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Baillie Gifford and the three quandaries of fund management

THE HOME of the Scottish Mortgage Investment Trust (SMIT) is an office a mile down the road from Edinburgh Castle. Aside from that it has little to do with Scotland, and nothing at all to do with mortgages. This makes it an apt flagship for Baillie Gifford, a British investment manager that prides itself on its unconventionality. Baillie Gifford’s 12 trusts and 33 funds together oversee assets worth £346bn ($466bn). That puts it well below the heavyweight category for global fund managers, whose members hold assets in the trillions. Yet the firm and its star vehicle hold wider lessons for other fund managers. Among the previous jobs of members of Baillie Gifford’s investment team are ballerina, soldier, doctor and concert pianist. One partner likes to tell potential clients that the firm’s equity-fund managers aren’t much interested in the stockmarket. Another describes her enthusiasm for a founder who is so focused on developing a breakthrough medical technology that he refuses point-blank to discuss what his company could be worth. But even those investors who insist on vulgar bean-counting will be impressed by the fact that £1,000 invested in the SMIT ten years ago would be worth around £11,600 today. By contrast, the same amount invested in the FTSE All-World index of stocks would be worth around £3,800. The author of this success is James Anderson, who took the helm of the SMIT 21 years ago and will step aside in April. The iconoclastic Mr Anderson participates in a long tradition of fund managers pouring scorn on their own industry. Conventional asset management, he said in his latest annual review of the SMIT, is “irretrievably broken”. Markets are in thrall to the “near-pornographic allure of news such as earnings announcements and macroeconomic headlines”. Mr Anderson has used his tenure to mould the SMIT to his liking. When he took over, the trust, then 91 years old, held shares in hundreds of listed firms, around half of which were British. Today it invests in a few dozen public and private companies based all over the world. The meteoric rise in the trust’s share price was fuelled by backing companies like Alibaba, Amazon, Tencent and Tesla early and then hanging on to them. Along the way, the amount of money Baillie Gifford oversaw grew by a factor of ten. The challenges the firm faces as Mr Anderson leaves are emblematic of those that confront the wider industry. The first is how to prevent a run of extraordinary performance from reverting to the mean and becoming pedestrian. Under Mr Anderson, the SMIT broadened its horizons to include new geographies and unlisted companies. It also placed bets on firms with unconventional business models and maverick founders that put other investors off. That does not mean that the route to future success lies in finding more privately owned companies run by irascible bosses. The SMIT’s outperformance in fact came from its early recognition of trends, such as the growing dominance of internet retailers and the increasing importance of electric vehicles. There is no set of rules for arriving at such insights, and so no guarantee of repeating them. The second challenge is to square the opportunities for returns with investors’ demands for social responsibility. The firm’s “health innovation” strategy attempts to do this, by betting on a hoped-for megatrend that will deliver both profits and improved medical care. But elsewhere in Baillie Gifford’s portfolio is BGI Genomics, a Shenzhen-based firm. It is part of a group that had two subsidiaries placed on an American watch list last year for “conducting genetic analyses used to further the repression of Uyghurs and other Muslim minorities” in Xinjiang, according to the Commerce Department. Even the most quixotic aim can end up in a moral quagmire. The final challenge is timeless and universal: succession. In announcing Mr Anderson’s departure, Baillie Gifford emphasised continuity. His replacement, Tom Slater, has managed the SMIT jointly with him since 2015. The philosophy and investment process of the trust, it insists, will not change. Yet it is losing the leadership of an uncommonly prescient investor. Mr Anderson himself has written of his waning enthusiasm for Amazon as Jeff Bezos, its founder and CEO, stepped aside and it ceased to feel like “Day One” at the company. Having been founded in 1908, Baillie Gifford’s first era passed a long time ago. As another day draws to a close, replicating its successes will be a tall order. An early version of this article was published online on November 16th 2021

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