One of the best performing global funds over the past three years has deep roots in the world of ESG (environmental, social and governance).

Since the Baillie Gifford Positive Change Fund (BYVGKV5) emerged in January 2017 it has posted a 110% total return, versus 18.6% for the MSCI World index.

The Baillie Gifford fund has even outperformed this year during the global markets sell-off, achieving 10.7% poitive total return in the year to 4 May 2020 versus a 9.7% decline in the MSCI World index, according to FE Fundinfo.

Financial Times recently cited analysis by Morningstar that found that nearly two thirds (62%) of global ESG large cap equity funds outperformed the MSCI World index in March, a period which encompassed the worst of the market collapse.

It quoted Hortense Bioy, director of passive strategies and sustainability research at Morningstar, as saying: ‘ESG funds tend to be biased towards higher quality companies with a stronger balance sheet, companies that are run better and operate more efficiently.’

The Positive Change Fund certainty fits that bill. Its investment strategy bears all the hallmarks of Baillie Gifford’s approach; a high-conviction, concentrated portfolio of exceptional growth businesses capable of producing returns that substantially beat market averages.

FOUR FOCUS AREAS

It invests in companies which can deliver positive social change in one of four areas: social inclusion and education, environment and resource needs, healthcare and quality of life, and addressing the needs of the world’s poorest populations.

What makes this fund stand out from other Baillie Gifford funds, says Rosie Rankin, positive change specialist and a director at Baillie Gifford, is being the only one with twin objectives. The first is attractive returns and the second is to contribute to a sustainable, inclusive world.

For example, it invests in US healthcare company Teladoc Health which plays into the digital health shift, offering consumers the chance to talk with medical consultants via
the internet.

‘Teladoc is mainly focused on the US but has scope to expand into other regions, which we would like to see happen,’ says Rankin.

You can see how virtual medical appointments could change lives in far flung places in Africa, parts of Asia and Latin America where physical access to medical professionals is very limited.

‘Teladoc’s user numbers have increased about 70% this year,’ says Rankin, a rise which she calls ‘incredible’. Its share price has already doubled in 2020 and is up nearly 600% in three years, despite the company not yet making a profit.

CONCENTRATED PORTFOLIO

The Baillie Gifford fund aims to hold between 30 and 50 stocks, and hang on to them for between five and 10 years, potentially longer.

It currently has investments in 31 stocks, drawn from across the globe, with nearly half the fund invested in North America (circa 45%), including well-known firms such as Tesla and Google-parent Alphabet. This concentration increases risks as well as returns potential.

As of 1 May it had just under £400m in assets and a 0.55% ongoing charge. Investors shouldn’t expect much in terms of dividends, with the fund yielding a mere 0.4%. You’ll make the bulk of returns through capital gains.

TECH WITH A SOCIAL CONSCIENCE

The fund only has a handful of London-listed stocks including FTSE 250 consultancy FDM (FDM) and Irish insulation firm Kingspan (KGP).

FDM’s long-run financial performance is outstanding while the shares have gone from 287p to 717p since returning to public markets in 2014 (the stock was over £10 pre-pandemic).

Rankin and her colleagues really like FDM’s recruitment policy, welcoming people returning to the workforce after an extended break (such as starting a family) and it also finds jobs for ex-services personnel, providing the IT skills and training needed for a second career.

PREMIUM RATINGS

As with the asset manager’s other funds and investment trusts, the Baillie Gifford Positive Change Fund has a distinct bias to more expensive growth-orientated stocks.

For example, fast growing glucose monitoring technology developer DexCom, its largest stake at 7.2% of the portfolio, is trading on 155 times forecast earnings for 2020, while biogenetics equipment maker Illumina is trading on a price-to-earnings ratio of 50-plus.

Baillie Gifford pays little attention to short-term valuation fluctuations and isn’t overly concerned with short term reporting numbers.

Instead it takes a long view, believing that market ‘myopia’ is a persistent structural issue, but not all investors will be comfortable with such a strategy.

For those happy to pay up for companies that can make a difference, this fund does look like an excellent one to own for many years to come.

‘Philosophically, we believe that positive impact and share price performance go hand in hand,’ says Rankin.

‹ Previous2020-05-07Next ›