INTERVIEW: Baillie Gifford looks to reset the narrative on growth investing, ESG

Asset manager Baillie Gifford ran a press event this month, bringing together titles from the financial trade press and nationals for a series of presentations by some of the firm’s key fund managers.

The mission? To differentiate its brand of growth investing, by demonstrating the expertise and judgement underpinning its stock picks.

As interest rates have risen and market performance has fallen, money has flooded out of “growth” stocks, where the valuation is driven by future potential rather than immediate earnings prospects. Baillie Gifford has been particularly impacted due to its large holdings in companies such as Tesla, which has fallen over 40% in the last two years.

These movements were “extreme on the way up and extreme on the way down,” says James Budden, Marketing Director.

What the media day aimed to address, James explains, was the misconception that growth companies owned by Baillie Gifford have only been growing because of cheap money, and can’t function in a high interest rate environment.

“Even in a world where we’ve seen interest rates rise really strongly to combat inflation, a vast majority of the companies we invest in are capable and resilient in this context.”

While yields on gilts are “seductive in the short term”, many companies such as Netflix that were hammered hard in 2022 have bounced back “very strongly”. Baillie Gifford believes that Moderna, for example, seen as a one-trick pony for Covid vaccines, “can offer a myriad of other opportunities.”

This was the theme throughout the day, with each fund manager explaining the robust processes that have underpinned their investment decisions.

“We believe markets are driven by big winners,” Steven Hay from Baillie Gifford’s flagship Managed Fund, explained in one of the presentations. “It’s not about avoiding losers as many would have you believe.”

The day also showcased the Sustainable Income Fund, Pacific Horizon Investment Trust and Japanese Income Growth Fund.

James remarks that the message about growth investing has at times been falling on “deaf ears” – is he seeing any turnaround on this?

He notes that gross sales have risen “quite nicely” in the last quarter, although this hasn’t been enough to counterbalance the outflows.

“Behaviourally, it’s very difficult to invest when things aren’t looking very good, but actually that is the time to do it.”

He notes that advisors and wealth managers have a particularly difficult job, being on the “front line” and explaining to clients.

“It’s a much easier conversation to say, we’ll be cautious, let’s buy a few gilts or bonds as the yields are very good.”

The advantage is that the money coming in is less likely to flee on a whim.

“If people are brave or clever enough to take advantage of the opportunity now I think that suggests they’re in it for the long term.”

For the year ahead, the plan is to continue putting out thought pieces and intellectual capital, white papers and webinars. These will talk about why things have gone wrong in markets, talking about the opportunity, and reassuring investors who have decided to stay with Baillie Gifford.

The key is the “long-term, actual investors” message which pervades everything – the firm does not allow “style drift”.

“We’re loyal to the way we do things and we can go through periods of underperformance.

“We’re not going to change and suddenly start buying oil companies and banks, which of course was something that was a question that a lot of people asked us, which kind of shows they didn’t really understand what we were doing.”

At another press meeting six months from now, James would hope to be able to talk about how the share prices of the stocks are beginning to reflect the operational success of the companies.

“You could see us emphasising those big winners that we have amongst our fund and trust range.

“If people come back to growth equities, we are the place to be.”

The changing nature of ESG

It’s not just the volatility in markets that Baillie Gifford is contending with. The firm also found itself at the centre of unwanted headlines over ESG when Greta Thunberg pulled out of the Edinburgh International Book Festival.

A Scottish publication called The Ferret criticised Baillie Gifford’s sponsorship of the upcoming festival, calculating that the stated 2% of the asset manager’s AUM in companies that profit from fossil fuels (5% of revenues coming from some form of fossil fuel activities) would total around £4.5 billion.

This then led climate activist Greta Thunberg to pull out of the festival, saying that “greenwashing efforts by the fossil fuel industry, including sponsorship of cultural events, allow them to keep the social license to continue operating.”

James says that with activists, there is “no tolerance – it has to be very black or white”.

He says that Baillie Gifford wouldn’t sponsor an event organised by Thunberg, and the sponsorship of the book festival was because “essentially no-one else would”.

At the time Baillie Gifford said in a statement that while the 2% figure “includes some exposure to oil and gas companies, such as Petrobras, the majority are businesses that have already moved most of their operations away from fossil fuels and are helping to drive the transition to clean energies.”

James says: “[Calling] Baillie Gifford a well-known fossil fuel investor is just absurd. But that is the world that we live in, and you have to bear that.”

He notes that while the festival has helped the asset manager reach its audience, the sponsorship is “not something we’re wedded to.

“We’re very happy to support these festivals, and in a lot of cases, they wouldn’t be able to carry on without our support.

“All businesses face that kind of moment where the poor publicity outweighs the benefits and you have to make a decision but we haven’t reached that stage.”

As with the growth investing versus speculation debate, there is a sense here that the nuanced point around engaging with companies on a transition rather than divesting is also falling on deaf ears. Does he believe that the argument is being heard?

“I think asset managers need to evidence that they are engaging in a more positive and effective manner.

“You can only do that by taking a long-term approach with the businesses you work with.”

James adds that a lot of people say they engage, but are probably doing as little as attending an AGM.

“There are levels of engagement and they’re very costly. You have to have that in terms of time and people to be able to do that properly.”

There may, then, be potential for differentiation by offering “genuine ESG”.