Baillie Gifford’s Gerald Smith has sold his stake in the group’s Pacific fund, preferring to invest directly in China.
The manager of the £891m Monks investment trust sold his 4.7% holding in the pan-Asia Baillie Gifford vehicle in order to gain exposure to Chinese consumer and construction stocks.
“The general consensus on China is it is a bit of a disaster – massive over-investment and massive problems in property and banks,” he says.
“However, one area markets do believe will be important over the next five to 10 years is consumer consumption.
“Also, I think investors are being too gloomy about construction. The situation is not as bad as markets think and China will find a need for the capacity it is building.”
Smith’s acquisitions include Swiss watch wholesaler Hengdeli, nappy manufacturer Hengan, shopping mall developer Renhe and China National Building Material. He now has 8% invested directly in China.
More generally, Smith is applying a barbell approach to his equity portfolio due to the uncertain economic outlook.
“Markets are quite polarised at the moment. There are renewed signs of problems in the US. It is not growing inflation, so if the recession returns there is a chance it could slide into deflation,” he says.
“In addition, either the debt in the financial system has gone away or it is going to come back and bite us.
“On the other hand, as the recent figures from Europe have shown, we have got reasonable growth in the world.”
Defensive stocks in the portfolio include the recently acquired Eldorado Gold, as well as McDonald’s. National Grid, Deutsche Telekom and Altria are among some of his more bullish bets.
Smith has also made small additions to his fixed income holdings, having cut them back to 7% from 20% this year.
He has added an ABN Amro-issued life settlement note and a bond backed by hotels and leisure assets.
“We bought the life settlement bond from a forced seller so we got a good deal. We estimate we will get about an 18% return,” he says.
“The asset-backed security is already in default, but we have bought the most senior tranche so all the available money is flowing into it. We have bought it on the basis that it will eventually default outright, but we still think it will generate a 15% return.”
