Baillie Gifford’s fund range has long been a hit with investors, as our Portfolio Clinic series frequently attests. While its collection of funds was hit badly in the 2022 growth sell-off, performance is bouncing back, and investor appetite remains strong.
However, due to the popularity of its funds, it is not unusual for investors to hold several Baillie Gifford strategies at a time, potentially increasing the risk of duplication. If the firm’s funds feature heavily in your portfolio, it is worth considering just how similar they are to one another and whether you are unwittingly doubling up on underlying holdings.
As a starting point, keep in mind that Baillie Gifford is an asset manager focused on growth stocks, so to an extent its funds are a variation on a theme. However, with 12 investment trusts and 32 open-ended vehicles on offer, each fund takes a slightly different approach.
Broadly, its funds fall into three categories as per the firm’s website: core growth, high growth and flexible growth. Its core funds are its most conservative selection, providing diversified portfolios, focused on managing volatility. They include the Baillie Gifford UK Growth Trust (BGUK) and the UK and Worldwide Equity Fund (GB00BZ3G2B42).
Meanwhile, its high-growth funds are a riskier proposition. These funds invest solely in companies its fund managers believe will grow their revenue rapidly and outpace “the broader economy over a sustained period”. Scottish Mortgage (SMT) and Edinburgh Worldwide (EWI) fall into this category.
Finally, its flexible growth options offer a hybrid strategy, with funds in this category holding companies that its fund managers classify as disrupters, steady compounders and capital allocators. Monks (MNKS), Pacific Horizon (PHI) and the Baillie Gifford China Growth Trust (BGCG) are all part of its flexible growth offering.
Duplication and overlap risk
Inevitably, given the range of funds on offer, and Baillie Gifford’s overarching growth strategy, there is some overlap between its fund options. However, the extent of that overlap varies. If you take a handful of Baillie Gifford’s most popular funds, it is clear that some portfolios are more similar than others.
The above table sets out the proportion of common listed holdings between various Baillie Gifford funds, accounting for the different weightings within the corresponding portfolios.
Out of this sample, Scottish Mortgage and Baillie Gifford US Growth (USA) are the most similar, with a 44 per cent overlap in their portfolios.
A significant amount of this overlap occurs within the trusts’ top 10 holdings. Making an appearance in both trusts’ top positions are Amazon (US:AMZN) (5.1 per cent and 4.6 per cent, respectively) and Meta (US:META) (4.7 per cent and 4.6 per cent).
The similarities are actually even greater than the headline figure suggests: Unquoted company SpaceX is the top holding for both trusts, with a 7.2 per cent allocation in SMT and an 11.1 per cent allocation in the US fund. But the overlap percentages only take into account the portfolios’ listed positions.
Baillie Gifford US Growth’s open-ended sibling, the Baillie Gifford American Fund (GB0006061963), also bears similarities to Scottish Mortgage, notes Darius McDermott, managing director at FundCalibre.
“There is a degree of crossover between the Baillie Gifford American fund and Scottish Mortgage, as both are built around the pursuit of asymmetric returns by backing disruptive, high-growth companies,” he adds.
Again, both funds have a sizeable allocation to Amazon and Meta in their top holdings. In the Baillie Gifford American fund this equates to a 7.2 per cent allocation to Amazon and a 7 per cent allocation to Meta.
From our sample, Monks and Scottish Mortgage also have a substantial 32 per cent portfolio overlap. Once more, much of this can be attributed to the top 10 holdings, with both trusts having sizeable allocations to Meta, Amazon and Taiwan Semiconductor Manufacturing Company (TW:2330).
To a degree, it is unsurprising that much of the overlap between Baillie Gifford funds comes from the major tech stocks. If Baillie Gifford chose not to hold these companies in its funds, it would be taking on a significant amount of index risk.
Therefore, focusing solely on the prevalence of the Magnificent Seven within its portfolios does not always give the most accurate picture of how similar its funds are, or how they differ from global or US-focused funds from other fund houses.
Read more from Investors’ Chronicle
Kamal Warraich, head of fund selection at Canaccord Wealth, argues that when considering Baillie Gifford funds, it is worth looking outside their top 10 positions to get a true idea of how differentiated they are.
“[Baillie Gifford funds] have a similar style, so they correlate in performance terms, but in terms of the stocks outside the top 10, they’re quite differentiated vehicles,” Warraich says.
When evaluating the presence of one company in two different portfolios it is also important to bear in mind two aspects of Baillie Gifford’s investment management approach.
Firstly, the fund house often holds the same company at different points in its life cycle across its various funds. Amazon, for example, is now a mainstay across most of Baillie Gifford’s portfolios, but originally it was in just a handful of its funds. As the company grew and became more dominant in its market, it became more prevalent across Baillie Gifford’s fund offerings.
Secondly, some companies are held across several portfolios but for different reasons, as each portfolio has its own mandate and investing timeline. A duplication of one company across two funds is, therefore, not inherently a bad thing, if it is being used for different ends in the two portfolios.
Performance correlation
Alongside the holdings overlap, it is also helpful to look at the correlation between funds in your portfolio if you are concerned about duplication. For example, how the performance of one fund will correspond with the performance of another. This can help you understand whether you are introducing true diversification into your portfolio, rather than pairing funds that on the surface do not overlap but will behave similarly in response to different market conditions.
In the table below, a coefficient of +1 would indicate a perfect positive correlation, while a coefficient of -1 would indicate a perfect inverse correlation. If the coefficient is 0, then the two funds are not correlated in terms of performance. The closer to +1 the score, the more similar the funds’ performance will be.
Some fund combinations perform in a very similar manner, even if the holdings overlap is not as high as other pairings. In these instances, the funds’ underlying investment strategies tend to take a similar approach.
“Even though Scottish Mortgage and Baillie Gifford US Growth have the highest holdings overlap, they do not have the highest correlation (0.88). That distinction goes to Scottish Mortgage and Monks at 0.92,” notes Mick Gilligan, head of managed portfolio services at Killik & Co.
While many pairings have a notably lower holdings overlap than the 44 per cent of exposure shared by Scottish Mortgage and Baillie Gifford US Growth, several have a correlation score that exceeds 0.75, indicating a high similarity in performance outcomes.
“This reflects the high growth bias across the Baillie Gifford range – all the trusts tend to move in a similar direction (to varying degrees) in any given market scenario,” Gilligan explains.
Scottish Mortgage and Monks, for example, will move in a similar fashion as both have similar investment philosophies, albeit Scottish Mortgage takes a more aggressive approach.
This, as well as their relatively high holdings overlap, leads to similar performance outcomes, although Scottish Mortgage tends to experience greater highs and lows.
Complementary pairings
While there is an overlap between some Baillie Gifford funds, that does not mean you need to restrict yourself to holding just one or two in your portfolio out of fear of duplication.
However, if you plan to hold more than this, you should consider how those funds fit with your other fund selections, and their overall weighting in your portfolio.
One way to look at this is to consider complementary pairings within the Baillie Gifford fund universe. A pragmatic way to diversify the underlying holdings in your portfolio is to blend its regional funds with its different growth strategies (core, high and flexible).
For example, Gilligan suggests coupling Scottish American (SAIN) with Baillie Gifford Shin Nippon (BGS). “SAIN is the most balanced of the BG trusts in terms of style and has increased its dividend (currently 2.8 per cent) for 51 consecutive years,” he says. Meanwhile, Baillie Gifford Shin Nippon invests in Japanese small caps with high growth potential.
There is no overlap between the top 10 holdings for these two funds. Scottish American’s top five holdings are Microsoft (US:MSFT), Fastenal (US:FAST), Deutsche Börse (DE:DTE), Procter & Gamble (NYSE:PG) and Swiss private equity business Partners (CH:PGHN).
Whereas Baillie Gifford Shin Nippon’s top five holdings are IT consultancy Infomart (JP:2492), sports equipment manufacturing company Yonex (JP:7906), real estate company GA Technologies (JP:3491), machine tool manufacturer Tsugami (JP:6101) and Cosmos Pharmaceutical (JP:3349).
Alternatively, you might want to look for funds managed by other managers that complement your Baillie Gifford selection. For this approach, look for quality and value investing options.
“The Schroders franchise is deep-value contrarian and blends very well with Baillie Gifford. Fidelity also has a good value suite of funds,” Warraich says.
“For quality options, you could consider Fundsmith. It is growth-focused, but it focuses on quality growth [stocks] whereas Baillie Gifford is focused on pure growth,” he adds.