Baillie Gifford rides to 50% growth as big bets cash in

When a money manager records 54% growth in assets under management in just one year, huge inflows or M&A activity are typically identified as catalysts.

But for Baillie Gifford Overseas Ltd., neither was the case. Rather, for the Edinburgh-based manager — predominantly running equities at 92% of total AUM as of Dec. 31 — big bets on longtime holdings of technology and high-growth stocks paid off. Assets grew to $430.9 billion as of Dec. 31, with worldwide institutional AUM up 48% to $355 billion. Also somewhat unusually for a large money manager these days, the firm does not offer exchange-traded funds.

The fund's biggest AUM by client domicile was the U.S., at 39.2% of total AUM, and total U.S. institutional, tax-exempt AUM was $88.3 billion as of Dec. 31, up 41.3% for the year.

"Net flows across the whole firm last year, including new clients, was almost exactly zero," said Stuart Dunbar, Edinburgh-based partner. "The common thread of what you're observing there — and I hasten to say as I wouldn't point people to short-term (performance) as a measure of success because it's not — but what you're observing is simply an astonishing run of performance." There were some "moving parts" on the sales and new clients side, "but fundamentally this is just about returns on assets," he added.

In fact, flows over recent years have been at or close to net-zero, including in 2020, as defined benefit clients derisked and rebalanced after achieving strong investment returns, a spokeswoman added. However, those outflows were offset by inflows from other types of clients and investors — leaving investment returns as producing the bulk of AUM growth. Six of the firm's 85 funds are closed to investors, including the £6.1 billion ($8.6 billion) Diversified Growth Fund, the £3.5 billion Japanese Fund and the £2.2 billion Global Discovery Fund.

While the COVID-19 pandemic could not have been foreseen, Baillie Gifford's holdings of stocks including Tesla Inc., Tencent Holdings Ltd. and Alibaba Group Holding Ltd. certainly look fortuitous now — even though they may not have looked so positive when they were first added to portfolios by the predominantly growth equity manager.

Take Tesla, for example. Mr. Dunbar said the firm added the U.S.-based electric car manufacturer around 2012. The firm's share price that year ranged between $5 and $7. Toward the height of the pandemic in March 2020, it was approaching and then surpassed $100 per share and finished 2020 at $705.67.

"For us, it's all about how do you try and get into these companies before they've been widely recognized in the rest of the market? (Tesla) is very high profile," partly because it is a transparent company, sometimes controversial — but there has been a huge amount of short interest "and for us, (has been) a very interesting lesson in the importance of supporting potentially great companies," Mr. Dunbar said.

Tesla has done so well over the past year that executives have been forced to keep top-slicing its holdings for risk management purposes, ensuring the company does not exceed a self-imposed 10% stock limit.

That's not to say that Tesla won't continue to grow at a great pace in the future. But executives have to question whether they can make five times their returns on a stock in the next decade. "We still really like the company but reduced our holdings significantly (recently) because (Tesla is) so widely recognized," Mr. Dunbar said — although there's still potential since Tesla can also be a holding to play on the "energy revolution."

Other successful holdings include Moderna Inc. — now a household name thanks to the COVID-19 vaccine but not particularly well-known two or so years ago. "We could see the possibility of this mRNA technology they're now using to deliver vaccines," Mr. Dunbar said. "COVID has been a proof test for them."

The firm's 2020 gains and the reasons behind them have not gone unnoticed. "Baillie Gifford is a growth manager and always has been — however, within that they have got some calls right, particularly on Tesla, where they bet big," said Dean Wetton, London-based managing director at Dean Wetton Advisory U.K. Ltd. "They have always been good but this really has been their time to shine."

However, 2020's outperformance means executives at Baillie Gifford have a new issue to deal with. "The last thing we're doing is patting ourselves on the back and saying, 'aren't we doing amazing?' The much more interesting question and one we're thinking more about, is (that) the world we envisaged pre-pandemic has fast-forwarded into reality, reflected in share prices … Being right is not all that wonderful because you then have to think 'what are we going to do now?'" Mr. Dunbar said.

One source also highlighted that the firm will be unlikely to repeat recent levels of outperformance in current markets, as the rotation into value stocks and out of growth continues.

Another new thing for Baillie Gifford executives, following on from the success of certain stocks and how they can replicate something close to 2020's stellar performance, is that portfolio turnover has ticked up. The firm's typical stock turnover was sub-10% per year. "That has probably shot up to 15%-20% in the last 12 months," Mr. Dunbar said.

So now, executives are looking for the next big opportunity. While online retail "is now old hat," there are areas that are almost untouched by the Amazons of the world, such as home furnishings and cars. There are some U.S.-based companies providing online furniture sales and some auto sites, too, Mr. Dunbar said.

Executives also like "synthetic biology" — a catch-all term for creating alternatives to environmentally unfriendly fossil-fuel-based products. Examples would be companies that create biodegradable plastics or plant-based protein.

The confluence of artificial intelligence and gene sequencing is another interesting area, such as companies held in Baillie Gifford's Health Innovation Fund, launched in December. The fund had £98 million in assets as of April 30.

And finally — although more in the private than public equity asset class — is space. The firm has a "large investment" in another Elon Musk company, Space Exploration Technologies Corp., with executives "thinking quite hard about what becomes possible when the cost of putting things into orbit reduces by 95%," Mr. Dunbar said. The firm's £1.3 billion Edinburgh Worldwide Investment Trust PLC had a 2.3% holding in SpaceX as of March 31, the seventh-largest holding for the trust. Tesla was top at 4.7%.

"We're not sitting in rooms and inventing science — it's much more of talking to a huge, wide number of academics, entrepreneurs, to the management of companies we admire, trying to get an understanding for how technology is developing," Mr. Dunbar said.

That desire to understand how technology of all kinds is developing is also evident in Baillie Gifford's relationships with academic institutions, including with the University of Cambridge, the University of Oxford and China's Tsinghua University, partnering to fund research into computational biology, which looks at insights gleaned from data to diagnose diseases.

New areas of technology may also require rethinking with regards to old sectors. "We're not big fans of oil companies but there could come a time when they're the pioneers of green technology," Mr. Dunbar said. A huge oil company investing heavily in clean technology would mean a potential new opportunity.

And green and ESG issues are a big focus for Baillie Gifford. However, somewhat unexpectedly for a manager that says 100% of its AUM is run under ESG principles, the firm has not yet signed up to the Net-Zero Asset Managers initiative — a group of money managers committed to support the goal of net-zero greenhouse gas emissions by 2050 or sooner. The initiative had signatories representing $37 trillion in AUM.

"Some people have challenged us as we haven't signed up yet — we will, but we need to understand what the consequences are for how we're investing clients' money," Mr. Dunbar said.

The firm was built on running equities for defined benefit funds, and while those assets are "still a significant part, largely institutional … DB allocations to growth assets are reducing. We recognized probably 10 years ago the need to think about the future. We're not seeking to be ever-bigger — we're trying to do a decent job of investing," Mr. Dunbar said.