Baillie Gifford fund sold First Republic stake ‘quickly’

Toby Ross

By Mark McSherry

Baillie Gifford’s £630 million Sustainable Growth Fund sold out of its position in the failing First Republic Bank “very quickly” in March after the credit rating of the bank was downgraded from investment grade.

JPMorgan Chase agreed to acquire First Republic Bank on Monday in a government-led deal for the failed lender after First Republic had been seized by regulators.

Baillie Gifford investment manager Toby Ross revealed the quick stake sale in a recent update on the Sustainable Growth Fund’s strategy covering the first quarter of 2023.

” … we held First Republic Bank in this portfolio, and it has been one of the most highly regarded banks in America … it had one of the best credit underwriting track records of any bank in the US,” said Ross.

“And so, we regarded it as a very strong institution. But earlier this month, Silicon Valley Bank failed. People started to draw analogies between that and First Republic, and confidence just started to evaporate very quickly.

“That was obviously a real shame.

“For me, one of the lessons, though, was when we saw the credit rating of First Republic being downgraded from investment grade, it was quite clear to us that the confidence in the bank had been irreparably lost, and there likely wasn’t a way back.

“And so, we took the decision to sell very quickly after that. And I guess the broader thing we’re thinking about is what are might the second order consequences of that failure be?

“And I guess the other thing that’s on our minds is, this is a really highly regarded institution.

“It’s very sad for all the employees there. We regard the people we worked with at First Republic, over many years, very, very highly. So, it’s a very sad outcome for them.”

Asked about the other companies in the fund’s portfolio that are in the Silicon Valley area “that may have exposure … through deposits” Ross said: “I’m very glad that gearing across the portfolio is very, very low, and much lower than the wider market.

“So, by and large, actually, our companies, very often, have net cash balances, rather than having lots of debt.

“And none of the companies we have, have had any issues, in terms of accessing their deposits, so we can put that worry to bed. I guess, longer term, the things we’re thinking about are why do we have this banking crisis?

“Well, it’s really a knock-on effect of interest rates having gone up very sharply, indeed. And it’s possible that that’s going to lead to other pockets of stress elsewhere in the financial system.

“We did actually take action in one other part of the portfolio. So, we used to own Sumitomo Mitsui Trust Bank, a Japanese bank, but we just decided look, this is another levered financial institution that if there is contagion in the financial system, it’s likely not going to be immune.

“And it wasn’t a high conviction holding, so we moved on from that, to try and limit any exposure. And I guess the other longer term impact may actually be that, as you referred to earlier, it makes it more likely that we’re reaching the end of this cycle of rising interest rates.

“So, we’re looking hard at gearing across the portfolio and pockets of stress, trying to avoid things that might be sensitive to contagion. But then also, I think it possibly does mark a bit of an end to the current phase of the market cycle that we’ve been in.”