Stock selection compounds woes for Baillie Gifford China Growth

230214 ACIC China

Baillie Gifford China Growth announced its annual results for the year ended 31 December 2023. The company’s net asset value total return was negative 40.9% and the share price total return was negative 40.8%, compared with a total return of negative 30.5% for the MSCI China All Shares Index (in sterling terms).

In the period from 16 September 2020 (the date of the adoption of the China strategy), the company’s net asset value and share price returned negative 49.3% and negative 50.5% respectively compared to a total return of negative 39.4% for the MSCI China All Shares Index (in sterling terms). The portfolio’s overwhelming exposure to non state-owned enterprise companies, particularly in the financials space, plus its underweight positions in energy and utilities (the two best performing sectors within the companies universe), contributed to the company’s relative underperformance. Whilst investment in China may prove volatile over a short term horizon, the managers have a long-term investment approach and are optimistic about the prospects for the future.

Regarding the performance, chair Susan Platts-Martin commented: 

“The 12 months under review have formed an extraordinary third consecutive year of market falls that has tested the patience of many investors. A year ago, the stock market looked set to embrace China’s reopening: covid was becoming a thing of the past, consumer spending was expected to bounce back, regulation of large technology companies was abating, measures were being rolled out to restore confidence in the property sector and there were hopes that geopolitical tensions were easing and there may be some level of cooperation. Some but not all of this has occurred but frustratingly we have not seen the results benefit the company’s performance in this financial year.

“Generally, the negative returns over the period have been driven by macroeconomics and geopolitics rather than the performance of the underlying companies in the portfolio. The listed holdings within the company’s portfolio continue to perform well operationally, delivering 17.7% earnings growth in the financial year.

“The underperformance in 2023 can largely be attributed to the company’s lack of exposure to the energy sector (the only sector which saw a positive return) and financials (the third best performing sector and which returned a negative 15%) and overweight position in consumer discretionary which returned a negative 37%. Foreign investors stayed away from China and domestic investors moved into defensive sectors and state-owned enterprises (‘SOE’). The FTSE China SOE index outperformed the non-SOE index in calendar year 2023, continuing a trend which began in 2021. Given that the Company invests for growth and as such is not weighted towards SOE companies, it has resulted in weaker performance relative to the benchmark.

“As part of the board’s oversight of the managers’ investment approach, I attended a Baillie Gifford trip to China to the investment team in Shanghai and portfolio companies. In addition, the board met with members of the Shanghai team virtually at its annual strategy day. The board remains satisfied that the managers are investing in accordance with its long term growth approach. There will be periods of underperformance during the investment cycle as the Managers do not invest in trends, and as I have previously noted, the managers have a long-term investment approach, and we would ask shareholders to judge performance over periods of five years or more.”

Regarding the outlook, she continued:

“Investor sentiment and related share trading have significantly influenced share price performance over the last three years, and share prices have diverged from their fundamentals. It is the fundamentals that our managers remain focused on, as it is a company’s operational progress over the long term that will deliver outperformance.

“The combination of an ambitious entrepreneurial culture and bold top-down policies with the sheer scale of China’s markets continues to provide a unique opportunity given lower valuations. A long-term investment horizon underpins our managers’ efforts as they seek to find the companies in China with the best sustainable growth outlook, regardless of their size, sector or position in an index. As I concluded in my Chair’s statement last year, China is a market where there is likely to be ongoing short term volatility however the prospects for significant long term growth remain.”

Stock selection compounds woes for Baillie Gifford China Growth

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