Baillie Gifford Positive Change: November 2021 fund update

• This fund is managed by a well-resourced team
• They invest in companies with the potential to grow significantly and have a positive impact on society or the environment
• Performance since launch has been impressive, which we put down to the managers’ 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

The Baillie Gifford Positive Change fund aims to deliver long-term growth by investing in companies capable of disrupting entire industries, where sustainability gives them an advantage over competitors. Every investment should have a positive impact on the environment or society, so the fund could work well as part of a broader responsible investment portfolio. Its focus on companies with the potential to grow significantly over the coming years means it could also work well alongside a fund investing in unloved companies with recovery potential.

The management team’s delivered excellent results since the fund launched in 2017 and we think it has the potential to do well over the long term although there’s no guarantees. Their track record is currently too short for us to consider the fund for the Wealth Shortlist.

Manager

This fund is managed by a team of four. Kate Fox and Lee Qian joined Baillie Gifford in 2002 and 2012 respectively. They’ve spent their entire careers at the firm and gained experience across a range of investment teams.

Michelle O’Keeffe joined the firm in 2015. She previously worked as a technical director of reporting at the Carbon Disclosure Project and a research associate at University College London’s Institute for Sustainable Resources, so she has a wealth of experience assessing and understanding environmental risks and opportunities.

Edward Whitten joined Baillie Gifford in 2018. He previously spent three years at a consultancy firm advising investors, insurers and companies on risk management and social impact in emerging and frontier markets.

The team also has the input of three analysts who are dedicated to the Positive Change strategy, and four portfolio advisers who each specialise in different areas and bring a range of expertise to the fund. Overall, we think the fund is well-resourced.

Process

The fund invests in companies that help to solve social or environmental problems and have the potential to disrupt their entire industry. In the first stage of their analysis, the managers consider whether the company’s product or service is sufficiently different to, and better than, the status quo. They also think about the quality of the management team, how the company treats its stakeholders, and if it has barriers to entry from competitors. Then they consider the company’s valuation – each investment should have the potential to double over five years.

The second stage of their analysis focuses on impact potential. The managers think about the company’s intent, including how committed it is to driving the positive outcome, the impact its products and services have on the environment and society and the way it conducts its business.

Each investment in the fund sits within one of four impact themes:

Social inclusion and education

Income inequality is rising across the globe. This section of the fund invests in companies helping to build a more inclusive society, or those improving education quality and accessibility. Eight of the fund’s investments currently sit within this theme, including online education platform Coursera. The team’s followed the company’s progress for some time, and recently bought shares when they listed on the stock market for the first time (through an Initial Public Offering, or IPO). The business works with companies, universities and governments to design online courses that allow people to learn new skills and boost their career prospects.

Environment and resource needs

There are around 8 billion people on the planet, and that’s expected to increase to almost 10 billion by 2050. Not only are there more of us, but the intensity of our impact on the environment is increasing. The fund currently invests in nine companies helping to improve resource efficiency and reduce the environmental impact of human activity. Agricultural machinery maker Deere & Co is an example. The firm is pioneering ‘see and spray’ technology, which uses cameras and machine learning to differentiate crops and weeds. The sprayer then only applies pesticide to weeds, and fertiliser to crops, significantly reducing waste.

Healthcare and quality of life

This part of the fund currently invests in 14 companies that are helping to improve our understanding of diseases, and the way we treat and prevent them, or boost the efficiency of the healthcare system. Current investments include Dexcom, a company that helps diabetics monitor their glucose levels from their smartphone.

Base of the pyramid

The number of people living in extreme poverty has declined substantially over the last 200 years, but it’s estimated that around four billion people across the globe still live on incomes of less than $3,000 per year in local purchasing power. This section of the fund currently invests in two companies that aim to help address the needs of the world’s poorest. Safaricom is a Kenya-based telecoms operator which provides a money service that can be accessed with a mobile phone. The firm has given millions of people access to money transfer facilities in a country where only a small portion of the population has access to traditional financial services.

The managers tend to invest in relatively few companies. This means each one has the potential to make a big difference to the performance of the portfolio, either positive or negative. The fund’s concentration adds risk, as does its exposure to emerging markets.

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. Co-manager Kate Fox is a partner at Baillie Gifford.

We think the firm’s partnership structure 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 of over twenty people, which is responsible for producing ESG research which challenges and contributes to the investment decision-making process. They also monitor companies' progress on an ongoing basis and engage with them on ESG matters where appropriate.

Cost

The fund has an ongoing annual charge of 0.53%. The HL platform fee of up to 0.45% per year also applies.

Performance

The fund’s performed well since launch in January 2017. Over this period, it’s risen 306.70%*, compared with 72.82% for the IA Global sector average. Our analysis puts this down to the managers’ ability to select outstanding companies, regardless of their size or what sector or country they’re in. Performance was also boosted by the managers’ focus on companies with plenty of growth potential, an investment style that’s largely been in favour throughout the period. However, there will be times when this style isn’t in favour and the fund’s performance could be weaker. As always, past performance is not a guide to the future.

While the managers’ track record is impressive so far, it’s still relatively short. This means there is less data to analyse to help us understand how the fund might perform over the longer term and in different stock market environments.

The fund’s also done well over the past year, outperforming its peers in the IA Global sector by 9.53%. Top performers included healthcare company Moderna, which developed a Covid-19 vaccine that has played a central role in helping global economies recover from the virus. The managers invested in the company during its initial public offering at the end of 2018 after recognising the potential applications for its mRNA technology. Electric car maker Tesla was another strong performer.

It wasn’t all plain sailing though. Weaker performers included plant-based meat maker Beyond Meat. The company recently reported a mixed set of results, with growth in international restaurant revenue and a drop in US retail sales, partly due to earlier customer stockpiling. The managers remain positive though. The company is in the process of expanding overseas, with new factories being built in the Netherlands and China. They think this will help lower costs for international markets and drive plant-based meat adoption.

Investors should note that the fund’s focus on companies making a positive difference means it's a more specialist fund than many others in the IA Global sector. There are large areas of the market that the fund won’t invest in, so there will be times when the fund’s performance differs significantly from its peers and the broader global stock market. We think an investment in this fund should only form a small part of a well-diversified portfolio.

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

** Data covering this period is unavailable. Fund launched in January 2017.

Read more about Baillie Gifford Positive Change, including charges

Baillie Gifford Positive Change Key Investor Informationn