Baillie Gifford Monthly Income: March 2025 fund update

• The focus of this fund is on providing a resilient level of income for today and into the future

• The fund’s name and one of the managers recently changed

• We think this is a good option for diversified exposure to stock and bond markets across the globe, with a focus on income provision

• The fund has recently been added to our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

Baillie Gifford Monthly Income invests across three broad investment areas: shares, real assets (such as property) and bonds. It aims to increase the income paid to investors by more than the increase in the consumer prices index (CPI - a measure of inflation) over the long term. The fund focuses on providing a resilient income over time, meaning that while the income provided may not be the highest available, it can be expected to be more consistent.

The fund invests evenly between the three areas noted above, but the real assets section is largely made up of companies listed on the stock market, meaning that usually more than half of the fund is invested in shares.

The income focus means that Baillie Gifford’s growth investment style is less pronounced than in some of their other multi-asset funds. We think this is more appropriate for a fund focused on income and should mean that this fund doesn’t exhibit the same swings in performance that other Baillie Gifford funds have seen in recent years. Although of course, there are no guarantees.

We think the fund could be used to provide diversification to an investment portfolio focused on growth or be a useful addition to a portfolio focused on providing an income.

Manager

Steven Hay, Nicoleta Dumitru, Lesley Dunn and Jon Stewart are the fund’s managers. They each have different areas of investment specialism and, with the exception of Jon Stewart, are managers of other funds at Baillie Gifford.

Hay is Head of Income Research and also manages the Baillie Gifford Managed fund, which also features on the Wealth Shortlist. He focuses on asset allocation decisions (how much is invested in different assets, like shares or bonds). Dunn is Head of the Credit Team and also manages the Baillie Gifford Strategic Bond fund. Dumitru is a multi-asset investment manager, specialising in real assets and specifically infrastructure investments. Stewart is a real estate specialist and joined Baillie Gifford specifically to work on this fund, selecting the property investments.

The managers all have significant and relevant experience within their areas of specialism. Of the four, Stewart joined Baillie Gifford most recently in 2020 and became a named manager of the fund at the end of January 2025.

Previously, James Dow, Head of Global Income and Growth, had been a named manager of the fund since it launched until the end of January 2025. He stepped down from his formal fund manager role due to an increase in other responsibilities within Baillie Gifford. He continues to manage the team that select the shares for the fund though, so his experience is not being lost.

Stewart had been working towards becoming a named manager of the fund for some time, and as Dow’s knowledge and experience remains within the business, we are comfortable with this change.

The managers also make use of the wider teams that they work with on other funds at Baillie Gifford to help with idea generation and wider economic views. This means that the fund has a wide range of views and inputs, reducing key person risk on any single manager.

Process

There are three broad categories of investments in the fund: shares, real assets and bonds. All of the managers look for investments that will contribute to the income paid by the fund, so that it’s not reliant on any one asset class to generate its income. This diversification helps the level of income to be more consistent over time. That said, it’s expected the bonds will be the largest contributor to the fund’s income over time.

The fund invests globally, and is diversified across 200-300 investments. While there’s debate and challenge across the team, the individual managers are given authority to select investments from their specialist areas for inclusion in the fund.

The shares portion of the fund is globally invested in large companies that the team expect to be able to pay and grow their dividend a long way into the future. This includes some companies in emerging markets, which are higher risk.

The bonds portion is currently largely made up of corporate bonds and will often include exposure to high yield and emerging market bonds. These bonds usually pay a higher income, however they’re higher risk.

The real assets section differentiates the fund from some of its peers and is focused on infrastructure and property. The team invests in both individual companies and investment trusts in each of these areas. These companies typically have revenues that are linked in some way to inflation, for example property rents that are increased in line with inflation each year. Because of the more consistent and predictable earnings that these companies achieve, their long-term performance is usually more consistent. That said, as company shares, they can be volatile at times too.

The amount invested in each asset changes over time. The team’s long and shorter-term views on the world influence where they invest. However, over the long term the fund will have roughly a third of its assets in each of the sections outlined above.

Over the last year there have been some small changes to the asset allocation, with the amount invested in shares being reduced and the amount in real assets increasing. At the end of February 2025, the fund had 32.1% of its assets in shares, 30.7% in real assets and 33.2% in bonds, with the remainder in cash.

Within the shares part of the fund, the managers recently invested in Paychex, a US listed HR solutions business. It has a long history of dividend growth and the managers invested after its share price fell. In the property portion of the fund, the managers invested in Grainger, a UK landlord. They think meaningful earnings growth could raise the share price over time.

The team sold their investment in Sonic Healthcare, following weak earnings growth that they expect to continue.

The fund applies a screening process to remove companies from their universe that are subject to UN Security Council sanctions or are non-compliant with the UN Global Compact initiative. They also don’t invest in companies that have revenues above particular thresholds coming from fossil fuel extraction and production, thermal coal distribution, tobacco production, controversial weapons and armaments.

As part of their company assessments, the managers also consider a number of different sustainability metrics and assign each company an overall score. This helps them to compare different companies’ sustainability credentials. Those that are considered leaders within their sector are preferred.

This sustainability analysis is considered alongside their wider due diligence, which means the managers don’t always have to invest in the highest scoring companies from a sustainability perspective. However, they won’t invest in the lowest scoring companies, regardless of how good they may be on other metrics.

The managers have the flexibility to use derivatives, which adds risk.

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.

Of the four managers for this fund, Dunn is a partner of the business.

ESG Integration

All of Baillie Gifford’s funds are run with a long-term view. The fund managers see themselves as long-term owners of a business, not short-term renters. So, assessing whether society will support, or at the very least, tolerate, the business model over the long term, and whether management will act as good stewards of shareholders’ capital, is an important part of the investment process.

Dedicated ESG analysts sit with and report into their respective investment teams, and the firm’s ESG efforts are supported by a dedicated Climate and Core teams. Individual investment teams are responsible for voting decisions and engagement for the companies they invest in. Investment in controversial weapons and cannabis is prohibited across the firm.

The firm reports all its voting decisions and provides rationale in situations where it votes against management or abstains, in a detailed quarterly voting report. There’s also a quarterly engagement report which details the companies engaged with, and the topic discussed, and further engagement case studies are available on the website. All this information is brought together in the firm’s annual Investment Stewardship Activities report.

Baillie Gifford courted controversy in 2024 when it left the Net Zero Asset Managers’ Initiative, a group of asset managers that have committed to achieving net zero carbon emissions by 2050. They also left the Climate Action 100+ collaborative engagement scheme. We view this as a disappointing backward step, but are encouraged that the group’s net zero and engagement related commitments remain unchanged.

The fund changed its name from Baillie Gifford Sustainable Income to Baillie Gifford Monthly Income on 31 January 2025. The previous name reflects the fact the managers look at every investment through a sustainable investing lens, including the screening process set out earlier in this update.

However, the fund’s name has changed as it hasn’t obtained a label under the Financial Conduct Authority’s (FCA) new Sustainability Disclosure Requirements. The process used to select investments hasn’t changed though and the key question, ‘is this investment compatible with a sustainable economy?’, remains central to the philosophy.

While it’s a shame the fund doesn’t have a label from the FCA, we’re pleased the way investments are selected remains unchanged.

The fund has a greater level of ESG integration than others at Baillie Gifford, but not compared with all peers. There are companies and industries that the fund invests in which some responsibly focused investors might consider to be sinners. An example could be electricity generation companies that are still using coal as part of their energy mix. They’re included in the fund because they have a plan to significantly reduce their use of coal in electricity generation. And to support the energy transition to greater use of electricity over fossil fuels (electric cars for example), these companies are important for future adoption of technologies that will reduce carbon output. From an investment perspective, this could boost long-term earnings.

Cost

This fund has an ongoing annual charge of 0.57%. We think this is a reasonable price compared to other funds in the sector. The HL account charge of up to 0.45% per year also applies, except in the HL Junior ISA, where no HL account charge applies.

Please note that charges are taken from capital. This can increase the income paid by the fund, but it might reduce the potential for capital growth.

Performance

The fund’s performed better than the average fund in the IA Mixed Investment 40-85% sector since launch in September 2018, having returned 37.58%* versus the sector average of 35.14%. Past performance is not a guide to the future.

Since launch, the fund has consistently not lost as much as its peers during market falls, but it hasn’t kept pace during market rises. This makes sense given the focus on generating income and our analysis suggests it’s reasonable to expect this type of performance over the long term.

The income paid by the fund has increased since launch, however it’s increased by less than CPI. Part of the reason for this is the impact of covid in 2020 when company dividends were significantly reduced. In some cases, the dividends were banned by governments if companies had received government support to help cover the costs of lockdowns. In that environment, it’s reasonable to expect the level of income paid by the fund to fall and this wasn’t the only fund impacted.

Inflation in 2022 and 2023 was also significantly higher than long-term expectations. The long-term aims of the fund are based on CPI being at or around the Bank of England’s target level of 2%. It’s therefore reasonable that the income paid by the fund didn’t increase in line with inflation when it was much higher.

We expect the fund to achieve its aim of increasing income in line with CPI inflation over the long term.

Over the 12 months to the end of February, the fund returned 6.05%, underperforming the sector average return of 9.81%. Some of the largest and fastest growing technology-based companies have boosted stock market performance. While this fund has investments in Microsoft and Apple, it doesn’t invest as much as the market, partly because some of these companies don’t pay dividends. Not Investing in these companies has detracted from performance compared to peers.

At a high level all areas that the fund invests in have provided positive returns over the last 12 months. But while returns have been positive, some areas have been weaker than others. Some emerging market bonds, property and infrastructure investments are the best examples of this. While the returns have been positive, compared to wider stock markets, these investments have been a headwind.

On the positive side, shares have added most value for the fund overall. As have the bond investments. Within the shares held, TSMC, Apple and Watsco have been some of the best performers. In terms of bonds, while some emerging market bonds struggled to provide strong returns, others performed very well. Some of the better performers were South African, Argentinian and Sri Lankan government bonds.

The fund had a historical yield of 3.99% as at 28 February 2025. Income isn’t guaranteed, and yields aren’t a reliable indicator of future income.