Baillie Gifford Global Discovery: September 2021 Update

• Douglas Brodie is a seasoned smaller companies investor
• Together with his team, they hunt globally for the big companies of tomorrow
• Long-term performance has been impressive, which we put down to the manager’s stock picking ability
• The fund does not currently feature on the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

Baillie Gifford Global Discovery aims to grow capital over the long term by investing in companies across the globe. These tend to be smaller, higher-risk companies with the potential to innovate and disrupt the status quo. The fund’s focus on smaller companies means it could form part of an adventurous portfolio and work well alongside funds investing in more established larger companies. The fund’s growth style could also complement other investments focused on unloved ‘value' companies with recovery potential.

We believe this fund is a good option for investing in global smaller companies, but the manager is happy with the fund at its current size and doesn’t want to attract lots of new investment. Unless that changes, we won’t be considering it for the Wealth Shortlist.

Manager

Douglas Brodie has been lead manager of the fund since launch in May 2011. He’s spent his entire investment career at Baillie Gifford, after joining in 2001, and became a partner of the firm in 2015. During this time, he’s been primarily focused on smaller companies, managing the Baillie Gifford British Smaller Companies fund for several years.

Brodie also manages Edinburgh Worldwide Investment Trust which adopts a near identical strategy but has the added flexibility to invest in unquoted companies and borrow to invest, known as ‘gearing’. Given the crossover between the two portfolios we think Brodie is comfortably able to manage both.

He’s supported by two deputy managers, Svetlana Viteva and Luke Ward, who both joined Baillie Gifford in 2012. After working in several different teams across the business, the pair joined Brodie on this fund in January 2018. The trio are part of the 8-person strong Global Discovery team.

Baillie Gifford is home to a diverse range of investors from an eclectic mix of academic backgrounds. With access to over 100 dedicated investment professionals, the team has eyes in all corners of the market, each viewing the world through a slightly different lens.

Process

The Global Discovery Team look for the world’s most innovative businesses with plenty of growth potential ahead of them. These companies must have the potential to solve big problems or disrupt the status quo. They must also show signs of an emerging competitive advantage, which could strengthen over time, and have the ability to thrive as they get bigger.

Meeting company management is key to their process. Many of the companies in the fund are still managed by their founders, which the team believe can be invaluable. Business founders often have the vision needed to continue to grow the company in future, and their incentives should be aligned with those of long-term investors.

Their process whittles down a universe of around 30,000 companies to a portfolio of between 80 and 125. Currently the portfolio invests in around 110 companies.

The team tends to find plenty of opportunities in the healthcare and information technology sectors, and over 60% of the fund currently invests in these areas. Geographically, the team is free to invest in any region, including higher-risk emerging markets, but the fund’s currently focused on the US, with around 70% currently invested there.

Recent investments include Chinese dental care firm Angelalign Technology. The managers believe the Chinese market for orthodontic products is growing rapidly, underpinned by greater awareness of dental care and growing disposable incomes. The team also invested in UK energy company ITM Power. The company specialises in hydrogen power, an area the managers see lots of growth potential over the coming years.

Sales included Dexcom, a US-based firm that develops real-time glucose monitoring systems for diabetes patients. It’s performed extremely well since the team’s initial investment, and they took the opportunity to sell their investment and use the profits to reinvest elsewhere. They also reduced their investment in electric vehicle maker Tesla following strong share price growth, although it remains one of the fund’s largest investments.

Culture

Baillie Gifford is an independent private partnership founded in 1908. It's owned by its partners, including Douglas Brodie, who work full time at the firm. This ownership structure means senior managers have a vested interest in the company, and its funds and investment trusts, performing well. 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.

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, which is responsible for producing ESG research that challenges and contributes to the investment decision-making process. They also monitor companies' progress, engaging with them on ESG matters where appropriate.

Cost

The fund has an annual ongoing charge of 0.77%. This is lower than the average charge for funds in the global sector. The HL platform fee of up to 0.45% per year also applies.

Performance

The fund’s performance has been strong since launch in May 2011. Over this period, it’s outperformed peers by quite some way, returning 505.4%* vs 187.4% for the IA Global sector average. Our analysis suggests the fund’s outperformance is mostly down to Brodie’s stock picking ability. His stock picking was particularly strong in the healthcare, financials and consumer discretionary sectors.

Last year was an exceptional one for the fund with many investments benefiting from life in lockdown. This led to the fund outperforming the IA sector by 61.7% in 2020. However, since the start of 2021, performance has been weaker, with the fund returning -4.0% compared with 15.1% for the sector.

A focus on high-quality companies helped the fund hold up relatively well in the early months of 2020 amid the coronavirus panic. However, we don't usually expect performance to be quite so strong in falling markets.

As investors turn their attention away from lockdown winners to companies positioned to benefit from economic re-opening, several of the fund’s investments have seen their share price slide. This includes food delivery company Ocado, US real estate online platform Zillow and virtual healthcare provider Teladoc. Despite these short-term headwinds, the companies continue to perform well operationally, and the managers remain confident in their long-term potential.

Over the long-term we expect Brodie and his team to do well but investors should be prepared for some volatility along the way and could get back less than they put in. Past performance isn’t a guide to the future.

Past performance is not a guide to the future. Source: *Lipper IM to 31/08/2021.

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Baillie Gifford Global Discovery Key Investor Information