Should you invest with Baillie Gifford?

Baillie Gifford is an investment management firm based in Edinburgh with more than £200 billion in assets under management.

This fund is having an annus mirabilis. According to Morningstar’s latest fund flow figures it attracted higher net inflows in the UK last month than both Vanguard and BlackRock.

Looking at performance for unit trusts over the past one, three, five and even 10 years, Baillie Gifford is consistently within the top performing funds among the roughly 4,000 available in the UK.

“Baillie Gifford was established as an investment management partnership over 100 years ago. Much has changed since then. For Baillie Gifford, seeking superior, long-term investment returns for our clients has not,” the fund management firm notes on their website.

What has truly not changed is the fund’s focus on the long-term. “Our current generation of partners and employees remains single-minded about our clients’ requirements. They are responsible for the careful stewardship of our long-term vision without the distraction of short-term shareholder demands. This ownership structure allows us to attract and retain the best investment talent, creating a distinctive and enduring culture.”

The top performing fund across all unit trusts available over the past one, three, five and 10 years is the Baillie Gifford American fund. The team consists of four managers – Tom Slater, Gary Robinson, Kirsty Gibson and Dave Bujnowski – and they also work across different funds including the US Growth Trust investment trust.

Over the past three years, this fund has gained more than £6.3 billion in size in that time alone. It’s also produced very strong performance (and hence media attention) in recent months. Even in areas like US equities, where index funds typically dominate, BG American is the second strongest performer of the first half of 2020, returning more than 50 per cent.

AJ Bell head of active portfolios Ryan Hughes told Money Marketing UK that there are a few factors which make Baillie Gifford stand out at the moment, some of which the group is in control of, and some of which is it not.

“I think one of the key attributes I see is it has a very different way in which it runs money,” Hughes says. “They are unashamedly long-term investors. We always go on about the importance of telling investors to be long term, but very few fund managers actually back that up with the way that they invest. But Baillie Gifford has a long-term mentality at its heart.”

The fund management firm also has another advantage over the competition: They have an unusual business structure. The business structure of Baillie Gifford is a partnership. The people who work at the group are the owners of the business. This means that there is no head man in the hierarchy cracking the whip for results. There are also no shareholders crying out for short-term returns. It is much more like a group of specialists each attending to their portion of the business.

To give an idea of how this works in practice, Baillie Gifford bought and held Tesla when it was worth $60 per share. They ignored the noise in the market, and thus have benefited from that company’s explosive growth. Shares in Tesla are currently at about $800 per share.

What is rational for the business may not be for the client

The “Behavioural Investment blog” on the Baillie Gifford website puts it like this: “Fund managers are themselves fixated on the short term.

Executives at (asset managers) are incentivised to raise assets under management and therefore become focused on near-term results. Although underlying investors are unlikely to be well-served by such myopia, the structure of the system means that fund managers have to play a different game.

“What is rational for the manager or business may not always be rational for the client.

We therefore exist in an environment where underperforming active fund managers are sacked, lose assets, forced to collapse their unrewarded risks and review their processes.  Even if you are a talented long-term investor you might not make it through your inevitable barren spell in-tact.  The result of all of these aspects is more money flowing into areas that have been ‘working’, exacerbating any perceived market distortions . Passive strategies reflect this, active strategies cause it.”

This is certainly an extraordinary contrarian take in a market where fund managers are judged rapidly and harshly.

But does this mean that you should invest in Baillie Gifford?

For now, Baillie Gifford is clearly on a winning streak. But a fund manager that actively chooses investments is certain to underperform the competition at some time. This is why the long-term view is so important, although there are limits, as economist John Maynard Keynes said: ”In the long-run, we’re all dead.”

However, Baillie Gifford is likely to provide a healthy return on your investment before you pass away. They’ve given good evidence of this for a hundred years, so they can’t be faulted for consistent performance. If you have the stomach to hold out, they will almost certainly reward you for it.