Baillie Gifford American – October 2020 fund update

Joseph Hill | Thu 08 October 2020

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

How it fits into a portfolio

Baillie Gifford American aims to grow an 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 December 2018 initially as an Analyst. During his time at Coburn ventures, Bujnowski worked with Baillie Gifford for years as an equity research client. As a result he says he was familiar with the culture and investing philosophy at the company ahead of joining.

In May 2020, 17 months after joining Baillie Gifford, he was promoted to co-manager with the ability to make investment decisions on the fund. Bujnowski continues to be based in New York in the US but remains in close and regular contact with Slater, Robinson and Gibson.

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 (33.9%), innovative healthcare (14.2%), the battle for our Attention (11.1%), new enterprise (13.7%), the digitalisation of finance (7.8%), the evolution of Transport (9.3%), capital allocators (5.3%), and changing education (2.8%).

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 June. 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.

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.

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 the impact of the coronavirus has accelerated many existing trends. These trends stretch across societies, from the way and where we work to how we as consumers interact with companies.

One of these changes is the shift of education to online settings. The managers are confident this is gathering pace, and have topped up their holding in Chegg as a result. Chegg is an on demand education service platform, offering subscribers access 24/7 access to tutors, a range of study materials and more. Clearly the disruption to in person education and shift to online learning has highlighted the future opportunity for the business in supporting remote learners.

In recent months the managers decided to sell the fund’s investment in New Relic in its entirety. The business offers a range of tools that allow developers to manage web performance in real time to provide a better end product for users. The managers became concerned with the execution issues the company has encountered as well as the increasingly competitive market environment they face. As a result they sold the positon and re-allocated the proceeds into higher conviction ideas.

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. Two of the fund’s co-managers, Tom Slater and Gary Robinson are partners at Baillie Gifford. 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 and should retain talented managers.

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 0.51%. The HL platform fee of up to 0.45% per year also applies.

Performance

The fund aims to outperform the S&P 500 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 can make it difficult to consistently perform better than the broader market over the long term. We think the talent and investment experience of the managers combined with the resources they have means they have the potential to do so.

Over the last five years the fund has delivered a return of 376.0%, compared with a return of 129.5% for the FTSE USA index*. The FTSE USA represents the performance of the broad US stock market. Remember past performance isn’t a guide to the future. There have been periods of weaker performance over this time though and 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.

Part of the fund’s recent exceptional performance can be attributed to the strong tailwind provided by its growth style of investing. Investors should note that while growth-style investing has done very well in recent years compared to value investing, a well-diversified and robust portfolio should include a variety of styles, as well as different asset classes and geographies.

Our analysis suggests the fund’s investments in the consumer discretionary and technology sectors in particular have been key drivers of this performance. Although the fund has had a very strong year this is a short timeframe, so you should consider this performance in the context of a longer time horizon and not in isolation. Past performance isn’t a guide to the future.

Over the last five years, the fund’s investments in Tesla, Shopify and Amazon have been the biggest contributors to performance. These stocks also currently occupy the funds top three investments by size, although Tesla has recently been trimmed to stay within diversification rules. The manager’s long term time horizon means the fund tends to have a relatively low annual turnover of stocks. This means investments that have performed well can remain in the fund as long as the managers remain convinced of the future growth opportunity.

Past performance isn't a guide to the future. Source: *Lipper IM 30/09/2020.

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