Baillie Gifford Managed: February 2022 fund update

• The managers have almost four decades of combined experience in the industry and are supported by the vast resource and expertise of Baillie Gifford
• We like their long-term, disciplined investment process, which has helped the managers deliver excellent long-term performance
• We think this is a good option for diversified exposure to stock and bond markets across the globe
• This fund is on our Wealth Shortlist of funds chosen by our experts for their long-term performance potential

How it fits in a portfolio

Baillie Gifford Managed invests across six major investment areas: shares in the UK, the US, Europe, Asia, the emerging markets, and bonds. It provides investors a huge amount of diversification in one fund, but the investments in emerging markets adds risk.

Shares tend to make up more of the fund than others in the same sector, so we consider it a more adventurous option than many of its peers. It could boost the growth of a more defensive investment portfolio with a focus on bonds or add a little stability to a portfolio focused on shares.

Manager

Iain McCombie and Steven Hay have been the fund's lead managers since November 2012. McCombie specialises in UK equities and joined Baillie Gifford in 1994. Hay joined in 2004 and is a fixed income specialist.

McCombie and Hay have the support of six other experienced investors who are all experts in their fields. They are representatives of the fixed income, US, Europe, emerging markets and developed Asia equity teams. The managers can also draw upon the vast resources at Baillie Gifford to help with additional research, challenge and analysis.

Process

The managers like to keep things simple. They tend to invest around 75% of the fund in shares because they think shares will be the main driver of returns over the long run. The rest is invested in bonds and cash with the aim to dampen volatility and add diversification.

The managers tend to invest more in shares than many other funds in the IA Mixed Investment 40-85% Shares sector, which we think makes it a more adventurous option than many of its peers. This means the fund could perform differently to other funds in the same sector. The ratio of shares to bonds can change over time though, depending on the team's economic outlook. The amount invested in each geographical location also changes, depending on where the team feel the best opportunities are available.

The shares section of the portfolio is managed in line with Baillie Gifford's growth-focused investment philosophy. The managers look for high-quality companies with clear and sustainable advantages over the competition. They consider a variety of factors, such as how fast the industry is growing, how the company's pricing structure works, how easily their products or services could be copied and how loyal customers tend to be. They also consider the firm’s financial stability, the quality of the management team, and whether senior managers' interests are aligned with long-term shareholders.

The fund currently invests around 77% in shares, 17% in bonds and 6% in cash. The managers tend to invest in companies for longer term, which means changes aren’t made too often. That said, the managers will make changes depending on the opportunities available.

A recent addition to the fund is Exscientia, a company that uses AI software to help drug companies use their research and development budgets more efficiently. Allegro, a Polish e-commerce company, was also added. Demand for both companies’ services increased and the managers feel they hold long-term growth potential. On the other hand, the team sold the digital real estate company Zillow, due to loss of conviction and concerns around its primary property valuation tool.

The bond section of the fund invests in government bonds and investment grade and higher-risk, high-yield corporate bonds. The managers have found fewer opportunities in bond markets in recent years as yields have fallen. Interest rates and yields have risen more recently, so the team has added to some high yield and developed market bonds, as well as emerging markets, like Peru and South Africa, where yields tend to be higher to compensate for the added risk. The managers can invest in derivatives, which increases risk as well.

Around 5%-10% of the fund is typically held in cash. This acts as a cushion when other assets decline in value and can also provide a source of funding for the managers when buying opportunities arise.

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.

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

Cost

This fund has an ongoing annual charge of 0.43%, but we've secured HL clients an ongoing saving of 0.18%. This means you pay a net ongoing charge of 0.25%. We think this is an attractive price to access a team we hold in high regard.

The fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. The HL platform fee of up to 0.45% per year also applies.

Performance

The fund has performed better than the average fund in the same sector over the long term. The managers' ability to select outstanding companies has added value, but our analysis suggests that investing in the right areas has been the dominant driver of returns over the long term.

Since McCombie and Hay took over in 2012, the fund has returned 154.63%* versus the IA Mixed Investment 40-85% Shares return of 89.79%. Though past performance is not a guide to the future.

The managers tend to invest more in shares than many other mixed-asset funds, so we expect the fund to perform well compared to peers when stock markets rise, but lag behind when markets fall. And we’ve seen evidence of the latter more recently.

The fund’s growth style of investing has been out of favour over the last 12 months, partly due to sharp increases in inflation and rising interest rates. This has held back the fund’s performance over this period.

Some of the more ‘growth’ focused North American companies, including e-commerce company Wayfair and Roku, a digital media platform, have been weaker. Some investments in Chinese stocks also hurt performance. Alibaba and Tencent were hit hard following a technology crackdown from the Chinese government.

Elsewhere, Ashtead, an industrial equipment rental company, and chemical distributor IMCD were some of the fund’s strongest performers last year. Ashtead saw an uptick in demand for its services as the construction industry bounced back following easing lockdown restrictions. IMCD released a strong set of results, boosting demand, and agreed to acquire chemical supplier POLYchem.

The fund may continue to underperform peers while growth investing remains out of favour. However, the reverse is also true, and we like the fact the managers continue to stick to their long-term investment process though.

This fund has a holding in Hargreaves Lansdown PLC.

Past performance is not a guide to the future. Source: *Lipper IM to 31/01/2022.

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