It is often disarming to write about your own portfolio – to lay your own financial decisions out for everybody to see. Despite having written about fund managers, strategists and financial advisers believe how you should be positioning or which funds you should be buying, there’s always the fear of getting it wrong.
But having written about my fund choices in the past, and as I leave Trustnet, I’ve decided to share with you the most recent portfolio addition – and possibly my last for some time.
In recent years, one area that I’ve become firmly convinced is undervalued, and one you should all be familiar with, is the UK.
For several years the UK economy has been held back not by any constraints on free trade, but by the uncertainty that the change in its relationship with the EU has caused. And now that we have some clarity around this, I expect businesses to begin investing and for the UK economy – while not flourishing – to grow stronger.
According to the closely watched Bank of America Global Fund Manager Survey, the allocation to UK equities among professional asset allocators stands at a 15 per cent underweight, the least-favoured region, although it has been gaining popularity more recently, as the chart above shows.
Political uncertainty notwithstanding, the frustration with the UK market is understandable as it has lagged its global peers in recent years.
As the below chart shows, the FTSE 100 has made just 8.33 per cent since the EU referendum (to 8 February), compared with double-digit gains for its developed market peers.
Performance of FTSE 100 vs global blue-chip indices since EU referendum
Source: FE Analytics
While I’ve added to my UK exposure during the course of the pandemic with Liontrust UK Smaller Companies and Royal London Sustainable Leaders Trust, I’ve now decided to add a fund that I think will be able to take advantage of any potential upswing in markets.
And as I head to pastures new, I’ve decided to tell you that the most recent addition to my portfolio is a Baillie Gifford fund.
I’ve watched with interest as Baillie Gifford funds have come to dominate the sectors in which they reside, but I’ve refused to get carried away with the hype surrounding the growth-focused asset manager. While others have loudly lauded Baillie Gifford strategies such as Scottish Mortgage Investment Trust and Baillie Gifford Positive Change, I've stayed uninvested.
However, believing as I do that the UK equity market could be set for a period of strong returns following years of lacklustre performance, I’ve finally cracked and decided that a growth strategy would be best.
While the Edinburgh-based fund house has a number of UK equity strategies for investors and three in the open-ended IA UK All Companies sector alone, I have decided that Baillie Gifford UK Equity Alpha is the best strategy for me.
The £803.1m fund – which was recently awarded the top rating in the FE fundinfo Crowns rebalance – is overseen by Gerard Callahan and aims to outperform the FTSE All Share by at least 2 per cent per annum over rolling five-year periods.
Rolling 5yr returns of fund vs benchmark since 2010
Source: FE Analytics
It has performed strongly over the past five years, making a total return of 114.27 per cent compared with a gain of 43.44 per cent for the FTSE All Share benchmark and 43.64 per cent for the average IA UK All Companies peer.
Performance of fund vs sector & benchmark over 5yrs
Source: FE Analytics
Callahan – head of the UK equity team – has managed the strategy in institutional mandates since 2000 and the open-ended Baillie Gifford UK Equity Alpha fund since 2010.
The team takes a long-term, low turnover investment approach, investing in a portfolio of high-quality growth companies capable of growing their profits and cashflows faster than the market average.
A ‘priority list’ is drawn from businesses meeting certain criteria, according to Square Mile Investment Consulting & Research analysts, which are then analysed on a five-year view.
Baillie Gifford UK Equity Alpha takes a concentrated approach with the top-10 holdings currently representing 51.7 per cent of the portfolio with around 33 holdings in total.
While the fund is able to invest across the market cap, many of its largest positions are made up of names lower down the market cap spectrum with strong growth prospects.
As such, its largest position is property portal Rightmove, which represents 8 per cent of the portfolio. Another top holding is online supermarket Ocado, which makes up 7 per cent while other holdings from the top-five include publisher Auto Trader, engineering company Renishaw and travel website Trainline.
Such a strategy should produce returns ahead of the market over a reasonable period, said the Square Mile analysts, although its “high-conviction approach, more specific investment criteria and limited regard for the benchmark” could lead to periods during where performance struggles versus the wider market.
“Although the fund has outperformed its benchmark for the majority of time in recent years, it has struggled to meet this target, and so its success rate looks low, especially when compared to other quality-growth funds in the IA UK All Companies space,” they noted.
Nevertheless, the asset manager’s track record of outperformance speaks for itself – although past performance is no indicator of future returns – and I feel comfortable in my choice.
While some of the Trustnet readers would rather that I had invested all my money in peer-to-peer lending schemes or exchange-traded funds, I hope that some of you have found my choices interesting at least, although they certainly shouldn’t be considered recommendations.