Baillie Gifford outlines “bottlenecks” approach to investing after post-2022 introspection

Baillie Gifford framed its style as finding bottlenecks in the economy to invest in, as it continued to fly the flag for active investment at a press event this week.

The Edinburgh-based asset manager runs sit-downs with the financial press throughout the year where fund managers offer insight into its current positioning. As a pure-play active manager which uses the tagline “actual investors”, the firm is one of the industry’s most prominent advocates of this investment style.

The April event took place amidst even greater volatility than has been typical in recent years, with the US’s President Trump having just unilaterally extended his ceasefire with Iran. Baillie Gifford was founded in the early 1900s, and saw a big growth in valuations during the 2010s as investors focused on growth potential over earnings, being an early holder in electric vehicle provider Tesla. However, as interest rates rose from 2022 onwards these stocks were punished in favour of companies with robust cashflow, with the firm seeing outflows of £100 billion in 2022.

While growth investing fell particularly out of favour, active investing in general is also facing questions, as index-tracking passives have continued to provide superior returns to most active funds.

These challenges haven’t changed the core investment approach, Marketing Director James Budden said, with the firm still viewing investing as “supplying capital to entrepreneurs” in search of long-term growth.

However, he notes that the firm was “introspective” after the 2022 battering.

“It threw out lots of questions. You had to go back to basics in a certain sense. We looked at all of our stocks in terms of resilience, profitability and cashflow. You saw pre-Covid, a period of very low interest rates, so there was a lot of money sloshing around. Everyone was keen to buy market share – profits were going to be way out there. Post-Covid it was very clear that that wasn’t the case: the market was reining things in and saying we want to see improvement on the bottom line and profitability.”

He adds: “It was refocusing on those attributes across all of our portfolios and testing the resilience of our companies. There was a stock selection review, which led to sales and things like that. But also there was a question over risk parameters – we did a lot of work with our risk team looking at correlations and valuations. What came out of that was that we maybe had a propensity to hold onto stocks too long sometimes, and there was no harm in recycling and selling. That’s become more of a feature of our portfolio than in the past, when it was more “run your winners”. We’ve become a little more circumspect in that sense around valuation.”

This has meant more formal guidelines and reporting in conjunction with the risk team.

Baillie Gifford is not alone in facing questions about active management, but its approach to spotlighting the fund managers (Monks, Managed, Emerging Markets and Japan) helps it to put a human face on its message.

Michael Taylor of Monks Investment Trust, positioned as a core holding for investors, contrasted his philosophy with the narrative-dominated approach taken by markets in general. Often companies are unjustly hit by big market sell-offs, he said, which may take little account of fundamentals.

Baillie Gifford views the market as dominated by a few winners, with Taylor conceptualising the approach more broadly as finding bottlenecks that will endure amidst these inevitable trends.

In the past, coders were heavily in demand, but with AI making coding capabilities abundant, the new bottleneck is physical: with individual companies in the portfolio including manufacturers of niche semiconductor parts and copper miners. He notes how, in February, software stocks were sold off indiscriminately over the fear they could be made obsolete by AI.

He added, however, that while the “median software company” might have a hard time due to AI disruption, software companies that sell something beyond the product will thrive. For example, Baillie Gifford has a holding in Samsara, a US-based provider of black box technology and cloud services for vehicles, which he says primarily sells “trust” rather than a piece of software.

“But they got sold off just like anyone else in February.”

It may not be in favour right now, and there may not be an imminent reckoning for index investing, but Baillie Gifford continues to offer a clear framing for active that differentiates it both from high-frequency trading and passive.