QD view: The overlap between the portfolios of Baillie Gifford’s range of global investment trusts is limited, yet investors are treating them as quite narrow variations on a theme and this is throwing up opportunities for those able to appreciate the nuances within the range.
It has undoubtedly been a difficult period for the Baillie Gifford investment trusts. Rising interest rates and the resulting rotation away from growth companies has been a tough environment for its style. However, there has been a tendency among investors to treat all the group’s global trusts as homogenous rather than looking at them individually, which has created some anomalies in the market.
Baillie Gifford has six investment trusts across four global sectors: Scottish Mortgage, Keystone Positive Change, and Monks in the Global Sector; Scottish American in the Global Equity Income sector and Edinburgh Worldwide in the Global Smaller Companies sector, plus the Schiehallion Fund, which is in the Growth Capital sector.
The temptation has been to see the five main global funds as varying degrees of Scottish Mortgage. In other words, the group’s high octane growth strategy is simply dialled up or dialled down to suit the mandate. This seems to be how the market sees it: the discounts are all broadly similar, varying from 12.5% for Edinburgh Worldwide, through to 11.8% and 11.3% for Keystone and Monks. Scottish Mortgage’s discount has moved in a little after a significant buyback programme, and is now 9.45%, while Scottish American is also on 9.5%.
The discounts have all experienced a similar trajectory in recent years – experiencing significant sell-offs as interest rates rose, often moving from small premiums. This suggests the market believes the trusts are broadly similar and subject to the same forces.
James Budden, director of marketing and distribution at the group, says: “Investors have not discriminated between the trusts, with the discounts widening in concert. The marginal buyers took a view on all Baillie Gifford trusts. There has been a bit of fluctuation since, such as in response to Scottish Mortgage’s buyback campaign and Saints’ discount has narrowed slightly because of its income generation, but only at the margins.”
NAV performance
The NAV performance of the trusts is far more varied than the discounts would suggest. Scottish American is up 9.4% over one year, and has delivered an annualised 8% return over three years. Scottish Mortgage’s NAV has seen an annualised fall of 8.1% over three years, but is up 20% over one year.
Monks’ annualised three year return is -1%, with a rise of 16.5% over one year, while Keystone three year performance is -6.6%, and it has not yet recovered in line with the other trusts over 12 months, declining 3.2%. Edinburgh Worldwide has struggled the most in recent years, with with an annualised decline of 21.3% over three years and 8% over one year. Its small cap bias has been a major limiting factor.
The cross-over between the trusts is minimal. The highest commonality of holdings is between Monks and Scottish Mortgage, at 24%. Scottish American and Scottish Mortgage have just 2% of holdings in common. Edinburgh Worldwide and Scottish Mortgage are often bracketed together, but the small cap/large cap difference means they only have 6% of holdings in common. Keystone and Scottish Mortgage have 13% commonality.
Budden says there are important strategic differences between the trusts. “Scottish Mortgage looks for conceptual companies, aiming to find exceptional business. These will be the big outliers of the future – Nvidia or Tesla. Monks is far more measured, balancing some full-on growth companies with companies such as Ryanair of Microsoft, neither of which would be found in Scottish Mortgage. It has 100 holdings, so each position is smaller. The trust will also take more of a view on the economic cycle.” For example, the managers recently bought Martin Marietta Materials, an American construction aggregates group likely to be a beneficiary of infrastructure development programmes in the US.
Scottish American, Budden points out, is all about growth in income. It has now notched up 50 years of consecutive dividend growth. This income growth is unlikely to emerge from the Amazons or Nvidias that appear in Scottish Mortgage. Instead, the trust’s top 10 holdings include blue chip stalwarts such as PepsiCo and Proctor & Gamble.
Edinburgh Worldwide is further down the market capitalisation scale, which has been a key factor in its recent weakness. It “strives to understand how the world is evolving and which companies are best positioned to both drive and benefit from that evolution.”[1] It is looking at areas such as next generation healthcare, AI innovation and the energy transition, but focusing on companies at an early stage in their evolution.
Budden says the commonality between Keystone and Scottish Mortgage comes from an overlap between Keystone’s sustainability objective and Scottish Mortgage’s hunt for high growth. There is a significant amount of growth potential in trying to solve large global problems, such as the energy transition.
Independent teams
All the trusts operate as autonomous units, with their own analyst teams and research engine. Budden says: “The only exception is Monks, which has ‘scouts’ in the other teams. They are formally requested to look out for Monks ideas as part of their analysis, but for the other trusts, the teams are independent.” While all the trusts operate firmly in the ‘growth’ camp, the outcomes they are looking for and the type of companies they look for to achieve those outcomes are very different.
Budden admits there have been times when there has been greater correlation between the trusts, but the company has worked to correct them where they have happened: “During the 2020 Covid period, Monks found itself holding more rapid growth stocks than was its natural position. The trust paid for it with weaker performance afterwards. The managers really learned lessons from that. That is the one time the trusts have come closer.”
The Baillie Gifford trusts are more distinct from each other than the market currently suggests. The market is treating high risk trusts in the same way as low risk, predictable trusts. This seems anomalous and may ultimately represent an opportunity, as investors start to appreciate the nuances within the range.
[1] https://media.bailliegifford.com/mws/cilnngk2/baillie-gifford-film-ewit-mi-transcript-feb-2024.pdf