Baillie Gifford’s focus on disruptive companies capable of adding value over a five-year market cycle is out of fashion at present, potentially challenging the growth equity manager’s ability to deliver benchmark-beating returns for the current cycle.
“We can’t recall when our approach was so out of step with the prevailing market narrative,” the Edinburgh-based firm wrote in a recent fund commentary, contrasting Baillie Gifford’s relatively long-term approach to investing with the market’s “current near sightedness.”
In a recent interview, Stuart Dunbar, a Baillie Gifford partner who works with the firm’s clients, said the current moment is marked by “a peculiar mismatch,” with a tidal wave of change and disruption coming down the pike in sectors such as energy, healthcare and financials even as market players appear singularly focused on near-term cash flows.
By way of example, Dunbar pointed to Moderna — a Cambridge, Mass.-based drugmaker included in some of Baillie Gifford’s biggest portfolios — which he noted can see its share price fall dramatically if somebody says the company’s COVID-19 vaccine sales look set to decline.
“Moderna is not a COVID company. Moderna is an innovative mRNA platform drug company with a pipeline of 40 or so drugs … based on deep sequencing and analysis,” Dunbar said. That the company’s share price goes up and down depending on talk about its COVID-19-related sales “tells me the market is completely focused on the wrong thing,” he said.
Other factors weighing on growth stocks include, of course, the surge in interest rates over the past 20 months, with higher discount rates weighing on net present value — even though good companies with pricing power should be able to continue to grow, Dunbar said.
The result: a “tremendous roller-coaster” ride this cycle, with an initial COVID-driven leg of stellar outperformance in 2020 followed by a painful stretch of underperformance, he said. By way of example, Baillie Gifford’s $44.8 billion international growth equity strategy beat its benchmark by a whopping 54.4 percentage points in 2020, followed by underperformance of 17.9 points in 2021, 20.4 points in 2022 and 3.2 points for the first nine months of 2023.
Baillie Gifford reported $264.4 billion in total assets under management as of Sept. 30. That is relatively flat from the $268.7 billion in AUM it reported as of Dec. 31, 2022, but is down 42% from $454.9 billion at the end of 2021, according to Pensions & Investments data.