- Global smaller-cap ‘Discovery’ fund ratings cut
- Shared focus on US health and software
- Negative returns over one and three years
Edinburgh-based investment manager Baillie Gifford saw two of its global growth funds lowered by ratings agency Morningstar from Silver to Neutral last week after a prolonged period of underperformance.
The funds, which together managed over £1 billion assets at the end of July, have a bias towards smaller-cap companies and use the S&P Global Small-Cap Index as their benchmark.
HEAVILY CONCENTRATED
The two funds concerned – Baillie Gifford Global Discovery B (0605933) and Baillie Gifford Worldwide Discovery (BD09K41) – share the same managers and have a strong bias towards the US market and healthcare stocks.
Moreover, the top 10 holdings in both funds are almost identical with one sole exception and both funds are fairly concentrated with the 10 biggest positions making up around 40% of assets.
Possibly the only names in the top 10 familiar to UK investors will be online grocery delivery company Ocado (OCDO) and molecular sensing technology firm Oxford Nanopore Technologies (ONT), with the rest mostly made up of US pharmaceutical and software companies including Alnylam (ALNY:NASDAQ), Exact Sciences (EXAS:NASDAQ), MarketAxess (MKTX:NASDAQ), Schrodinger (SDGR:NASDAQ) and STAAR Surgical (STAA:NASDAQ).
As of the end of July, the track record for the Global Discovery fund, priced in sterling, was less than impressive, with a one-year return of -6.5% against a target of 0% and a three-year return of -13.8% against a target of 13.3%.
The smaller Worldwide Discovery Fund, priced in dollars, fared better over one year with a return of 1.4% against a target of 10.2%, although it still lagged its benchmark, while over three years it performed little different to its larger sibling with a -12.8% return against a target of 11.5%.
‘UNDERWHELMING PERFORMANCE’
Morningstar fund analyst Daniel Nilsson commented that while the investment managers, led by Douglas Brodie, were experienced, he was ‘concerned by the team’s continued inability to execute their process in a way that would produce category- and index-beating results on a risk-adjusted basis’.
Nilsson added: ‘Moreover, whilst the process has been consistently applied since launch, we have lessened our conviction in both portfolio construction and the application of sell discipline, which has led to underwhelming performance outcomes over recent times.’
