Baillie Gifford American: November 2021 fund update

• This fund is a great way to invest in disruptive businesses with strong growth prospects in the world’s largest stock market
• The managers benefit from the research carried out by a large bank of analysts
• The managers have delivered strong returns to investors over the last five years in part due to their growth-focused investment 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 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 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.

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 provided research for investors, including Baillie Gifford. As a result 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 but remains in close and regular contact with Slater, Robinson and Gibson, who are based in Edinburgh. We think the managers are well resourced to focus on the job in hand and they also have access to a wider team of almost 40 analysts who spend time researching US companies.

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 kinds 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 developing trends across the economy, preferring to think of their investments in themes rather than sectors. They’ve grouped them into nine distinct themes, the largest of which include: the future of commerce (30.7%), innovative healthcare (21.0%) and new enterprise (17.7%). 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 September). 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 e-commerce platforms Shopify and Wayfair.

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 companies. This means each one can contribute significantly to returns, although this approach increases risk. The find also has a small amount in smaller companies, which are higher-risk.

The managers believe that the impact of 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 and the gamification of learning. The managers invested in learning platform Duolingo which has been a beneficiary of these trends. The business has played a role in broadening access to education and providing personalised content for users. On the other hand, in recent months the managers decided to sell their investment in personal styling business Stitch Fix because of leadership changes.

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. Three of the fund’s co-managers, Tom Slater, Dave Bujnowski 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 who are 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 ongoing charge for this fund is 0.51%, but HL clients benefit from a saving of 0.20%, resulting in a net ongoing charge of 0.31%. This saving is provided through a 'loyalty bonus', which is tax-free in an ISA or SIPP. However, they may be subject to tax in a Fund and Share Account. The HL platform fee of up to 0.45% per annum 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 performed strongly, delivering a return of 335.30%*, compared with a return of 115.13% and 99.75% for the FTSE USA index and the IA North America peer group respectively. 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 returns and performance will be volatile at times. We also don’t expect the fund to hold up as well as the index in a falling market. Like all investments, the fund can fall in value so investors could make a loss.

Our analysis suggests the fund’s investments in the consumer discretionary sector have been a key driver of this performance. As well as stock selection, 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.

Over the last year the fund hasn’t performed as well as the FTSE USA index or the IA North America peer group average. Although some investments like electric car maker Tesla and cloud services provider Cloudflare have performed impressively, not all companies held have performed the same. Some of the fund’s investments in companies that did very well as a result of the pandemic have been more of a drag on performance in the last 12 months. The biggest detractors over this period have been Zoom Video Communications and e-commerce platform Wayfair.

You should consider annual performance in the context of a longer time horizon and not in isolation. Past performance isn’t a guide to the future. 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 they have further growth potential.

Past performance isn't a guide to the future. Source: *Lipper IM 31/10/2021.

Find out more about Baillie Gifford American including charges

Baillie Gifford American Key Investor Information