There has been a rise in the number of investors looking for a way to contribute to a more sustainable world while still making a strong return on their money.
And the team-managed £274m Baillie Gifford Positive Change fund seems to have offered a way to do just that, returning 110.50 per cent since it launched little over three years ago in January 2017 versus the MSCI AC World’s 17.13 per cent gain.
The Edinburgh-based global equity fund ranks number one amongst the 283 funds in the IA Global sector since inception (its average peer has made just 17.60 per cent over the same time frame), beating others by a relatively large margin.
The second-ranked Baillie Gifford Global Discovery fund and third-ranked GAM Star Disruptive Growth fund, have returned 81.08 per cent and 80.79 per cent respectively. Fundsmith Equity made 53.69 per cent, putting it in 12th place.
Rosie Rankin, a product specialist on the Baillie Gifford Positive Change fund, attributed its performance to a simple philosophy: it invests in high quality growth companies that can deliver positive change.
Performance of the fund vs sector and index since launch
Source: FE Analytics
Rankin explained that each company in the portfolio has to meet two specific criteria: “It has to deliver attractive investment returns over the long run and deliver a positive change on society by contributing to a more sustainable and inclusive world.”
She added that there are no compromises - each holding must be able to deliver on both criteria.
When it comes to the financial case of a company, Baillie Gifford Positive Change has a very ambitious growth mindset. The investment team only selects companies it believes will double in share price appreciation over five years.
Stock selection is based on underlying company fundamentals, driven by the belief that companies whose core business activities are addressing global challenges, will experience rising demand for their products and services. In other words, they will be growth businesses.
Rankin also pointed out that a number of these companies will enjoy sustainable competitive advantages, such as loyal customers and highly motivated employees. This ensures they will be high quality companies.
“Ultimately the team believes that it will be the companies that are addressing a major societal challenge who will outperform,” she added.
When it comes to the second criteria of delivering a ‘positive change’, the fund narrows it down to four impact themes; Social Inclusion and Education, Environment and Resource Needs, Healthcare and Quality of Life, and Base of the Pyramid.
Companies within the portfolio are categorised under one or more of these four themes and for each potential company in the portfolio the team conducts an impact analysis assessing three factors.
The first factor is to look at the impact of the company’s core products and services and how much it addresses a global environmental or social challenge and are improving the status quo.
The second is to assess the company’s intent towards delivering positive change, essentially the company’s mission and how it is implemented.
Finally, the third factor examines the company on its business practices, looking at its actions across the full value chain, including its relationship with all stakeholders: shareholders, customers, employees, industry, society and the environment.
Alphabet has been a top 10 holding and driver of performance from early on in Baillie Gifford Positive Change’s history, currently comprising 3.7 per cent of the portfolio.
It’s core business, Google, provides free access to information to billions across the world and fits the social inclusion and education theme.
However, the funds manager admits that the lack of diversity and independence on the board of Alphabet is disappointing, as well as some remuneration practices being questionable.
As the team pointed out in its impact report: “There is no perfect company, and there is no easy way to sum and net off different positive and negative impacts.
“Companies make it into the portfolio when we believe, based on professional judgement, that the impact is more positive than negative”.
Tesla, the fund’s second largest holding at 6.5 per cent, , delivered strong first quarter performance for the fund despite high volatility, Rankin told Trustnet.
Tesla aims to accelerate the world's transition to sustainable energy through the manufacture and sale of high-performance electric vehicles, solar energy generation systems and energy storage products, fitting the environment and resource needs theme.
Despite being led by the somewhat polarising chief executive Elon Musk, Baillie Gifford admits some concern in the absence of support by his executives, but because it has been a long time investor, it boasts good company access and communication.
The fund’s top 10 holdings make up just over 52 per cent of its portfolio, and it employs a high concentration and a high conviction approach, with only 31 companies within the fund.
Performance of the fund vs sector and index since the start of the coronavirus sell off
Source: FE Analytics
When it comes to ESG funds, some assume that to invest in sustainable companies is something that can only be afforded during good times. However, Baillie Gifford Positive Change has managed to hold up significantly better than its peer group and the MSCI world even during the coronavirus sell-off.
Explaining this, Rankin pointed towards its holdings in Moderna and Teladoc.
The fund invested into US biotech firm Moderna at IPO and it went on to drive performance during the coronavirus sell-off. Moderna is accelerating trials for a coronavirus vaccine and has recently been granted $483m by the US government to do so.
Baillie Gifford, however, had been speaking to the company for almost two years before investing, as many of its programmes have the potential to target diseases which there are no treatments for.
Teladoc, a US based telemedicine and virtual healthcare company, was another name that buoyed performance during the sell-off.
Rankin said the fund also invested into this company before the coronavirus crisis, but the stock has rallied on the back of changing behaviours around speaking to a doctor virtually or over the phone as people are in lockdown.
During the sell-off, Rankin said Baillie Gifford Positive Change did not make many changes to its holdings. She underscored the importance of taking a long-term approach to investing, supporting companies and providing the ‘patient’ financial capital required to solve the global issues that also require some time to address in the long term.
Over the last three years, the Baillie Gifford Positive Change fund has returned 90.33 per cent compared with the MSCI AC World’s 15.32 per cent and the IA Global sector’s 14.19 per cent.
Performance of the fund vs sector and index over 3yrs
Source: FE Analytics
The fund is run by five investment managers at Baillie Gifford and two analysts from its Governance and Sustainability team. It has an ongoing charges figure (OCF) of 0.55 per cent.