Bargain Hunter: out-of-form Baillie Gifford trusts slip to discounts

Four of the best-performing trusts of 2020 have seen their performance come off the boil. 

After a stunning 2020, in which funds and trusts managed by Baillie Gifford dominated the top performers, last year proved to be a reversal of fortune.

Four of Baillie Gifford’s funds were in the top 10 active fund performers of 2020. However, each fund fell out of form in 2021, with value shares return to favour not helping matters. Baillie Gifford’s funds invest in growth companies, so the more economically sensitive stocks, such as miners and banks, are not their natural hunting ground.

The four stars of the show in 2020 were Baillie Gifford American, Baillie Gifford Long Term Global Growth, Baillie Gifford Positive Change and Baillie Gifford Global Discovery. The respective returns for that year were 121.8%, 95.6%, 80.1% and 76.8%.

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In 2021, each fund significantly underperformed rivals. In what proved to be another solid year for US and global markets, the average fund in the Investment Association’s (IA) North America and global fund sectors posted gains of 25.5% and 17.7%.

At the bottom of the pile, with a loss of 20.6%, was Baillie Gifford Global Discovery. Also in the red was Baillie Gifford American, down 2.8%, while Baillie Gifford Long Term Global Growth and Baillie Gifford Positive Change returned 3.9% and 10.8%.

For investment trusts, it was the same story. Various trusts that performed well in 2020 saw their performance come off the boil in 2021. This has dampened demand for their shares, resulting in several Baillie Gifford trusts moving to discounts, having spent most of the past year trading on a premium.

Four trusts managed by Baillie Gifford were among the top five performing trusts of 2020: Pacific Horizon (LSE:PHI), Baillie Gifford US Growth (LSE:USA), Scottish Mortgage (LSE:SMT) and Edinburgh Worldwide (LSE:EWI). The respective returns were 133.5%, 128.6%, 110.5% and 87.7%.

In 2021, Pacific Horizon and Scottish Mortgage were up 15.5% and 10.5%. Both gained an edge over the average global trust, which returned 10.5%, but not the wider market, as the MSCI World Index returned 22.9%. Edinburgh Worldwide and Baillie Gifford US Growth went from hero to zero, posting losses of 21% and 4.8%.

All four trusts, which spent a lot of time in 2021 trading on a premium, can now be picked up on a discount. Figures from Winterflood (to the market close on 19 January) show that Edinburgh Worldwide is trading on a discount of 8.2% versus 0% over the past 12 months.

Pacific Horizon, which has a one-year average premium of 6.9%, can now be picked up on a 7.3% discount. The trust, which invests in under-appreciated growth shares in the Asia-Pacific region, has seen its share price fall by just under 20% since the start of 2022. Over the past year, the trust has traded on an average premium of 2.2%. Ewan Markson-Brown, who had co-managed the trust for seven years alongside Roderick Snell, left Baillie Gifford last summer to join Crux. Snell is now sole manager of the trust.

The next biggest discount, of 6.6%, is Baillie Gifford US Growth Trust. It invests in innovative businesses, in the hope that they will over time become exceptional growth companies.

Scottish Mortgage, meanwhile, is trading on a discount of 2%. Over the past year, it has averaged a 1% discount. The trust has also had a rocky start to 2022, with its share price down 12%. Longstanding fund manager James Anderson is retiring at the end of April and co-manager Tom Slater, who has been joint manager of the trust since 2015, will become lead manager.

Each trust is suffering from the market rotation towards shares that are likely to prosper from the post-pandemic economic recovery and higher interest rates to deal with soaring inflation. Demand for growth shares, particularly technology companies, has cooled over the past couple of weeks.

Allocations to tech shares, where the value of their future earnings are depreciated by higher inflation and the prospect of higher interest rates, slumped to the lowest level since 2008, according to the latest Bank of America fund manager survey. 

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Value shares, which include industrials, materials and banks, tend to be more economically sensitive. Such companies benefit from a growing economy, as this stimulates consumer spending. In 2021, value shares outperformed growth shares in the first half of the year, but from summer onwards the gap narrowed. Figures from FE Analytics show that in 2021, the MSCI Value Index returned 23.1% and the MSCI Growth Index returned 22.3%. However, it was the first year in more than a decade in which value shares kept pace with, and slightly outperformed, growth shares.

In 2022, value shares could well outperform growth shares, but this does not mean that an investor should bet one way or the other. Instead, it is much more prudent to own a mixture of both styles over the long term and follow one of the golden rules of investing to reduce risk; diversification.

Baillie Gifford invest for the long term, so its fund managers will be unfazed by short-term performance, good or bad. Scottish Mortgage’s co-manager Slater warned last May, following the best yearly return in the trust’s 112-year history, that “we would caution against elation after the past 12 months, just as we would counsel against misery following unprofitable years”. Slater urged shareholders to judge performance over longer-term time horizons. 

For long-term investors, the current discounts of the four growth-focused Baillie Gifford trusts may well appeal. The trouble is, there could be further short-term pain to come, so it could pay to wait.