1. The power of positivity

  2. The value of your investment and any income from it can go down as well as up and as a result your capital may be at risk.

  3. Optimism is in short supply in these volatile times, but Baillie Gifford’s Iain McCombie believes the benefits of focusing on the exciting opportunities that pervade the global economy far outweigh the negative news.

    From climate change to trade tensions, it’s not difficult to find reasons to be gloomy in the current environment. Iain McCombie, manager of the Baillie Gifford Managed Fund, believes optimism is important, suggesting positive long-term trends often go unreported and investors shouldn’t bet against human ingenuity.

    He says: “It’s very easy to tell everyone that there are risks. What that approach misses is that good things are happening. These stories are slow moving and not dramatic enough to make headlines, but they are important. The continued growth of the Asian middle class, for example, is not new news, but every week people are being taken out of poverty. That is very valuable.”

    McCombie says that, as a firm, Baillie Gifford “invests in optimism”. That means trying to be on the right side of change: “Things change, new services appear. Investors have got to take note – it’s disastrous for the companies that don’t adapt. The High Street in the UK is a good example.”

    Being optimistic rather than pessimistic makes sound financial sense. In equity markets, the worst-case scenario is to lose all the initial capital invested. However, the upside is, in theory, unlimited. While there will always be a few ‘misses’, investors would hope the big winners in their portfolios should make many multiples of the initial sum.  

    He adds: “This is why we are long term in our thinking. We can’t predict what influences short-term volatility in share prices, but the real risk is permanent loss of capital. Our style is not always going to be flavour of the month, but if our stocks are still growing, the share prices will eventually follow.”  

    This leads to the Managed Fund’s long-term structural preference for equities, which still account for around three-quarters of the portfolio’s holdings. The equity portion blends regional equities from the UK, North America, Europe, as well as developed Asia together with emerging markets. Those areas are roughly equal in the portfolio as it stands, giving a spread of exposure to markets.

    These geographic mandates are parcelled out to individual teams within Baillie Gifford and populated with their best ideas. As such, holdings reflect the firm’s long-term growth philosophy. This emphasis on the long term allows the fund managers to look through short-term noise: “On Netflix, for example, everyone has an opinion and many people are looking at quarterly subscriber growth. We want to step back from that and look at what is happening more broadly – the disruption to the way we watch television.”


    © Francis Vachon / Alamy Stock.

    The team seeks to add value through finding such opportunities rather than asset allocation. McCombie says: “The policy-setting group meets once a quarter, but we try not to tinker too much with the equity portfolio. Of any outperformance over the longer term, around 90 per cent comes from the bottom-up approach rather than through asset allocation. Even our asset allocation is bottom up. We ask the fund managers whether they are finding good ideas and, if so, we will give them more money to support that. We try to play to our strengths.”

    That said, the fund will also hold a structural weighting to fixed income. It has become more difficult to find fixed income opportunities as yields have fallen, and McCombie says that the cash (and derivative) weighting has risen to 11 per cent: “We are pretty cautious on bonds. Around 20 per cent of developed market government bonds have a negative yield. They appear to be working on the greater fool theory, so we need to approach them with caution. As such, that part has come down.”

    The fund, however, doesn’t hold any bonds with a negative yield. The bond managers can be flexible and are not committed to hold a certain percentage in individual markets. They can look across the globe to find the best opportunities. That means considering areas where bond yields are positive, such as emerging markets or Canada, and finding corporate bonds trading on more compelling valuations. As McCombie points out, not all companies with the same rating will perform the same. Discernment is vital.

    However, this shouldn’t create the impression that McCombie is anticipating significant change in the portfolio. Turnover is currently around 10 per cent and the managers try to align their time horizon with the businesses in which they invest. He believes people who frequently buy and sell shares don’t think enough about the drag on investor returns from trading costs.

    His is a patient approach: “The fund has been around for over 30 years. We’ve been through a variety of economic conditions. We don’t see anything particularly unusual today. In general, we want to find good companies with good growth prospects and back them for the long term.”

  4. Baillie Gifford Managed Fund Annual Past Performance
    To 31 December each year (%)

      2015 2016 2017 2018 2019
    Baillie Gifford Managed Fund 6.9 17.0 15.0 -2.2 20.4
    Investment Association Mixed Investment 40–85% Shares sector median (net) 2.4 13.1 10.0 -6.0 15.8

    Source: StatPro. Class B income shares. Returns reflect the annual charges but exclude any initial charge paid. The manager believes the Investment Association Mixed Investment 40-85% Shares sector median is an appropriate benchmark given the investment policy of the Fund and the approach taken by the manager when investing.


    Past performance is not a guide to future returns.

    All data is as at 31 December 2019, unless otherwise stated. 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.

    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.

    Investments with exposure to overseas securities can be affected by changing stock market conditions and currency exchange rates.

    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.

    Baillie Gifford & Co Limited is authorised and regulated by the Financial Conduct Authority. Baillie Gifford & Co Limited is an Authorised Corporate Director of OEICs. All data is sourced from Baillie Gifford & Co unless otherwise stated.

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