Baillie Gifford Positive Change aims to contribute toward a more sustainable and inclusive world while generating strong returns by investing in four ‘impact themes’: Social inclusion and education; environment and resource needs; healthcare and quality of life and ‘base of the pyramid’ (companies addressing the basic needs of the global poorest).
It shares a number of characteristics with other Baillie Gifford global funds: A high-conviction, concentrated portfolio, which increases risk as well as return potential, a search for exceptional growth businesses, and a low turnover of holdings resulting from investments being kept for the long term and not actively ‘traded’.
We added the fund to our list of preferred funds for new investing in November 2018 as we excited by the potential of a high-conviction growth-oriented strategy with an ‘impact’ angle. Since this time, it has been one of the best performing funds available to UK retail investors.
Table: Baillie Gifford Positive Change Fund discrete annual returns versus benchmark and sector average
We had high hopes for the fund when we added it to the list, but it has exceeded our expectations. So, can the stellar performance continue? To answer this question, it is important to understand how the fund is managed what has driven performance to date.
How is the fund managed?
Fundamental company research by the managers, Kate Fox and Lee Qian, involves examining six questions: What societal challenge is the company tackling? Is the company’s offering better than the e status quo? Is there a committed management team? How does the company treat its stakeholders? Is there a strong likelihood of creating a defendable and profitable business? Is the business attractively valued? Impact analysis is in-depth and reflects on companies’ product impact, intent and business practises, with a scoring system used to help frame discussions and comparisons.
There are no filters involving financial metrics used to narrow down the investment universe, with the managers instead allowing the teams’ curiosity and enthusiasm drive the research agenda. Ideas the team generate will come from a range of sources, including communication with other Baillie Gifford teams. The culture is highly collaborative and there will tend to be significant stock overlap between this fund and others in the Baillie Gifford range.
There is no reference to economic considerations within portfolio construction. The managers pay little attention to short-term valuation fluctuations and aren’t overly concerned with quarter-on-quarter reporting numbers. Instead, they try to take at least a five to ten-year view with the intention that any company invested in has the potential to at least double in value.
This is a ‘concentrated’ strategy investing in a relatively small number of companies, which increases the risk of the growth-oriented strategy still further. The fund will typically hold between 25 and 50 positions, presently there is 34. The managers tend to run winners that deliver on their growth potential and can thereby deliver outsized returns. This philosophy results in a ‘top-heavy’ portfolio, with more than half of assets often accounted for by the top ten holdings. Turnover – the frequency of holdings being bought and sold – will tend to be very low, in line with the team’s long-term investment horizon.
What has driven performance?
The fund has ridden a wave of technology and healthcare innovation, reflecting the managers’ success in backing the disruptive business models of companies aiming to solve some of the world’s most significant challenges. Chief among these is Tesla whose share price ballooned over the course of 2020. The position was trimmed several times in response, which had the positive effect of locking in some profits close to highs.
Despite reducing the position, Tesla is the second largest holding in the fund with the managers remaining positive. They believe the company’s lead in battery technology looks set to become further entrenched both in terms of electric vehicles and the energy generation and storage side of the business.
The top holding in the fund (at around 9%) is Moderna, whose share price has exploded upwards this year – rising around six-fold at the time I write this. The innovative biotech company shot to fame last year as the first company to start trialling a Covid-19 vaccine, but that was just the start. Its successful Covid vaccine ignited sales while it continued to build a large pipeline of drugs to tackle infectious diseases, autoimmune disorders and cancer treatments. It is a high-risk company, but one the managers continue to back owing to its unique platform that develops medicines based on messenger RNA (mRNA) technology, which tiggers immune responses through teaching cells how to make proteins.
Besides the outsized gains from Moderna and Tesla, positive performance has also come from chip makers ASML and TSMC, as well as M3 which helps pharmaceutical companies and doctors access information and drugs online. M3’s platform has seen a rapid increase in activity from both companies and doctors as social distancing rules have curtailed physical drug sales activities.
The fund has seen its share of poor performers too, with diabetes monitoring device maker Dexcom, virtual healthcare company Teladoc and food cultures and enzymes provider Christian Hansen the largest detractors over one year. However, the impact of these has been small relative to the outperformance of the holdings noted above.
Sales of Tesla have generated funds for new ideas including 10x Genomics (life science and diagnostics), Peloton (digitally-connected fitness programmes and equipment), and Coursera (online educational platform), while significant outright sales were Alphabet and Kingspan, which were no longer considered to meet the fund’s positive change criteria.
What could go wrong?
We believe the fund could have a tougher time in relative terms if more economically sensitive (or ‘cyclical’) sectors and capital-intensive industries lead the market, or if growth stocks suffer the headwind of rising bond yields and/or inflation expectations. The fund did well in the 2020 correction, which was unique in its nature and largely accelerated structural disruptive trends. A conventional economic recession may pose a different environment for the fund.
There are also clear sectoral biases to technology and healthcare, two areas that are aligned with the fund’s drive for positive change, and returns will likely dip if the largely positive sentiment surrounding these areas recedes. The concentrated nature of the portfolio with significant stakes in immature businesses whose success can be binary in nature also adds to the risk. The fund’s outstanding performance should not blind investors to the higher risk, volatile nature.
We also recognise that the extent of outperformance to date is unlikely to be sustained as the range of new stock ideas may be more limited and, at the margin, constrained by the fund’s size, which has increased rapidly owing to rapid inflows of investor money on top of strong performance. The team have also taken on Keystone investment trust, which adds further to the amount under management.
The fund remains a high octane option for exposure to global shares with the added benefit of aiming to be a force for sustainability and inclusivity. It is reliant on certain key holdings – Tesla ad Moderna account for 7% and 9% of the fund respectively – and stylistically on a growth-orientated approach. The fund should therefore be expected to suffer lengthy difficult periods, even though these have been short and shallow to date.
For longer term investors able to ride out these spells, we continue to believe that Baillie Gifford idea generation in the context of long term sustainability trends represents a compelling proposition with excellent performance potential.
For investors interested in the impact investing aspect to the fund, it is important that you take the time to read fund literature carefully to check that values are aligned with your own. An important resource in this regard is the fund’s annual Impact Report produced by Baillie Gifford here.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
Baillie Gifford Positive Change - fund update
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