Baillie Gifford Global Discovery: September 2020 update

Kate Marshall | Wed 09 September 2020

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• Douglas Brodie invests in smaller companies he thinks have excellent growth potential
• Some companies that he’s held onto as they’ve grown into large ones have done well
• Recent performance has been impressive as many companies have benefitted from the global pandemic
• This fund is not on our Wealth Shortlist. You can find the funds chosen by our analysts for their long-term performance potential here

How it fits in a portfolio

Baillie Gifford Global Discovery aims to deliver long-term growth by investing in mainly higher-risk smaller companies from around the world. It could work well alongside global funds investing in larger companies to provide more adventurous exposure to the global stock market. It could also add international diversification to a portion of a portfolio invested in UK smaller companies.

Manager

Douglas Brodie has been the lead manager of this fund since its launch in May 2011. He’s spent his entire investment career at Baillie Gifford, which he joined in 2001 and became a partner of the firm in 2015. He began managing a UK smaller companies fund in 2007, before expanding his investment universe with this global fund. He’s currently also the lead manager of Edinburgh Worldwide Investment Trust, which has a similar portfolio but can invest in unquoted companies too. Given the cross-over between the two portfolios we think Brodie is comfortably able to manage both.

He is supported by Svetlana Viteva and Luke Ward, who’ve also spent their whole careers at Baillie Gifford after joining in 2012. They spent their first few years working with different investment teams across the business before joining Brodie on the investment trust in December 2017 and the fund in January 2018.

We think the fund is a strong option for investing in global smaller companies, but we won’t be considering it for the Wealth Shortlist. Brodie doesn’t want to attract lots of new investment and for the fund to grow too big, as he thinks it could potentially make the fund more difficult to manage and cause performance challenges.

Process

Brodie and the team invest in companies they think could grow significantly over the long term by solving global challenges such as healthcare innovation and intelligent automation. While most companies in the portfolio are small, the managers think it’s more important to focus on the immaturity rather than the size of a business. That’s so they have lots of room for growth potential. They can stay invested in companies if they grow into large ones. The fund’s largest holding, for example, is currently Tesla, which recently became the world’s biggest car company by market value.

The managers believe the biggest long-term investment returns will come from a small number of companies, but given it’s almost impossible to know with certainty which companies those will be, they maintain a diversified portfolio with currently over 100 holdings.

They’ve found the most opportunities in the US, which is why around two-thirds of the portfolio is invested there. The remainder is mainly invested in companies from developed markets such as the UK and Japan although the managers can also invest in higher-risk emerging markets and would like to invest more in countries such as China and India in the future.

Industry-wise, the biggest portions of the fund are invested in healthcare, technology and consumer sectors. Recent new investments include virtual banking software provider Q2, which the managers think will benefit as traditional banks face up to the competition posed by digital ‘challenger banks’; and US medical device company Shockwave, whose technology uses sonic pressure waves to improve care for those suffering from artery diseases.

Culture

Baillie Gifford was founded in 1908 and has become well-known for its investing-for-growth philosophy. The firm is an independent private partnership, allowing its managers to remain focused on long-term investing without short-term shareholder distractions. When they invest in companies, they actively engage with management teams and encourage them to think about the long term too. Baillie Gifford also makes extensive use of academic research, and has consultancy agreements with universities and institutes both in the UK and around the world.

Cost

The fund has an annual ongoing charge of 0.79%. This is lower than the average charge for funds in the global sector. The HL platform fee of up to 0.45% per year also applies.

Performance

Since Brodie launched the fund in May 2011 he’s achieved strong results. The fund has returned 419%* compared with 124.7% for the FTSE Global Small Cap index. Remember that’s not an indication of future performance and you may get back less than you invest, as investments rise and fall in value.

For most of its life the fund moderately outperformed the benchmark but, since the pandemic-induced stock market volatility began in February, the benchmark-beating returns have accelerated as many companies in the fund have benefitted from the coronavirus crisis and resulting worldwide lockdowns. Although this is a very short timeframe and there are no guarantees this will continue.

Investments in the healthcare and consumer sectors in particular have boosted recent performance. Electric car-maker Tesla, biopharmaceutical company Alnylam Pharmaceuticals, and virtual healthcare service provider Teladoc have been among the biggest contributors to recent gains.

Given the unprecedented circumstances from which many of the portfolio companies have benefitted, we wouldn’t expect this level of performance to be sustained in the future. We think the fund can do well over the long term, but it will likely experience setbacks along the way, such as if the managers’ investing-for-growth style falls out of favour. Brodie and the team believe there is still plenty of room for their companies to keep growing, although as ever there are no guarantees.

Chart showing Baillie Gifford Global Discovery performance since launch

Past performance is not a guide to the future. Source: *Lipper IM to 31/08/2020

Past performance is not a guide to the future. Source: Lipper IM to 31/08/2020

More about this Fund, including charges

Key Investor Information