on the future:
The value of your investment and any income from it is not guaranteed and may go down as well as up and as a result your capital may be at risk.
In September 2020, we became investment managers for what was the Witan Pacific Investment Trust, following the decision by the board to appoint us. Our radical proposition was simple – to refocus the trust away from the broad Asia Pacific region, and instead focus it solely on the most important, and arguably most exciting market of the coming decades: China.
Consequently, the trust has been renamed as Baillie Gifford China Growth Trust plc, and the portfolio invested into the 40-80 Chinese companies which we believe are most likely to deliver outstanding growth over the next five to 10 years. The portfolio is similar to our highly regarded Baillie Gifford China Fund. However, the trust will have the added advantage of financial gearing and being able to invest into smaller cap and unlisted companies, the latter of which are becoming an ever more important investment opportunity in China.
So why China and why Baillie Gifford?
At the end of 2019, Baillie Gifford did something it had never done in its 112 year history – we opened a permanent research office outside of Edinburgh – the location – Shanghai.
The first and most obvious reason for this is that the opportunity for investors in China is huge.
China has already achieved the fastest sustained expansion by a major economy in historyWorld Bank 2019
Over the past decade, China has accounted for roughly a third of all global GDP growth, its middle class is now the largest in the world, and the economy and stock market are the second largest. Driven further by world-leading technology, continual innovation, and a middle class growing by tens of millions every year, there is so much more to come.
More importantly, the opportunities in the equity market are compelling. Our experience of China is that it is one of the most inefficient markets in Asia, partly as a result of the significant role played by retail investors who make up some 80 per cent of domestic trading volumes. Such participants often exhibit herd like investment mentalities, with holding periods measured in days not years. We are confident such inefficiencies give the trust, with our five to 10-year investment time horizon, a truly differentiated edge.
At the stock level, China is where investors can find many of the world’s most innovative companies which are well suited to our growth style of investing. Some examples from our portfolio include:
Revolutionising healthcare –
Ping An Good Doctor, an online GP service, has utilised artificial intelligence in such a way that a single Ping An doctor can review 500 patients a day, with double the accuracy of a physical doctor.
© 2018 Bloomberg Finance LP.
Catalysing ecommerce –
Alibaba and JD.com have helped create the world’s biggest ecommerce market, larger than the next 10 combined.
© Visual China Group via Getty Images.
Spearheading electric vehicle adoption –
CATL, the world’s largest electric vehicle (EV) battery maker, has enabled China to account for nearly half the global EV market.
Chinese companies continue to ramp up their investments in research and development, (the country already spends more on R&D than all of the EU, and is likely to soon overtake the USA). This, combined with the world’s largest middle class, whose appetite to consume and adopt technology is arguably growing faster than anywhere else in the world, gives us confidence that many of the world’s leading technology firms will be found in China over the coming decades.
It is perhaps surprising that, despite these attractions, China is significantly underrepresented in global portfolios: globally, China is 18 per cent of market cap, 30 per cent of listed stocks, but only 2.5 per cent of global funds’ allocations.
Source: MSCI ‘China and the future of equity allocation’ published in June 2019. *in MSCI Investable indices
**Market capitalisation weight in China %
†stocks delivering 15% p.a. or better on average for the 5 years to end 2019.
As the market continues to open up and its vast potential is realised, this simply has to change. We believe investors would be wise to consider holding China now to get ahead of this substantial anomaly.
Why Baillie Gifford?
Baillie Gifford is fortunate to have been investing in China for many decades, providing us with years of knowledge and understanding of the unique Chinese market, and allowing us to hone our unique investment process through numerous market cycles. The result is that our long-term approach, focused on growth companies, has added significant value for our clients. Our China fund for instance has an impressive track record being top quartile in performance since inception and over 1,3,5 and 10 years.
Key to our success has been our differentiated philosophy, which is perhaps surprisingly simple: it is long-term, active and growth. Taking each in turn:
- We’re genuinely long term. Our investment horizon is five to 10 years, in a region where the average holding period is only a couple of months. This is a massive differentiator. Our incentivisation is also staunchly long-term. We’re remunerated based on five-year rolling investment performance – again, something we believe to be almost unique in the region
- We’re active: We look for companies that can substantially outperform the market and we hold them in size. We’re willing to be very different to the benchmark and this willingness to be different has been a strong driver of performance.
- Finally, we’re growth. To be frank, if you’re not looking for growth companies in China, you’re missing the point. China has some of the most exciting and transformational growth companies in the world and our philosophy is centred on finding them.
We are supported by a substantial China resource at Baillie Gifford. The trust is run within our very experienced Emerging Markets Team, which has been managing money, much of it in China, since 1994. We also benefit from the wider Baillie Gifford investment resource. For instance, throughout the firm, we have over £40 billion in Chinese equities, around 70 of our global investors research Chinese companies, and we now have the additional valuable insights from our colleagues in Shanghai.
Thanks to our experience, size and unusually long investment time horizon, we have a strong reputation in China and have developed a number of close relationships with the country’s leading companies. This brings many benefits, including being sought out to be early investors in the best unlisted Chinese companies. With a number of companies increasingly putting off listing until much later in their development, a key benefit of the trust is its ability to take advantage of this growing opportunity set, supported by Baillie Gifford’s significant experience in this area.
The Baillie Gifford China Growth Trust is a highly differentiated product, characterised by Baillie Gifford’s long-term time horizon, our focus on identifying companies with substantial growth potential, and our experience investing in China and in attractive unlisted equities. We believe this is a compelling proposition for investors seeking access to what we believe is the most exciting, yet under-owned, market of the coming decades: China.
Annual Past Performance to 30 June Each Year (%)
2016 2017 2018 2019 2020 Baillie Gifford China Fund B Acc 3.1 50.1 16.6 -1.9 32.7 MSCI China All Shares Index* -2.2 34.7 13.0 1.3 16.0 MSCI China All Shares Index +2%** -0.2 37.4 15.2 3.3 18.3 Investment Association China/Greater China Sector -6.9 34.8 17.3 -1.7 18.7
Source: StatPro, FE, MSCI, IA. Sterling. Returns reflect the annual charges but exclude any initial charge paid.
*(MSCI Golden Dragon Index to 02/05/2019, MSCI All China Index to 27/11/19 thereafter MSCI China All Shares Index).
**(MSCI Golden Dragon Index to 02/05/2019, MSCI All China Index to 27/11/19 thereafter MSCI China All Shares Index) +2%.
Past performance is not a guide to future returns.
The managers believe the MSCI China All Shares Index + 2% is an appropriate benchmark given the investment policy of the funds and the approach taken by the manager when investing. In addition, the manager believes an appropriate performance comparison for this fund is the Investment Association China/Great China Sector.
The views expressed should not be taken as fact and no reliance should be placed upon these when making investment decisions. They should not be considered as advice or a recommendation to buy, sell or hold a particular investment. If you are unsure whether an investment is right for you, please contact an authorised intermediary for advice.
This article was produced and approved in September 2020 and has not been updated subsequently. It represents views held at the time of recording and may not reflect current thinking.
This recording contains information on investments which does not constitute independent investment research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned. Investment markets and conditions can change rapidly.
The trust’s exposure to a single market and currency may increase risk.
The trust invests in overseas securities. Changes in the rates of exchange may also cause the value of your investment (and any income it may pay) to go down or up.
The trust's risk could be increased by its investment in unlisted investments. These assets may be more difficult to buy or sell, so changes in their prices may be greater.
The trust invests in emerging markets where difficulties in dealing, settlement and custody could arise, resulting in a negative impact on the value of your investment.
The trust can borrow money to make further investments (sometimes known as “gearing” or “leverage”). The risk is that when this money is repaid by the trust, the value of the investments may not be enough to cover the borrowing and interest costs, and the trust will make a loss. If the Trust's investments fall in value, any invested borrowings will increase the amount of this loss.
Baillie Gifford & Co Limited is authorised and regulated by the Financial Conduct Authority (FCA). The investment trusts managed by Baillie Gifford & Co Limited are listed UK companies. The Baillie Gifford China Growth Trust is listed on the London Stock Exchange and is not authorised or regulated by the Financial Conduct Authority.
For a Key Information Document for the Baillie Gifford China Growth Trust, please visit our website at www.bailliegifford.com
MSCI Legal Disclaimer
The MSCI information may only be used for your internal use, may not be reproduced or re-disseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an "as is" basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the "MSCI Parties") expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. (www.msci.com)
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