Edinburgh Worldwide Investment Trust: March 2024 update

• Douglas Brodie hunts the globe for small companies with strong growth potential.

• Brodie is prepared to hold onto companies for long periods of time to generate long-term investment growth.

• More recently the trust’s performance has been held back as smaller companies haven’t performed as well as large ones.

How it fits in a portfolio

Edinburgh Worldwide Investment Trust aims for long-term growth by investing globally in what the management team classifies as ‘immature’ businesses. These tend to be smaller, higher-risk companies focused on innovating and disrupting the status quo. The trust could help diversify an adventurous investment portfolio and complement funds or investment trusts invested in larger companies in the UK or internationally.

Manager

Douglas Brodie has been lead manager of the trust since 2014. He’s spent his entire investment career at Baillie Gifford, after joining in 2001, and became a partner of the firm in 2015. Brodie launched Baillie Gifford Global Discovery in May 2011, which is an open-ended fund that invests in a similar way as this trust but doesn’t have the ability to invest in unquoted companies (companies that aren’t yet listed on a stock market) or borrow to invest, known as ‘gearing’. Given the cross-over between the two portfolios we think he’s comfortably able to manage both.

Brodie is supported by two deputy managers, Svetlana Viteva and Luke Ward, who both joined Baillie Gifford in 2012. After working in several teams across the business, the pair joined the manager on the trust in December 2017.

The team has access to over 100 investment professionals at Baillie Gifford. They have eyes on all corners of the market, which is something we think sets them apart when it comes to identifying the companies of tomorrow.

Process

Brodie, Ward and Viteva look for companies with specific qualities to whittle their universe down to a portfolio of around 75 to 125 companies. A company must typically be less than $5bn in size to be considered for the trust.

While they invest in small businesses, the managers look for innovative ones with a long runway of growth in front of them. They must have a competitive advantage, which could strengthen over time, and be able to thrive as they get bigger. For certain industries, such as platform technology, they evaluate the opportunity for network effects, where a product or service improves with greater user numbers.

Meeting company management is key to the investment process. Many of the companies in the trust are managed by their founders, which the team believes can be invaluable. Business founders often have the vision needed to continue to grow the company in future.

Brodie only invests a small amount of money when he first invests in a company. If the team’s conviction grows, or if the share price falls significantly so they can invest at a cheaper price, they may invest in more.

Sectors like healthcare, industrials and technology are where most opportunities are found. While the trust can invest across the world, including higher-risk emerging markets, as at the end of February 2024, 72.4% is currently invested in the US.

Brodie has changed the trust less during the 12 months to end of October (the period covering the trust’s annual report and accounts) than he has done in recent years having only added three new companies. This includes American mining company MP Materials. It focuses on mining rare earth such as neodymium and praseodymium, which are used in high strength magnets for electric vehicles and wind turbines, as well as a range of consumer, industrial and military applications. French biotech company Cellectis was also added, which is a genetic engineering company focused on cell-based therapies for cancer treatment. Finally, US software company HashiCorp was also added. Brodie also added to investments as his conviction increased including UK company Oxford Nanopore.

Most changes came from Brodie selling companies where the investment case had not progressed as he hoped. Over 10 names were sold including American e-commerce company Wayfair, and American software companies Everbridge and Splunk. Healthcare companies Chinook Therapeutics and Tabula Rasa were both also sold after receiving takeover approaches.

The trust can invest up to 25% of its assets measured at the time of investment in unlisted companies (those not listed on a stock market). This was increased from 15% and approved by shareholders at the AGM in February 2022. Investors should be aware that investment in unquoted companies is higher risk and they can be considerably less liquid than those traded on established stock exchanges.

At the end of October 2023, unlisted investments made up 26.2% of the trust’s assets up from 14.1% the previous year. During the trust’s reporting period Brodie made no new investments in private companies but added to investments in SHINE Technologies and Astranis Space Technologies.

Given the exposure went above the trust’s limit, no new investments can be made or follow up investments until it moves back below 25%. It’s important to remember that many aspects impact the weighting of unlisted companies including how listed companies perform and how often the unlisted companies are valued. During the reporting period Baillie Gifford and an independent team revalued the 14 companies held 130 times.

Investors should be aware that the trust can borrow money to invest with the intention of increasing returns (known as gearing) to shareholders. At the end of February 2024 it was 13%. This could magnify losses in a falling market and increases risk. The managers also can use derivatives, which if used adds risk.

Culture

This trust is managed by Baillie Gifford, an independent private partnership founded in 1908. It's owned by its partners, including 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. This has helped cultivate a culture with a long-term focus, where investors' interests are at the centre of decision making.

Fund managers are also incentivised in a way that aligns their interests with those of long-term investors and could retain talented managers.

ESG Integration

All of Baillie Gifford’s funds and trusts are run with a long-term investment horizon in mind – they 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 team, an ESG Services team (responsible for voting operations and ESG data) and an ESG Client team (responsible for ESG-related client communications). Individual investment teams are responsible for voting and engagement for the companies they invest in. Investment in controversial weapons is prohibited across the firm.

The firm reports all its voting decisions and provides rationale in situations where it voted against management or abstained, in a detailed quarterly voting report. There is 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 Stewardship Activities report.

Cost

The ongoing annual charge over the trust’s financial year to 31 October 2023 was 0.70%. Investors should refer to the latest annual reports and accounts, and Key Information Document for details of the risks and charging structure. If held in a SIPP or ISA the HL platform charge of 0.45% (capped at £200 for a SIPP and £45 for an ISA) per annum also applies. The platform charge doesn’t apply if the trust is held in a Fund and Share Account.

Investment trusts trade like shares, both buy and sell instructions with HL will be subject to share dealing charges.

Performance

Since Brodie took over management of the trust in 2014, its Net Asset Value (NAV) has grown by 93.58%*. Performance has been volatile at times though and, as always, past performance isn’t a guide to future returns.

Over the trust’s last financial year to the end of October 2023 its NAV declined 23.80%, and delivered a share price return of -27.69%. Over this period the trust faced a headwind posed by investing in smaller companies rather than large.

Smaller companies underperformed larger companies as they are generally more sensitive to interest rate changes. Central banks in most of the world have raised interest rates as they battle inflation and investors have moved to the large companies they know and love. Smaller companies are generally less mature and therefore rely more on bank lending and will typically hold less cash. With higher interest rates earnings haven’t been able to keep up. Typically, during times of economic uncertainty like we’ve seen in 2022 and 2023, smaller companies tend to lag larger peers. However, when the economic outlook improves, they tend to bounce back much quicker.

In terms of individual stocks over this period, the weakest performer was healthcare company Novocure. Brodie believes other investors have become too focused on the short term with regards to their recent lung cancer drug trials which required further data. The team remain positive on Novocure’s long-term potential and the importance of its technology. Healthcare company Alnylam Pharmaceuticals also detracted after a key drug was rejected by the FDA.

On the other hand, some of the trust’s unquoted investments performed well. Space Exploration Technologies (SpaceX) and PsiQuantum were two of the best performing unlisted companies over the trust reporting period. SpaceX which is the largest holding in the trust continued to perform well, they debuted their starship stack and Relativity Space, its entirely 3D-printed Terran-1 rocket. Both are following a rapidly iterative and intentionally destructive development process in order to deliver significant cost and capability improvements in the years ahead.

From the listed side of the trust US healthcare company Exact Science, which specialises in non-invasive molecular tests for early cancer detection, was the best performer. Brodie believes the company has made material progress and boosted their near-term commercial traction. Given the share price growth, Brodie sold some shares to take profits and reduced the investment.

The managers’ growth style of investing aims to benefit from investing in exceptional growth businesses and holding them for long enough to reap the rewards. This can lead to periods of volatility though, and performance will look quite different from peers and the broader global market at times. A trust like this should be held as part of a well-diversified investment portfolio and be held for the long term. Investments rise and fall in value, so investors could get back less than originally invested.

At the time of writing the trust trades on a discount of -11.21% and over the last 12 months on average, it has traded at a discount of -16.96%. Over the 10 years to the end of February 2024 the trust has on average traded at a discount of -6.02%.