a sub-fund of Baillie Gifford UK & Balanced Funds ICVC

Transcription

1 BAILLIE GIFFORD Baillie Gifford Managed Fund a sub-fund of Baillie Gifford UK & Balanced Funds ICVC Investment Philosophy and Process This document has been prepared for use by professional advisers and intermediaries only. It is not intended for use by retail clients.

2 Contents Introduction to Baillie Gifford 3 Key Facts 3 Fund Aims 4 Investment Philosophy 4 Investment Process Equities 5 Investment Process Fixed Income 6 Portfolio Construction 6 Risk 6 Team Structure 7 How to Contact Us 8 Managed Fund P&P indd Ref: INF PP

3 Introduction to Baillie Gifford Baillie Gifford, founded in Edinburgh in 1908, is one of the UK s largest independent investment management firms and is 100% owned by the current partners, all of whom work full-time for the firm. We believe our independence provides stability for our clients and employees, as well as motivation for our investment professionals and alignment of interests with our clients. Staff turnover is very low across the whole organisation. Key Facts Corporate Stability and Continuity Baillie Gifford is entirely independent, being wholly owned by its current working partners. Our partnership structure has enabled us to retain and motivate key people, leading to an enviable record of corporate stability and continuity which we believe has contributed to strong investment results. Emphasis on Bottom-up Research We aim to identify and invest in companies that can deliver long-term growth. We focus our resources on gaining broad, longer-term insights into the business models and competitive advantages of the companies in which we invest, and typically take a three to five year view in our analysis. Our portfolios have relatively low turnover and we tend to ignore short-term market noise. Backing our Judgement We are committed investors, backing our views by running relatively concentrated portfolios. We believe we can best add value for clients by putting meaningful amounts of money to work in our best ideas. We do not use benchmarks as our starting point for portfolio construction. Single Location Global View Companies increasingly operate in a global environment it is not sufficient to consider regional investment opportunities in isolation in order to understand their competitive position and underlying attractiveness against their international peers. The presence of all of Baillie Gifford s portfolio managers in one building enables us to easily share perspectives and debate issues, and is key to our ability to gain real insight into the companies in which we invest. We further ensure that investors have a global perspective by occasionally moving individuals between our regional teams: we value breadth of perspective and experience over excessive specialisation. Staying Focused Baillie Gifford is solely an investment management company, and for equity portfolios we focus entirely on long-only investments. We do not short stocks or run hedge funds. It is equally important that our investment team itself stays focused on the key tasks of company research and portfolio construction. We therefore run a relatively limited number of model portfolios, to which all clients/funds are attached. Client relationships are handled by our highly experienced Client Departments who oversee all aspects of delivering our services to clients, ensuring that investment managers are free to concentrate on investment issues. 3

4 Fund Aims The objective is to produce attractive returns over the long term by investing worldwide in transferable securities, whether directly or via collective investment schemes, in any economic sector, but with the ability also to invest up to (but no more than) 10% in value of the Fund in deposits. The Fund will be diversified by exposure to different asset classes (e.g. in most circumstances fixed interest stocks as well as equities), by international exposure and by exposure to companies operating in a wide range of industries. The portfolio will generally also have exposure to some medium and smaller sized companies as well as the largest blue chips. Derivatives may be used from time to time in keeping with the Fund s objective with the intention of either protecting or enhancing the return on the Fund. As with any investment, your clients capital is at risk. Investment Philosophy In equities, we are bottom-up, growth orientated, long term investors. We back our judgment, running concentrated portfolios with relatively low turnover. We aim to add value through the use of proprietary, fundamental research, prioritising the selection of individually attractive companies, rather than taking top down industry bets. In fixed income, we aim to add value by taking a broad range of active positions across a wide range of fixed income assets, with the main sources of added value likely to come from stock selection in corporate bonds, taking duration and yield curve positions in government bonds, active currency management and asset allocation. 4

5 Investment Process Equities For every stock under consideration we analyse three aspects: the opportunity available to the company, its ability to execute on that opportunity and the valuation of the business. Opportunity Execution Valuation To produce attractive returns Industry background Competitive advantage To capitalise on the opportunity Financial strength Management Are the opportunity and execution discounted in the stock price? Sell Discipline First, we assess a company s opportunity to deliver attractive returns by analysing the market in which it operates and whether the company possesses any clear and sustainable competitive advantages. Considerations here include the growth rate of the industry, the structure of pricing, barriers to entry, the uniqueness or otherwise of products and any enduring cost advantages. Second, we consider execution the ability of the company to capitalise on the opportunity it has. We analyse the financial structure of the company, in particular whether it can fund growth from internally generated cash flow. We also look for tangible evidence that management run the business for shareholders, which includes their attitude to incremental capital expenditure, their willingness to exit poorly performing activities and their use or otherwise of techniques such as share buybacks to improve shareholder returns. Third, we consider the valuation that has been placed on the company s shares to determine the extent to which the market has already appreciated these strengths and, given the analysis above, to assess the time period over which a company must sustain its competitive advantage to justify its present value. While valuation measures will depend on the type of business being analysed we aim to consider both relative and intrinsic value. Relative measures include price to earnings and price to cash flow, with particular interest in free cash flow measures. Intrinsic measures aim to separate valuation into steady state and future value components, and to consider replacement asset values. Our sell discipline is the mirror image of our buy discipline. We continually monitor the companies we own, and we will sell or reduce if we believe that the company s opportunity has shrunk or its execution has worsened. Specific situations that would prompt us to consider selling a stock include: an adverse change in the industry background a deterioration in the company s competitive position a loss of confidence in management, perhaps as a result of a poor acquisition. We rarely make complete sales on valuation grounds alone. Rather, a rise in the valuation might cause us to reduce the size of our holding. 5

6 Investment Process Fixed Income The fixed income portion of the Managed Fund is designed to capture the best ideas of the firm by allocating between various funds run by the Rates & Currencies and Credit teams at Baillie Gifford. This allocation is made on the basis of an assessment of longer term value in each bond asset class and also reflects the level of opportunities being found by the respective teams. These positions incorporate interest rate and active currency views, driven by our assessment of the economic fundamentals and market environment in a broad range of emerging and developed economies; often implemented as a derivatives overlay. This approach allows us to both target our desired active positions and to eliminate unwanted risks. We also find many opportunities amongst corporate bonds, spanning both investment grade and high yield issuers, where we follow a stock-picking approach. We back our diligent fundamental analysis with meaningful positions where we have established a high level of conviction and try to look for milestones that affirm our investment thesis. Across the whole portfolio, we take a purposefully longer term approach rather than adopt a short term trading mentality. All of the fixed income funds are managed in a risk-aware manner with the objective of producing attractive long term returns relative to their respective benchmark indices. Portfolio Construction Representatives of our regional equity departments select stocks from their areas UK, Europe, North America, Developed Asia and Emerging Markets and construct regional model portfolios based on their views of the most attractive individual investment opportunities within their universes. Stock selection is the primary focus of the teams. Stocks are debated within each investment team, with investment decisions reflected in model portfolios at the regional level which are then combined to form the Managed Fund. For fixed income, the Credit and Rates & Currencies teams combine stock picking in corporate bonds with a more macroeconomic approach in government securities and currencies. Asset allocation is driven by the views of our investment teams, based on the availability of attractive long-term investments in each area. Specifically, the Policy Setting Group (PSG), comprising senior investors from investment teams along with members of our Clients Department (CD), meets regularly to assess these inputs and set targets for the Managed Fund s exposure to each region and asset class, including the allocation between bonds and equities. The Managed Fund may, from time to time, take significant over or underweight positions in equities relative to bonds if we believe that the investment environment warrants such a move. Risk Our attitude to investment risk is pragmatic. We aim to ensure that we are thoroughly aware of the level of risk that we are taking and its possible implications. The investment teams are assisted in the task of risk monitoring by our dedicated Risk Department. We believe there are three main areas of potential risk: Fundamental Risk (of the companies we invest in) We continuously re-examine the fundamental performance of the companies in which we invest and the expectations upon which our investment decisions are based. Dealing Risk Our proprietary restrictions system is designed to prevent inappropriate deals before they are placed. 6

7 Benchmark Risk Risk is often defined with reference to a benchmark/ comparative index. This Fund uses the average of the IA Mixed Investment 40%-85% Shares Sector as its comparative index. While we do not believe that this definition covers all aspects of risk, it is one to which we pay close attention. Our proprietary systems analyse the difference between the portfolio and its benchmark/ comparative index, and our Risk Department provides analysis of our portfolios, particularly volatility based approaches such as tracking error, and stylistic features of the whole portfolio. Team Structure The named Fund Managers for this Fund are: Iain McCombie Iain graduated MA in Accounting from Aberdeen University and trained as a Chartered Accountant. Iain joined Baillie Gifford in 1994, and has spent the majority of his career as an investment manager in our UK Equity Team. He is lead manager of our UK Core strategy and has been one of the four members of our Pan-European Portfolio Construction Group since He became a Partner in 2005 and Chief of Investment Staff in Steven Hay Steven graduated BAcc in Economics and Accountancy from the University of Glasgow in 1992 and completed an MSc in Economics from Warwick University in Prior to joining Baillie Gifford, Steven was a fixed income investment manager with Scottish Widows. His experience includes seven years undertaking analysis and research for the Bank of England s Monetary Policy Committee, and involvement in managing the UK s foreign exchange reserves. Steven joined Baillie Gifford in 2004 and is Head of the Rates and Currencies Team. 7

8 How to Contact Us Dealing Dealing Fax Client Relations Enquiries Fax Website A Prospectus and Key Investor Information Document (KIID) are available for the Fund. These are available in English and can be obtained by contacting us on the telephone number above. Alternatively, the Fund s KIID is available to download and/or view on our website at Or Contact your Regional Sales Manager Grant Walker Nigel Cathcart Scott Mackenzie Simon Gaunt Head of Intermediary Sales South East London London grant.walker@bailliegifford.com nigel.cathcart@bailliegifford.com scott.mackenzie@bailliegifford.com simon.gaunt@bailliegifford.com Kevin Mitchell Laura Swiers Chris Whittingslow Thomas Patchett Scotland, N Ireland and NE England North and Midlands South West, South Wales and Channel Islands South Midlands and East Anglia kevin.mitchell@bailliegifford.com laura.swiers@bailliegifford.com chris.whittingslow@bailliegifford.com thomas.patchett@bailliegifford.com Your call may be recorded for training or monitoring purposes. Baillie Gifford & Co Limited Head Office Calton Square, 1 Greenside Row, Edinburgh EH1 3AN Telephone + 44 (0) Copyright Baillie Gifford & Co Authorised and regulated by the Financial Conduct Authority.