Over the last several years, one investment management firm has been topping the performance charts in most sectors.
On a five-year view, Baillie Gifford-run funds are the top performers in the IA North America, IA Europe excluding UK, and IA Global Emerging Markets sectors. Funds of theirs also rank second in IA China, third in IA Global, fourth in IA Asia Pacific ex Japan, and ninth in IA UK All Companies and IA Japan.
While their performance hasn’t carried over to their bond, multi-asset and absolute return funds, their stockpicking ability has seemingly enabled them to dominate most equity sectors.
“The Baillie Gifford funds have a very strong growth style, which doesn’t just look at the fundamentals of a business but the opportunities they can see within those companies,” explained Adrian Lowcock, head of personal investing at investment platform Willis Owen.
“This has resulted is in some very high conviction investments and indeed some extremely large positions in their favoured stocks.”
He added: “Most of the Baillie Gifford funds are not an outright technology funds but the team has identified companies which have utilised technology to disrupt and challenge established businesses.
“It is this disruption theme which has helped drive those company share prices and Baillie Gifford funds.”
This is especially the case when you look at the popular Baillie Gifford-run £1.2bn Scottish Mortgage Investment Trust, which is the top ranked in the IT Global sector.
Just five successful stock picks account for more than 30 per cent of its performance for the last five years.
The biggest contributors were three US companies, Amazon (10.5 per cent), Tesla (6.6 per cent) and Facebook (3.1 per cent), the other two were China’s Tencent and Alibaba, whose performance accounted for 6.6 per cent and 6.2 per cent respectively.
Performance of trust versus sector over 5yrs
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Source: FE Analytics
Investing in these companies has enabled Scottish Mortgage to capture their growth, but these stocks are also staple holdings for many other funds – particularly those with a growth focus.
Looking across the Investment Association universe, Amazon is held by 171 funds, Alibaba is held by 158 funds, Facebook is held by 128 funds, and Tencent is held by 82 funds, according to data from FE Analytics.
It comes as no surprise that Amazon and Facebook are top holdings in Baillie Gifford’s North American funds, Alibaba and Tencent are top holdings in their China and Asia Pacific funds, and that all four companies are present in most of their global funds.
So what makes Scottish Mortgage and other Baillie Gifford funds slightly different to others at the top? The holding that stands out compared to other funds especially within the IA Global and IA North America sectors, has also been one of the biggest contributors to performance: Tesla.
Only eight funds in the IA Global and IA North American sectors hold positions in the electric car manufacturer, and six of them are Baillie Gifford-managed funds. Indeed, Baillie Gifford is one of the biggest shareholders in Tesla after chief executive Elon Musk.
Stewart Heggie, investment specialist at Scottish Mortgage Investment Trust, said that while Tesla has clearly made a significant contribution particularly over the last 12 months, this ‘overnight’ success has in fact been “years in the making”.
“While the shares have performed very well, the scale of the opportunity has simultaneously increased, and the progress that Tesla has made both operationally and financially over the last 18 months has been particularly impressive,” he explained.
So how were managers at Baillie Gifford able to identify a company like Tesla and invest with conviction early on which allowed them to cruise to the top of the performance charts? Perhaps it boils down to their “actual investing” mantra, in which they place great emphasis on.
Baillie Gifford’s role in private markets, funding and identifying companies before they go public, could be spilling over into their ability to identify public companies early on in their growth.
In fact, the Scottish Mortgage Investment trust has a mandate that allows it to invest into unlisted or unquoted companies, which account for 17.1 per cent of its assets as of the end of last month.
Looking forward, Heggie said that while the likes of Amazon, Facebook and Alibaba have been strong contributors in the past, he is excited to see a new wave of companies emerging such as Zalando, Shopify and Stripe “who by focusing on the merchants rather than the end users, are providing them with the tools to grow their businesses”.
The growth of digital platform businesses like Amazon, Alibaba and Tencent “have remained adaptable, moving rapidly into new areas and driving an increasing amount of economic activity online,” Heggie said. “As these companies have expanded, they have enjoyed significant returns to scale.”
While he believes these three companies still have a vast runway ahead of them, he said: “We are now entering a period where some of the large platforms are grappling with the consequences of success and influence.”
Indeed, two of these platforms, Facebook and Amazon, are amongst the four US tech giants who are testifying to congress against concerns that their businesses may be harming competition.
Baillie Gifford’s US equity strategy specialist Ben James said that Baillie Gifford’s approach has boiled down to finding just a few “exceptional growth” companies that can become multiples of their size, holding them in scale, and patiently riding out any volatility over five-to-10 years.
He explained: “We invest in this way because we know that the returns of the stock market over the long term are dominated by a tiny fraction of companies.
“If we can identify at least some of these outliers early on, and capture their asymmetric long-term returns, we can more than offset any mistakes we make along the way.”
He added: “It takes more patience than most in our industry exhibit to invest in this way.”
James believes this approach is also reflected in the largest contributors of performance of the £4.5bn Baillie Gifford American fund, the top-ranked fund in the sector over five years.
Performance of fund vs sector over 5yrs
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Source: FE Analytics
Their largest contributors have been Shopify (12.2 per cent), Tesla (9.4 per cent), Amazon (9.1 per cent), MarketAxess (6.3 per cent) and Wayfair (4.8 per cent).
“We’ve made mistakes, of course, with Tripadvisor, Chipotle Mexican Grill and Lending Club all detracting from performance,” he admitted. “However, you can see the power of asymmetry in the numbers.”
TripAdvisor had detracted 3.2 per cent from performance, and Chipotle and Lending Club detracted 1.9 and 1.5 per cent respectively.
“Given that we need to see the potential for every holding to return at least 2.5x from its current price over the next five years, we tend to let our winners run if we can still see significant upside from here,” he said.
“What’s really exciting for us is that we believe we are in a period of significant disruption, which is generating wonderful opportunities for growth.
“So much so that even for these top performing companies from the last five years, each is still in the early stages of addressing the vast opportunities ahead of them.
“They remain among our highest conviction ideas in the fund,” he finished.