Edinburgh-based fund management giant Baillie Gifford said the global rout in growth stocks “has been both staggering and sobering” and has been a “humbling experience for managers such as Baillie Gifford” — and more so for its clients.
A number of high flying funds and investment trusts managed by Baillie Gifford came back down to earth with a bang in the first half of 2022.
Amid the rout, Baillie Gifford’s assets under management and advice fell more than 30% to around £240 billion.
In a note to clients, James Budden, Baillie Gifford Director of Marketing and Distribution, wrote: “… we are acutely aware that 2022 has been very uncomfortable for those that invest with us …
“As a result, we have revisited the investment case for every stock we hold.
“We are gauging their long-term prospects in the prevailing environment and beyond.
“We are more than happy to continue holding most; some are in the waiting room and a few have been shown the door.
“More importantly, our philosophy and process remain unchanged.
“We continue to seek exceptional companies that offer significant returns to investors on five-to-ten-year horizons.”
Budden wrote that the clouds gathered for growth investing as “easy money, pent-up demand and supply chain issues stoked vicious inflation” and China first cracked down on tech platforms then re-engaged battle with Covid-19.
“… most destructive of all, President Putin invaded Ukraine with tragic consequences.”
Budden wrote: “This cocktail of concerns has had serious short-term consequences for growth managers such as Baillie Gifford.
“While many investors have seen drawdowns of 30 per cent or more over the past few months, this does not necessarily make us villains.
“In the same way that we were not heroes in 2020, when some portfolios rose by over 100 per cent …
“Our style of investing will inevitably see periods of share price volatility.
“Tesla, for example, has endured 11 sharp declines ranging from -60 to -17 per cent on the way to an almost 2,000 per cent gain for investors in many of our portfolios.
“Unsurprisingly, investors are now finding it difficult to digest long-term uncertainty. They prefer to embrace what they believe are short-term certainties.
“The market has revalued growth in a way last seen in the tech bust and the Great Financial Crisis.
“But this may not be fair.
“Many of these revalued growth stocks are in significantly better shape than those damaged during earlier crises.
“Indeed, there is a strong chance that quality growth has become dislocated in share price terms from corporate fundamentals and prospects …
“If this is the case, then we could be on the cusp of a great opportunity.
“Netflix and Zoom have seen share prices fall back below 2019 levels.
“This is despite revenues and margins doubling in the case of the former and revenues multiplying by five for the latter.
“The much-maligned China tech giants Alibaba and Tencent are priced at 2016 and 2017 levels.
“Again, despite revenues increasing five times and doubling respectively. Significant operational progress and savage ratings creates market inefficiency and therefore opportunity …
“We can’t tell you when or how share prices will bounce back. Nobody can with accuracy.
“Stock markets are unpredictable and in the short run are affected by all sorts of human behaviours. Panic, excitement and herding, to name a few.
“Our investment process deliberately invests through that noise.
“We know that over five years and longer, market sentiment becomes much less important to investment returns. Company fundamentals dominate over these longer time frames.
“Therefore, we search for those rare businesses with exceptional and underappreciated growth potential.
“In contrast to current market sentiment, we believe that the opportunities to own businesses with outlier potential are expanding as innovation accelerates in almost every industry.
“In times like these, it becomes harder to exercise patience, but that’s exactly when our investment edge is at its most important.”