Baillie Gifford manager attributes consistent outperformance to bottom-up stockpicking approach and understanding individual companies
Murray Allan and James Mowat have run the Baillie Gifford Managed fund since May 2007, consistently delivering top-quartile returns.
Allan attributes performance to the managers’ bottom-up stockpicking approach, based on understanding individual companies rather than macroeconomic issues.
According to Morningstar, the £449m fund is ranked ninth out of 114 vehicles in the IMA Balanced Managed sector over three years to 9 August, up 11.6% compared to a sector average decline of 1.5%. Over one year the fund is ranked third out of 145 funds, up 22.1% compared to a sector average increase of 14.9%.
As well as co-managing Baillie Gifford’s Managed fund, Allan is a director in the firm’s institutional client department.
What has driven the fund’s outperformance over the last year?
The main thing that went right for us was the UK had a good year, and the UK makes up about a third of the fund. We had a return of just over 31% for the UK compared to the FTSE All Share index, which was only up 21%, so that had a big effect. We did not own any BP, which was mainly fortuitous. I think you need a bit of humility when these things happen. We did not view BP as a terrible company, but obviously becoming embroiled in the catastrophe off the Gulf was a terrible thing for it, and that helped relative performance.
The UK stocks we were positively overweight in which helped quite a lot include engineering firm Aggreko, which has been doing very well in the Far East, particularly in some of the emerging markets. It is also doing very well in South Africa, because a lot of these countries do not have much power generating infrastructure. Cairn Energy has been another good performer, because although oil stocks have not been very good, the company has been continuing to find new oil and developing that. Weir Group, another engineering firm, has also done particularly well.
The other area which performed strongly for us was Europe, including stocks such as Swedish engineering company Atlas Copco, which has been enjoying the fruits of the high growth in emerging markets. Another one is the Swedish retail bank Svenska Handelsbanken, which, unlike some of the UK banks, has been very well managed over the years. Brown-Forman, a traditional American drinks company which makes Jack Daniel’s whiskey, has also done well.
Asset allocation has also contributed strongly to our outperformance. We managed to keep as much as we could in equities within the limits in which the fund has to operate. We have also managed to be overweight emerging markets. Emerging markets did better than the developed markets in every sense, in total returns, and also I think the stocks did better as well.
What changes have you made to the portfolio in recent months?
We have been trimming Aggreko, which has been doing spectacularly well in stock market terms, and taking a bit out of Cairn Energy. We have completely sold out of Vodafone because we were less convinced about some of the long-term benefits to it of emerging markets, which was one of the reasons for buying it. We have looked very hard again at BP but have not quite convinced ourselves that it would be a stock we would want to hold in the fund. We have been looking at some of the UK retail banks again, where we have been very underweight.
Once again we are not enthused really. I know from the short-term numbers that everything is onside again. They are getting rid of a lot of the bad debts and building up their balance sheets again, but the worry is they are going to have a very regulated, quite low margin business in future. Interest rates will have to go up again quite soon, the mortgage market is going to be flat and property prices are not really going anywhere. We are still retaining an overweight in emerging markets.
Do you think investors should still be looking at balanced managed funds?
They have been much maligned. I have been in this business for over 25 years. For many years there was a great fashion in the pension fund and intermediary worlds to specialise. You would pick the best UK manager and the best small-cap manager and somehow put a portfolio together that would get the best of all worlds. The trouble is, firstly, it is not that easy to identify those people and, secondly, somebody then has to take the responsibility of putting it together. The thing about managed funds is the track record for portfolios like ours has been very good over 23 years. This is partly due to the fact we have added quite a decent bit of value through an asset allocation process which has worked. We have been underweight bonds at the right time, and we have mostly put clients’ money into emerging markets at the right time. So I do think there is a role for managed funds.
What is your view on markets at the moment?
The fund is well positioned. If BP were to double in price, the UK retail banks were to motor ahead, or if telecoms such as Vodafone were to perform then it would do less well. If there was a big move away from emerging markets it would probably impact negatively on the fund. But I do not think you can plan for every eventuality. Most of the decisions we make tend to be fairly gradual. We have been trimming some of the things which have done probably too well. I do think Aggreko, Cairn Energy and Weir Group have all had spectacular rises in the share prices. Sometimes in those circumstances it makes you a little bit uncomfortable as a fund manager, and you take a bit of money out of those.
I do not think the markets in the UK and Europe look overpriced. The US market to me does look a little bit more expensive but there are individual stocks within those markets which look excellent value. If there was some retrenchment – if emerging markets came back sharply – then that would give us the opportunity to put more money into them, but until that happens we are fairly happy with the portfolio as it is.
The thing that would probably not suit us is a massive jump in the markets, although, having said that, last year we did well when the markets rose very sharply. Normally we do quite well in dull markets and in falling markets as well. In July the markets were down fairly sharply and we did quite well against the peer group.
The fund was launched in 1987. It is a very good vehicle for people who do not know what is going to happen next, which I think is most of us. It has done very well against its peer groups, over the years it has produced decent levels of return for investors without the high level of volatility you sometimes get in a pure equity fund. The fund is run by Baillie Gifford which is a very sensible company that has been very stable. Unlike some others which have come and gone, we have been running the same business for a hundred years.
