest in businesses with strong growth prospects in the world’s largest stock market
• The fund has delivered strong performance over the last five years
• We have added this fund to our Wealth Shortlist of funds chosen by our analysts for their long-term potential

How it fits in a portfolio

This fund aims to grow your investment over the long term. The manager’s growth style of investing aims to benefit from investing in exceptional growth businesses and holding them for long enough to reap the rewards. We think this fund could work well in a portfolio with little exposure to the US, invested for long-term growth. Its focus on large companies means it could also sit well alongside a US equity fund focused on medium-sized or higher-risk smaller sized companies, or a US fund with a value bias.

Manager

The team behind the fund is made up of four talented investors.

Tom Slater joined Baillie Gifford in 2000 and has risen up the ranks to become a partner in the company and Head of US Equities. Slater is also joint manager of Scottish Mortgage Investment Trust and has been co-manager of this fund since 2016. Gary Robinson has been with Baillie Gifford since 2003 and has experience of working in their Japanese, UK and European equity teams prior to joining the US equity team. Robinson has been co-manager of this fund since 2014 and is also a partner at Baillie Gifford.

Kirsty Gibson joined Baillie Gifford after graduating in 2012 and has been a co-manager of the fund since the start of 2018. Dave Bujnowski is the fourth and final co-manager of the fund. After previously working for UBS and Coburn Ventures he joined Baillie Gifford in 2018 and has recently been promoted to co-manager of the fund.

We think the managers are well resourced to focus on the job in hand. They also have access to a wider team of 38 analysts who spend time researching US equities at Baillie Gifford.

Process

The managers invest in companies with high growth potential that they think could be capable of delivering exceptional returns over the long run. They believe that companies with resilient business models make for good long term investments and that corporate culture can be a key component of company performance and ultimately investor returns although of course there are no guarantees.

Culture is difficult to measure and capture. But the managers believe it’s one of the most underappreciated drivers of long-term returns. Companies with a strong culture are often adaptable, durable and willing to invest for the future at the expense of short term profits. And although there’s no exact science, they believe that it’s these kind of companies that are often the ones to really deliver on their vision and purpose.

The managers spend a lot of time thinking about industry dynamics and the powerful trends developing across the economy. They have grouped these into eight distinct areas. They are; the future of commerce (28.7%), innovative healthcare (16.6%), the battle for our Attention (13.3%), new enterprise (11.5%), the digitalisation of finance (10.2%), the evolution of Transport (7.8%), capital allocators (7.6%), and changing education (2.3%).

The numbers in brackets indicate how much of the fund is invested in companies they think will profit from each trend playing out over the long term as of the end of March. They don’t round to 100% due to the fund’s small cash holding.

Many of these businesses disrupt old ways of doing things. In the future of commerce category, the trend the fund has the largest exposure to, you’ll find businesses like Chewy, the online pet food and grooming supplier. The business has a strong culture and customers are able to discuss with staff what products are suitable for their pets. The managers believe they’re well positioned to take advantage of the growing humanisation of pets, where owners consider their animals a family member and reflect this by spending more and more money on them.

The second largest trend the fund has exposure to is innovative healthcare. This is quite a wide-ranging category and can include companies involved in areas from therapy development to medical device design. Examples here include Illumina, the gene sequencing specialist, and Teladoc, the online platform that enables virtual access to medical professionals.

Founder involvement is another element that the managers view positively. They believe these individuals, who usually still have much of their wealth tied up in the business, often possess the strong vision that’s required to continue growing the company. Tesla is an example of a stock that fits the bill here and has been a long term holding in the fund, after its initial purchase in 2012.

The managers believe few companies are capable of delivering exceptional returns over the long run, so they prefer to run a relatively concentrated fund of between 30 and 50 stocks. This means each one can contribute significantly to returns, although this approach increases risk.

The managers believe that an effect of the coronavirus related market disruption may well be an increase in the pace of disruption in many areas. Technologies and companies that reduce friction and allow us to continue consuming, while allowing businesses to function, are likely to become more highly valued. They recently decided to sell positions in Fortive over concerns about its future growth and in education company 2U due to concerns over its strategy reset. This funded the purchase of shares in Workday, the Finance, HR and planning software system. The managers have high conviction in the company’s culture and growth potential and saw a period of share price weakness as an opportunity to invest.

Culture

Baillie Gifford is an independent private partnership founded in 1908. It's owned by partners who work full time at the firm. This ownership structure means senior managers have a vested interest in the company, and its funds, performing well. We think this has helped cultivate a culture with a long-term focus, where investors' interests are at the centre of decision making. We also like that fund managers are incentivised in a way that aligns their interests with those of long-term investors.

Baillie Gifford recognises the risks posed by Environmental, Social and Governance (ESG) issues and uses its position to encourage companies to act in a sustainable way. The company has a dedicated Governance and Sustainability Team of sixteen which is responsible for producing ESG research which challenges and contributes to the investment decision-making process. They also monitor companies' progress on an ongoing basis, engaging with them on ESG matters where appropriate.

Cost

The fund has an ongoing annual charge of 0.52%. The HL platform fee of up to 0.45% per year also applies.

Performance

The fund aims to outperform the S&P500 index by 1.5% per year after costs over any five year period. The share prices of well-known US companies can react very quickly to new information. This makes it difficult to consistently perform better than the broader market over the long term, but we think the Baillie Gifford American team are well equipped to do so.

Over the last five years the fund has delivered a return of 240.1%, compared with a return of 97.6% for the FTSE USA index*. As always, past performance isn’t a guide to the future. There have been periods of weaker performance over this time though, and we think performance will be volatile at times. We also don’t expect the fund to hold up as well as the index in a typical falling market. Like all investments, the fund can fall in value so investors could make a loss.

The fund has performed very strongly so far this year with its positioning towards technology and ‘the new economy’, and away from industrials which have tended to be more cyclical, having a positive impact. Over the period of the coronavirus lockdown we’ve seen demand for online services explode. This has given the larger online platforms the chance to demonstrate their resilience and they’re increasingly being viewed as vital utilities for people’s lives. The fund’s investments in Zoom, Shopify and Netflix to name just a few have been beneficiaries of this trend. A number of other holdings in the fund, like Moderna and Illumina, have also performed well recently because of their link with the immediate healthcare needs or research into a cure. Although the fund has had a very strong year this is only a very short timeframe to consider performance over and remember that past performance isn’t a guide to the future.

*Source: Lipper IM 31/05/2015 – 31/05/2020

Past performance is not a guide to the future. Source: Lipper IM to 31/05/2020

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