Inaugural annual results from Schiehallion Fund

Baillie Gifford’s Schiehallion Fund (MNTN) has released inaugural annual results, covering the period from 4 January 2019 to 31 January 2020. The growth capital sector company invests in late-stage private companies. It raised gross proceeds of US$477 million at launch on 27 March 2019.

During the period from 27 March 2019 to 31 January 2020, the company’s share price and net asset value returned 21.5% and 3.7%.

Since shares opened for trading on the London Stock Exchange, they climbed steadily, on thin trading volume, reaching a premium of approximately 17.6% at 31 January 2020.

MNTN noted in the announcement that it had said when upon its launch that it would be reasonable to expect that the company would be two-thirds invested within the first two years. MNTN says is well on track to meet that milestone, with 35.5% of shareholders’ funds invested in 17 private companies as at the end of January 2020.

While the near-term priority remains the identification of investment opportunities and the deployment of the initial capital, once the company is substantially invested, it may seek to raise additional capital, most likely by way of a C share issue to avoid cash drag on the ordinary shares, in order to enable it to continue to invest in new opportunities.

Portfolio update and outlook from Baillie Gifford

Portfolio Update

“Since the interim report for the period to 31 July 2019, we have invested in nine new companies. All of these businesses happened to be domiciled in the US. This is both a coincidence, but also reflective of the calibre of companies to be found in the North American market. San Francisco and Silicon Valley are synonymous with technology led businesses, but we have found companies in Austin, Los Angeles, Boston, New York and Seattle every bit as innovative as their Bay Area counterparts. Whilst some still have a domestic focus, others are most certainly international businesses, most notably Airbnb, which has more than seven million listings, located over 190 countries around the world.

In the Interim Management Report we noted two themes, which have both continued since then. The first was the growing impact of internet facilitated business models on a wider range of industries. Two of our recent investments highlight this in particular. RigUp is changing how blue-collar workers find work in the energy industry, whilst Convoy is making it more efficient for truckers and shippers to connect. Network effects underpin the business models of both companies, making them better as they get bigger, and leading to robust competitive advantages in large industries that have witnessed little change for decades.

The other trend we have continued to see is our ability to buy shares in private companies where pre-existing shareholdings within Baillie Gifford has given us preferential access. Airbnb, Affirm, Warby Parker and Indigo Agriculture are all recent examples. These are businesses we have known for years and that we have seen execute over our time as shareholders.

We are often asked how Environmental, Social, and Governance (ESG) considerations are factored into our investment thinking. Schiehallion does not have an explicit ESG mandate, but these questions are still woven through our research. There is a common perception that ESG analysis is somehow distinct from fundamental business analysis. This might be true over short time periods, but over our time horizon of ten years and beyond, these two types of analysis converge. How a business is run, its impact on broader stakeholders, and the perception of whether it is a force for good or ill, will come to have a direct impact on the growth prospects of a given business, just as much as the business’s competitive advantage and margin structure. In our research framework, we ask of every company ‘What is your impact on Society?’ We ask this question, not to satisfy some abstract ESG criteria, but because it unlocks insight into long-term opportunities and risks for companies.

The growing relevance of ESG issues is highlighted by a number of our recent investments. Affirm is an online point of sale lender, founded by Max Levchin who was previously one of the founders of Paypal. Point of sale lenders have historically treated their customers very badly, offering opaque teaser rates and exorbitant late fees. Affirm have made it their mission to treat their customers well. They do not charge late fees and they are totally transparent with the interest they charge. In one sense, this is a tick on any two-dimensional ESG scoring system, but in another more important sense, it defines the company’s customer proposition, generates goodwill and repeat business with their borrowers, and underpins their competitive advantage.

Another recent example is Allbirds, the direct-to-consumer shoe company, whose branding is based around the sustainability of their product. Again, Allbirds would get a tick from an environmental sustainability perspective, but more importantly, they are tapping into a shift in consumer’s priorities and have developed a product, brand, and supply chain that enables them to offer a differentiated product and as a direct result grow rapidly.

The other side of this is the companies we choose not to invest in. We have declined, and will continue to decline, companies where we think the societal impact of a product or service, or the culture of the business, will have a net negative impact on the world in which that business operates. We have seen time and time again how consumer or regulatory backlash can negatively impact companies that do ill, which in turn makes these companies unattractive investments. We believe we have a much better chance of making attractive returns for shareholders by deploying their capital into companies that have a positive impact on a wider range of stakeholders and avoiding those companies that do not.”

Outlook

“We remain excited by the outlook for the current portfolio, though this is tempered by the uncertainty presented by Covid-19. The idiosyncratic nature of each of these businesses makes it difficult to generalise about how each will fair over the coming year. This is by design. Whilst there will be external factors that influence the success or failure of a company, each holding in Schiehallion has been selected because of its ability to determine its own destiny over the longer term through product differentiation, business model innovation and execution. It is likely that some companies in the portfolio will face challenges in the near term as a result of Covid-19, particularly those tied to the travel industry. But we believe that the long term opportunity and investment potential is unchanged for these businesses. We also continue to be encouraged by the pipeline of new opportunities, both from businesses that are new to us, and others that we have been following closely for many years. Again, this encouragement is tempered by the wider uncertainty presented by Coronavirus.”

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