Fund Review: Baillie Gifford European fund

The Baillie Gifford European fund, with £75.14m in assets under management, may be small when compared with others within its peer group. However, it has considerable bite – outperforming both the MSCI Europe ex UK index and the IMA Europe ex UK sector average in one, three and five-year time periods.

This performance has helped the fund enter the Investment Adviser 100 Club for the first time this year, and manager, Tom Coutts, attributes much of this to the ‘multi-sleeve’ approach to building the portfolio.

Mr Coutts, head of the European equity team at Baillie Gifford and who manages the fund alongside Paul Faulkner and Stephen Paice, points out the aim of the fund is to “make money for our clients”, through investing in companies in Continental Europe including the Republic of Ireland.

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He adds: “We seek to do this through fundamental business analysis in order to identify high quality, growing enterprises run by trustworthy people – the sort of company that you would like to own, and manage, yourself.

“We believe that such businesses should grow in value over time, and simply hold a portfolio of them. We don’t care about the benchmark, don’t trade very often, and spend most of our time reading and thinking, not answering the phone or checking share prices.”

Mr Coutts, who is the longest serving of the three managers on the fund, notes the team’s philosophy is broadly consistent across Baillie Gifford, adding the ownership structure of Baillie Gifford allows the managers to focus on investment, “and to stick to an approach that we believe works, regardless of the market environment”.

The approach of the team behind the European fund is a multi-sleeve approach that Mr Coutts explains: “[This] is a simple mechanism that allows our clients to have the benefits of team-based decision making while avoiding some of the risks of groupthink.

“In practical terms, each of the three managers is responsible for a portion of the portfolio over which he has complete discretion, with all the benefits of accountability and motivation that responsibility brings.”

He adds that because all three managers share the same investment philosophy and work to a common research agenda, there is a considerable degree of overlap between the three ‘sleeves’.

“This allows us to get the weight of clients’ money invested in our best ideas – if we all hold a stock it’s weighting in the portfolio will, all else being equal, be greater than if just one manager likes it – while also permitting managers to back their individual enthusiasms,” points out Mr Coutts.

For example the manager notes that at the end of June 2013 there were 33 holdings in the fund owned by one of the three managers, which accounted for approximately 32 per cent of the portfolio. This is compared with eight holdings owned by all three sleeves, which accounted for roughly 28 per cent of the portfolio.

Mr Coutts adds: “This shows that we are managing both to concentrate clients’ money in holdings that we all like, while also having a number of smaller holdings where, precisely because of their non-consensual nature, the potential upside may be greater.”