Baillie Gifford: our short-term performance doesn’t make us villains

Baillie Gifford funds and trusts have gone from hero to zero, but investors have been urged to be patient and hold their nerve.

For the first time since the pandemic, around 300 private investors gathered in London last week to hear from representatives of Baillie Gifford, which has seen the performance of its funds and investment trusts crash to earth in 2022.

Baillie Gifford dazzled investors during the pandemic, with five of its funds and four of its investment trusts among the top 10 performers for all funds and trusts in 2020. Its approach of identifying high-growth companies was in vogue as investors looked for lockdown winners generating their own growth rather than relying on the performance of the wider economy.

However, this year the growth style of investing has fallen out of favour given high levels of inflation and interest rate rises. Both devalue the future earnings of companies seeking to be profitable in the future. Instead, value shares, which make most of their profits today, have been in fashion.

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Investors in Baillie Gifford funds or trusts who have been in it for the long haul – including myself (having bought Scottish Mortgage (LSE:SMT) a decade ago) – will have seen their returns punctured rather than flattened. However, those who bought more recently – such as at the start of this year – could be nursing share price losses of as much as 30% to 40%.

For those in this position, plenty of patience is required, as the bigger the loss, the steeper the climb to get back to even. For example, a loss of 10% requires a gain of 11% to break even; a loss of 20% requires a gain of 25%; while a loss of 33% requires a gain of 50%; and a loss of 50% requires a gain of 100%. 

Setting the scene ahead of four presentations, Alex Blake, director of investment trusts at Baillie Gifford, urged private investors to think long term.

Blake pointed out: “We are very aware that some investors have suffered drawdowns of 30% or more, but that does not make us villains today, as much as it didn’t make us heroes in 2020.”

He said that “stock markets are unpredictable” and influenced by the macro and herding in the short term, but that over longer time horizons “company fundamentals are much more important”.

The other four speakers – two investment specialists representing Scottish Mortgage and Monks (LSE:MNKS), an investment manager for Pacific Horizon (LSE:PHI) and fund manager Praveen Kumar of Baillie Gifford Shin Nippon (LSE:BGS) – all echoed the sentiment.       

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Claire Shaw, an investment specialist for Scottish Mortgage, said: “This has been one of the toughest years in recent decades. Even for our longstanding shareholders, this has not been a pleasant time.”

While there’s no shortage of headwinds, including the war in Ukraine, high inflation and interest rates on the rise, Shaw pointed out that Scottish Mortgage are long-term optimists. She said: “We are resolutely long-term through good times and bad.”

Scottish Mortgage backs disruptive companies with a technological edge over competitors. The trust aims to invest in “the small number of exceptional companies that really matter”, as Shaw put it.

Year-to-date, Scottish Mortgage’s share price has lost 38.3%. Over three and five years, it is up 57.9% and 90.2%, ahead of the average global trust return of 33.4% and 57%.

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In May 2021, Tom Slater, the lead manager of Scottish Mortgage, sounded a note of caution when the trust produced record yearly returns. Slater urged shareholders to judge performance over longer-term time horizons. 

He made the same point in May this year following Scottish Mortgage’s period of underperformance, urging investors to have a minimum time horizon of five years.

Slater said: “Our purpose is to provide long-term funding and support for growth companies and the entrepreneurs building the future of our economy. This approach will sometimes be popular and sometimes, as now, be out of favour.

“Because of such swings, we discourage those with a time horizon under five years from investing in our shares. While we do not enjoy discomfiting our fellow shareholders, we believe resilience during drawdowns is necessary for generating long-term return.”

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Elsewhere at the conference, Jon Henry, an investment specialist for global investor Monks, acknowledged that its around 25% share price decline so far in 2022 “is not the kind of performance we set out to deliver”.

Monks invests in three growth buckets: stalwart, rapid and cyclical. Henry pointed out that the rapid growth stocks performed best following the re-opening of economies and society. However, in hindsight he said that the trust should have rebalanced quicker to maximise profits from those share price gains and reduced some risk ahead of the growth style of investing falling out of favour.

Over three and five years, Monks has returned 11.4% and 44.7%.  

The author owns shares in Scottish Mortgage, along with other investment trusts and funds.