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<p><strong>As with any investment, your capital is at risk. Past performance is not a guide to future returns.</strong></p>
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<p><strong>Danielle Levy (DL): </strong>Hello and welcome to this programme for Baillie Gifford. The latest in a series of webinars where we talk to the managers of the business’ investment trusts and funds. My name is Danielle Levy and today, I’ll be talking to Steven Hay, co-manager of the Baillie Gifford Monthly Income Fund about how he runs the portfolio. He will then answer your questions which you can submit at any time via the Q&A box. Steven, thank you for joining us and welcome.</p>
<p><strong>Steven Hay (SH): </strong>Thank you. Thanks for having me.</p>
<p class="MsoNormal"><strong>DL:</strong> Your strategy will have been put to the test following the recent outbreak of war in the Middle East and last April when we saw Donald Trump’s tariff announcements. Both created significant market volatility. How has the fund performed over the past year?</p>
<p class="MsoNormal"><strong>SH: </strong>Well, as you said it’s been a volatile time over the last 12 months. I think that’s probably set to continue in terms of just events that we can’t predict. It’s been a period of resilient returns for the fund and very steady income progress, which we’re very pleased about. For example, in calendar year 2025 the fund delivered 7.5% total return. In pounds and pence, the income grew nearly 6%, which is well ahead of inflation which is our target. Inflation’s at about 3.4% so, well ahead of inflation. That’s great. Our equities did struggle a bit. Mainly due to the fact that our steady growth equity style that we have within this strategy was a bit out of favour last year. Everybody wanted AI stocks and so forth. You mentioned Liberation Day tariffs and the impact that had. One of the benefits of this style of equity that we have in this fund means that they tend to hold up much better than the wider market.</p>
<p class="MsoNormal">On the downside, they still fell, but only about half of the global equity market and that’s exactly what we’ve seen over the last few weeks as well. Yes, our equities are down a little bit, but they’re not down half as much as the global equity market has been over the period. I would say the more important point is the diversification really worked in 2025. We’ve got multiple ‘income engines’ we call them, supporting the journey and if one stalls, then the other one can pick up the slack. That’s the whole point of the diversification. The fund is really designed to progress. Doesn’t matter what kind of market regime we’re in. It doesn’t have a narrow set of winners. Really broad-based progress we should hope for in almost any market regime and that’s what we delivered last year.</p>
<p class="MsoNormal"><strong>DL:</strong> If we look specifically at the income that the fund produces. What has helped you to deliver a resilient income stream through these challenging markets?</p>
<p class="MsoNormal"><strong>SH:</strong> I think one of the keys is we’ve got multiple income engines as I was saying. They’re designed to keep on paying the dividends if they’re equities or coupons, if they’re bonds, whatever the weather. Therefore, very importantly, you reduce the forced selling of capital to fund income payments. We’re really anchoring our distributions in what we call natural income. That’s the income that just naturally flows from the dividends from the equities and coupons from bonds and not from asset sales or from funny derivative strategies. They’re just the natural income that comes from the fund. We’re very diversified by cashflow type and return driver across equities, across real assets, property, infrastructure and across fixed income. We also use a global opportunity set to really broaden our sources of income. Although, we do hedge our currency risk back to sterling as far as practical.</p>
<p class="MsoNormal">Over 80% of our fund is outside the UK so, we’ve got a really good global broad-based source of income opportunities. We do also operate with an explicit income risk guideline which is then we don’t want to see more than a 10% decline in our income in any 12-month period. That really determines the types of assets we’re holding in the strategy. We have to have really reliable consistent income within all the different parts of the fund. That’s really the reason why we continue to have very stable income.</p>
<p class="MsoNormal"><strong>DL:</strong> If volatility remains elevated, what does it mean for your strategy?</p>
<p class="MsoNormal"><strong>SH:</strong> As I was saying, I think volatility is likely to remain pretty elevated for many reasons. I don’t necessarily mean in the skirmishes in Iran, but just generally. I think we’re seeing a more volatile world with more uncertainties. We would argue that capital volatility is actually less important for many of our client-base than income volatility. What we do know is that if you get higher capital volatility, then you’re increasing your sequencing risk. That’s if you’re having to sell your assets to generate income. The worst case is that you have to sell those assets when the market’s down and if markets are very volatile, they can be down more often. If you sell when the markets are down, that dramatically reduces your permanent opportunities and return over time. You really want to avoid that. For us, we’ve got diversified sources of return. Diversification within the portfolio so, it should be more resilient from a capital sense.</p>
<p class="MsoNormal">The important point is that we’ve got that meaningful level of natural income. That means you don’t have to sell assets to generate your income. It’s just being thrown off by the portfolio month-by-month. I had mentioned that the income risk guideline, we expect income not to fall by more than 10% in any one year. That means that clients keep getting their income, even if the markets are down. We’ve held within that 10% guideline throughout the whole history of the strategy, even during COVID when UK equity dividends were down 50%, we maintained within that level. The client just sits there and gets the income and the capital can be volatile, but it doesn’t necessarily matter at that point. When I think about levels of other types of volatility, we’ve got inflation risk which is in there. Again, that’s an express objective of the fund is to grow the income and capital in line with UK inflation.</p>
<p class="MsoNormal">We know that’s what really matters to people over a long-run. The portfolio includes assets that should be able to support income growth relative to inflation over time. We have property and infrastructure which often have explicit inflation linkages or at least, implicit inflation linkages. We want our equities to have pricing power and that’s the way they can keep up with income. That really helps. Then on the other big risk for people in retirement or approaching retirement is longevity risk. It’s just that they run out of money and the portfolio doesn’t generate enough return. We’re very focused on staying invested, but to be able to stay invested, then you need to have that consistency of income that you don’t have to drawdown capital. It’s about that not reaching for yield and buying things that are actually riskier and are going to deplete your capital over time.</p>
<p class="MsoNormal">It’s about the right amount of income that can give you a nice little income, but can also allow you to grow your capital over time. I think that’s some mistake that people make in the market is that they just go for the highest yield product out there without really asking how are they generating that yield and what does it mean for my capital in future years? There’s usually a trade-off there. I can think of the likes of BP during the COVID crisis when their had a dividend of 9.2% or a yield of 9.2% and then that very quickly fell as it was apparent that they couldn’t maintain that. That’s a run through of some of the main things. I think the last thing is just to say that having asset allocation flexibility is really important here. Having that flexibility to add to things that have cheapened up too much or change the balance of risks in the portfolio. For us, we don’t really want to take one big macro bet. We just want to have a really resilient portfolio across a range of macro-outcomes.</p>
<p class="MsoNormal"><strong>DL:</strong> You’ve touched on inflation there. I’m sure a lot of the audience will be thinking about this at the moment, particularly with the oil price rise. What is your outlook for inflation this year and are you expecting to see a repeat of 2022?</p>
<p class="MsoNormal"><strong>SH: </strong>Absolutely not. We’re not expecting to see a repeat of that. It’s interesting because a lot of the market commentary thus far, has been using headlines that would make you think this is going to be as bad as that period post-COVID and Russian invasion of Ukraine. As the moment, we’re expecting this to be significantly different. Yes, there will be an impact on inflation from the higher oil price and gas price. Mainly on headline inflation. Headline inflation in the UK and Europe could be up to one percentage point higher for a period. We don’t think core inflation, which is actually more important for policymakers. That strips out the more volatile energy and food elements. That core inflation may be up 0.2%, 0.3%. This is not changing the landscape for inflation. Before, inflation was up to 10% or 11% during COVID. It was completely different.</p>
<p class="MsoNormal">I’m saying that with an assumption that taking our current market expectations for the oil price to be valid. Obviously, it could be the case that this becomes a much more prolonged war and oil prices remain much higher, but I think the most likely scenario is that some kind of solution is found. Trump already wants an offramp and is trying to layout that path already. We think on balance, more likely within the next few weeks you’ll see this be resolved to a large degree. Albeit, we don’t have any certainty on that, but I do think oil prices will come back down and so, the impact of inflation will be much, much more limited than the last time.</p>
<p class="MsoNormal"><strong>DL:</strong> Even if it is temporary or short-term, how are you responding to the prospect of higher inflation? For example, have you made any changes to the fund’s bond allocation?</p>
<p class="MsoNormal"><strong>SH: </strong>We are very aware of inflation when we’re building the portfolio, to make sure we’ve got inflation protection in there. We’re not trying to match every inflation spike that happens for these unknowable events, but what we’re trying to do over five-year periods, we’re trying to make sure the income and capital grow in line with inflation.</p>
<p class="MsoNormal">We have to have a good degree of inflation linkage in there and that’s what we’ve got in the portfolio. We haven’t really responded directly from the inflation risk. As I said, I think our best case or our base case is that inflation won’t be that much higher as a result of this. You’ve seen bond markets sell-off quite a bit and we have not taken advantage of that yet. The thing we are thinking about is whether we should be adding a bit of duration to the fund. We add a little bit of bond risk to the fund as we’ve seen yields move up 0.8% in the UK, for example. It feels a little bit overdone for the actual inflation risk that’s there, but of course, there’s plenty of uncertainties with that. We’re just thinking about that at the moment.</p>
<p class="MsoNormal"><strong>DL:</strong> The strategy has around one-third in equities and you favour stocks that pay out dividends. What is your outlook for dividends?</p>
<p class="MsoNormal"><strong>SH:</strong> Our equity exposure is really centred on that durable cash generation. We’re looking for companies that have a track record of delivering that year-on-year earnings growth. Very stable. Resilient to recessions, for example. Even if that’s out of favour in what we’ve had recently, with the narrow leadership markets you’ve had in the US in particular, we’re not so involved in that. We’re just looking for those companies that are reliable dividend payers. For us it’s not about the highest dividend yield today, it’s about dividends that can persist and grow through the cycle. That’s where our focus is. In the resilience of the dividend and the ability of it to grow, rather than picking a very high dividend which may not be sustainable in the long-run. The point there is that our investors want a stable income experience. They don’t want a regret risk of, I went for that and it’s now not paying me as much as I thought it was.</p>
<p class="MsoNormal">It's helping investors stay invested and seeing their income in pounds and pence growing every year. You might have a fund that pays a high dividend, but it may well be that your pounds and pence you get every year may be declining all the time because the capital’s falling. That’s no good to anyone. It’s all about staying invested. Finding those companies that can pay that resilient growing dividend.</p>
<p class="MsoNormal"><strong>DL:</strong> How much are you expecting to grow the fund’s income by this year? Maybe we’ve touched on this, but how are you planning to do that?</p>
<p class="MsoNormal"><strong>SH:</strong> The aim is for that real income growth over time. Not just on a one-year basis. We’re not looking to turn a long-term retirement objective into a one-year promise. That anchor is CPI over rolling five-year periods for both income and capital. 2025 is a great example of the engine working. Income growth about 6%. In this year, we think income growth will probably be a bit lower than that. Probably be closer to zero actually, over the year, for a couple of reasons. We think growth will resume again in 2027. The underlying structural drivers of income growth in the portfolio are all working very well. It’s those equities that can grow dividends and we see operationally, the companies are doing really well growing their earnings. Their dividends will continue to grow. We’ve got those real assets with contracted regulated cashflows. The infrastructure and the property and we’re seeing very good income growth coming from them as well.</p>
<p class="MsoNormal">We’re seeing our fixed income pay a nice high yield. That engine is working. The reason the growth might not be so high this year is because we’ve decided to put a small part of our equity holding into a growth sleeve. So, because there’s so much going on with AI and disruption in the economy—I know we’ve all forgotten about AI with what’s happened in Iran for the last few weeks, but there’s such a big disruption and change that’s going on, that we felt it was appropriate to have some small allocation to some of the faster growing companies. We know that that’s at the expense of near-term income. So, we’re going to reduce our income growth this year and put some money into those faster growing growth companies. Only 5% of the portfolio. From next year, we’ll expect to see the income back to our usual above inflation growth hopefully.</p>
<p class="MsoNormal"><strong>DL:</strong> Obviously, diversification is crucial to help a portfolio to absorb any unforeseen shocks. How do you make sure the portfolio is diversified enough?</p>
<p class="MsoNormal"><strong>SH:</strong> We target diversification that really is there. Meaning different return drivers, different cashflow sources. Not just lots of holdings. The portfolio’s built across three core income engines. Equities, real assets, and fixed income. Those are all doing different things. Plus, a modest allocation to cash. We’ve got that global opportunity set. We are getting a lot of diversification from being outside the UK. Not being too reliant on any particular economy. The currency risk is back to sterling to remove that. We’re clear what each sleeve is for and the job that it plays in the portfolio. We know the equities are there for the real growth in income above inflation. We’re looking for the property and the infrastructure to provide income that will rise in line with inflation, but is a bit higher than you get from the equities. Then we’re looking for the fixed income to pay an even higher income, but we accept that bit probably won’t grow with inflation because it’s fixed income, it doesn’t tend to do that.</p>
<p class="MsoNormal">It provides more stability. It provides that higher level of income and it’s blending those three types of assets together that gives us the diversification and resilience. We’ve done a lot of modelling over the years to work out what is exactly the right mix of those asset classes to hit that objective? All the time you’re balancing how much income can I pay versus my capital growth? For us, it’s very important that we do balance that. We pay as high an income as we can while still aiming to grow the capital in line with inflation because that’s really important for your future income growth.</p>
<p class="MsoNormal"><strong>DL: </strong>Have you made any recent changes to the fund’s asset allocation?</p>
<p class="MsoNormal"><strong>SH:</strong> Fairly measured shifts. We’ve been keeping that balanced three engine design pretty much. We have reduced cash. We’ve been holding a bit more in cash and we’ve been reducing cash through last year as rates fell. There was an opportunity to move the cash elsewhere and we’ve added into emerging market bonds have been an attractive area for us to move into. They had yields that had sold-off and gone a lot higher post-COVID. Never quite come back down as far as developed market bond yields so, there was some great opportunities there. With the weaker dollar and US interest rates coming down, that was a great environment for emerging market bonds. We’ve had about 20% of the portfolio in emerging market bonds. Both hard currency and local currency. Quite different, but they’re both exposed to emerging markets.</p>
<p class="MsoNormal">We added a little bit to high yield as well. An area we’ve liked over the last number of months is property and infrastructure. Property and infrastructure had a great few years and then with the big rate move up post-COVID, they both struggled. We’ve noticed that they’re very cheap from a valuation point of view. They’re unloved, but operationally they’re doing very well. We’ve got holdings that we really like in these areas and we think they’re too cheap. Infrastructure in particular, can be seen as being a bit of a boring asset class. Steady, resilient, which definitely plays a part, but not really shooting the lights out in terms of earnings growth. What you’re seeing, for example, we’ve got quite a significant in US utilities and they’re very heavily regulated, but they’re allowed to earn a regulated return and because there’s such a focus on building out the grid to bring in renewables, they’re allowed to earn a higher regulated return.</p>
<p class="MsoNormal">Rather than looking at the 2% to 3% earnings growth, we’re looking at more of a 6%, 7%, 8% earnings growth, but they’re still as reliable and consistent. For us, they’re not boring. They’re actually very exciting so, we’ve been adding to infrastructure and property as well we think is a bit cheap. Those are probably the areas we’ve liked the most.</p>
<p class="MsoNormal"><strong>DL:</strong> You spoke earlier about the opportunity that was available in REITS trading on quite large discounts. Have they delivered for the portfolio and what is your outlook for REITS in general for the ones you hold in the portfolio?</p>
<p class="MsoNormal"><strong>SH:</strong> After a few disappointing years they did better again last year. The discounts did narrow significantly. Again, as I say, operationally great. We know from our macro work that the time you really want to be invested in REITS is when you’ve got the economy growing reasonably well and you’ve got interest rates coming down. That’s a perfect environment for REITS. We delivered that for a bit last year. They did do very well. That stalled a bit with the recent developments. The move back up in gilts and some market concerns about inflation so the discounts have widened out again on REITS. We’re waiting for the catalyst to come that will really make these things perform and be the best performing thing in the market. Meanwhile, while we’re waiting for that they pay a nice high yield. We’re getting a yield of over 5% on the REITS that we hold and they’re all really good quality companies. We don’t buy any of the speculative stuff.</p>
<p class="MsoNormal"><strong>DL:</strong> Can you talk us through some examples?</p>
<p class="MsoNormal"><strong>SH: </strong>We tend to focus on more specialist property areas. Not just the offices or retail and I wouldn’t do hotels because that’s too volatile. It’s not a consistent enough dividend for us. Logistics is an area that we like. Building warehouses that are used the more and more online retail there is and that continues to grow. That’s been a very interesting area. CTP is a company we really like in Eastern Europe. Eastern Europe is quite a lot lower in terms of penetration of online retail, but it’s growing fast and CTP are a great developer of these properties, as well as operating them. They’ve been a very interesting investment. Another one, for example, is also thinking about-, although in public markets we think property’s very cheap, it has been the case that private money has come in to take things private because they’re so cheap.</p>
<p class="MsoNormal">That pressure often brings deals to the market. One of them was Assurer, for example. You’ll remember the headlines last year, but Assurer was operating medical practice properties. Very, very resilient rental income coming from NHS backed, etcetera. Very resilient, but very cheap, trading at a 7% or 8% yield. We thought it was too cheap and so did Primary Healthcare Properties who came in and took it our last year and we saw a big narrowing of the discount when that happened. That’s another option in the property market when you see things get taken out because the private market realises that it’s cheap. I will say in all our asset classes we are avoiding the riskiest things and we are looking for the things that can pay enough of an attractive dividend and they can grow that with a real reliability and consistency so that we can make sure we can pay our income monthly for our clients because that’s what they need.</p>
<p class="MsoNormal"><strong>DL:</strong> Have you taken advantage of market volatility to initiate any new positions? If so, what have you been buying?</p>
<p class="MsoNormal"><strong>SH:</strong> We’re always on the lookout for opportunities, always considering which asset class may have overreacted to this. We haven’t done a lot during this current thing because we’re obviously just waiting to see what’s going to happen. As I mentioned earlier, we like emerging market bonds and some of the emerging markets have sold-off perhaps because they’d been in a bit of a tear beforehand so people had been reducing profitable positions. Peru, for example, that’s one market we really like as a local currency. We like the currency. We like the bonds. The institutions are good. Inflation’s very low. Growth is good. They’ve got big copper production. They’re a very good place. Yields are 6.5%, 7% and they sold-off significantly as part of this and it shouldn’t have made any difference to them.</p>
<p class="MsoNormal">It doesn’t fundamentally, it’s simply a market reaction. We did add to Peru as part of looking at what was happening. We had some cash built up at the sidelines. The other thing we did was we sold some infrastructure. We’ve been overweight infrastructure relative to our strategic asset allocation and infrastructure has held up remarkably well, as we would have expected to be honest. Through this period, it’s held up very well. The renewable trusts have done very well because power prices are up and, in the US, utilities have done extremely well so we actually took advantage of that and reduced some infrastructure and moved it into cash. That cash is there for us to take advantage of cheapness in other asset classes that we’re seeing at the moment. We’re just looking through different asset classes and thinking about what we might want to invest in.</p>
<p class="MsoNormal"><strong>DL:</strong> The final question I have for you and I guess it’s the million-dollar question for the audience. What advice can you offer to retirees who are potentially concerned about the prospect of higher volatility in markets and elevated inflation? How can they keep their spending power intact?</p>
<p class="MsoNormal"><strong>SH:</strong> With the caveat that every retiree is different and I don’t want to offer investment advice, but for me I think you obviously hope retirement is long. I think for us, often pots aren’t big enough. There’s that longevity risk. I think remaining invested and remaining invested in assets that can properly grow is the biggest thing for me that’s absolutely key. Don’t derisk more than you need to and stay invested. I think that’s one of the big reasons why we developed monthly income product is because we want our clients to be able to feel that they can stay invested, harvest that natural income from the strategy and don’t worry too much about the capital volatility because it doesn’t really effect your day-to-day. Don’t get drawn into making mistakes and selling because things are falling. That’s the worst time to sell. You want to be buying when things are falling.</p>
<p class="MsoNormal">If clients can just stay invested, they can just see the benefits of the compounding over many years. They’ve obviously got to get the risk balance right, but that’s why for us-, we’re not an annuity, we can’t guarantee an income, but we focus really, really hard on finding investments that are really reliable income payers. Won’t cut their dividend, won’t default their coupon and then we blend them with lots of diversification to make it even more resilient. That hopefully gives clients the ability to stay invested. It’s those things. It’s building diversification across the portfolio, not being too narrow in terms of what you’re investing in and don’t have dependence on selling assets to fund your spending. Inevitably their may be some of that, but just as your whole strategy, we think it’s better to avoid that and reduce your sequencing risk and have a natural income.</p>
<p class="MsoNormal"><strong>DL:</strong> Thanks, Steven. We’ve had quite a few questions coming in. The first question is about how the income is distributed. Someone has asked, “Is the distributed income smoothed so that the income is broadly even month-to-month or is it as received?”</p>
<p class="MsoNormal"><strong>SH:</strong> It’s smoothed a bit. As an OEIC, we have to pay out all our income over a 12-month period. That’s what we have to do, but we do smooth it. We pay out one 13th of our expected income every month until the last two months and then a balancing income payment in the last two months to pay out the whole lot. It is smoother over the whole period.</p>
<p class="MsoNormal"><strong>DL:</strong> Someone else has asked, “Some other income funds invest in gold ETFs to reduce asset volatility. Do you invest in non-income producing assets?”</p>
<p class="MsoNormal"><strong>SH:</strong> It’s a really good question. We usually want to have everything paying income in the fund. When we see a great capital opportunity that we think can improve the overall outcomes of the fund, then we will consider it. Within our different asset classes, we will sometimes have our specialist managers within each asset class saying I’ve got a great opportunity for this particular equity, but it’s only got a 1% yield or it’s got no yield, doesn’t pay a dividend at the moment, what do you think? We can’t have very many of them in the strategy because we need to maintain that high level of income. There’s room round the edges for great opportunities. Gold could come into that category, but we wouldn’t be able to hold much of. We rarely have the confidence to say that we know what’s going to happen with gold to be honest.</p>
<p class="MsoNormal">Asset allocation generally is difficult, even in the asset classes that we do think we understand. We’ve probably got a decent amount of humility about that. We have held gold miners in the past. Gold miners are a way, when an investment has got some income but is also exposed to the gold price. The reason for holding them was that we thought it would be a great hedge in the portfolio for income. Let’s say there’s a global recession or something and income does fall in some part of your portfolio. Then if the gold price has gone up in response to that risky event, then the gold miners will earn more money and they’ll pay a higher dividend and that will offset your income drop. When we look back over a number of different episodes over history and you find that the gold miners don’t actually pay any higher income until about two or three years after the event.</p>
<p class="MsoNormal">By that time, your income hit has usually happened in the first year, then the companies are back. So, it doesn’t actually help you. From an income point of view, it wasn’t as much of a help as we maybe thought it was beforehand. Yes, I can see why there could be a place for gold from a capital point of view. As I said, we just don’t really have the strong enough views on what drives the gold price. We think we’ve got enough diversification coming through in other parts of the portfolio to play that role.</p>
<p class="MsoNormal"><strong>DL:</strong> “You highlighted the fund’s yield is generated from the natural yield of the portfolio. Would there be any circumstance where the fund would resort to paying a yield from capital?”</p>
<p class="MsoNormal"><strong>SH:</strong> No. We’re not allowed to do that with the UK OEIC rules.</p>
<p class="MsoNormal"><strong>DL:</strong> I guess that’s more akin for investment trusts.</p>
<p class="MsoNormal"><strong>SH:</strong> Yes. We can’t do that. I think there was talk of maybe changing at some point, but at the moment we certainly can’t. There’s a regulation we can’t do that.</p>
<p class="MsoNormal"><strong>DL:</strong> I guess we’re drawing on your background working as an economist for the Bank of England here. “If interest rates rose by 3% to 5%, how would this affect the capital value of the fund?”</p>
<p class="MsoNormal"><strong>SH: </strong>The short answer would be it would fall. As virtually every other asset in the market would. We don’t have a huge amount of duration in the fund, i.e., exposure to rising rates, but we do have some bonds that would be influenced by that. Obviously, we’ve got a lot of diversification within our bonds globally. It depends if it’s just in the UK that that move happens or if it’s a global interest rate move. We would see our bonds fall in price. We would see our longer duration assets, such as infrastructure and property, they are sometimes seen a little bit like bonds because they’ve got a very clear set of regulated cashflows often. They sometimes react that way. With equities it really just depends why the interest rates are rising. If it’s because growth is good, even if inflation’s a bit high, you might see equities do reasonably well as part of that scenario. It’s not sure how equities would do in that situation.</p>
<p class="MsoNormal">It would be a challenging environment. Our challenge, as managers, is to-, obviously, depends why this has happened and our ability to position the portfolio ahead of such a move in interest rates. What we did before the COVID move up in interest rates is we recognise the rates were low. We had a very strong view that inflation was going higher and we hedged a lot of the duration risk in the portfolio. We shortened the bond portfolio significantly and that really helped mitigate the worst impacts of rising yields. I don’t know what it is that’s going to cause that, but hopefully, we try and anticipate these things and move the portfolio ahead of that.</p>
<p class="MsoNormal"><strong>DL:</strong> You did talk about how the strategy compares to annuities earlier, but there is a more direct questions which is, “How would you summarise the pros and cons of your fund versus an annuity?”</p>
<p class="MsoNormal"><strong>SH:</strong> I guess the obvious pro is an annuity is guaranteed. You know with certainty what you’re going to get and you can get inflation linked annuities, although they are more expensive and less common. With us you don’t have that guarantee of income. We say that we are managing the portfolio and stress testing it such that the income won’t drop by more than 10% in any one year. That’s some degree of volatility, but the reason we chose that number was from talking to clients before we launched the strategy. They didn’t know what volatility they could tolerate in their income and we said, “How about 10%?” and they said, “We could probably live with that. It’s not our only source of income and if things fell by 10%, we can probably live with that.” That’s why we’re there. We’ve got some volatility in our income and you would expect that, but you’re expecting your income to grow over time.</p>
<p class="MsoNormal">Your annuity is not growing in line-, if it’s inflation linked it might grow in line with inflation, but it’s not growing in real terms. We’re looking to grow ahead of UK inflation. Probably the big thing as well is that with an annuity you die and that’s it, gone. There’s nothing left to pass on as an inheritance. Whereas with monthly income, you’ve accumulated that capital pot and that can be passed on. That seems to me to be an absolutely massive difference between monthly income and annuities, that you can then decide what you want to do with that pot of capital that’s hopefully grown, at least in line with inflation over time. Keeping its value in real terms. We feel like an annuity in perpetuity. Whereas an annuity is not.</p>
<p class="MsoNormal"><strong>DL:</strong> Someone else has asked if you could talk them through how you have exposure to infrastructure within the portfolio?</p>
<p class="MsoNormal"><strong>SH:</strong> Importantly it’s listed infrastructure. This is not directly invested infrastructure. It’s listed infrastructure. My colleague, Nikoleta, who also sits on our decision-making group for monthly income, she manages an infrastructure portfolio that’s full of listed infrastructure and equities. They can sometimes move in line with the general equity market, but there’s really quite different underlying drivers to them. We focus on core infrastructure, not the part that’s more economically sensitive. Things like transport or gas pipelines. Those things are not part of what we’re investing in as much. It tends to be more the regulated utilities, electricity grid providers, that kind of thing. We do have some exposure to investment trusts in the UK. The likes of UK Wind, Greencoat Renewables, Foresight Solar. We have a mix there, but the bulk of it is in regulated utilities.</p>
<p class="MsoNormal"><strong>DL:</strong> “How does the monthly income fund fit into a broader portfolio?”</p>
<p class="MsoNormal"><strong>SH:</strong> I think it’s a core income building block for late-stage investors. The fund is designed for late-stage accumulation and retirement. It’s explicitly addressing those longevity, inflation, and sequencing risks. It provides a monthly natural income and it aims to grow that in line with CPI over five-year periods. It’s very diversified so it supports a steady experience in drawdown. It really can form a core allocation for investors who want to prioritise that stability and resilient income. They can add other growth assets to complement it as they think appropriate. We think it can sit pretty nicely alongside other similar strategies that may be more of a value style. Within a broad multi-asset income portfolio, we tend to be slightly more on the growing the income over time style and other people will be more the value and pay a higher income now. If people want that, they can blend it, but a pretty core allocation I would say.</p>
<p class="MsoNormal"><strong>DL:</strong> Another question which is drawing on your experience managing the fund through different market conditions is, “How do you deal with crises and what have you learnt over the years?”</p>
<p class="MsoNormal"><strong>SH:</strong> This is an interesting one. One we’ve actually been discussing round our desk quite a bit recently. There is a similar pattern to quite a lot of these things. Certainly, when it comes to what we’re currently experiencing now. You never know, right. This could be different this time, but there’s usually a period where something happens and it might be the actual invasion or whatever and the market reacts a bit and people think it won’t last long so people don’t really adjust positions too much and the market sells off a bit, but it’s fairly well contained. Then there’s a process of escalation. People think maybe it’s not going to be over quite as quick. Maybe it’s going to go on a bit longer and they climb the wall of worry and markets inevitably follow. What you get is people start liquidating their positions. People who have profitable trades or positions in certain assets, we’ll just sell them to keep the money because we’re not sure what’s going to happen.</p>
<p class="MsoNormal">People who’ve got positions going against them, they don’t have enough stomach to keep them going so they cut them. That’s where you get that capitulation. Every crisis always engenders that degree of investor behaviour, which is going on around about this. It’s often in the worst possible moments that the deal is then being made or you’re getting to the endgame. Our experience is that’s the time that you should be buying. The time when it feels most difficult to buy is the time that you should be buying. There’s definitely a bit of that. I think if you’re going to sell your assets going into a crisis like this, you want to sell very early. Don’t sell once you’ve seen all the downside. Once you’ve seen all the downside, that’s the time to buy. For us there are two good things within monthly income. One thing is that we quite often hold some cash. We’ve been holding cash going into this and when we’ve raised a bit more cash we’ve got firepower. Having some ability to take advantage of the sell-off in different assets is really helpful.</p>
<p class="MsoNormal">The other thing is we’ve got so much diversification and resilience in our portfolio that it’s capital volatility we’re talking about here, not income volatility for us. I’ve feeling very relaxed about it at the moment in terms of-, we talked earlier about the income forecast, but it’s not being affected at all by what’s going on at the moment. No impact and so, we can sit here on the sidelines feeling quite relaxed because we know our income is safe and resilient because of the diversification and because of the types of assets that we hold in the portfolio. That makes me feel more relaxed. I think I make better decisions when I’m more relaxed.</p>
<p class="MsoNormal"><strong>DL:</strong> There’s a question about your asset allocation process. “How often do you review asset allocation and what’s the process there?”</p>
<p class="MsoNormal"><strong>SH: </strong>We review our asset allocation. There’re different tiers of it. I mentioned the strategic asset allocation earlier. We go through an optimisation process. We develop long-term returns for all the different asset classes. Look at income and capital and do an optimisation process to work out what is the central case best portfolio to help with our objectives over the next ten years? We do that every couple of years. We review that. That sets our strategic asset allocation. Then we have our tactical asset allocation process. We know that at any one time the best portfolio for us won’t be exactly that strategic one. We have a tactical allocation process. There’s four people involved in the monthly income strategies. Decision-makers and the asset allocation. There’s myself. My background is an economist, a macro specialist if you like. That’s what I bring to the party. We’ve got Lesley Dunn, who’s head of our credit team. She runs our high yield investment portfolios.</p>
<p class="MsoNormal">I mentioned Nikoleta who covers infrastructure. We’ve also got John Stewart who’s our property, our REITS guy. The four of us make the decisions on tactical asset allocation. We’re feeding off the inputs from all the different asset class specialists. We meet weekly. We discuss what’s going on, but we’ll formally discuss asset allocation on a bimonthly basis and decide what to do and we’ll [unclear 42:55] the asset allocation as we think is required.</p>
<p class="MsoNormal"><strong>DL: </strong>The final question which I think is trying to end on some optimism. “After a challenging few weeks, are there reasons to feel optimistic about 2026 and what are your expectations for the year?”</p>
<p class="MsoNormal"><strong>SH:</strong> If we wind back even a few weeks and think where we were, the growth outlook for the world economy was looking pretty strong. In fact, the strongest for quite some time. We were seeing a huge fiscal boost in Europe. A huge fiscal boost in Japan. A change in government there. We saw the emerging markets doing pretty well in general and the US was also firing reasonably strongly. Even the UK was looking a bit more positive. That was the underlying structural economic position. Inflation had been-, we argued a lot about it here which direction it was going, but clearly, inflation had been falling significantly over the last couple of years and was back down to more or less target. Maybe not quite, but more or less at target. Personally, I think AI’s quite a disinflationary force and will keep acting year-on-year. A structural force keeping inflation a bit lower. A bit like the opening up of the global economy under the World Trade Organisation bringing China in and the internet.</p>
<p class="MsoNormal">Those things were disinflationary forces. I think AI’s a bit like that. I accept there’s a bit of inflationary pressure in the short-term so, we’re not quite sure where that’s going to play out. I think overall, it’ll be contained. I think we won’t see much in the way of interest rates rises. You’ve seen interest rate cuts. That’s going to keep on feeding through. You see increased defence spending. I think the overall economic outlook is still pretty positive and I don’t think what we’ve seen so far will derail that. I remember through the tariff thing I thought exactly the same thing at the time, but yet, the market was panicking about what was going to happen to growth and inflation. Actually, not a lot. I think in a few weeks we’ll probably be through this and we’ll be back to worrying about AI and thinking about what the impact of that is on our portfolios and life, rather than thinking too much about oil. That’s the hope at least.</p>
<p class="MsoNormal">DL: Thank you, Steven. That’s all we have time for today. Thank you very much for your time and your insights. Thank you to those watching and for your questions. We have more sessions like this coming up from Bailey Gifford so, do keep an eye out for those if you found today useful. Thank you and goodbye.</p>
<p> </p>
<h3>Baillie Gifford Monthly Income Fund </h3>
<p><strong>Annual past performance to 31 December each year (net%)</strong></p>
<table border="1" style="border-collapse: collapse; width: 99.9148%; height: 163.667px;">
<tbody>
<tr style="height: 39.5521px; border-bottom: 2px solid black;">
<td style="width: 25.3371%; height: 39.5521px; text-align: center;"> </td>
<td style="width: 14.1052%; height: 39.5521px; text-align: right;"><strong>2021</strong></td>
<td style="width: 14.8888%; height: 39.5521px; text-align: right;"><strong>2022</strong></td>
<td style="width: 16.3254%; height: 39.5521px; text-align: right;"><strong>2023</strong></td>
<td style="width: 15.803%; height: 39.5521px; text-align: right;"><strong>2024</strong></td>
<td style="width: 13.5827%; height: 39.5521px; text-align: right;"><strong>2025</strong></td>
</tr>
<tr style="height: 74.5833px;">
<td width="288" style="width: 25.3371%; height: 74.5833px; text-align: left;">
<p>Baillie Gifford Monthly Income Fund B Inc</p>
</td>
<td width="75" valign="top" style="width: 14.1052%; border: 1pt solid windowtext; padding: 0cm 5.4pt; height: 74.5833px; text-align: right;">
<p class="Default">9.7</p>
</td>
<td width="75" valign="top" style="width: 14.8888%; border-top: 1pt solid windowtext; border-right: 1pt solid windowtext; border-bottom: 1pt solid windowtext; border-image: initial; border-left: none; padding: 0cm 5.4pt; height: 74.5833px; text-align: right;">
<p class="Default">-9.6</p>
</td>
<td width="75" valign="top" style="width: 16.3254%; border-top: 1pt solid windowtext; border-right: 1pt solid windowtext; border-bottom: 1pt solid windowtext; border-image: initial; border-left: none; padding: 0cm 5.4pt; height: 74.5833px; text-align: right;">
<p class="Default">8.9</p>
</td>
<td width="75" valign="top" style="width: 15.803%; border-top: 1pt solid windowtext; border-right: 1pt solid windowtext; border-bottom: 1pt solid windowtext; border-image: initial; border-left: none; padding: 0cm 5.4pt; height: 74.5833px; text-align: right;">
<p class="Default">2.5</p>
</td>
<td width="75" valign="top" style="width: 13.5827%; border-top: 1pt solid windowtext; border-right: 1pt solid windowtext; border-bottom: 1pt solid windowtext; border-image: initial; border-left: none; padding: 0cm 5.4pt; height: 74.5833px; text-align: right;">
<p class="Default">7.5</p>
</td>
</tr>
<tr>
<td style="width: 25.3371%; text-align: left;">
<p> IA Mixed Investment 40-85% Shares Sector</p>
</td>
<td style="width: 14.1052%; border: 1pt solid windowtext; padding: 0cm 5.4pt; text-align: right;">
<p class="Default">10.9</p>
</td>
<td style="width: 14.8888%; border-top: 1pt solid windowtext; border-right: 1pt solid windowtext; border-bottom: 1pt solid windowtext; border-image: initial; border-left: none; padding: 0cm 5.4pt; text-align: right;">
<p class="Default">-10.0</p>
</td>
<td style="width: 16.3254%; border-top: 1pt solid windowtext; border-right: 1pt solid windowtext; border-bottom: 1pt solid windowtext; border-image: initial; border-left: none; padding: 0cm 5.4pt; text-align: right;">
<p class="Default">8.1</p>
</td>
<td style="width: 15.803%; border-top: 1pt solid windowtext; border-right: 1pt solid windowtext; border-bottom: 1pt solid windowtext; border-image: initial; border-left: none; padding: 0cm 5.4pt; text-align: right;">
<p class="Default">9.0</p>
</td>
<td style="width: 13.5827%; border-top: 1pt solid windowtext; border-right: 1pt solid windowtext; border-bottom: 1pt solid windowtext; border-image: initial; border-left: none; padding: 0cm 5.4pt; text-align: right;">
<p class="Default">11.6</p>
</td>
</tr>
</tbody>
</table>
<p><span style="font-size: 9.0pt; font-family: 'Helvetica Now Text',sans-serif; mso-fareast-font-family: 'Helvetica Now Text'; mso-bidi-font-family: 'Helvetica Now Text'; mso-font-kerning: 0pt; mso-ligatures: none; mso-ansi-language: EN-GB; mso-fareast-language: EN-US; mso-bidi-language: AR-SA;">Source: FE, Revolution. Net of fees, total return in sterling. Share class returns calculated using 10am prices, while the Index is calculated close-to-close.</span><span style="font-size: 9.0pt; font-family: 'Helvetica Now Text',sans-serif; mso-fareast-font-family: 'Helvetica Now Text'; mso-bidi-font-family: 'Helvetica Now Text'; mso-font-kerning: 0pt; mso-ligatures: none; mso-ansi-language: EN-GB; mso-fareast-language: EN-US; mso-bidi-language: AR-SA;"></span></p>
<p><strong>Past performance is not a guide to future returns.</strong></p>
<p><span class="source-text">The Fund has no target. However you may wish to assess the performance of both income and capital against inflation (UK CPI) over a five-year period. In addition, the manager believes an appropriate performance comparison for this Fund is the Investment Association Mixed Investment 40-85% Shares Sector.</span></p>
<p> </p>
<p><strong>Monthly Income Distribution per unit (pence) </strong></p>
<table border="1" style="border-collapse: collapse; width: 99.8339%; height: 163.667px;">
<tbody>
<tr style="height: 39.5521px; border-bottom: 2px solid black;">
<td style="width: 18.8288%; height: 39.5521px; text-align: right;"><strong>2021</strong></td>
<td style="width: 19.9951%; height: 39.5521px; text-align: right;"><strong>2022</strong></td>
<td style="width: 21.828%; height: 39.5521px; text-align: right;"><strong>2023</strong></td>
<td style="width: 21.1615%; height: 39.5521px; text-align: right;"><strong>2024</strong></td>
<td style="width: 18.1623%; height: 39.5521px; text-align: right;"><strong>2025</strong></td>
</tr>
<tr style="height: 74.5833px;">
<td width="75" valign="top" style="width: 18.8288%; border: 1pt solid windowtext; padding: 0cm 5.4pt; height: 74.5833px; text-align: right;">3.9</td>
<td width="75" valign="top" style="width: 19.9951%; border-top: 1pt solid windowtext; border-right: 1pt solid windowtext; border-bottom: 1pt solid windowtext; border-image: initial; border-left: none; padding: 0cm 5.4pt; height: 74.5833px; text-align: right;">4.1</td>
<td width="75" valign="top" style="width: 21.828%; border-top: 1pt solid windowtext; border-right: 1pt solid windowtext; border-bottom: 1pt solid windowtext; border-image: initial; border-left: none; padding: 0cm 5.4pt; height: 74.5833px; text-align: right;">4.2</td>
<td width="75" valign="top" style="width: 21.1615%; border-top: 1pt solid windowtext; border-right: 1pt solid windowtext; border-bottom: 1pt solid windowtext; border-image: initial; border-left: none; padding: 0cm 5.4pt; height: 74.5833px; text-align: right;">4.4</td>
<td width="75" valign="top" style="width: 18.1623%; border-top: 1pt solid windowtext; border-right: 1pt solid windowtext; border-bottom: 1pt solid windowtext; border-image: initial; border-left: none; padding: 0cm 5.4pt; height: 74.5833px; text-align: right;">4.7</td>
</tr>
</tbody>
</table>
<h3>Important information and risk factors</h3>
<p>This communication was produced and approved in March 2026 and has not been updated subsequently. It represents views held at the time of recording and may not reflect current thinking.</p>
<p>This communication should not be considered as advice or a recommendation to buy, sell or hold a particular investment. This communication 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. </p>
<p>Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA).</p>
<p>Baillie Gifford & Co Limited is authorised and regulated by the Financial Conduct Authority. Baillie Gifford & Co Limited is an Authorised Corporate Director of OEICs. </p>
<p>The Fund does not guarantee positive returns. It aims to maintain the capital value in line with inflation, however this is not guaranteed. Investment markets can go down as well as up and market conditions can change rapidly. The value of an investment in the Fund, and any income from it, can fall as well as rise and investors may not get back the amount invested.</p>
<p><strong>The specific risks associated with the Fund include:</strong></p>
<ul>
<li><!-- [if !supportLists]-->Market values for illiquid securities which are difficult to trade, or value less frequently than the Fund, such as holdings in weekly or monthly dealt funds, may not be readily available. There can be no assurance that any value assigned to them will reflect the price the Fund might receive upon their sale. In certain circumstances it can be difficult to buy or sell the Fund's holdings and even small purchases or sales can cause their prices to move significantly, affecting the value of the Fund and the price of shares in the Fund.</li>
<li>Custody of assets, particularly in emerging markets, involves a risk of loss if a custodian becomes insolvent or breaches duties of care.</li>
<li><!--[endif]-->The Fund invests in emerging markets where difficulties in trading could arise, resulting in a negative impact on the value of your investment.</li>
<li>Bonds issued by companies and governments may be adversely affected by changes in interest rates, expectations of inflation and a decline in the creditworthiness of the bond issuer. The issuers of bonds in which the Fund invests, particularly in emerging markets, may not be able to pay the bond income as promised or could fail to repay the capital amount.</li>
<li><!--[endif]-->Investments may be made directly in hedge funds or, through specific investment vehicles into property, infrastructure and commodities. Returns from these investments are sensitive to various factors which may include interest and exchange rates, economic growth prospects and inflation, the occurrence of natural disasters, and the cost and availability of gearing (debt finance).</li>
<li><!--[endif]-->The Fund has exposure to foreign currencies and changes in the rates of exchange will cause the value of any investment, and income from it, to fall as well as rise and you may not get back the amount invested.</li>
<li><!--[endif]-->Derivatives may be used to obtain, increase or reduce exposure to assets and may result in the Fund being leveraged. This may result in greater movements (down or up) in the price of shares in the Fund. It is not our intention that the use of derivatives will significantly alter the overall risk profile of the Fund.</li>
<li><!--[endif]-->The Fund's share price can be volatile due to movements in the prices of the underlying holdings and the basis on which the Fund is priced.</li>
<li><!--[endif]-->The manager can charge some, or all, expenses to the Fund’s capital, reducing its value. This amount can vary from year to year.</li>
<li>The Fund invests according to sustainable and responsible investment criteria which means it cannot invest in certain sectors and companies. The universe of available investments will be more limited than other funds that do not apply such criteria/ exclusions, therefore the Fund may have different returns than a fund which has no such restrictions.</li>
</ul>
<p>Further details of the risks associated with investing in the Fund, including a Key Investor Information Document and how charges are applied, can be found in the Trust-specific pages at <a href="http://www.bailliegifford.com">www.bailliegifford.com</a>, or by calling Baillie Gifford on <strong>0800 917 2113</strong>.</p>
<p> </p>
<h3>Glossary:</h3>
<p><strong>Real assets</strong> – Investments linked to physical assets, such as property and infrastructure, which can often provide income.</p>
<p>Fixed income – Investments, such as bonds, that usually pay a regular level of income.</p>
<p><strong>Hedge our currency risk back to sterling</strong> – Reducing the impact of foreign currency movements so returns are measured more in pounds sterling.</p>
<p><strong>REITs</strong> – Real Estate Investment Trusts; listed companies that own or invest in property and usually pay income from rents.</p>
<p><strong>Hard currency</strong> – A major, widely used currency, such as the US dollar, that is generally seen as more stable than many emerging market currencies.</p>
<p><strong>Local currency</strong> – The domestic currency of the country issuing the bond or investment, rather than a major global currency like the US dollar.</p>
<p><strong>Duration </strong>– A measure of how sensitive a bond or similar investment is to changes in interest rates.</p>
<p><strong>Natural income</strong> – Income paid by the underlying investments themselves, such as dividends from shares or interest from bonds, rather than from selling assets.</p>
<p><strong>Yield</strong> – The income an investment pays, usually shown as a percentage of its value.<br>Sequencing risk – The risk that poor market performance at the wrong time, especially when taking money out, reduces how long investments will last.</p>
<p><strong>Drawdown</strong> – Taking money out of an investment portfolio to provide spending money.</p>
<p><strong>Annuity</strong> – A financial product that usually provides a guaranteed income, often used in retirement.</p>
