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Fund Manager
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Square Mile
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strategy directly from the fund manager himself.
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research and market views together with an explanation of the
The Baillie Gifford European Fund is a long-term European equities fund that aims to generate a minimum 10% return p.a. for clients over a period of 10 years. It targets “hidden champion” businesses that are leaders in their niche. As global players, these stocks tend not to be particularly affected by the region’s geopolitical situation at any point in time.
Axis analyses the fund from four perspectives to bring you insight,
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Review By Nicola Brittain
COMPANY_ Last Word
The Baillie Gifford European Fund has a pretty convincing premise, it invests in companies that are leaders in niches often overlooked by the wider investment community. When combined with a long-term approach, when the general market is increasingly short term, this strategy means the fund is able to buy quality stocks at often excellent valuations.
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“The European equities team, led by Stephen Paice, chooses stocks with the following characteristics: they must be aligned to their customers and Baillie Gifford’s long-term philosophy; they must show good growth potential; and they must have a competitive edge over their peers.”
JOB TITLE_ Investment Writer
YEARS IN INDUSTRY_ 17
LOCATION_ London
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Clear investment philosophy puts fund above peers
COMPANY_ Square Mile Investment
To view Square Mile Investment Consulting and Research Ltd's disclosure on their involvement on this site, please click here.
JOB TITLE_ Research Manager
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“This fund's management team focus solely on identifying the best growth companies they can find and looks to hold them for the longer term. This is a thoughtful strategy, designed for investors with a long-term horizon.”
The Baillie Gifford European fund has many of the characteristics we like to see in a strategy. Its most appealing feature is the sensible and repeatable process, based on the house principles of identifying and investing in well-managed companies believed to be growing sustainably. While this might sound simple enough, few investment managers have been able to follow this consistently and successfully over long periods of time.
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Last Word
Perspective
The Baillie Gifford European Fund aims to produce attractive capital growth of 10% over a five or 10-year period. Seasoned investors might ask ‘why Europe?’, since the region has been unfashionable in recent years with problems including low growth and an inharmonious political and economic situation. However, these investors would be missing the point. The fund invests in global companies with strong fundamentals that just happen to be in Europe, and the team simply don’t take the sort of top-down, geographical perspective that would lead to this kind of unfavourable conclusion. Stephen Paice, investment manager Baillie Gifford said: “Top-down sentiment grows and wanes but our bottom-up analysis means we know what the innovative and entrepreneurial businesses are.” And Europe is a haven for a type of company that Baillie Gifford prizes highly – Paice described them as “hidden champions”. These businesses are hidden because they tend to fly under the general radar and be overlooked by the wider investment community - B2B niches are less attractive than other niches. Similarly, they are champions because they have a competitive edge, excellent growth potential and a global reach. Examples of this type of company are Atlas Copco, a Sweden-based firm that specialises in air compression technology; Hexpol, a rubber compounding company based in Belgium; and Novozymes a biotechnology company based in Copenhagen, Denmark.
These companies believe that their destiny is in their own hands, and they don’t rely on any economic backdrop, but where there is a downturn they are likely to be the most dominant players in their niche, and so will acquire weaker companies. Although there might be a short-term drop in profits during turbulent times Baillie Gifford’s long-term perspective will give the stocks time to recover.
Paice leads the seven strong team, and is one of three decision makers on the fund. All seven members are generalists and know the companies they choose well. The fund holds between 40 and 80 stocks (currently 49). A long-term focus gives the team a competitive edge over its peers, as these are increasingly short-term in their outlook owing to high-frequency trading and the release of more data among other things. But, as Paice points out, this short-term perspective means other funds do not benefit from the compound returns that a more long-term fund gets. Baillie Gifford’s approach means the fund is well positioned to take full advantage of these interesting “hidden champions” at a time when the wider market is not.
Baillie Gifford European Fund benefits from hidden champions
AUTHOR_ NICOLA BRITTAIN
Companies must be over €1bn market cap to qualify for selection, and the 850 companies that do are filtered down to a focus list of 150. The fund currently holds 49 of these but as Paice explained, the other 100 or so are closely followed. It works out which companies it thinks are attractive by using a common framework looking for three important characteristics – ‘alignment, growth, and edge’. Alignment looks for the advantages of long-term thinking, making sure businesses are aligned with customers and employees. It is also particularly keen on owner-operator structures, approximately 75% of the stocks are insider owned - these are often, but not always, family businesses. Paice added: “we like this type of owner because they have skin in the game, and tend to work to a longer-time horizon than others. This structure doesn’t guarantee success, but it increases the odds of outperformance.” The team is also looking for companies with the potential to grow significantly – with significant compound growth over a five to 10-year time horizon. Finally, the team chooses companies with a competitive edge: this might be an advantage in terms of economies of scale, brand, innovation, research and development capabilities, patents or strong relationships with other companies.
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Kames Global Diversified Income Fund
Fund
Vincent McEntegart has been managing the Kames Global Diversified Income Fund for six years and is well-versed to the changeable financial climate. Curabitur blandit tempus porttitor. Aenean lacinia bibendum nulla sed consectetur.
Manager
Vincent McEntegart
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All of these factors result in this fund being an attractive proposition and one that might appeal to investors considering a longer-term allocation to European equities, however, it should be noted that this is not a fund for investors expecting index-like returns. The fund can look and perform very differently from its benchmark index, as can be seen from a quick glance at the fund's annual performance over 2017, 2016 and 2015. Since its inception in February 2000, fund returns are ahead of the MSCI Europe ex UK index, although these gains have been made in more recent years since the current team of managers took over the strategy. The rolling three and five-year returns are comfortably ahead of the index, thanks primarily to some well-judged stock-picking in a number of sectors.
In general, we think that having a clear investment philosophy and a sound investment approach are good things to look for when choosing investment funds. However, the package is more complete if the managers in charge of said funds are also able to articulate an equally clear set of objectives over a certain time horizon. In this fund's case, the managers are seeking to deliver returns over the benchmark index in the region of 2-3% p.a., over a rolling five-year period or more. On the whole, we believe that this strategy ought to do well when markets are focusing on company fundamentals, though the fund may struggle when market participants are chasing certain themes, such as deep value stocks.
This UK domiciled OEIC has an OCF of 0.60%, making it attractive not only from a cost perspective but also, more importantly, because it provides access to a well-resourced team at Baillie Gifford managing in line with a thoughtful process aimed at longer-term oriented investors.
AUTHOR_ AMAYA ASSAN
“Baillie Gifford seeks to generate superior long-term returns for investors. It believes that the best way to achieve this is by investing in well-managed companies that can grow sustainably due to their competitive edge and financial strength.”
Overall, we believe that the process followed is quite thoughtful. Ideas are generated from a number of sources including the team's own research, company meetings and from within Baillie Gifford through interaction with other investment teams. There are seven investment professionals in the team, who have varying degrees of investment experience and company research knowledge, however we believe the bench is deep enough to effectively examine Europe's large universe of stocks. Heading the team is Stephen Paice, who joined the firm in 2005, supported by Tom Walsh and Moritz Sitte, who joined Baillie Gifford in 2009 and 2010, respectively. The three managers responsible for this fund have worked together for a number of years and bring a complementary set of perspectives and skills to the table. Portfolio construction is undertaken in a sensible manner and, although there are certain risk guidelines at a stock and industry level, risk is very much considered more broadly. The team believes, for instance, that benchmarks are not risk free and a tracking error doesn't fully capture all the risks of an investment.
Baillie Gifford is a long-established Edinburgh-based investment partnership that is well known among institutional investors. Applying a common set of investment principles and having a longer-term investment horizon than most other investment firms, Baillie Gifford seeks to generate superior long-term returns for investors. It believes that the best way to achieve this is by investing in well-managed companies that can grow sustainably due to their competitive edge and financial strength. This manner of investing has been proven to work over time and Baillie Gifford has seen its share of assets in some strategies grow substantially over the years. We believe there is plenty to like of Baillie Gifford's style of fund management.
This fund's management team seeks to identify and invest in attractive growth companies across the market capitalisation spectrum. Investments are made and sized based on a stock's own merits rather than with the index in mind. When analysing a company, they consider its prospects over the next five years. The longer-term time horizon used differentiates this strategy from many other European equity investors, giving the portfolio managers an advantage because they are able to back their judgement and build meaningful positions in companies over time. They believe the growth in underlying profits and cash flows of their companies' lines of business will ultimately make money for investors.
Superior long-term returns come from quality companies with competitive edge
Lynn Hunter, research analyst, Square Mile
Square Mile
Perspective
Fund buyers' perspective
Four independent fund buyers provide insight into the Baillie Gifford European Fund.
Market Reaction
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Jonathan Woo_ investment research_ Santander Asset Management
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“There has been considerable structural reform in giant markets like India, China and the Pacific Tiger economies. It’s a time of change from investment in infrastructure to innovation. Baillie Gifford looks for superior growth, meaning its style is suited to this change. They make some debatable valuations but are valiant investors and can spot businesses with great fundamentals early. They are picking the sort of businesses that have the potential to steam ahead and accrue multiple years of earnings growth for investors.”
Scott Spencer_ Investment Manager_ F&C Multi-manager solutions, BMO Global Asset Management
“The key rationale behind Income Maximiser is the delivery of a 7% yield. The use of derivatives in the portfolio means the upside is therefore limited but we find the fund is a lower beta way of getting equity exposure as well as some downside protection.”
“The fund managers of Schroder Income [Nick Kirrage and Kevin Murphy] pick the stocks, and the derivatives for Income Maximiser are then written accordingly. We like the fact that derivatives provide a diversification element and we have a great deal of confidence that the derivatives are run by a separate team. It is a very different skill set and is a USP of theirs.”
Richard Philbin_ CIO_ Wellian Investment Solutions
Mona Shah_ head of collectives_ Rathbones
“After years of lacklustre performance, Asia and the emerging world experienced a resurgence last year, driven by rising commodity prices and a fundamental shift in favour of more cyclical sectors like financials, energy and materials. But many of the fortunes of Asia and emerging markets are driven by sentiment from the West, which was negatively affected by the US election in November. While markets have regained their initial losses, we’ve had no more clarity on what Donald Trump’s policies will mean with regards to global trade and protectionism. For this reason, we believe that diversification should offer benefits in a period where markets are likely to be volatile. In addition, the economies in Asia-Pacific are showing increasing dependence on domestic demand, and we believe funds exposed to growing demand from consumers in China, for example, may be better placed to withstand headwinds from the US.”
Robert Shepherd_ Director_ Bright & Co.
We were on the lookout for something different and, let’s face it, 4% or lower is the norm in this environment. So this is attractive”
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Achievable, sustainable, reliable
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Fund
Manager
Perspective
Fund Buyer
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This demo version has been optimised for desktop, laptop and tablet. Smartphones, iPhones will be supported in the next version.
to bring you insight, research and market views
together with an explanation of the strategy
directly from the fund manager himself.
Axis analyses the fund from four perspectives
The Baillie Gifford European Fund has a pretty convincing premise, it invests in companies that are leaders in niches often overlooked by the wider investment community. When combined with a long-term approach, when the general market is increasingly short term, this strategy means the fund is able to buy quality stocks at often excellent valuations.
Scroll down to read more...
Review By Nicola Brittain
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Stephen graduated with a BSc (Hons) in financial mathematics from Glasgow Caledonian University in 2005. He joined Baillie Gifford in the same year and is an investment manager in the European equity team. Stephen became a member of the Pan-European Portfolio Construction Group in 2014.
Investment Manager
Stephen Paice
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The Baillie Gifford European fund has many of the characteristics we like to see in a strategy. Its most appealing feature is the sensible and repeatable process, based on the house principles of identifying and investing in well-managed companies believed to be growing sustainably. While this might sound simple enough, few investment managers have been able to follow this consistently and successfully over long periods of time.Scroll down to read more...
Superior long-term returns come from quality companies with competitive edge
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Axis interrogates the fund from four perspectives
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The Baillie Gifford European Fund has a pretty convincing premise, it invests in companies that are leaders in niches often overlooked by the wider investment community. When combined with a long-term approach, when the general market is increasingly short term, this strategy means the fund is able to buy quality stocks at often excellent valuations.
Review By Nicola Brittain at Last Word
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joined Baillie Gifford in the same year and is an investment manager in the European equity team. Stephen became a member of the Pan-European Portfolio Construction Group in 2014.
Stephen graduated with a BSc (Hons) in financial mathematics from Glasgow Caledonian University in 2005. He
The Baillie Gifford European fund has many of the characteristics we like to see in a strategy. Its most appealing feature is the sensible and repeatable process, based on the house principles of identifying and investing in well-managed companies believed to be growing sustainably. While this might sound simple enough, few investment managers have been able to follow this consistently and successfully over long periods of time. Disclaimer »
“In keeping with the firm’s overall investment direction, Baillie Gifford’s European strategy invests within the quality growth end of the market. With the European recovery now firmly taking hold, we can expect to see a lot of the latent growth potential in European corporates begin to be unlocked which should, in turn, begin to see these opportunities positively repricing.”
James Penny_ senior investment manager_ TAM Asset Management
Tom White_ senior research analyst_ Tilney
“Small and medium-sized companies have vastly outperformed their larger counterparts in Europe in recent years. As a result multi-cap funds like Baillie Gifford European have been the standout performers in the Europe ex UK sector. Using such funds isn’t without its risks, but can be a valuable source of diversification and additional alpha in client portfolios.”
Patrick Thomas_ investment manager_ Canaccord Genuity Wealth Management
“The fund is characterised by a high active share (positioned very differently from its benchmark). It also has a very low turnover of underlying holdings implying strong conviction. It has historically had a high weighting to midcaps and a preference for profitable franchises . However, we do not currently use the fund in our portfolios due to its relatively small size.”
Neil Clare_ senior analyst_ FundQuest Adviser
“After a good year for European equities in 2017, European equity managers seem to have retained their positive perspective going into 2018. While valuations have risen, European equity markets remain attractively valued relative to other developed markets, notably the US, and could rally further for the following reasons: confidence in a sustained and synchronised global economic recovery, accommodative monetary policy from the ECB, strong earnings growth, and a reduction in political risk. ”
Baillie
Gifford
European
and market views together
Axis analyses the fund
strategy directly from the
from four perspectives to
bring you insight, research
fund manager himself.
with an explanation of the
Review By Nicola Brittain
at Last Word
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Clear investment philosophy puts
fund above peers
James Penny_ senior investment manager_
TAM Asset Management
Patrick Thomas_ investment manager_
Canaccord Genuity Wealth Management
“The fund is characterised by a high active share (positioned very differently from its benchmark). It also has a very low turnover of underlying holdings implying strong conviction. It has historically had a high weighting to midcaps and a preference for profitable franchises . However, we do not currently use the fund in our portfolios due to its relatively small size. ”
“After a good year for European equities in 2017, European equity managers seem to have retained their positive perspective going into 2018. While valuations have risen, European equity markets remain attractively valued relative to other developed markets, notably the US, and could rally further for the following reasons: confidence in a sustained and synchronised global economic recovery, accommodative monetary policy from the ECB, strong earnings growth, and a reduction in political risk.”
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Debt/equity ratio
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20
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60
Baillie Gifford American
30
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10
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Yield* %
S&P 500 Index
Source: UBS, Baillie Gifford. As at 31 December 2016
* 12 month forward estimate
Baillie Gifford American – the difference between 5-year annualised returns and the S&P 500
Source: Baillie Gifford
Date: 31 December 2017
Patrick Thomas_ investment manager_ Canaccord Genuity Wealth Management
Tom White_ senior research analyst_ Tilne
James Penny_ senior investment manager_ TAM Asset Management
“In keeping with the firm’s overall investment direction, Baillie Gifford’s European strategy invests within the quality growth end of the market. With the European recovery now firmly taking hold, we can expect to see a lot of the latent growth potential in European corporates begin to be unlocked which should, in turn, begin to see these opportunities positively repricing. ”
Patrick Thomas_ investment manager_ Canaccord Genuity
Wealth Management
Source: FE Analytics
Data from Jan ’05 - Dec ‘17
Baillie Gifford European vs MSCI Europe
exc UK (rolling 5yr monthly)
Source: Baillie Gifford
Baillie Gifford European Fund: Performance versus the MSCI index
Until end of December 2017
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Historic earnings growth
25
15
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Return on equity
20
Baillie Gifford European Fund:
Performance versus the MSCI index
Baillie Gifford European vs MSCI Europe exc UK (rolling 5yr monthly)
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10
-6
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