Investors may want to reconsider holding more than one Baillie Gifford fund, due to the high amount of commonality between the portfolios.
Data provided by Quilter Cheviot showed that just 10 stocks make up more than 25% of the total allocation in Baillie Gifford’s 10 biggest portfolios, with many funds holding at least five or six of the same companies as one another.
Baillie Gifford has been incredibly successful in the past few years. Nick Wood, head of fund research at Quilter Cheviot, said its high-conviction approach to growth has rewarded investors over the long-term and said his group was a “happy holder” of Baillie Gifford’s portfolios.
Yet many investors found themselves drawn into various Baillie Gifford portfolios back when it seemed the group could do no wrong. In some ways it has become a victim of its own success, as its explicit growth bias has pushed many of its biggest portfolios into just a handful of stocks. Investors may want to consider whether owning more than one Baillie Gifford fund is beneficial when it comes to diversification.
Data provided by Quilter Cheviot below shows the amount invested in the combined top 10 holdings of 10 largest Baillie Gifford portfolios on its platform, both open and closed ended, accurate to the end of February 2022.
Source: Quilter Cheviot
The table below shows each portfolios’ total assets under management (AUM).
Source: Quilter Cheviot
Wood said the high concentration meant any underperformance in some of these stocks would have a meaningful impact across multiple Baillie Gifford portfolios, and the group as a whole.
Tesla, Moderna and Amazon appeared in several portfolios, but Tesla and Moderna could have an even bigger impact because Baillie Gifford holds so many of its shares.
According to Wood, the fund house owns 11% of all Moderna stock. It also owns 1% of all Tesla’s shares.
Wood agreed that there was a clear overlap between many of the funds listed, especially among the global and US-focused names.
Scottish Mortgage, Baillie Gifford Managed and Baillie Gifford Long-Term Global Growth all hold the same 10 stocks, and many of the others hold at least five or six of these names.
The exceptions were the Asia and European specific funds, which cannot invest in many of these stocks by the nature of their sector.
It is also worth noting the significant impact Scottish Mortgage had on the total results.
The trust is the group’s largest portfolio by some way at £13bn, and alone it holds around half of Baillie Gifford’s exposure to Tesla. Given the size of the portfolio, its managers James Anderson, Tom Slater and Lawrence Burns must allocate a large amount to an individual stock for it to affect performance. The £1.1bn investment in Tesla makes up just 5% of the trust’s total portfolio, for example.
However, this does not take away from the increased concentration risk that would come from holding multiple Baillie Gifford portfolios, said Wood.
“Areas where it has high conviction will certainly impact the funds,” he explained.
“The key thing here for me is there are investors who have been attracted to the fantastic performance of Baillie Gifford and perhaps bought a number of its funds thinking ‘well, they've done well so they'll continue to do well’, without necessarily thinking about the overlap between them.”
He added: “The problem with owning lots of funds from one individual fund house, particularly if it has more commonality – for example, Scottish Mortgage, Baillie Gifford American and to a certain extent something like Monks – is that although they're not entirely connected, you will end up with overlap there and, of course, you will end up with the strong views of the team reflected across your portfolio.”
This overlap means that there would be less diversification among investors’ portfolios, which is one of the golden rules of investing.
Wood pointed out this level of overlap is not exclusive to Baillie Gifford, but affects many other managers with a consistent process. However, he said Baillie Gifford’s ultra-high conviction approach may have exacerbated the problem.
The self-described nature of Baillie Gifford’s strategy is “bottom-up with a long-term horizon” investing in “exceptional growth outliers”. Therefore, if it backs a stock to be an “outstanding winner of the next decade, then I would expect it to include it in portfolios where that is appropriate”, Wood said.
He added that while each portfolio manager can take a different view, it would be surprising if the same stocks were not held where available.
“If Tesla wasn't in the US portfolio, you might well question ‘is it a high conviction, what is your differing view?’”.
Wood finished by saying investors should make sure they have a balanced portfolio across stocks and styles. Given how much the momentum in markets has shifted, they should examine their portfolios to ensure they don’t end up “with a little bit more exposure than is necessary”.
“I would always say you want to have diversification when it comes to styles,” he added.