Buy into fund manager Baillie Gifford’s success

Shares in Baillie Gifford’s growth-focused Scottish Mortgage Trust are worth buying, says Max King.

Bill Gates in November 1985 © Deborah Feingold/Getty Images

Bill Gates changed the world
(Image credit: Bill Gates in November 1985 © Deborah Feingold/Getty Images)

Baillie Gifford's extraordinary success has made many of its rivals envious, while those who have missed out on the stellar returns desperately want their scepticism vindicated.

No fund in the Baillie Gifford stable represents their growth-focused style better than its £7.5bn flagship investment trust, Scottish Mortgage (LSE: SMT), and its supremely self-confident co-manager, James Anderson.

SMT is no Woodford

As exposure to unlisted equities has been built up to 17% of the portfolio, within sight of the 25% maximum, the initial public offering (IPO) market has disappointed, with Pinterest, Lyft and Uber all falling from their issue price. Has SMT been overpaying for its investments? And, of course, Neil Woodford, also an advocate of private equity (PE) investment, has hit a brick wall, illustrating the risks of investing in illiquid shares. Simon Gaunt, a director at BG, bristles at such analogies. The firm, he points out, invests in established businesses with scale, not the early stage start-ups favoured by Woodford. This does not mean "venture" investing is doomed, just that Woodford has been poor at it unlike life-sciences investment trust Syncona, for example.

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SMT is invested in Lyft, but not in Uber or Pinterest. The route to profitability for ride-hailing companies is not clear at present, but few doubt it will emerge and that ride-hailing is here to stay. In 2012, the share price of Facebook halved after an over-hyped IPO, but then soared after doubts about its potential on mobile platforms and the monetisation of its services were resolved.

The volatility of the tech sector has been masked by its long-term performance, but early investors in Netflix regularly saw their share price halve. Share prices, as last year, are prone to get ahead of events, but fast growth means that valuations soon catch up. In short, scepticism about prospects and valuations have been a regular feature of tech's long bull market.

Anderson argues that "growth investing is widely denigrated and value investing regarded as the one true faith". Yet, "the world changed in the late 1980s when Microsoft listed. The marginal cost of its software licences was zero, bringing in an era of increasing returns to scale and market opportunities unrestricted by production constraints". Investors have yet to adapt to a world in which business models are not built on the existing economic infrastructure but bypass them, making nothing safe. For example, Anderson thinks that progress in solar and battery technology, with efficiency improving 20% each year, could bankrupt the fossil fuel industry in ten years.

Don't cut yourself off

"The future will be very different from how the average fund manager sees it," says Anderson. The implied message is to be wary of "cheap" shares that will not necessarily bounce back as the business cycle matures and invest in "reassuringly expensive" companies that are better positioned for change. SMT shares, at a small premium to net asset value, are worth buying.

Max King
Investment Writer

Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.

After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.