Baillie Gifford: 'We have done a lot of soul searching'

The asset manager, known for its growth-style investing, has ridden a rollercoaster in recent years, enjoying a boom in the performance of its trusts and funds in 2020 and 2021 as central banks rushed to stimulate economies amid lockdowns.

At one point, in mid-November 2021, the share price of the company’s flagship trust, Scottish Mortgage, was sitting 155 per cent higher than in January the year before.

We believe that the vast majority of companies Baillie Gifford holds are in good shapeJames Budden, Baillie Gifford

However, as inflation began to creep up and central banks started raising interest rates, markets cycled away from growth companies.

As a result, Scottish Mortgage’s share price crashed 37 per cent since the start of the year.

“We’ve seen the most extraordinary volatility over the last three years, first in a positive direction and then in a negative direction,” the company’s director of marketing and distribution, James Budden told FTAdviser.

The firm has done a lot of soul searching over the past year, he said.

“We have been looking at [our] portfolios, trying to understand whether they are resilient within an inflationary environment.

“What’s the balance sheet like, can they increase their margins, do they have a proposition which is going to cut through?”

All the company can try and do, Budden said, is to find great growth companies, invest in them and hold onto them for five to 10 years

“And genuinely we believe that the vast majority of companies [Baillie Gifford holds] are in good shape.”

Growth falters

Reflecting on the last 12 months, Budden said that markets had thrown the growth companies out “with the bathwater”, and although the firm thinks it has some very good investments which are doing well, their share prices currently do not reflect that.

“Because of this inflationary environment there is this idea that future earnings are discounted,” he said, adding that the company’s fund managers have no idea when this will change.

Some people had invested in our funds on the basis of performance during an abnormal performance periodJames Budden, Baillie Gifford

Posing a question that has previously given rise to the phrase ‘Tina’ (there is no alternative), he asked what else there is for investors currently.

“The idea that somehow you are either invested in growth or you’re invested in value is pretty bogus - there was a slight rally around so-called value stocks in the beginning of the year,” he said.

“[Some of] those companies benefitted from coming out of Covid and there was a short period where they did really well, but they’ve been dumped like everything else since.”

“So it’s difficult to see where you would rather be…[ we think] you would rather be involved in a company that has some pretty extraordinary long-term growth prospects.”

One result of the extraordinary fluctuations in the performance of Baillie Gifford funds has been that a number of people have been investing in them for the first time, without understanding the company’s USP.

“We found [that] some people had invested in our funds on the basis of performance [during] an abnormal performance period, and did not really understand fundamentally what we are trying to do,” Budden said. 

“We had some strange questions like, why did you not you sell at the top and then reinvest the money in BP and Shell..it is not what we do.”

China

One part of Baillie Gifford’s investment style that has been questioned is its stance on China.

Scottish Mortgage was an early investor in Alibaba, the Chinese tech firm, and also has holdings in Meituan and Tencent.

It has been somewhat of an outlier in the investment management community for its continued favouring of the state, which spooked investors with a regulatory crackdown. 

I think a lot of this crisis is seen very much through a western prismJames Budden, Baillie Gifford

A number of government interventions in Chinese companies last summer led to a significant fall in the value of emerging markets' economies and the country’s markets were further punished by its “no Covid” policies which have led to rolling lockdowns, though it remains to be seen what will happen as the country scrapped the zero covid rules. 

Scottish Mortgage’s previous manager, James Anderson, said in April this year before he retired that investment managers can learn more from Marxism than the media or US hedge funds.

Then, in November, Scottish Mortgage’s investment managers, Tom Slater and his deputy Lawrence Burns performed an about-turn, cutting the trust’s exposure to a number of Chinese companies, including Alibaba.

At the time, the pair said the regulatory environment in China remains challenging, and they were concerned that ongoing uncertainty will harm the risk-tolerant culture that has driven the long-term success of China's private sector.

The last 10 to 15 years have been dominated by big platforms in China, Budden said.

“I think this is where the government, the party, and Xi Jinping have shown a change in attitude.”

Budden references the disappearance of Jack Ma in 2020, linked to a speech he made about regulators, followed by another regulatory crackdown.

“This environment is likely to persist…these are very big companies, can they get much bigger within this environment,” he asked.

“The answer is probably, ‘unlikely’, so there are better options elsewhere.”

Furthermore, the “innate prejudice” against a party state as opposed to a democracy creates a lot of “philisophical headwinds” for western investors.

These questions are not easily answered, he said.

Asia has been getting richer for the last 10 to 15 yearsJames Budden, Baillie Gifford

Moving to investing in Asia, Budden highlighted the difference in financial situations between the continent and other, more develop nations.

“I think a lot of this crisis is seen very much through a western prism.

“One of the notable differences is the dollar has been very strong, and that normally creates all sorts of havoc in Asian markets, because a lot of their debt is dollar-denominated,” he said.

But that’s not the case any more, and these economies are not as reliant on the dollar.

“Asian economies are much more inward than outward looking,” he said, with a lot of good consumed domestically rather than exported.

“Asia has been getting richer for the last 10 to 15 years.”

sally.hickey@ft.com