The Baillie Gifford Managed Fund’s UK Champions

1. How do you think about the fund’s allocation to the UK? What is there to be optimistic about in your home market?

The Managed Fund’s strategic asset allocation is 75 per cent equities, 25 per cent bonds and cash. We typically split the equity exposure equally across four regions, one of which is the UK. Our approach to asset allocation versus this starting point is that it is driven by the availability of investment ideas.

As of end December 2020, the Managed Fund had around 17 per cent of the portfolio invested in UK equities, so slightly less than our strategic allocation of 19 per cent. We’re still finding great opportunities, but 2020 was a challenging year. While the Fund’s UK equity holdings outperformed the broader UK stock market, returns lagged behind other regions and our preference is to add incrementally to holdings that have been weaker, rather than rush to increase their size.

That said, since the start of 2021, we have been making additions to the fund’s UK equity exposure with new buys including Close Brothers, a merchant bank, as well as Persimmon, the UK’s largest house builder.

Our optimism about the opportunities available is driven entirely by our active approach to stock picking. This allows us to invest in a small subset of very carefully selected, homegrown companies with solid competitive strengths, innovative ideas and fantastic growth opportunities. The opportunity set is truly diverse, and contains world leaders in fields such as healthcare, advanced manufacturing and long-term savings.

2. The UK seems to lag behind other regions on technology. What’s your view?

One of the big misconceptions about the UK stock market is that it is little more than big banks, big pharma and oil majors. There is actually a raft of really exciting online platform businesses that fly below the radar.

Indeed, the Managed Fund has invested in several of these for many years. Rightmove is a great example. It’s the UK’s largest online property portal and has been held in the fund since 2011. With around 80 per cent market share, we think its dominance should be self-reinforcing over time, with both buyers and sellers increasingly turning to the most popular site in order to transact.

But we are not just focused on the established online disruptors. Draper Esprit, purchased for the Managed Fund in 2020, provides a fantastic way to access early stage opportunities. It’s a venture capital business that invests in early stage European technology companies such as the smart-banking app Revolut, and the telemedicine business, Push Doctor. In a relatively short time, the investment team at Draper Esprit has built up an interesting portfolio of fast-growing businesses that have the potential to be significantly larger on a long-term view.

3. How do you consider ESG when investing in the UK?

While the Managed Fund’s focus is on engagement, rather than exclusion, our starting point is to focus on well-managed companies with sustainable competitive advantages, and we would typically avoid those companies where poor governance, environmental or social factors are detrimental to future prospects.

The consideration of ESG factors is therefore a key component of our long-term, active, growth-focused investment approach – not just in the UK, but in all equity regions as well as fixed income.

During 2020, we saw unique challenges in engaging with companies on our clients’ behalf. However, our approach to stewardship did not change, and we were able to maintain good access to companies, despite most of us working from home for a significant proportion of the year. This allowed us to continue to effect change among the strategy’s holdings where needed. UK-listed highlights included our discussions with:

• Abcam, the UK life sciences company. In this instance we made it clear we would not support some proposed changes regarding remuneration. We were pleased to see them subsequently dropped, allowing us to support the final remuneration proposal.
• Rio Tinto, the Anglo-Australian diversified metals and mining group. We have engaged several times with the company following the Juukan Gorge disaster in Australia in May 2020 to understand how this dreadful incident could have happened and what steps have been taken to learn from the mistakes. While the contrition of the company is genuine, in our view, we have pushed for governance improvements that we think are in the best interests of all stakeholders. At the company’s request, we have also provided guidance and advice on its efforts towards meeting its goal of best-in-class ESG reporting, and we consider our active ownership relationship as helpful to its responsible ambitions.

4. How do you find exciting opportunities in the UK?

As bottom-up stock pickers, our time is spent finding companies which should offer superior long-term profit growth. In addition to company meetings, we have regular, focused investment trips (when we are able to travel!) to meet with founders, owners and senior management of businesses. We also have a number of independent ‘inquisitive researchers’ who employ a more investigative approach to research.

The value of our investigative researchers was underlined with the recent purchase of Games Workshop, the Nottingham-based miniature gaming company, which was first explored in early 2019.

Following this, we visited the company’s Nottingham headquarters and, given our enthusiasm, then sent one of the researchers to follow up and challenge our initial takeaways.

Further research and debate amongst the team convinced us that the company's high-quality intellectual property and expanding market opportunity were not adequately captured in the current valuation. While the product is ultimately of niche appeal, we have come to believe that the niche is growing and will be sufficiently large to result in significantly higher revenues and profits in five to ten years’ time. We therefore took an initial holding for the fund in 2020.

5. Where are you seeing innovation and market leaders emerge in the UK?

The UK market provides access to a wide range of innovative businesses that might not be household names but are world-class operators and market leaders in their respective industries.

• Genus, held since 2018, is an excellent example. It’s a world-leading animal genetics business which analyses DNA to find the strongest genetic profiles to breed ‘elite’ cows and pigs. By selecting animals with desirable characteristics, Genus is able to help farmers to produce pork, beef and milk more sustainably. As we continue to see a growing population with more disposable income, we believe that Genus will benefit from a rising demand for meat and dairy products.
• Halma is another great example; possibly the biggest UK company you’ve never heard of! Held since 2000, it develops technologies which help to save lives and protect critical infrastructure, covering everything from detecting fires and gas leaks to monitoring air and water pollution. For over a decade, Halma has grown at a brisk pace, consistently increasing both revenues and profits on an annual basis and delivering excellent returns to long-term shareholders.