By Mark McSherry
Baillie Gifford’s latest “Annual Value Assessment” report on its UK authorised funds has reported that 18 of 36 funds run by the Edinburgh investment giant “have underperformed their index and outperformance target, or comparator benchmark, over their recommended holding period.”
The assessment — in line with the UK Financial Conduct Authority (FCA) requirements — said Baillie Gifford’s equity investment teams have been reviewing the companies in their funds and “changes have been made where investment cases no longer look as compelling.”
Baillie Gifford had around £235 billion under management and advice as at July 31, 2023.
The report said: “The recent market environment has been very difficult for a wide range of investors.
“The combination of high inflation and interest rate rises, geopolitical tensions and the continued impact of the Covid pandemic – most notably in the restrictions in China over the last year – created uncertainty across financial markets.
“In particular, higher inflation severely impacted early-stagegrowth businesses, putting Baillie Gifford’s investing style out of favour with the market.
“As a result, most of our funds delivered disappointing returns over the 12 months to 31 March 2023. That has impacted the longer-term returns, which are over three or five years, depending on each fund’s investment objective.
“Baillie Gifford’s investment philosophy and processes remain fundamentally unchanged in this macroeconomic environment, and we remain confident that Baillie Gifford’s active growth investment style will reap the rewards over the long term.
“Nevertheless, the equity investment teams have been reviewing the companies in their funds to ensure they remain financially resilient, well-managed and have long-term growth potential, particularly against a backdrop of higher inflation.
“Changes have been made where investment cases no longer look as compelling. The investment managers believe their portfolios are filled with exciting and innovative companies that can deliver growth for investors over the next five years and beyond.
“In addition, recent share price falls have enabled them to buy some attractive companies that they previously felt were too highly valued.”
Funds behind target included Baillie Gifford American Fund, Baillie Gifford Developed Asia Pacific Fund, Baillie Gifford European Fund, Baillie Gifford Global Alpha Growth Fund, Baillie Gifford Global Discovery Fund, Baillie Gifford International Fund, Baillie Gifford Japanese Fund, Baillie Gifford Japanese Income Growth Fund, Baillie Gifford Japanese Smaller Companies Fund, Baillie Gifford Sustainable Growth Fund, and Baillie Gifford UK and Worldwide Equity Fund.
Nonetheless, Baillie Gifford concluded that “value was delivered” for 35 of the 36 funds in the year to March 31, 2023.
“The FCA’s Assessment of Value rules require all managers of UK-domiciled investment funds to carry out an annual review to assess the overall value delivered to clients,” said Baillie Gifford.
“The review comprises seven criteria including quality of service, performance against objective and costs.
“The fund that fell short of providing value was the £141 million British Smaller Companies Fund. A recent strategic review of the fund highlighted declining investor demand, and a growing trend for Baillie Gifford’s smaller company research to have a global, rather than domestic focus.
“In light of the fund’s underperformance over recent years, it was deemed to be in the best interests of the shareholders to close the Fund. The Fund was subsequently shut on 27 June 2023. Shareholders have been informed of this decision, and their investments redeemed on 28 July 2023.
“Despite challenging market conditions, the Value Report concluded that Baillie Gifford’s range of funds have delivered value to clients. Important factors in this rating included fund costs, which the report found remain at low levels relative to peers; and quality of service, which is of a high standard across the fund range.”
James Budden, Director of Marketing and Distribution at Baillie Gifford, said: “We remain supportive of the Value Assessment initiative and the insight it provides for investors. The latest report shows our funds have continued to deliver value for investors against a difficult macro-economic backdrop.
“Our objectives remain to provide outperformance over the long-term and enable our clients to gain exposure to exceptional companies that deliver innovation and beneficial changes in society. We assess the performance of our equity funds on a five-year horizon and bond funds over three years.
“Although returns have been weak of late in absolute terms they are not out of step with expectations for growth assets in the prevailing environment.
“Costs are crucial to any collective fund’s returns and to the value provided for investors, and we strive to keep costs competitive and transparent.
“Fees and charges have been reduced 27 times in the last ten years, and of the 36 funds assessed this year, 32 were ranked in the first quartile (lowest costs) when compared to the peer group.”