Loyal partners ignore the commotion
Baillie Gifford’s 35 partners eschew short-term rewards and market noise in favour of a measured approach and by promoting a shortlist of funds that have a competitive edge, writes Will Jackson.
Investor short-termism is back in the spotlight following the publication of a Lipper research paper: “The Pressure to Perform”. Through analysis of historical data, the report shows that funds with strong one-year track records gain a disproportionately large share of inflows. Lipper warns that the phenomenon could have a dangerous side effect, in encouraging portfolio managers to adopt overly short-term outlooks.
Fund buyers with longer time-horizons might therefore be relieved to find groups that claim to ignore the short-term noise, in favour of a more gradual approach to investment. Baillie Gifford, for example, not only prides itself on low turnover in its equity portfolios but also among its staff. The Edinburgh-based firm is wholly-owned by a group of 35 working partners with an average service record of 19 years.
James Budden, Baillie Gifford’s director of retail marketing and distribution, says the partnership structure protects it from the pressures at listed groups. “It gives us a great degree of stability,” Budden says. “People can concentrate on what they’re meant to be doing - which is long-term active investment - without worrying about the short-term performance of the business and how that might impact the activities of the firm.”
Fund manager appointments over the past 12 months are typical of Baillie Gifford’s emphasis on staff retention. Following the departure of Ben Thompson, the manager and co-manager of its High Yield Bond and Corporate Bond funds respectively, the firm chose not to recruit a replacement externally and instead re-allocated his duties to two members of its fixed income team: Donald Philips and Rob Baltzer. (Focus continues below)
Similarly, Peter Hollis’s decision to step down as head of European equities led Baillie Gifford to promote Tom Coutts. Coutts, who joined the firm in 1999, takes over from Hollis in April. In the same month, Gerald Smith, the manager of the £1 billion Monks investment trust and a partner since 1998, will be promoted to chief investment officer (CIO). James Anderson, CIO since 2006, will remain at the firm.
This pattern of internal appointments also extends to other areas of the business. Last October the firm announced the retirements of Chris Fletcher, Jim McGhie and Ken Edwards - respectively the heads of retail administration, Baillie Gifford Life and intermediary sales. Grant Walker succeeded Edwards at the start of the year, while Fletcher and McGhie will be replaced by their long-serving deputies in April.
Walker’s promotion in January enabled Budden to step into his newly-created retail marketing and distribution role. The position gives Budden responsibility for sales in Baillie Gifford’s Oeic and investment trust ranges and, unusually for a retail marketing director with open-ended products at his disposal, he is most enthusiastic when discussing prospects for the firm’s range of eight closed-ended vehicles.
Budden notes that Baillie Gifford started out as an investment trust manager and says it remains strong in this area. His priority is to increase demand for the global trusts, which include Monks and the £2 billion Scottish Mortgage portfolio run by Anderson. Budden says Scottish Mortgage’s total expense ratio of 55 basis points should make it an attractive option for investors seeking low-cost active global equity exposure.
“Investment trusts are written into the culture of the firm,” says Budden. “In other retail houses that have investment trusts, they’ll be predominantly Oeic salesmen. Here the sales team are incentivised across both types of fund.” Strong performance from Scottish Mortgage is already having an impact on demand for shares, he adds, allowing it to trade at a tighter discount to net asset value than its peer group.
Baillie Gifford will run about 50 IFA events this year to promote its closed- and open-ended funds. About a quarter of the money in the firm’s Oeic range is retail money, and Budden says it will focus its sales efforts on a shortlist of funds where it can demonstrate a competitive advantage: American, Emerging Markets Bond, Emerging Markets Leading Companies, Global Income, Greater China and High Yield Bond.
“We have a shortlist of what we call ’focus’ funds internally, and we spend a lot of time concentrating on those rather than trying to sell a list of 21 or 22 Oeics,” Budden explains. “There are things like our American fund in particular, which is a sector leader. We’re trying to promote and sell things where we’ve got a chance of getting results - that’s the investment trust range and the half-a-dozen Oeic focus funds.”
One open-ended fund conspicuous by its absence from the focus list is Emerging Markets Growth. The portfolio passed £1 billion in assets under management in late 2010, prompting Baillie Gifford to announce its soft-closure in April. Budden says the move is designed to protect the fund’s all-cap strategy, and the firm will concentrate its efforts on growing the large-cap Leading Companies Oeic run by the same team.
Emerging Markets Growth is ranked second-quartile over three years. Toby Ricketts, the chief executive officer at Margetts, says the fund suits his firm’s investment process. “It has consistent outperformance, it is a fairly wide portfolio of 80-120 stocks, and it has a stockpicking approach with a focus on understanding the risks of each of the companies it holds,” Ricketts says. “We have held it a very long time.”
Budden says Baillie Gifford has no plans to capitalise on demand for its emerging market team by launching a closed-ended fund in this space. Emerging market investment trusts have proved popular over the past year but Budden says the team is already “very busy” running institutional money.
The firm’s American and European managers would have capacity to run closed-ended funds if they became available, however. “If someone else was looking to move a mandate - particularly a European one - we would be delighted to throw our hat into the ring,” he adds.
On demand for investment trusts more broadly, Budden says that although the Retail Distribution Review (RDR) will boost the industry, its impact will be unevenly felt. “It will benefit investment trusts who actively engage with intermediaries and get their name known, or who are particular champions in their sector,” Budden says. “So I think you’ll see a group of investment trusts do very well out of RDR. But for a lot of investment trusts, it won’t make a blind bit of difference.”
Rob Pemberton, the investment director at HFM Columbus, does not use closed-ended funds owing to liquidity concerns. However, he is upbeat on Baillie Gifford’s American, European and bond Oeics, and has recommended the International fund for several years.
“Baillie Gifford is an asset management company I truly respect,” he adds. “The discipline of investment trust investment is evident in their open-ended funds, in which they have strong performance across a range of equity markets.”
Baillie Gifford has more than £70 billion in assets under management and advice. The firm manages investments for pension funds, institutions, charities and retail clients.
Have you looked at investment trusts more since RDR?