Baillie Gifford American: September 2023 fund update

Investments can go down as well as up so there is always a danger that you could get back less than you invest. Nothing here is personalised advice, if unsure you should seek advice.

• The fund invests in disruptive businesses with strong growth prospects in the world’s largest stock market
• The managers benefit from the research carried out by a large bank of analysts
• The fund has underperformed over the last year as its high growth investment style has fallen out of favour
• This fund features on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits into a portfolio

Baillie Gifford American 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. We think this fund could work well in a portfolio with little exposure to the US, invested for long-term growth. Its focus on large companies means it could also sit well alongside a US equity fund focused on medium-sized or higher-risk smaller companies, or a US fund with a value bias.

Manager

The team behind the fund is made up of four talented investors. Tom Slater joined Baillie Gifford in 2000 and has risen up the ranks to become Head of US Equities. Slater is also manager of Scottish Mortgage Investment Trust and has been co-manager of this fund since 2016. Gary Robinson has been with Baillie Gifford since 2003 and has experience of working in their Japanese, UK, and European equity teams prior to joining the US equity team. Robinson has been co-manager of this fund since 2014.

Kirsty Gibson joined Baillie Gifford after graduating in 2012 and has been a co-manager of the fund since the start of 2018. Dave Bujnowski is the fourth and final co-manager of the fund. After previously working for UBS and Coburn Ventures he joined Baillie Gifford in December 2018 initially as an analyst. During his time at Coburn Ventures, Bujnowski provided research for investors, including Baillie Gifford. As a result, he was familiar with the culture and investing philosophy at the company ahead of joining.

In May 2020, 17 months after joining Baillie Gifford, he was promoted to co-manager with the ability to make investment decisions on the fund. Bujnowski continues to be based in New York but remains in close and regular contact with the rest of the team, who are based in Edinburgh. The managers also have access to a wider team of over 60 analysts who spend time researching US companies, so we think they are well resourced to focus on the job in hand.

Process

The managers invest in companies with high growth potential that they think could be capable of delivering exceptional returns over the long run. They believe that companies with resilient business models make for good long-term investments and that corporate culture can be a key component of company performance and ultimately investor returns, although of course there are no guarantees.

Culture is difficult to measure and capture. But the managers believe it’s one of the most underappreciated drivers of long-term returns. Companies with a strong culture are often adaptable, durable and willing to invest for the future at the expense of short-term profits. And although there’s no exact science, they believe that it’s these kinds of companies that are often the ones to really deliver on their vision and purpose.

The managers spend a lot of time thinking about industry dynamics and developing trends across the economy, preferring to think of their investments in themes rather than sectors. They’ve grouped them into nine distinct themes, the largest of which include: the future of commerce (30.0%), new enterprise (21.3%) and innovative healthcare (14.3%). The numbers in brackets indicate how much of the fund is invested in companies they think will profit from each trend playing out over the long term. Many of these businesses disrupt old ways of doing things. In the future of commerce category, the trend the fund has the largest exposure to, you’ll find businesses like e-commerce platforms Shopify and Wayfair.

Founder involvement is another element that the managers view positively. They believe these individuals, who usually still have much of their wealth tied up in the business, often possess the strong vision that’s required to continue growing the company. The managers believe few companies are capable of delivering exceptional returns over the long run, so they prefer to run a relatively concentrated fund of between 30 and 50 companies. This means each one can contribute significantly to returns, although this approach increases risk. The fund also has a small amount invested in smaller companies, which are higher-risk.

Over the last year the managers have made several changes to the portfolio. Biotech company Illumina was sold. It was a relatively small holding in the portfolio and the managers believe there are better opportunities elsewhere. It was a similar story for financial services company MarketAxess which was also sold. Healthcare company Abiomed also exited the portfolio after they were subject to a takeover by Johnson & Johnson.

The managers reinvested the proceeds of these sales into a number of new investments for the fund, including in technology company Meta (previously Facebook). Meta has been in the portfolio before however, it was sold following concerns around regulation, relevance, and recruitment. The managers believe these pressures have eased, with Meta regularly engaging with regulators, and the spotlight focusing elsewhere. The managers believe that Meta has restored its reputation as one of the most innovative places to work with their strong focus on AI.

Restaurant chain Sweetgreen was also added after strong earnings and after successfully using robotics in one restaurant to improve efficiency. The managers believe this offers rollout potential across other stores and is a good opportunity for the business.

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. Three of the fund’s co-managers, Tom Slater, Dave Bujnowski and Gary Robinson are partners at Baillie Gifford. 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.

ESG Integration

All of Baillie Gifford’s funds 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 charge for this fund is 0.52%, but HL clients benefit from a saving of 0.20%, resulting in a net ongoing charge of 0.32%. This saving is provided through a ‘loyalty bonus’, which is tax-free in an ISA or SIPP. However, this may be subject to tax in a Fund and Share Account. The HL platform fee of up to 0.45% per annum also applies.

Performance

The fund aims to outperform the S&P 500 index by 1.5% per year after costs over any five year period. The share prices of well-known US companies can react very quickly to new information. This can make it difficult to consistently perform better than the broader market over the long term. We think the talent and investment experience of the managers combined with the resources they have means they have the potential to do so.

Over the last five years the fund has not performed as well as we would have hoped, delivering a return of 39.10%*, compared with a return of 57.63% for the IA North America sector average. Our analysis suggests that over this period, stock selection has detracted from the fund’s returns, particularly in the healthcare and communication services sectors.

It’s been a tough period but there have been times over the last five years where the fund has performed strongly, most notably from 2019-2021. Many of the fund’s holdings were beneficiaries of the acceleration of some trends as a result of the pandemic, sending their share prices higher. However, as the US central bank embarked on an interest rate rising programme to battle higher inflation, the managers’ high-growth investment style has fallen out of favour with investors. This made investors less willing to buy companies with high growth potential, which has seen share prices of some the fund’s investments fall significantly.

Performance has been volatile and past performance isn’t a guide to the future. We don’t expect the fund to hold up as well as the index in a falling market. Like all investments, the fund can fall in value so investors could make a loss.

Over the last year the fund has risen by 6.36%, delivering stronger returns than the IA North America peer group average which returned 4.13%. The fund’s investment in e-commerce company Shopify was the biggest contributor to performance over the last 12 months, with semi-conductor company Nvidia also performing well. Both companies are seen as beneficiaries of Artificial Intelligence (AI) advancements. Some investors believe AI can greatly enhance business’ efficiency and improve their ability to be able to offer a better service to their customers. Companies that are early adopters of AI have seen strong performance over 2023.

Not all of the companies invested in by the managers performed well over the year. The fund’s investment in financial services company First Republic Bank was a key detractor from performance. In the wake of liquidity issues in the US regional banking sector, the position was sold from the fund following concerns about the risks posed by withdrawals of deposits to the bank’s operations and profitability. Healthcare company NovoCure also performed poorly as they received mixed trial data from a cancer treatment currently in development.

You should consider annual performance in the context of a longer time horizon and not in isolation. The manager’s long-term time horizon and the fund’s concentrated nature means performance can be volatile and look very different to the benchmark.

Past performance isn’t a guide to the future. Source: *Lipper IM 31/08/2023.

Find out more about Baillie Gifford American including charges

Baillie Gifford American Key Investor Information

Important information – Please remember the value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. This article is provided to help you make your own investment decisions, it is not advice. If you are unsure of the suitability of an investment for your circumstances please seek advice. No news or research item is a personal recommendation to deal.

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