Baillie Gifford has put its British Smaller Companies fund on watch after it underperformed its benchmark by over 17 percentage points as sentiment toward growth stocks soured.
The £182m fund was given an amber rating last year due to performance issues but this was downgraded to red in its third assessment of value (AoV) report.
It was the only fund in its 37-strong product range deemed not to be delivering value overall. Five other funds, including a trio of UK equity strategies and a pair of investment grade bond vehicles, were rated amber, meaning further action and/or monitoring is required.
This is the second time the British Smaller Companies fund has been flagged as failing to provide value. In the five years to 31 March 2022, it generated an annualised return of 2.6%, while its benchmark, the Numis Smaller Companies Index (excluding investment companies), returned 4.7%. The fund aims to outperform the index by at least 2% per annum over rolling five year periods.
Though the Edinburgh manager said the fund showed signs of improvement in 2020, following the introduction of a new team in 2019, more recently performance has slumped. In the year to 31 March 2022, it lost investors 18.5%, substantially higher than the index’s returns of -1.1%. This was driven primarily by its underweight to energy and commodities, which have rebounded sharply in 2022.
“Overall, we continue to believe in the fundamental qualities of the portfolio and the ability of the companies held to grow earnings faster than the market. The fund’s management fees and other costs were low in relation to other funds in the peer group.”
Amber ratings
British Smaller Companies was one of four Baillie Gifford funds to be given the lowest possible score for performance.
Its UK Equity Alpha, UK Equity Focus and UK Equity Core funds all failed to outperform the FTSE All-Share as they were hit by the rotation away from long-duration growth companies. Not holding punchy positions in banking, pharmaceuticals and energy stocks also dented returns.
UK Equity Alpha suffered the steepest decline in the year to the end of March, falling 19.4% versus the FTSE All-Share, which was down 13%. Following the retirement of longstanding portfolio manager Gerard Callahan, Milena Mileva has taken the reins of the fund, which in April absorbed her existing UK Equity Focus fund. Assets in the combined fund are currently £795.9m.
Baillie Gifford said it had taken “very little action” on the UK Equity Core fund, run by Ian McCombie, due to its strength of conviction in the underlying portfolio and investment process. The £216.7m fund returned -0.2% in the year-long period under review, below its 14.2% target, with gains offset by its holding in the British Smaller Companies fund.
Elsewhere, the Investment Grade Bond and Investment Grade Long Bond fund were also called out for performance issues. Both vehicles underperformed in 2020 as corporate bonds recovered sharply from the pandemic-driven sell-off. Though they have regained some ground recently, it was not enough to offset the wider losses.
