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

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.

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.

Recommended

If you think now is a good time to buy, look at these investment trusts
Investment trusts

If you think now is a good time to buy, look at these investment trusts

With the latest market slides, an awful lot of assets are beginning to look very cheap indeed. If you are thinking of buying, Merryn Somerset Webb has…
10 Mar 2020
How to build a properly diversified investment trust portfolio
Sponsored

How to build a properly diversified investment trust portfolio

Max King explains how to build a well diversified portfolio using one of our favourite tools – investment trusts.
25 Feb 2020
Why investment trusts are the best vehicle for your money
Sponsored

Why investment trusts are the best vehicle for your money

Max King explains the advantages of investment trusts – sometimes called closed-ended funds – over their open-ended counterparts (or Oeics).
11 Feb 2020
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
17 Jan 2020

Most Popular

The electric-car bubble could get an awful lot bigger from here
Renewables

The electric-car bubble could get an awful lot bigger from here

The switch to electric cars is driving a huge investment bubble. But that’s not necessarily a bad thing, says John Stepek. Fortunes will be made and l…
24 Sep 2020
Can Rishi Sunak’s winter plan save the UK economy?
UK Economy

Can Rishi Sunak’s winter plan save the UK economy?

With his Winter Economic Plan, chancellor Rishi Sunak is hoping to support the economy through the dark months ahead as restrictions tighten again. Jo…
25 Sep 2020
The rising dollar is proving bad news for most other assets – will it last?
Investment strategy

The rising dollar is proving bad news for most other assets – will it last?

Precious metals, stocks and pretty much every other asset has taken a tumble as the US dollar strengthens. Dominic Frisby looks at how long this trend…
23 Sep 2020