The one fund Baillie Gifford is monitoring after value assessment

No funds were included on the red list this year. 

Just one of Baillie Gifford’s 35 funds require “monitoring”, according to the asset manager’s recently released Annual Value Assessment Report.

The firm’s second annual report, released on 30 July, found that all 35 funds provided investors with value, when compared to both their respective index and performance targets.

Of those, 34 funds were included on the firm’s “green list”, meaning they provided value. Just one fund, the Baillie Gifford Emerging Markets Bond fund, was included in the amber list. Funds on the amber list are deemed to provide value but require further monitoring.

No funds were included on the red list this year. Red list inclusion means a fund has been judged to not provide value and action needs to be taken.

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Baillie Gifford Emerging Market Bond was on the red list last year. Owing to better performance following changes to the fund’s investment process and the strengthening of its management team, it is now on the amber list.

However, the report notes that fund’s performance was “still disappointing”, hence its failure to win a place on the green list.

The fund underperformed its three-year target, dated to 31 March 2021, with a loss of 2.1% on an annualised basis, compared to 0.2% index decline. Since then, performance has picked up, with the fund returning 3.6% on a 12-year basis. The report notes: “The underperformance occurred mainly in 2018 when detractors included a position in Argentina.”

Baillie Gifford’s previous value assessment report resulted in two bond funds, Active Gilt Investment and Active Long Gilt Investment, being closed in March this year. The report had placed both on the red list, meaning they were judged to not be providing investors with value.

However, the report did point out that the performance of many Baillie Gifford funds was especially strong due to the unique circumstances of the past year.

The report noted: “Several funds had invested in companies that were well placed to benefit from prevailing behavioural changes, such as a move to higher levels of online activity. Some had invested in online retailers around the world, as well as in companies such as Zoom (NASDAQ:ZM), which has seen a surge in demand as a result of travel restrictions.”

Baillie Gifford says this can be seen as “evidence of the forward-looking research process and benefits of a long-term growth stock-picking style”. However, they also acknowledge that “the short-term returns of some of the funds have occurred in exceptional circumstances and are unlikely to be repeated”.

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Dean Buckley and Kate Solsover, non-executive directors at Baillie Gifford, said: “We challenged ourselves to find a reason to award more amber or red ratings but failed. However, the strength in the share prices of the growth companies in which Baillie Gifford invests is unlikely to be repeated in the coming year. Accordingly, both the board and we would suggest that this has been an unusual year in very many ways and, in performance terms, is unlikely to be matched.”

Value for money reports: the key details

Under new rules set out by the Financial Conduct Authority (FCA), which came into effect in September 2019, fund management firms are required to publish annual fund reports on the ‘value for money’ of their fund products. The reports must be publicly available on the fund manager’s website.

The FCA set out seven “value criteria” that the reports are required to address.

These are: fund performance over an appropriate timescale relative to the fund’s objectives and strategy, investment manager’s costs, quality of service provided, comparable market rates of similar funds, cost of comparable services (for instance the cost of the fund to institutional investors or pension schemes), appropriateness of share classes, and whether economies of scale are being passed back to investors in the form of lower fund charges.

The good news is that, so far, the reports appear to be the catalyst behind a number of positive trends. There are instances of fund management groups cutting fund charges, closing poor-performing funds, and moving investors into newer, cheaper share classes.

But there have been shortcomings. The reports are, in most cases, very difficult for investors to find, as they are generally not in a prominent position on a fund management firm’s website. Another issue is that fund management firms are essentially policing themselves instead of there being independent oversight.