Edinburgh Worldwide Investment Trust: March 2025 update

• The team of three hunt the globe for small companies with strong growth potential.

• They are 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 larger ones.

How it fits in a portfolio

Edinburgh Worldwide Investment Trust aims to achieve long-term growth by investing globally in what the management team classify 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 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.

In November 2024, deputy managers Svetlana Viteva and Luke Ward were both promoted to co-managers of the trust alongside Brodie. They 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. Given the trio have worked together for over 7 years we think this is a good evolution of the team structure.

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

In March 2024 Jonathon Simpson-Dent was appointed as the new chairman of the trust. Working alongside the managers and other members of the board Simpson-Dent conducted a detailed review of the trust to identify areas they could improve on. This has led to several changes to the process and portfolio which will they are hopeful will provide more consistent returns.

Previously Brodie, Ward and Viteva looked for companies with specific qualities to whittle their universe down to a portfolio of around 75 to 125 companies where a company must typically be less than $5bn in size to be considered for the trust. Now the team are looking to build a portfolio of 60 to 100 companies that are typically below $25bn in size. This gives the managers a bigger universe of ideas as well as having more conviction in their best ideas.

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.

The team only invests a small amount of money when they first invest in a company. If their 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 January 2025, 75.9% was invested in the US.

Whilst they still seek the best smaller companies globally, the managers are now focusing more on financially mature companies. They aim to have at least 50% of the trust exposed to companies delivering positive cash flow and proven returns. As of the end of October 2024, this exposure stood at 64.7%. Additionally, they target 15% of the portfolio allocated to early-stage companies that are yet to or have just started to deliver gross profits. At the end of October 2024, this allocation was 19.1%.

Due to the changes in the process the trust has changed a lot over the 12 months to the end of October 2024 (the trust’s annual reporting period). The number of companies has fallen from 98 at the end of October 2023 to 85 companies 12 months later. Among the companies sold was the US educational company Chegg, whose share price fell significantly as customers began using AI companies for their educational needs instead of subscribing to Chegg. Other companies sold included Israeli freelance company Fiverr International, US manufacturing company Stratasys, and Japanese e-commerce company MonotaRO.

The team bought a number of companies as well. UK computer business Raspberry Pi was added as the team expect significant growth over the coming years. Chinese semiconductor company Silergy who manufacture analogy chips was added to the trust. They are well placed to benefit from China refocussing on supplying semiconductors in-house rather than focussing on imports for the US. US healthcare company Rx Sight was also added, they make adjustable lenses allowing doctors to customise patients’ vision after cataract surgery.

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). 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 January 2025, unlisted investments made up 27.4% of the trust’s assets. Given the exposure is 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.

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 January 2025 the gearing level was 7%, this is lower then it was at the end of February last year when gearing stood at 13% . Gearing 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 are run with a long-term investment horizon in mind. The firm’s 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 Environmental, Social and Governance (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 Core team (responsible for voting operations, ESG data and ESG-related client communications). 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 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 Investment Stewardship Activities report.

Cost

The ongoing annual charge over the trust’s financial year to 31 October 2024 was 0.76%. 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 except in the HL Junior ISA, where no platform fees apply. The platform charge doesn’t apply if the trust is held in a Fund and Share Account.

Investment trusts trade like shares, both a buy and sell instruction will be subject to the HL share dealing charges within any Hargreaves Lansdown account, except online in the HL Junior ISA.

Performance

Since Brodie took over management of the trust in 2014, to the end of February 2025, the share price has risen 114.40%*, well ahead of the AIC Global Smaller companies peer group which returned just 38.90%. The Net Asset Value (NAV) has also risen 109.47%. Remember past performance is not a guide to the future.

Over the trust’s last financial year to the end of October 2024 the trust’s share price rose 26.12%. This compared to an increase of 22.44% for the AIC Global Smaller companies peer group. The trust’s NAV also increased 13.09%.

Smaller companies continued to underperform their larger peers throughout 2024. Smaller companies faced difficulties as central banks raised interest rates to combat inflation in 2022. Given that smaller companies are generally less mature, they often rely more on lending and typically hold less cash compared to larger companies. This has led investors to focus more on the bigger companies they know and trust. Despite the hope that falling interest rates would attract more attention to smaller companies investors have remained focused on large companies that continue to grow, such as the "magnificent seven" (Alphabet, Apple, Amazon, Meta, Microsoft, Nvidia, and Tesla), while small companies continue to lag behind.

Over the trust's financial year, the investment in US healthcare company Alnylam Pharmaceuticals was the largest provider of returns. They recently demonstrated a successful phase three trial in cardiovascular disease, which is likely to be a huge success and push them towards sustained profitability. US law enforcement equipment provider Axon Enterprise also performed well, capitalising on advancements in artificial intelligence (AI) to build new products. Additionally, US private space exploration company SpaceX added to returns, continuing their progress with the development of the Starship rocket, while the satellite side of the business, Starlink, also continues to grow.

On the other hand, some of the trust’s private companies didn’t perform as well. UK engineering company Reaction Engines was the largest detractor, as the company entered into administration. US aerospace company Relativity Space also performed poorly over the year. From the public side of the portfolio, healthcare company Staar Surgical detracted, as did UK healthcare company Oxford Nanopore Technologies.

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 -5.30% and over the last 12 months on average, it has traded at a discount of -8.27%. Over the 10 years to the end of February 2025 the trust has on average traded at a discount of -5.49%. Over the trust’s reporting period to the end of October 2024 the board bought back over £21m worth of shares in order to help narrow the discount. The board also announced in November that they have committed up to £130m to provide options for future capital returns to shareholders, though there are no guarantees.