Baillie Gifford has trounced passive rivals Vanguard and Blackrock for UK fund flows in June as its aggressive focus on growth and technology finds it in the “sweet spot” amid the coronavirus volatility.
Morningstar estimates the Edinburgh fund house took in £691m worth of net flows last month, which the data provider said was its highest monthly net inflow in at least two years.
Vanguard, the fund group with the second highest June inflows, amassed £269m, up only slightly from the £253m it brought in during May and down substantially from the £1.2bn it raked in for March as the coronavirus sent markets into a spiral.
Vanguard and Blackrock are still well ahead of other UK fund providers for raking in the highest net flows on a one-year view, with Blackrock currently leading at £7.6bn, followed by Vanguard at £6.2bn compared with Baillie Gifford’s £1.4bn of new money. But for the last two months it has attracted more money than both passive fund groups, with inflows at Vanguard slowing and Blackrock getting hit by redemptions.
Q2 flows Baillie Gifford versus Vanguard and Blackrock
| April | May | June | |
| Baillie Gifford | £547m | £467m | £691m |
| Blackrock | £1.1bn | -£208m | -£134m |
| Vanguard | £574m | £253m | £269m |
Source: Morningstar
7IM senior portfolio manager Peter Sleep finds Baillie Gifford’s triumph over the passive players that have dominated for years “very refreshing”.
“It has been monotonous reading about flows into passive over the last 10 years,” says Sleep. “It is nice to see an active firm like Baillie Gifford challenge the big passive houses.”
Baillie Gifford AUM smashes record £262bn in Q2
Like other active houses Baillie Gifford struggled over the first quarter as markets turned volatile amid the virus crisis. Portfolio Adviser revealed that assets across the firm had tumbled 9% from £218.6bn in December to £197.8bn by the end of March.
But by 30 June group-wide AUM had fully recovered and had surged to a record £262bn.
Baillie Gifford head of retail marketing and distribution James Budden (pictured) says the firm’s spike in assets in Q2 has largely been performance driven which has brought in “solid flows”.
Budden says the fund group’s outperformance may strike some people as surprising given that growth houses like Baillie Gifford typically underperform during times of market stress.
“Overvalued or supposedly momentum stocks, people sell them off immediately when things get bad, but actually that hasn’t happened in this particular case,” Budden says.
But he says the “apparent extraordinary rise” in AUM over the past quarter makes sense considering the effects of lockdown measures have resulted in more e-commerce, food delivery, online entertainment, online communication for work and school, cloud computing and digital healthcare, themes that are well represented in Baillie Gifford’s Oeics and trusts.
Tesla, which Baillie Gifford owns a 6.5% stake in, has seen its share price triple since January to $1,417 a share, while Amazon and Netflix which also feature in the top 10 holdings in many Baillie Gifford funds, including the £13bn Scottish Mortgage trust, have seen shares jump over 50%.
Other Baillie Gifford favourites like Teledoc, Zoom and Delivery Hero have also done “incredibly well” over the period, Budden notes.
Baillie Gifford funds in the ‘sweet spot’
AJ Bell head of active portfolios Ryan Hughes says Baillie Gifford has been “in the sweet spot for some time with its focus on aggressive growth and technology”. Its strong performance across its range of funds demonstrates that high conviction active investing still has a place in the market, says Hughes.
“With a very good bounce back in markets since the March lows, investors have seemingly looked to pile into this investment approach in the hope that it continues”.
See also: Baillie Gifford funds go ‘bonkers’ riding the tech boom
With the exception of the UK and Japan, Baillie Gifford funds have been at the very top of their respective IA developed market categories during the first half of the year.
In the IA Global sector all four of the top funds belong to Baillie Gifford, with Long Term Global Growth Investment finishing first with returns of 47%, followed by Global Discovery (35.9%), Positive Change (34.3%) and Global Stewardship (33%), according to data from FE Fundinfo.
And in the US where active funds have notoriously struggled to beat the index, Baillie Gifford American generated returns of 54.1% over the period, second only to Morgan Stanley US Growth (64.2%) in the IA North America sector and comfortably beating its benchmark, the S&P 500, which was up just 2.9%.
See also: Coronavirus sector review: Morgan Stanley and Baillie Gifford prove active funds’ worth in US
The £4.6bn fund, which is co-managed by Gary Robinson, Tom Slater, Kirsty Gibson and Dave Bujnowski, was the strongest performer of all Baillie Gifford’s Oeics and trusts and ranked fourth across the entire IA universe in H1. Its top holdings include Canadian e-commerce company Shopify (10%), Tesla (8%), Amazon (7.9%) and online furniture store Wayfair (6%).
Three other Baillie Gifford funds, Access Long Term Global Growth, Long Term Global Growth and Global Discovery also made the list of top 10 performers over the period.
Morningstar notes in its June report that Baillie Gifford European, which topped the IA Europe ex-UK sector with returns of 14.8% over the first half, saw its highest net inflow to-date of £228m, which was also the highest of any UK fund last month.
“Investors looking to invest in Europe have primarily been choosing funds with a growth bias, and Baillie Gifford European is no exception,” the data provider said in the report. “This year to the end of June, the strategy outperformed its MSCI Europe ex UK benchmark by over 17% in sterling terms and has even beaten the equivalent growth-style benchmark by almost 10%.”
Active houses with few passive and growth-style funds losing out
Enthusiasm for Baillie Gifford’s style of investing last month contrasts with other long-running active houses that were hit with heavy redemptions last month, Morningstar said.
It noted fund groups like Schroders, BNY Mellon and Columbia Threadneedle, that don’t offer passive vehicles or many growth-style equity funds, haemorrhaged a combined £1.3bn in June.
Invesco, another fund active manager which fits that description, saw £1.2bn exit the business, though a decent chunk of this (£740m) was redemptions from a single fund, the Invesco Global Targeted Return Strategies.
“Even in cases where the funds at these houses are meeting expectations, these types of offerings are simply out of favour with investors at the moment,” Morningstar said.
Sooner or later growth style will fall out of favour
But Robin Powell, editor of The Evidenced-Based Investor warns against reading too much into Baillie Gifford’s six months of outperformance which he says “is simply random noise, and totally irrelevant, as I’m sure a long-term investment manager like Baillie Gifford will agree”.
“Having a growth and tech bias worked well in the first half of 2020, but sooner or later every investment style will fall out of favour,” Powell adds.
Continued outperformance will dictate whether the Edinburgh manager continues to attract flows, Powell says.
“The problem is that almost by definition, a proper, high-conviction active manager like Baillie Gifford will inevitably underperform the market from time to time, sometimes very substantially. Most active investors simply don’t have the stomach for it.”
Sleep thinks Baillie Gifford’s “long-term direction of travel is positive”. The fund group’s strategy of identifying a small handful of companies that can double in the next five years has worked out well for it, with Sleep noting turnover is “remarkably low,” and it has done a good job balancing the riskiness of these high growth stocks.
“Baillie Gifford has many experienced staff and they will not be sitting on their laurels,” says Sleep. “I am confident that they can continue on an upward trajectory.”
