The three best performers over the first half of the year were Baillie Gifford funds, a fact which Shore Financial Plannning director Ben Yearsley notes is unusual.
| Funds H1 2018 (top ten) | Return % |
| Baillie Gifford American | +29.77 |
| Baillie Gifford Long Term Growth | +19.75 |
| Baillie Gifford Global Discovery | +18.82 |
| Neptune Global Technology | +18.69 |
| Aubrey Global Conviction | +18 |
| Axa Framlington Global Technology | +16.88 |
| JPM US Smaller Companies | +16.54 |
| Artemis Global Energy | +16.18 |
| Artemis US Smaller Companies | +14.87 |
| Standard Life Global Smaller Companies | +14.52 |
Source: FE Analytics
Yearsley adds that the 10% of outperformance separating Baillie Gifford American from the next best performer is “bonkers”.
He isn’t overly familiar with the fund or the team behind it, which includes co-manager Gary Robinson (pictured), but says this doesn’t matter because the funds are run using a similar house style.
“They’re a long-term growth house, so whether you’re buying Scottish Mortgage, Baillie Gifford American or Baillie Gifford Discovery you’re effectively buying into the same long-term process of proper growth. There’s no wishy-washy-ness here.”
Tech concentration
Darius McDermott managing director of Chelsea Financial Services was not surprised Baillie Gifford funds featured in the top because of the firm’s high concentration in the major tech stocks.
The IT sector is the largest weighting for both the Baillie Gifford American and Long Term Growth funds, making up 27.10% and 45.53% of the funds respectively, and is the second biggest sector in the Global Discovery fund at 27.10%.
He rates the American fund and the Global Discovery fund, which invests in small to mid-cap companies and has received an Elite ranking from FundCalibre. The Baillie Gifford American fund does not appear in FundCalibre’s elite-rated funds.
Yearsley agrees that having a tech bias has helped funds outperform over the first half of the year.
“It just shows how that part of the market has carried on performing this year,” he says of the technology sector generally. “It’s clear that tech is what has been driving the US market. You look at the world market and the US is one of the only markets that has really gone up this year.”
Tech top heavy
Of the 3866 funds in the Investment Association universe, roughly 110 hold Google parent company Alphabet in their top-10 holdings, while 101 invest in Facebook, according to FE.
Amazon is the most popular of the traditional Fang stocks (Facebook, Amazon, Netflix and Google), appearing in the top 10 holdings of 155 funds in the IA universe, despite being the most expensive of the bunch, trading at $1,714 per share. Only eight funds are invested in Netflix.
But Baillie Gifford is part of a small handful of fund groups that has all four Fang stocks in their top-10. Two of its funds, Baillie Gifford American and Global Select, have holdings in the Silicon Valley quartet.
The only other IA recognised fund that invests in all four stocks is the Goldman Sachs US Focused Growth Equity Portfolio.
A slightly wider pool of 12 funds invests in just Facebook, Amazon and Alphabet, including the Axa Framlington Global Technology fund, which was the sixth best performing fund over the first half of the year.
Déjà vu
There is noticeable overlap between the top 10 investments in the Scottish Mortgage trust and the American fund but also the Long Term Growth fund.
Amazon is the largest holding across all three, making up 10.5% of the 7.5bn trust and over 9% of the pair of Oeics. Technology is the theme dominating the portfolios, which sport the same Silicon Valley tech giants, Facebook, Netflix and Tesla, in their top 10 investments.
Scottish Mortgage and Long Term Growth share large weightings toward Chinese heavyweights Tencent, Alibaba and Baidu.
In the past, Baillie Gifford has justified overlap in its top 10 holdings by pointing out that $17 trillion or half of the wealth creation from the S&P 500 in 90 years has come from 90 out of 25,000 companies.
“If you buy their funds and you look at what they own, then you know the strategy you’re playing and either you agree with them or you don’t agree with them,” says McDermott.
“Baillie Gifford are not hiding what they do. They are an out and out growth manager with a big weight to tech which they think is a huge disruptor and still underappreciated from a growth perspective. You can’t help but admire their conviction really.”
High conviction
Peter Sleep senior portfolio manager at Seven Investment Management says Baillie Gifford can afford to take high conviction positions in tech because it is not a public company.
Baillie Gifford is still structured as an independent investment partnership, which is why they “do not mind so much when all of their funds are under if growth is out of fashion,” says Sleep.
The 44 partners in the business are all employees of the firm and include joint-senior partner Andrew Telfer and Scottish Mortgage trust co-manager and head of North American equities Tom Slater.
“A public company might try to run a mix of growth or value funds or run funds with much less tracking error or less conviction,” Sleep continues. “This way a public company’s earnings get a smoother ride through the cycle.”
The Baillie Gifford American fund was launched in 1997 during the emergence of the dotcom bubble. Within its first 10-year period, it returned 68.34% in sterling to class B income shareholders versus the IA North America sector’s 26.10%.
Over its lifespan it has produced total returns of 728.27% over two and a half times higher than the sector average of 276.69%.
| 1 yr | 3 yr | 5 yr | 10 yr | |
| Baillie Gifford American | 39.1% | 126.7% | 179.4% | 382.73% |
| IA North America | 11.4% | 53.9% | 97.6% | 232.84% |
Source: Trustnet
Yearsley doesn’t believe that concentration in tech stocks is a problem for the fund group.
“If that’s where the growth is, then you’ve got to expect it with someone like Baillie Gifford. It’s the same with income funds. They have all got oil and tobacco stocks because they are the ones producing income. As long as you know what you’re buying, it’s OK.”
That said, McDermott says there is “limited value” to be had from the Fang stocks now for first-time investors due to the fact they have already had such a strong run.
But he says it might be possible that the tech titans have further room to grow.
“If you think we are in a potentially lower growth world with a potential for trade wars and what that might mean for the global economy, that maybe that compromise is still worth its premium now and going forward, then I think you could create an argument that suggests it goes on for longer.”
