Baillie Gifford American – fund performance review

As part of our research and analysis, we analyse fund manager performance after charges, to find managers who are truly adding value for investors. We monitor performance on an ongoing basis and how it compares with our expectations. This includes analysis of a manager’s ability to add value through stock selection and their style of investing. We like those who consistently apply their investment process through different market conditions. As part of this analysis, we’ve conducted a review of the Baillie Gifford American fund following a period of underperformance.

What we expect from the fund

The Baillie Gifford American fund 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. They think there aren’t many of these businesses around though, so prefer to run a relatively concentrated portfolio where each company can make a real difference to the fund’s performance, which increases risk. This means we expect the fund to have a high active share and to perform differently to the S&P500 index and we don’t expect the fund to hold up as well as the index in a typical falling market. 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.

Performance analysis

The fund had a very strong 2020 and delivered a return of 120.03%* to investors. Many of the fund’s holdings benefitted from the onset of coronavirus which accelerated many existing trends across the economy. As well as strong stock selection, part of the fund’s exceptional performance over this period can be attributed to the tailwind provided by its growth style of investing being in favour. Investors should note that we don’t expect to see further periods of such strong performance.

The positive news about the effectiveness of vaccines against coronavirus in November 2020 signalled a turning point for markets. Sectors of the market that had suffered in 2020 started to perform better, benefitting value focused funds and posing a headwind to growth focused funds.

Since the turn of the year into 2021, high growth stocks, often those with cashflows furthest in the future have suffered some of the largest share price falls. Worries about rising inflation and interest rates going up have seen investors be less willing to pay up for companies with high growth potential. 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 this period. This period of painful performance has led us to carry out further analysis on the fund.

Our view

As part of our review of the fund, HL’s research and investment risk teams have met with the fund managers and investment risk team at Baillie Gifford. Fund managers at Baillie Gifford are afforded significant autonomy over how they invest, but equally it’s important to ensure that there’s an appropriate level of risk oversight and challenge to decision making.

It’s been a difficult period of performance for the fund and in periods where their style is out of favour, we like managers to stick to their investment process and focus on the longer term. Considering our analysis and engagements with Baillie Gifford, we are comfortable the fund’s four co-managers are continuing to follow their investment process. We are confident that the managers are well supported with resources and by colleagues to focus on the job in hand.

The fund aims to outperform the S&P 500 index by 1.5% per year after costs over any five-year period but its style of investing means performance can look quite different over shorter periods. Over the last five years the fund has delivered a return of 175.48%, compared with the IA North America peer group average return of 84.32%. We think investors should always invest with a long-term focus and an appropriate time horizon in mind. The value of investments can go up and down, particularly over short time periods, so you could get back less than invested.

Past performance is not a guide to the future. Source: *Lipper IM to 31/03/2022.

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