The Baillie Gifford American fund has changed its concentrated portfolio this year as one of the vehicle’s biggest positions began impacting another long-term holding.
Gary Robinson, co-manager on the £407m fund, said the team used the market sell-off in early 2016 to add in four companies to the 40-stock portfolio.
The manager, who runs the fund alongside Tom Slater and Helen Xiong, said the trio financed the purchases using capital from the sale of long-term holding United Parcel Service (UPS), after the company’s growth prospects became hampered by the fund’s largest holding, Amazon.
“We’re not necessarily very negative about UPS’s growth prospects from a competitive advantage perspective, but we had become concerned that the growth opportunities might be less than in the past,” he said.
Mr Robinson said UPS had benefited from the growth in e-commerce with Amazon.
The team maintains a strong positive view on the online retailing giant, which accounts for almost 10 per cent of the fund.
“It has become increasingly apparent that in order to improve on customer service and shorten delivery times, Amazon is willing to make [logistics] investments itself,” the manager said.
“The business is getting to a scale now where it can justify this, and that’s a problem for UPS as it removes a key growth driver.”
By the end of February, the fund added in four new holdings: Netflix, Interactive Brokers, and pharmaceutical firms Alnylam and Juno Therapeutics. The stocks now account for roughly 5 per cent of the fund.
The 40 stocks have been included in the fund based on nine questions around four criteria. These cover culture, competitive advantage, growth and upside potential.
On Interactive Brokers, the fund used the “indiscriminate market sell-off” in January to initiate a holding.
The firm had done well on the first three criteria when first analysed in September 2015, but the Baillie Gifford team struggled to see an upside of at least 2.5 times share price return in five years.
However, between September and the purchase, the shares plunged by more than 30 per cent.
“At that level the stock met the upside threshold and we decided to take a holding,” Mr Robinson said.
Positions in “internet-enabled” firms dominate the fund’s top 10, with Amazon, Alphabet (Google), Facebook and TripAdvisor all making an appearance.
But Mr Robinson said that despite holding significant proportions in popular stocks, and demanding a 2.5 times return, valuations did not concern him.
He said the team was comfortable with companies willing to invest for long-term gains.
“A large number of firms that behave in this way are run by ambitious and visionary founders who are not interested in trying to satisfy Wall Street’s short-term demands,” he said.
“Amazon with Jeff Bezos is a good example of that. When you back the ambitious visionary then the assessment of the market opportunity can change over time. They can unlock new opportunities that were not apparent at the time of the initial investment.
“Many will look at short-term measures of valuation and that isn’t helpful. Looking at Amazon on a price-to-earnings basis; yes, it looks expensive. But it is investing a lot and the best opportunities are still ahead.”
The Baillie Gifford American fund delivered 14 per cent over one year and 46 per cent across three years, compared with the IA North America sector’s average return of 5 and 40 per cent respectively.
