Edinburgh-based investment firm Baillie Gifford had a dreadful time in 2022, with none of its 49 funds and trusts making a positive return.
Baillie Gifford’s funds rose to prominence and were popular among investors as their strong tilt towards growth blossomed the low interest rate environment of the post-financial crisis era.
However, things drastically changed last year with central banks hiking interest rates to slow the economy in an attempt to fight inflation.
As a result, many of Baillie Gifford’s trusts experienced peak to trough share price falls of over 60%, including Scottish Mortgage, Edinburgh Worldwide, Baillie Gifford US Growth and Baillie Gifford China Growth.
However, Anthony Leatham, research analyst of investment companies at Peel Hunt, said now is not the time to abandon the growth style, especially as some central banks have indicated that peak interest rates are on the horizon.
He added: “In that environment, we expect to see Baillie Gifford’s holdings deliver revenue and profit growth. Furthermore, if we plunge into recession, quality businesses that can continue to grow their market share and remain less exposed to leverage should perform better in relative terms, which could work in Baillie Gifford’s favour.“
One of the trusts Leatham highlighted is the asset manager’s flagship trust, Scottish Mortgage. It has significant exposure (29%) to private equities, with holdings such as SpaceX, which has made investors nervous given the uncertainty in valuations of private firms.
It has also caused turmoil at the board level, with former non-executive director Amar Bhidé warning that he does not believe the trust has the capabilities and governance clout to monitor illiquid investments.
Yet, Leatham said that the combination of “world-class” businesses such as NVIDIA, Moderna and Amazon alongside some disruptive and hard-to-access private firms can deliver strong returns, even in an “anaemic” economic environment.
He added: “As a result of the negative sentiment, Scottish Mortgage is trading on a 22% discount (versus a 10-year average discount of 1%) with year-to-date NAV total return up 8% and shares down 7%, suggesting a significant dislocation.”
Performance of trust over the 10yrs and YTD vs sector and benchmark
Source: FE Analytics
James Carthew, head of investment company research at QuotedData added that we might now be close to the “point of maximum pessimism” towards Scottish Mortgage and that the trust may soon start to recover.
He said: “I don’t expect the recovery to happen as fast as the slide did, but commentators are starting to speculate about IPOs of stocks in the unlisted portfolio, which could help validate the valuation of its unlisted portfolio, calm nerves and rekindle investors’ enthusiasm.”
Carthew also highlighted another Baillie Gifford’s trust in the IT Global sector, Monks Investment Trust.
He said: “Monks offers a more balanced version of the approach with a portfolio that has relatively little exposure to unlisted firms and is comprised of ‘rapid growth’ firms – relatively early stage and innovative firms – ‘growth stalwarts’ – profitable, growing, non-cyclical businesses with defensible business models – and ‘cyclical growth’ firms.
“The mix of these within the portfolio varies over time but the combination has produced less volatile returns than some of its stablemates.”
Performance of trust over the 10yrs and YTD vs sector and benchmark
Source: FE Analytics
Over 10 years, the trust has failed to beat its benchmark, as the sell-off in growth stocks erased the relative outperformance that had been built up in earlier years.
Carthew added: “I don’t think that this is a reason to give up on the trust. In fact, coming out of a rough patch and trading on a low teens discount, now might be a good time to be building a position.”
Monks was also added to Winterflood’s recommendations at the beginning of the year, replacing Scottish Mortgage. Winterflood analysts described Monks as a “well-managed” exposure to global growth stocks but with less volatility and more diversified exposure than Scottish Mortgage.
They wrote: “We believe that the fund’s investment portfolio remains attractive on a long-term view, given its diversification and the inclusion of a range of growth themes that are not interdependent.”
For investors considering a bet on a recovery in growth investing, Carthew suggested that a bolder move would be to back Edinburgh Worldwide.
He said: “It is the small-cap version of Scottish Mortgage, trades on a slightly wider discount of 22%, has underperformed Scottish Mortgage by a wide margin (43 percentage points) over three years, gearing of about 13%, and about 21% of the portfolio is exposed to unlisted firms.”
Performance of trust over the 10yrs and YTD vs sector
Source: FE Analytics
While the trust has outperformed the IT Global Smaller Companies sector over 10 years, it has not done nearly as well as the other Baillie Gifford trusts in the same period.
Carthew added: “For the most part, the portfolio is invested in smaller firms, generally unloved by investors.
“Couple that with the adverse sentiment towards growth stocks, and particularly ones with low-to-no profit, and it is easy to see why Edinburgh Worldwide’s performance has been so bad, and by implication, just how much upside there might be if the tide turned back in its favour.”
Finally, Leatham highlighted Baillie Gifford European Growth Trust, which is currently trading on a 14% discount.
He said that the trust offers access to “attractive world leading” businesses such as battery manufacturer Northvolt, payment provider Adyen and semi-conductor equipment manufacturer ASML.
Performance of trust over the 10yrs and YTD vs sector and benchmark
Source: FE Analytics
In a note published in December 2022, trust analysts at Kepler wrote that it could be an attractive entry point due to the discount (which has since then slightly increased), although they stressed that it was important for investors to take a long-term view.