The Next Chapter: Baillie Gifford trusts look ahead

As with any investment, your or your clients’ capital is at risk. Any income is not guaranteed and can fall as well as rise.

Sometimes big challenges can highlight fundamental strengths. Introducing The Next Chapter, Baillie Gifford’s three-yearly investment trust conference, James Budden reflected on what Baillie Gifford had learned from a bid for control of three of its trusts by US activist shareholder Saba Capital. 

That failed attack, he said, sought to exploit lingering misconceptions of the sector as old-fashioned and complacent. Instead, it was an opportunity to highlight trusts’ dynamism and vigilance, with record numbers of mergers, buybacks, and wind-ups demonstrating boards’ commitment to shareholder interests. The sector, he argued, has shown Darwinian survival instincts, with its strong governance and relentless pursuit of shareholder value through strategic management of illiquid assets, gearing, dividends, and capital returns.

Before introducing presenters from each of the individual trusts, Budden highlighted how Baillie Gifford uses the unique advantages of the investment trust structure, particularly access to private companies – a big theme of the two-day conference – which put clear blue water between trusts and their open-ended equivalents.

Day 1

Tom Slater: Scottish Mortgage Investment Trust

Reflecting that only one in 10,000 companies survive to their century, Tom Slater, manager of the 116-year-old Scottish Mortgage Investment Trust, discussed this longevity in terms of distinctiveness, stability, and adaptability. With approximately 20 per cent of companies driving half of market gains, and only about 5 per cent of stocks increasing five-fold in any five-year period, asymmetry is the cornerstone of Scottish Mortgage’s investment philosophy.

Slater detailed the Trust’s focus on transformative companies, evaluating fundamentals, holding on to successful investments, and accepting that while some investments will inevitably fail, gains from big winners such as NVIDIA dwarf the losses from those that fail.

Time, he noted, is an underused advantage in investing, as most focus on short-term horizons of just one-to-two years, while big returns only emerge over five-10 years.

Scottish Mortgage’s long investment horizon, he said, allows them to own growing businesses before the market recognises their value, to support companies creating entirely new industries, and to allow compounding to work its magic. Technology and consumer discretionary sectors continue to lead returns, he said, while healthcare has declined as a top performer, due to rising interest rates and drug pricing concerns. Slater also noted that the evidence is clear and compelling that outliers can be found around the world, hence the Trust's unconstrained approach.

Recent market volatility has reinforced Scottish Mortgage’s belief that adaptability and resilience are critical, as exemplified by Shopify, Meta, and Spotify. The trust’s portfolio companies typically have stronger cash positions, lower debt, and higher research and development investment than the market. Disciplined valuation management remains essential, hence the decision to sell around £2bn from NVIDIA and Tesla positions over the past two years to invest in newer ideas.

Douglas Brodie: Edinburgh Worldwide Investment Trust (EWIT)

Douglas Brodie explained how Edinburgh Worldwide Investment Trust (EWIT) holds approximately 80 companies, 60 not held elsewhere by Baillie Gifford funds. EWIT, he explained, targets innovative, future-shaping companies early in their development journey, focusing on immature businesses on a path to greatness. Those that succeed can deliver exceptional returns through their technological advantages and innovative business practices.

Brodie cited notable early investments in companies like Tesla (before it reached trillion-dollar status), Dexcom (a diabetes management pioneer), and SpaceX (when reusable rockets were just beginning). He structures the portfolio across three key areas: healthcare innovation (particularly genomics and DNA technologies), digital infrastructure (tools that transform business processes), and hardware 2.0: engineering businesses enhanced by software. With approximately 30 per cent of the portfolio in private companies, he highlighted the asymmetric return potential of EWIT’s approach.

Other companies highlighted included PsiQuantum set to unlock quantum computing’s transformative potential and enable deeper and more versatile computations for fields like battery chemistry, fertilisers, and material science. Axon, makers of AI-powered body cameras for law enforcement, was also mentioned. 

Brodie acknowledged EWIT’s challenging performance in 2022-2023, which he ascribed to the high interest rate environment, but he pointed to signs of recovery, with business fundamentals reasserting themselves. He described EWIT’s pure form of growth investing as an approach designed to discover the breakthrough companies shaping the future.

James Dow: Scottish American Investment Company (SAINTS)

James Dow presented income-and-growth-oriented Scottish American Investment Company (SAINTS) as the antidote to heightened market uncertainty, geopolitical conflicts, and inflation concerns. Against this, SAINTS offers a portfolio of durable, resilient growth companies that can help shareholders sleep well at night during volatile times.

Dow highlighted SAINTS’ impressive history, noting it was the first investment trust to offer limited liability when launched in 1873. The trust hasn’t reduced its dividend since 1938, delivering over 50 consecutive years of increases. More impressively, SAINTS has maintained 3 per cent real dividend growth above inflation since the 1930s, demonstrating resilience through numerous economic cycles, wars, and even a pandemic. The management approach focuses on finding growth companies capable of relentless 10 per cent compounding, combined with resilient dividends across cycles, appealing both to income-seeking clients and those interested in steady total return compounding. SAINTS, he said, is structured around companies with dominant market positions selling recurring-use products: companies benefiting from steadily growing end markets, companies leveraging strong core positions into related markets, and companies that gain share by consistently outperforming competitors.

Dow presented a checklist of factors for durable, resilient companies that includes characteristics like high profit margins (which help companies absorb cost increases), management commitment to dividend protection, and immunity from regulatory dividend restrictions. He argued these fundamentals give him confidence that the portfolio will continue its dividend resilience regardless of future challenges.

Roderick Snell: Pacific Horizon Investment Trust 

Roderick Snell’s presentation made the case for Asia ex-Japan as approaching a major inflection point that could make it one of the best-performing markets in coming decades.

Snell’s case for an Asian renaissance was built around three key pillars: valuations, resilience, and growth. He highlighted the region’s compelling valuations, noting Asia trades at a record discount to developed markets despite the IMF predicting 90 per cent of Asian countries will outpace developed market growth. On resilience, he points out how Asia has weathered the aggressive US rate-tightening cycle without a crisis – unlike in previous decades – due to stronger economic fundamentals, orthodox monetary policies, and less dependency on foreign capital.

For growth, he emphasised Asia’s expanding middle class (projected to represent two-thirds of the global middle class by 2032) and the increasing shift toward domestic brands like BYD, Xiaomi, and Luckin Coffee in China. Snell acknowledges two persistent headwinds that have held the region back: China’s economic weakness and US dollar strength, but suggests both factors may be changing in Asia’s favour.

Snell detailed Pacific Horizon’s investment approach, highlighting two major positions they’ve been increasing over the past year. He explained his interest in Vietnam, to him the best structural growth story of any country in all emerging markets, and enthused about China, where Pacific Horizon has doubled its exposure to approximately one-third of the portfolio. He concluded by reiterating his optimism about Asia’s potential inflection point, with previous headwinds potentially becoming significant tailwinds in the coming years.

Iain McCombie and Milena Mileva: Baillie Gifford UK Growth Trust

In their presentation, UK Growth Trust managers Iain McCombie and Milena Mileva challenged the prevailing negative narrative about UK equities. They argued that headlines about investors slashing holdings and exiting the market belied the compelling opportunity in UK stocks, where valuations remain attractive even as performance has begun to improve.

The duo emphasised that their approach is distinctly different from typical UK equity funds, which tend to focus on value and income. Instead, they offer a genuinely high conviction growth portfolio, based on identifying companies that can consistently grow earnings ahead of the market over many years. Their philosophy involves holding growth companies in significant positions regardless of index weightings, maintaining long-term holdings, and conducting deep fundamental analysis through day-long corporate engagement that allowed them to better understand companies’ future potential.

Examples cited included Games Workshop, which recently joined the FTSE 100 on the strength of its intellectual property in plastic fantasy figurines, 4Imprint, a distributor of promotional products that has consistently outperformed its industry by counter-cyclically investing during downturns and Howdens, the kitchen company that has outperformed the declining UK kitchen market by 3 per cent annually over 20 years. Finally, they cited longstanding holding Genus, the world’s leading animal genetics company. Genus has disappointed investors due to a prolonged cyclical downturn but its prospects are improved by its success in creating disease-resistant livestock.

McCombie stressed that the top 10 holdings contained none of the ‘usual suspects’ found in typical UK equity funds. He said that despite the challenging environment for growth investors in recent years, the managers have maintained their commitment to their process and their belief that the UK is overlooked for growth and innovation.

Matthew Brett: Baillie Gifford Japan Trust

Matthew Brett began with a macro perspective on Japan’s evolution from the 1980s bubble, to lost decades, to a period of steady normalisation over the past 15 years. He noted that years of deflation, turned to ‘no-flation’ and now wages are growing strongly for the first time since the 1980s. He argued this wage growth makes the recovery self-sustaining, potentially triggering a virtuous cycle of rising asset prices and expanding economic activity.

Meanwhile significant improvements in corporate governance are encouraging companies to address cross-shareholdings and deploy excess cash in shareholder-friendly ways. But despite these positives, he noted that Japan trades at a substantial discount to global markets, making its valuation increasingly attractive.

Turning to specific investment opportunities, he focused on four exceptional Japanese companies. First is Eisai, a family-owned pharmaceutical company that has developed Leqembi, a breakthrough Alzheimer’s drug. The second is SoftBank, which owns 90 per cent of Arm Holdings (the chip design company used in 99 per cent of mobile phones) yet trades at a 50 per cent discount to the sum of its parts. Then Recruit Holdings, owner of the Indeed job site that serves 300 million people and benefits from powerful network effects. Finally, as an illustration of Japanese manufacturers with exceptional competitive ‘moats’, he cited Keyence, which produces factory automation sensors with remarkable 50 per cent operating margins, and Olympus, which commands 70 per cent of the global endoscope market.

Looking forward, he expects the Trust to maintain its growth advantage even as cyclical tailwinds fade. On earnings, despite the Japanese market showing strong growth as margins expanded, Brett anticipates the Japan Trust will outpace the market going forward as portfolio companies’ growth investments begin to yield returns.

Day 2

Helen Xiong: The Monks Investment Trust

In her address, Helen Xiong, deputy manager of The Monks Investment Trust, offered a framework for investment during turbulent times. Rather than claiming to be able to predict outcomes in an unpredictable world, Xiong focused on methodology for navigating fundamental uncertainty.

She observed that her lifetime had seen once-unimaginable changes, from the collapse of the Soviet Union to 9-11 to Covid, to the rise of artificial intelligence. Living through these events, she noted, feels like chaos rather than ‘history’.

Xiong’s approach to managing a portfolio, she said, hinged on three principles: building resilience, retaining perspective, and pouncing on opportunities. She distinguished between risk (quantifiable and manageable) and uncertainty (which can’t be reliably quantified), emphasising that economic data is always context-specific, making historical precedents unreliable predictors.

Her solution mirrored nature’s wisdom. Just as biodiverse ecosystems withstand shocks better than monocultures, Monks constructed its portfolio with diverse growth drivers. Monks blends three growth profiles: ‘stalwarts’ that compound steadily, ‘rapid growth’ companies disrupting industries, and ‘cyclicals’ where management teams could transform economic volatility into opportunity.

Xiong cautioned against the market’s misguided fixation with ‘reversion to mean’, arguing that markets don’t revert cleanly but fluctuate unpredictably around shifting averages. Rather than focusing on short-term developments, Monks thinks long term about the impact of enduring trends such as the rise of artificial intelligence.

She described how, maintaining this long-term perspective, the team had used recent volatility to upgrade the portfolio—reducing its valuation premium while increasing its growth potential. Xiong concluded that optimism, which may seem naive during challenging times, often proves most rewarding precisely when uncertainty is highest.

Linda Lin and Sophie Earnshaw: Baillie Gifford China Growth Trust

In their discussion, Baillie Gifford China Growth Trust managers Sophie Earnshaw and Linda Lin acknowledged that China has faced significant headwinds, including a property market slowdown, geopolitical tensions, and regulatory crackdowns, but argued that the market remained investible for those with longer time horizons.

The managers noted a decisive turning point in September 2023, when Beijing issued a comprehensive stimulus package and took steps to restore confidence in the private sector. President Xi Jinping’s meetings with tech founders, including Alibaba’s Jack Ma, signalled support for the internet industry’s role in AI transformation. This policy shift was particularly significant given the state’s cold shoulder of tech innovators in previous years.

While acknowledging that China’s economy was transitioning, not booming, the managers identified vibrant pockets of growth beneath headline figures. They cited examples from the trust’s holdings, including luxury spirit producer Kweichow Moutai, budget-friendly platform PDD, and rapidly expanding chain Luckin Coffee. They also highlighted that Chinese households had accumulated approximately $9tn in savings since the pandemic – twice the size of the UK’s entire GDP – creating potential for future consumption growth.

On innovation, the managers explained that China’s structural advantages included an immense talent pool (40 per cent of global science and engineering graduates), a competitive manufacturing base enabling rapid product iteration, and a large domestic consumer base willing to trial new technologies. The surprise emergence of AI company Deepseek exemplified China’s transition from ‘Made in China’ to ‘Invented in China.’

Despite geopolitical tensions, the trust’s holdings were predominantly domestically focused, with many exporters having diversified their manufacturing bases. With companies holding approximately one-third of their market capitalisation in cash while forecasting strong earnings growth, the managers expressed confidence in identifying quality growth companies adaptable enough to thrive in a challenging environment.

Stephen Paice: Baillie Gifford European Growth Trust

Stephen Paice, manager of Baillie Gifford European Growth Trust, discussed the trust’s journey since 2019, noting two strong initial years followed by four challenging ones. Despite current pessimism reflected in the 10 per cent discount, Paice was confident both Europe and the Trust were starting a new chapter.

He identified European conservatism as a key historical headwind compared to US spending. However, significant shifts were underway: German Chancellor Friedrich Merz represented a monumental political and fiscal change with a pro-business approach, while geopolitical pressures had pushed European politicians into strategic overdrive regarding infrastructure, defence and capital markets.

Unlike previous false dawns, he said, this shift was substantiated by GDP inflection, real wage growth, controlled inflation and appealing valuations. Paice acknowledged the board’s performance-based tender if the trust failed to outperform over four years.

The strategy to return to outperformance centred on growth investing, with Paice emphasising that companies needed not just to be good but to exceed market expectations. He illustrated this with Spotify, where Baillie Gifford maintained faith despite an 80 per cent share price collapse, before the company proved critics wrong with a tenfold recovery.

The portfolio included approximately 8 per cent in private companies like Bending Spoons, Sender and Flix Mobility. Portfolio companies were growing faster than the index (15 per cent versus 9 per cent), with higher returns on capital and stronger balance sheets.

Contrary to regulatory stereotypes, Paice highlighted Europe’s exposure to powerful structural growth trends: semiconductors, industrials, digital pioneers, supply chain innovators, domestic champions, climate businesses, healthcare companies, pharmaceutical innovators and luxury brands.

Paice concluded that Europe was changing, yet many portfolio companies remained priced for perpetual disappointment. If now was not the time to invest in European growth, he didn’t know when would be.

Robert Natzler: The Schiehallion Fund

Robert Nazler explained how the market is fundamentally changing, with most large companies now staying private rather than listing on stock exchanges. An impressive 87 per cent of US companies making over $100 million now operate privately, representing a major shift in how businesses access capital.

The Schiehallion Fund specifically targets promising private businesses across several high-growth sectors including social media, artificial intelligence, data management, manufacturing services, and Chinese consumer brands. These companies often offer better investment value because they’re seeking private funding while waiting for the right moment to enter public markets.

To illustrate this transformation, Nazler compared financing activity between 2023-2024, noting that just seven large private market deals matched the total capital raised across all technology public offerings, demonstrating the growing importance of private markets despite fewer transactions.

After a period of excessive valuations in 2021-2022, prices in international private markets have returned to reasonable historical levels, creating attractive investment opportunities globally. While US private companies still command premium prices at about 15 times their revenue, better-valued options exist in international markets.

Companies in the Schiehallion portfolio are growing significantly faster than typical technology stocks, with stronger profit potential. Although about 80 per cent aren’t yet profitable, most have sufficient cash reserves to operate for at least four years, providing financial stability.

The risk profile sits between safer public investments and riskier early-stage venture funding. A typical Schiehallion investment is a company generating $200m in annual revenue and growing at 70 per cent yearly, projecting future growth of 84 per cent compared to much lower rates in other investment categories.

Nazler highlighted success stories including payment platform Wise (75 times revenue growth since investment), Affirm (24 times), and TikTok owner ByteDance (23 times). He expressed confidence that as conditions improve for public offerings, many portfolio companies will successfully transition to public markets, citing their operational strength as the foundation for his optimism about future prospects.

Brian Lum: Baillie Gifford Shin Nippon

Brian Lum, the new manager of Baillie Gifford Shin Nippon, presented the case for investing in Japanese small caps. He built upon Matthew Brett’s earlier discussion about Japan’s broader investment appeal, focusing specifically on the small cap opportunity.

Lum highlighted Japan as the deepest small cap market outside the US and China, with 3,000 to 4,000 companies to explore compared to just over 1,000 in the UK. He emphasised that while aggregate growth was important, the real opportunity lay in identifying outliers within this universe, noting how previous small caps like Keyence had grown into $100bn companies.

Japan’s contrasting business landscape presented significant opportunities for disruptors, Lum explained. While certain sectors demonstrated remarkable efficiency, many domestic supply chains operated with layers of inefficient middlemen. The ‘Galapagos syndrome’ of Japan’s unique business environment, also created growth opportunities, as the 120-million-person market remained challenging for foreign firms to penetrate its idiosyncratic business ecosystem, particularly in sectors such as fintech.

Lum highlighted the emergence of a new breed of entrepreneurs in Japan, noting that 11 of Japan’s 55 billionaires had founded companies in the previous 25 years.

The investment approach focused on three qualities: curiosity (seeking companies that viewed markets differently, often founder-led businesses), bravery (maintaining conviction despite recent challenges), and patience (with portfolio turnover lower than industry average).

Lum illustrated this approach through four examples: GA Technologies, a real estate platform that dramatically improved transaction efficiency; Cosmos, a low-cost retailer with consistent growth; Tsugami, an engineering company with strong Chinese operations; and Yonex, a dominant family-run sports equipment maker, specialising in badminton but expanding into tennis.

Acknowledging Shin Nippon’s poor recent performance amid Japan’s small-cap growth derating, Lum expressed excitement about the portfolio’s valuation opportunity. He pointed out that despite superior historical and forecast growth, the portfolio traded at a valuation below the index, with additional discount in the trust’s share price. The board had been supportive during difficult times, adjusting market cap parameters and actively buying back shares—nearly 10 per cent in the previous financial year.

Kirsty Gibson: Baillie Gifford US Growth Trust

Kirsty Gibson outlined their approach to investing in exceptional American growth companies. Launched in March 2018, the trust provides investors access to exciting growth companies, both public and private, with the ability to invest up to 50 per cent in private businesses. Currently the share is between 35 and 40 per cent.

Gibson identified three key competitive advantages: a long-term horizon (five to 10 years), a conviction-led approach with a concentrated portfolio, and a focus on exceptional growth companies that drive market returns. She emphasised that long-term investing is challenging, requiring conviction that can withstand inevitable volatility. She illustrated this by showing how top performers such as NVIDIA and Tesla experienced multiple drawdowns of 30 per cent or over on the road to delivering big returns.

Addressing the uncertainty surrounding President Trump’s second term, Gibson emphasised a focus on structural growth trends rather than predicting political outcomes. These trends include falling battery costs, declining AI inferencing costs, and advances in genetic understanding. She stressed the importance of investing in companies with resilience to navigate short-term challenges and adaptability for long-term opportunities.

Gibson highlighted culture as the foundation of successful companies, distinguishing between ‘foundational culture’ (the deeply held beliefs that define a company’s mission) and ‘created culture’ (practical manifestations that evolve over time). She used CoStar and Shopify as examples of companies with strong cultures that enabled them to navigate significant transitions while building lasting value.

The presentation showcased several portfolio companies navigating transformative periods: DoorDash expanding beyond restaurant delivery, Databricks leveraging AI, Stripe moving into stable coins, Duolingo expanding beyond language learning, SpaceX developing larger reusable rockets, and salad specialists Sweetgreen transitioning to robotic food assembly.

Gibson concluded that while index investing has its place, the US Growth Trust offers access to exceptional companies – public and private – built on strong cultures that provide the alignment, flexibility and adaptability needed to capture extraordinary growth opportunities in the US.

Amy Atack: Conclusion

Closing the two-day conference, Baillie Gifford managing partner Amy Atack thanked clients for their support amid recent challenges for the investment trust sector, while highlighting the positives. She emphasised the firm’s pride at being the leading manager of investment trusts, and underlined its unwavering commitment to the sector, which now represents around 10 per cent of assets under management. 

Atack acknowledged the volatility experienced by growth investors amid global disruption, fragmentation and recalibration, but affirmed Baillie Gifford’s continuing pursuit of excellence and constant improvement.

Looking ahead, Atack highlighted two key areas. First, AI, which is enhancing human capability and productivity within their investment processes but not replacing creativity. Second, private company investing, which she described as a strategic priority and differentiating advantage for the firm as more companies remain private longer.

This emphasis, she said, offered investment trust clients access to innovative, high-growth companies otherwise unavailable to most.

Thanking the trust boards for their invaluable stewardship during difficult periods, Atack expressed her optimism in all the opportunities created by the current technological, cultural and structural shifts. The right approach for the future, she said, was one of confidence, optimism, and a shared commitment to excellence and partnership. 

For more information on the trusts and their performance, please visit our Funds page.

Words by Colin Donald.

Important information and risk factors

This communication was produced and approved in May 2025 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

Unlisted investments such as private companies can increase risk. These assets may be more difficult to sell, so changes in their prices may be greater.

The Schiehallion Funds risk is increased as it holds fewer investments than a typical investment trust and the effect of this, together with its long term approach to investment, could result in large movements in the share price. Market values for securities which have become difficult to trade may not be readily available and there can be no assurance that any value assigned to such securities will accurately reflect the price the Trust might receive upon their sale.

The Pacific Horizon and Baillie Gifford China Growth Trust invest in China, often through contractual structures that are complex and could be open to challenge, where potential issues with market volatility, political and economic instability including the risk of market shutdown, trading, liquidity, settlement, corporate governance, regulation, legislation and taxation could arise, resulting in a negative impact on the value of your investment.

Investment in smaller companies is generally considered higher risk as changes in their share prices may be greater and the shares may be harder to sell. Smaller companies may do less well in periods of unfavourable economic conditions.

This article does not constitute, and is not subject to the protections afforded to, independent research. Baillie Gifford and its staff may have dealt in the investments concerned. The views expressed are not statements of fact and should not be considered as advice or a recommendation to buy, sell or hold a particular investment.

All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk. Past performance is not a guide to future returns.

Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). The investment trusts managed by Baillie Gifford & Co Limited are listed on the London Stock Exchange and are not authorised or regulated by the FCA. A Key Information Document is available at bailliegifford.com.

Key Information Documents are available at bailliegifford.com.

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