CUTTING
EDGE CITY
James Anderson on Berlin’s
entrepreneurial spirit
A NEW BROOM
How China’s leaders plan
to change the economy
STARTING OUT
Why young companies
can offer more
Welcome
I am pleased to bring you this
issue of Trust magazine.
Inside, we meet a number
of Baillie Gifford investment
managers – some are making
their debut within these pages,
while others have taken over
the reins of some of our trusts.
We also travel to Berlin to
interview James Anderson, the
manager of Scottish Mortgage
Investment Trust PLC. James
found a city very much at the
heart of economic and
political Europe, as well as a
dynamic and creative business
environment, which is
reflected in our interview
and photographs.
I enjoyed reading this and
the many other interesting
features in this issue, and I
hope you do, too.
LINDSEY GREIG
Chief Executive, Baillie Gifford
Savings Management Limited
Lindsey Greig is responsible for
customer support for personal
investors and intermediaries.
t | 02
This issue’s contributors
HEATHER
FARMBROUGH
BEN
MCLANNAHAN
is the editor of Trust
and a freelance
journalist. She has
worked as a stockbroker,
a fund manager and
a journalist on the
Financial Times.
is the Tokyo correspondent
for the Financial Times,
and he has written for
the FT’s Lex column,
Institutional Investor
and The Economist Group.
JEFF SALWAY
PHILIP COGGAN
is a freelance
journalist and writes
the weekend personal
finance pages for
The Scotsman and
Scotland on Sunday.
is the Buttonwood
columnist and capital
markets editor of
The Economist.
His latest book
explores democracy.
EDWARD
RUSSELL-WALLING
HEATHER
CONNON
is a writer and editor
specialising in business
and finance. He has
written for several
publications including
The Wall Street Journal
and the Financial Times.
has been a financial
journalist for 25 years,
contributing to titles
such as the Observer,
The Independent
and the London
Evening Standard.
COLIN RENTON
DAVID SMITH
is an investment
writer at Baillie Gifford.
He joined the firm in
2007, having worked
in similar roles with
two other large
asset managers.
is economics editor
and an assistant editor
and policy adviser for
The Sunday Times.
His latest book is
Free Lunch: Easily
Digestible Economics.
JOE FARADAY
JENNIFER HILL
is an investment
manager with Baillie
Gifford. He has a
degree in engineering,
joined Baillie Gifford
in 2002 and with
his work has travelled
extensively.
is a freelance journalist,
writing for The Independent
and City AM among
others. She is the former
deputy money editor of
The Sunday Times and
personal finance editor
of The Scotsman.
www.bgtrustonline.com
Contents
Regulars
Features
04 IN BRIEF
Details on the new ISA; Scottish Mortgage success; and a new
manager for Pacific Horizon
10 06 PASSPORT TO BERLIN
James Anderson talks to
Heather Farmbrough about
his fascination with the
German capital
14 KEEPING YOUR NERVE
Holding on to shares can be a
good idea, says Colin Renton
13 SPONSORSHIP & EVENTS
The next Private Investors’ Forum and book festival dates
16 A NEW DIRECTION
Edinburgh Worldwide
managers on investing in
younger companies
32 DAVID SMITH
David Smith on the state
of the eurozone
34 BOOK REVIEW
Philip Coggan on Thomas Piketty’s book Capital in the
Twenty-First Century
35 THE TRUSTS
Baillie Gifford’s trusts, how to
invest and important risk details
Editor: Heather Farmbrough
Sub-Editors: Bernie Deehan, Lisa Loveday
Design: Touch
www.thetouchagency.co.uk
Print: J Thomson Colour Printers
www.jtcp.co.uk
Trust is a financial promotion.
It has been printed on Arctic Volume
paper which was sourced from
well-managed forests independently
certified according to the rules
of the Forest Stewardship
Council ® TT-COC-002242
[email protected] and 0800 917 2112
FIRMLY GROUNDED
Heather Connon explores
the benefits of foundation
or family businesses
19 THE POWER OF INFLUENCE
Identifying personality types
can help investors, writes
Joe Faraday
22 EYES ON THE EAST
Ben McLannahan on China’s
new leaders and their plans
for the economy
27 A WORLD OF POSSIBILITY
Dominic Neary talks to
Jeff Salway about the global
reach of SAINTS
30 MORE CHOICE FOR
INVESTORS
Using online platforms can
simplify the investment
process, says Jennifer Hill
All editorial queries should be directed to:
Stuart Conlan,
Baillie Gifford Savings Management Limited,
Calton Square, 1 Greenside Row,
Edinburgh EH1 3AN.
Images © Getty Images unless otherwise stated.
Trust is also online at www.bgtrustonline.com
Cover image: The Reichstag Building, Berlin
by David Vintiner
The articles in this issue were written
between April and May 2014
03 | t
New fund
manager
for Pacific
Horizon
Ewan Markson-Brown was appointed as the fund
manager of Pacific Horizon Investment Trust PLC
in March.
Ewan, who joined Baillie Gifford in September
2013, was senior vice president of Emerging Market
Equities at PIMCO, and before that was a lead
portfolio manager covering Asia Pacific equities at
Newton. He has 14 years’ investment experience and
holds an MA in politics, philosophy and economics
from Oxford University.
Ewan is part of Baillie Gifford’s Emerging Markets
Equity Team and has specific responsibility for
covering the Korean and ASEAN (Association
of Southeast Asian Nations) markets. Baillie
Gifford’s team-based approach to stock-picking,
and its consistent investment philosophy and
process, ensure a smooth transition in portfolio
responsibilities.
He replaces Mike Gush, who will continue to
provide input through his role as a member of the
Emerging Markets Equity Team. Roderick Snell
remains deputy manager of Pacific Horizon.
Great news for
Scottish Mortgage
Scottish Mortgage Investment Trust PLC has been
in the news recently. In April the trust reduced its
annual management fee from 0.32 per cent to
0.30 per cent, reinforcing its commitment to lowcost investment. It also appointed Dr Paola Subacchi
to the board. Dr Subacchi is research director of
international economics at London’s Chatham House,
home of the Royal Institute of International Affairs.
She is an expert on the functioning and governance
of international financial and monetary systems,
has published books on finance, and is an adviser
to governments and non-profit organisations.
Scottish Mortgage also won the Global Growth
category at the Moneywise Investment Trust Awards
2014, for the third time in the past four years. And
finally, Scottish Mortgage received the top (Gold)
score in Morningstar’s Analyst Rating, based on
a conviction in the fund’s ability to outperform its
peer group and/or relevant benchmark over the
long term.
To find out more about Scottish Mortgage,
visit www.scottishmortgageit.com
Past performance is not a guide to future
performance. Please note that other charges
may apply.
RISK WARNINGS AND IMPORTANT INFORMATION
The views expressed in Trust should not be considered
as advice or a recommendation to buy, sell or hold a
particular investment. The articles contain information
and opinion on investments that does not constitute
independent investment research, and is therefore not
subject to the protections afforded to independent research.
Some of the views expressed are not necessarily those
of Baillie Gifford. Investment markets and conditions can
change rapidly, therefore the views expressed should not
be taken as statements of fact nor should reliance be
placed on them when making investment decisions.
t | 04
The information contained within Trust has been
compiled with considerable care to ensure its accuracy
at the date of publication. However, no representation or
warranty, express or implied, is made to its accuracy or
completeness. Nothing in this information or elsewhere
in Trust shall exclude, limit or restrict our duties and
liabilities to you under the Financial Services and
Markets Act 2000 or any conduct of business rules
that we are bound to comply with.
Any telephone call you make to us may be recorded
for training or monitoring purposes.
www.bgtrustonline.com
Baillie Gifford examines
Scotland’s big vote
The referendum on Scottish independence will take place on
Thursday 18 September, and the outcome is a source of some
concern for investment trust shareholders.
Although a vote for independence could have an impact on the
financial services industry in terms of taxation, currency and
regulation, answers to most questions will only become clear
after the event.
Baillie Gifford has created a working group to consider the
potential implications of the referendum. It is engaging with
both sides of the campaign, as well as with the Scottish and UK
governments. The boards of all Baillie Gifford investment trusts
continue to put their shareholders’ interests first, and the company
does not intend to take sides in the debate.
Should the people of Scotland vote for independence, there would
be a transition period of at least 18 months. During this time, the
new legislative, regulatory and monetary framework would be
negotiated and agreed.
Scotland’s finance secretary, John Swinney, has expressed
confidence that the referendum vote will not adversely affect the
interests of investors. “The reality is that Scotland is a wealthy
country, with a successful financial services industry which is more
than capable of thriving under any constitutional position,” he said.
Trust magazine wins again
Trust has won the Best Newsletter category at The Association
of Investment Companies (AIC) Best Information to Shareholders
Awards, which were held in London in May.
The judges felt Trust was “the stand-out winner for the strong
articles”. They felt the quality of the design and content made it
an ideal “coffee table” publication that would help to encourage
a good relationship with customers.
Since the magazine’s launch in 2004 this is the fourth
consecutive year in which Baillie Gifford has won the award
and the sixth win overall.
Stuart Conlan, marketing manager at Baillie Gifford, said:
“Baillie Gifford is thrilled to have won the Best Newsletter
award again this year. It’s important to us that our readers
enjoy Trust and find it engaging as well as useful.”
[email protected] and 0800 917 2112
Boost your
investments with
the new ISA
George Osborne’s March 2014 budget brought
some good news for tax payers – you will soon
be able to invest much more in the newly
overhauled ISA scheme. The current cash ISA
and stocks and shares ISA will be merged into
a single product, and the annual allowance
will increase from £11,880 to £15,000.
You will be able to invest the whole amount
in cash, or in stocks and shares, where
currently only half of an ISA can be invested
in each. Savers with existing ISAs will be
able to transfer all of their stocks and shares
products into cash ones, or vice versa.
The increased limit will come into force
on 1 July, and Baillie Gifford will be ready
to accept the new £15,000 ISA allowance on
this date. Baillie Gifford does not offer a cash
ISA, but the full amount can be invested in its
stocks and shares ISA.
Baillie Gifford’s director of marketing
and distribution James Budden said: “This
shows a very strong commitment to this form
of investment by the government, which is
welcome news for investors and savers.”
As with all stock market investments, please
remember that your capital is at risk. You
should note that tax rates and reliefs may
change at any time and their value depends
on your circumstances.
05 | t
PASSPORT
TO BERLIN
Scottish Mortgage manager James Anderson
tells Heather Farmbrough why the German
capital’s idiosyncratic nature makes it
an exciting place for investors
WORDS: HEATHER FARMBROUGH
t | 06
www.bgtrustonline.com
HEATHER FARMBROUGH What brought you
to Berlin?
JAMES ANDERSON Several reasons. We should
always take the chance to diversify our sources of
information beyond the predictable, and this was
one of those chances. Something very strange has
happened; as the world’s economy has become
increasingly global, our sources of media information
have become even narrower. Most of our news comes
from London or New York. Berlin is one of the most
obvious illustrations of the difference between our
perception of the economic and political situation
and the reality. Berlin is home to the people who
make decisions about Europe. I always thought
there was never more than a one per cent chance
that the eurozone crisis would lead to the break-up
of the eurozone, mainly because no-one in Berlin
wanted it. So there was no serious chance that it
would ever happen, but a bunch of journalists and
other pontificators in London thought it would and,
at the time, markets took their views more seriously
than those of the people here in Berlin.
HF While you’ve been in Berlin, you’ve met with the
management of several companies located here. How
important do you think it is to those companies to be
located in Berlin rather than elsewhere in Germany?
JA I think so often it’s cities that create companies
rather than countries; this leads to another reason
why I came here. I’ve realised that there is a
profound difference in the way Berlin does business.
It’s not just about not wearing ties, although nobody
does here; it’s because there is a real chance that the
attitude, culture and atmosphere in this city means
that Berlin might be one of the most exciting places
in the world over the next 20 years for creating new
businesses. The people at Rocket, the major internet
start-up incubator I visited earlier today, call Berlin
‘uni-cultural’ rather than multi-cultural – everyone
just mucks in, all from different countries and
speaking many different languages.
It’s also interesting because Berlin is where most of
German industry was created. Companies that drove
German industrialisation, like Siemens, Borsig and
AEG, were Berlin companies, and then, for reasons
we know about all too well, industry went away. The
old Siemens factory here is now a UNESCO world
heritage site. Berlin has lots of space; housing rents
are quite often less than half of what they would
be in the UK.
[email protected] and 0800 917 2112
Berlin has changed far more
than other cities destroyed
in the Second World War
07 | t
HF Is that deliberate? Are rents controlled?
JA It’s not just a happy coincidence, no. The
authorities are conscious of the need to attract all
kinds of individuals to the city, particularly young
people. Part of Berlin’s extraordinary difference
from other cities is that it attracts so many young
people. It’s got the most vibrant nightlife in the
world, but it’s about much more than this. I went to
a conference with a very Berlinesque title – ‘Cities,
Religion, Capitalism’. The event was sold out, on a
Saturday evening – in a hall that holds more than
1,000 people, with many more listening outside –
for a panel discussion about capitalism! I don’t
think that would happen in many other places.
HF Berlin does not feel like other capital cities.
Since I’ve arrived, I’ve felt almost displaced.
JA Yes, you do, it’s disorientating. There is real
political power here, but it’s quite a disruptive
or unconventional model. It’s the only city in the
world I’m aware of that is genuinely political with
a capital P. There is a marked reluctance to bow
to authority, and that’s critical and different. That
freedom from constraint is incredibly important.
t | 08
Cities of power have been almost universally bad
at creating wealth because this requires freedom
from constraint. As I said earlier, there is now
little new heavy industry here; Berlin has changed
far more than other cities destroyed in the Second
World War. Berlin is not typical, it’s sui generis.
I think it is a one-off and that’s been one of my
surprises. Berlin is Berlin, it was a thriving city,
then it went through a phase when it wanted to be
German, now it’s gone back to being Berlin.
HF Is Berlin one of the world’s supercities?
JA I’ve changed some of my thinking on this.
I think the habit we’ve got into of looking at
urbanisation and counting the large rich cities
and thinking that this translates to economic
progress is wrong. Many large cities create
anonymity and a lack of connection between the
people who live and work there. The only cities
that will really create anything worthwhile are
those where there is a local consciousness, a
sense of something. There is a feeling of that
in Berlin. It’s important that as cities grow
they don’t develop separate zones of wealth
as this kills their vitality.
www.bgtrustonline.com
HF You mentioned the eurozone earlier. Just suppose
that Germany was not in the eurozone. What would
the picture have been for Europe?
JA There’s been this endless view that a lot of
Spain, Italy and Greece’s problems are due to the
eurozone. The question to ask is this: would any
of those countries have been in a better or worse
position if they hadn’t been part of the eurozone?
Spain would have been in a far worse position, with
huge currency devaluation and without important
labour market and pension reforms. Italy without
the eurozone would have meant that Mr Berlusconi
and his party successors would have been there
forever. I think that having a free trade zone, a free
economy and free movement of capital is profoundly
important for German industry.
HF Last year you took a six-month sabbatical.
What struck you most while you were away?
At the end of the Second World War, Berlin was
divided into four zones belonging to Britain, the US,
the USSR and France. In 1948, Soviet forces closed
down the corridors to the city from the Western
zones, isolating Berlin from the rest of the country.
Almost one fifth of the population of East Germany
had fled to the West by 1961 and in response to
several ‘incidents’ East German soldiers erected a
barbed wire barrier overnight on 13 August 1969.
This was soon replaced with concrete. The Wall cut
through streets and even houses.
In the 1980s, the effects of glasnost and economic
hardship led to the collapse of East Germany and,
on 9 November 1989, the authorities removed travel
restrictions. The Wall became irrelevant and was
quickly torn down. Little remains other than the
single row of cobbles laid as a reminder, but the
longest remaining stretch of the once graffiti-covered
wall is the 1.3km East Side Gallery of political
and satirical murals (see picture above). For older
citizens, they will always be East or West Berliners,
but for the young, they are just Berliners. HF
[email protected] and 0800 917 2112
JA A couple of things. Firstly, I think one of our
troubles in the fund management industry is that
we’ve become so internally focused that we have
almost completely forgotten what we are there
for. People are completely obsessed with the
self-referencing question of whether they can
outperform. Also, and more importantly, we
should be there to help companies. Our original
function was to provide finance to businesses and
we underestimate our role in this at our peril.
In the early days of capitalism, companies had
owners. They don’t so often have owners today;
most of them have share-traders who swap their
share certificates every three months as prices go
up and down. I think that the way we go about the
task is completely wrong. I just don’t believe that
sitting in an office being at the mercy of all this
f low of information, with people trying to get you
to trade and to respond to events, is the way to
manage money. A better way is to choose the right
companies to invest in and then to develop a
relationship in which we can work with management
over the long term for the good of all shareholders.
This interview took place in April 2014.
A Berlin Trip Note written by James Anderson
appears in the 2013/14 Scottish Mortgage
Investment Trust PLC Annual Report, which
can be found at www.scottishmortgageit.com
09 | t
FIRMLY
GROUNDED
Foundation or family shareholders can
benefit companies in the long term
WORDS: HEATHER CONNON
When families or founders set up
an institution to own shares in a
company they have created, it is
one way of ensuring continuity of
ownership and guiding principles.
The long-term view of the foundation
shareholder can help the company
to avoid the short-term pressures
that are becoming prevalent in
financial markets.
For example, the Novo Nordisk
Foundation in Denmark aims to
‘provide a stable basis for the
who founded them may look
anachronistic in an era where shortterm performance seems to carry
more weight in the stock market
than long-term considerations.
However, there is growing evidence
that a significant family or
foundation shareholding can help
promote stability and longevity
within a company – and can also
help to improve financial results.
Steen Thomsen, professor
and director of the Center
The focus is on keeping the business
growing over time so that it will be
there for the next generation
commercial and research activities
conducted by the companies
within the Novo Group’ – including
healthcare and biotech businesses
Novo Nordisk and Novozymes.
In the US, the objective of the
Hormel Foundation, established
more than 70 years ago, is the
‘primary protection’ of the
independence of meat company
Hormel Foods.
These links between global
businesses and the entrepreneurs
t | 10
for Corporate Governance
at Copenhagen Business
School, and Henry Hansmann,
professor of law at Yale Law
School in the US, concluded in
a paper published last year that
foundation ownership did not
harm performance and may
actually enhance it. By their very
nature, industrial foundations
are long-term investors. Their
attenuated profit motives make
them more likely to maintain a
www.bgtrustonline.com
Entrepreneurs
and philanthropy
The amounts being given to
modern foundations sound
enormous: Bill Gates, the
founder of Microsoft, and
his wife Melinda, have
pledged to give away 95
per cent of their wealth to
charity. They have already
donated nearly $30bn via
their eponymous foundation
– and they have persuaded
fellow billionaire Warren
Buffett to contribute, too.
He has donated nearly $13bn.
But philanthropy has long
been a tradition among the
corporate elite: Andrew
Carnegie, John D Rockefeller,
Joseph Rowntree, J Paul
Getty and Henry Ford are
among industrialists who set
up foundations that still exist
today. While their bequests
were measured in millions,
adjusting for inflation, they
would still look generous
even by today’s standards.
The technology industry is
creating many more multibillionaires; companies
such as Google, Facebook
and Twitter are still very
young and majority-owned
by their founders yet attract
high valuations. Whether the
technology will be followed
by a philanthropic bonanza
remains to be seen.
[email protected] and 0800 917 2112
11 | t
Family companies in which
Baillie Gifford trusts have shares
Company
Held by
AMAZON SCOTTISH MORTGAGE & SAINTS
ATLAS COPCO
SCOTTISH MORTGAGE & SAINTS
NOVO NORDISK FONDEN MONKS
NOVOZYMES SCOTTISH MORTGAGE & SAINTS & MONKS
steady course than profit-seeking owners. While
this could reduce short-term profits, it may create
long-term value.
Julien Reynolds, investment manager at Baillie
Gifford, who has specific interest in the impact of
family share ownership of companies, sees the key
issue as “whether management is focused on hitting
pre-set targets or managing the business for the long
term”. He cites Novozymes as an example of where
a foundation exerts a strong influence on how the
company is run. “The focus for the management of
companies owned by the foundation is on how to
keep the business growing over time so that it will
be there for the next generation,” says Julien.
He believes that this attitude is shared by familyowned businesses, whether ownership is through
a foundation or directly. “Whereas in a non-family
business, external shareholders will set targets
based on measures such as turnover, earnings per
share or return on capital. Management will aim to
hit those targets but they will not necessarily be in
the long-term interests of the business.”
Julien cites two pieces of research carried out for
Baillie Gifford. The first analysed the performance
and share ownership of banks in the 10 years
before the financial crisis. Those banks where the
managers had the lowest equity stakes were most
leveraged and took the most risk.
The second analysed the performance of companies
in the US S&P 500 Index where the founders or their
families still own at least 10 per cent – a list that
includes giants such as Walmart, Oracle and Amazon
(Scottish Mortgage and SAINTS hold shares in the
latter). The analysis shows that, over the 15 years to
t | 12
the end of 2013, those with family stakes outperformed the
rest of the index by an average of eight per cent a year.
The size of the shareholding is less relevant than
the degree of engagement in encouraging long-term
performance, says Julien: “In most foundations, a senior
manager from the business is also a member of the
foundation’s board.”
This kind of relationship helps to cement the
importance of managing the business in the interests
of future generations rather than bowing to shortterm pressures.
Foundations are more common in industries such
as pharmaceuticals, where research activities require
a long-term view. There can be conflicts of interest,
however – for example, this occurred when the Wellcome
Trust sold its shares in the Wellcome Foundation because
it wanted to diversify its sources of income and reduce
the size of its stake in the company.
Other potential conflicts include disagreement
between foundation and external shareholders on
accepting a hostile takeover – although, as Julien
observes, if external shareholders prefer to accept
a low bid, it may simply indicate that they have
failed to appreciate the long-term attractions of
foundation businesses.
Please remember that the value of a stock market
investment and any income from it can fall as well as
rise and investors may not get back the amount invested.
Investments with exposure to overseas securities can
be affected by changing stock market conditions and
currency exchange rates. Past performance is not a
guide to future returns.
www.bgtrustonline.com
Sponsorship & Events
Learn from fund
managers at our
London forum
Baillie Gifford’s next Private Investors’
Forum will take place on the afternoon of
Tuesday 28 October at London’s exclusive
private members venue, The Hurlingham
Club. After a buffet lunch, there will be
presentations by some of our key investment
trust managers, and Baillie Gifford
representatives will be on hand to answer
any queries you may have.
This is the fifth year that one of our forums
has been held in London, and it has proved
very popular – more than 800 people
pre-registered to attend the last event,
even though only 350 spaces were available.
Don’t miss this opportunity to broaden
your investment knowledge. Early registration
is strongly advised to secure your place. To
pre-register for tickets and be kept informed
of the full line-up once confirmed, visit Trust
Online at www.bgtrustonline.com/forum
And for details of our recent Edinburgh forum in
March, go to www.bgtrustonline.com/business
THE HURLINGHAM CLUB
Book yourself a date with literature
Baillie Gifford has been sponsoring events at literary festivals around the
UK for five years. Our investors can request free pairs of tickets to these
events (while stocks last). Watch out for further sponsorship-related
prize draws throughout the year. The next festivals include:
Ways With Words, Dartington
Friday 4 July – Monday 14 July
Buxton Festival
Friday 11 July – Sunday 27 July
Edinburgh International Book Festival
Saturday 9 August – Monday 25 August
Henley Literary Festival
Monday 29 September – Sunday 5 October
The Times Cheltenham Literature Festival
Friday 3 October – Sunday 12 October
For more details, please visit www.bgtrustonline.com/sponsorship
[email protected] and 0800 917 2112
13 | t
Keeping your nerve
Evidence tells us that holding on to shares
works, but it requires a cool head
WORDS: COLIN RENTON
Research shows that a long-term
approach to investing delivers
better returns, at lower cost, than
frequently traded short-term
holdings. Yet, while the value of
taking a long-term view is widely
documented and a frequently
uttered objective among investors,
such claims are at odds with
shortening investment horizons
and increasing stock turnover. The
problem, perhaps, is the absence of
a concrete definition of ‘long term’,
which may have different meanings
for different types of investor.
Among the reasons for the
acceleration of trading is the
growing pressure on investors and
the companies in which they hold a
stake to deliver good performance
for an increasingly impatient
audience. Companies work within
shortening timeframes, reporting
quarterly or even monthly figures.
Many investors do likewise.
Jonathan Bates, a fund manager
at Baillie Gifford, has written and
spoken on this subject. Shorttermism is, he argues, a deeply
ingrained human characteristic,
closely related to our reactions
to stress which have evolved
remarkably little since our remote
ancestors. When threatened, our
blood pressure rises, our short-term
memory improves and we put aside
all thought of long-term projects.
t | 14
“These are useful responses when
faced with a lion, but considerably
less useful when confronted with
falling share prices or a quarter’s
bad performance, he says.”
This tendency has been
exacerbated in recent years by a
number of developments, one of
which he calls the “CNBC effect”,
after the business news TV channel.
“It has turned every trivial
company announcement into a
major event, and every 90-day
reporting period into a trial of
management competence and
corporate viability,” says Jonathan,
who believes the pressure could
continue to build. “CNBC is now
old media. We don’t yet know the
impact social media may have on
reporting cycles. In addition, the
continued fall in the frictional
cost of buying and selling stocks
makes it easier to trade.”
He believes that portfolio turnover
offers a basic insight into an
investment manager’s style. The
decision to hang on to stocks when
other holders are selling can be
very difficult. It might be equally
awkward to retain a position in
stocks that have performed well
and represent a significant
proportion of a portfolio, creating
pressure to reduce or sell and
reinvest in another company with
good prospects.
TENDING OLIVE TREES
TAKES TIME AND PATIENCE
Research conducted by Tom Slater,
deputy manager of Scottish Mortgage,
provides some insight into why
he takes a multi-year approach to
investing. While admitting that it
does not work in every instance,
and some stocks inevitably perform
poorly, Tom emphasises the benefits
of a patient, buy-and-hold approach,
and the need to resist following the
herd. His investigation looked at the
rolling five-year returns for each stock
in the S&P 500, covering the period
from 1984 to 2013.
“If you consider each opportunity
to invest in a stock for five years as
a discrete opportunity, then in the
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TOM SLATER
For genuine longterm investors, even
10 years is too short
WARREN BUFFETT
30 years under investigation you
would have had 18,052 potential
investments,” he explains. “Imagine
a hypothetical portfolio where you
invested £1 in each of them. Your
portfolio would have a book cost of
£18,052 and at the end of the fiveyear holding period, you would
have £39,337.”
At this point, the mixed
performance of holdings would
mean that 20 per cent of the
original investments accounted for
50 per cent of the portfolio. Tom’s
research confirms that stocks held
for longer would have delivered the
best growth. “Consider an equally
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weighted 30-stock portfolio picked at
random from all of the stocks in the
S&P 500 and held for five or 10 years
ending in 2012 with no trading,” he
adds. “For the five-year portfolio,
the largest holding would have been
9 per cent. For 10 years, it would
have been 17 per cent.”
This highlights one of the potential
pressure points mentioned earlier by
Jonathan – strong performance of a
stock can lead to discomfort for both
the investment manager and the
shareholder in a trust.
As Tom concedes: “Bearing
in mind that I have assumed no
skill for the manager other than
managing to buy stocks that were
evenly distributed over the curve
of possible returns, it would suggest
that we will have holdings that the
outside world perceives as ‘risky’,
simply by pursuing a buy-and-hold
strategy with our stated
time horizon.”
On balance, however, Tom says
it is clearly a positive situation for
those investors who can withstand
the temptation to trade. “Consider
a fund manager with a one-year
horizon and a flat portfolio,” he
says. “To simplify the exercise
I assume that he sells (with no
trading cost) his entire portfolio
after a year and reinvests across
the range of potential outcomes
for the next year.
“What is his return and how
does it compare to the buy-and-hold
investor? The answer is that in
26 of the 29 five-year periods that
I’ve measured, the buy-and-hold
investor does better. On average,
buy and hold does 8 per cent
better over a five-year period.”
The benefits are even greater
when buying and selling costs
are incorporated. Little wonder,
then, that for genuine long-term
investors, even 10 years is too
short. Or, as US investment
guru Warren Buffett once said:
“Our favourite holding period
is forever.”
Please remember that the value
of a stock market investment
and any income from it can fall
as well as rise and investors may
not get back the amount invested.
Investments with exposure
to overseas securities can be
affected by changing stock
market conditions and currency
exchange rates.
Past performance is not a guide
to future returns.
15 | t
A new direction
The new managers of Edinburgh Worldwide
explain why they invest in younger companies
WORDS: EDWARD RUSSELL-WALLING
DOUGLAS
BRODIE
JOHN
MACDOUGALL
t | 16
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The world keeps changing and successful investment
strategies, if they are to stay that way, sometimes need
to change, too. Digital technology and globalisation have
enabled dynamic entrepreneurial companies to expand
more rapidly, so Edinburgh Worldwide Investment
Trust plc (EWIT) is now investing in them at an earlier
stage of their development.
EWIT’s unconstrained global approach to investment
was adopted in 2003 after Baillie Gifford was appointed
as the company’s manager – it could invest in any
sector, in any country. It held a concentrated portfolio of
around 40 growth stocks, with a long-term investment
horizon of five years or more. However, at January
2014’s AGM, shareholders approved proposals to
broaden the investment remit and permit investment
in growth companies at an earlier stage in their
development. “There was a desire to give EWIT more
John, an ancient and modern history graduate,
has run the Japanese Smaller Companies Fund for a
number of years and also manages the Baillie Gifford
Shin Nippon Investment Trust PLC.
“Mention smaller companies and people tend to think
of domestically focused businesses,” says Douglas,
adding that this picture of them was largely true until
about 10 years ago. Since then, however, the tools
to help these companies grow internationally have
multiplied. “Then, you had to be local to wherever you
were trading, with a lot of physical infrastructure and
distribution,” says Douglas. “Large companies built
their corporate strength around that. But today the
internet can be your distribution platform. A growing
company can reach global markets much earlier in its
lifecycle without taking on lots of additional risk.”
Advances such as the internet, cloud computing and
Our focus is on a small subset – those that we think could be the
large-cap companies of tomorrow. But we’re investing in them today
differentiation and relevance versus other global funds,”
explains Douglas Brodie, the trust’s lead manager.
Because these earlier-stage companies bring a
slightly higher level of risk, the trust’s remit has been
expanded and now comprises around 100 global
stocks. EWIT doesn’t like to use the phrase ‘smaller
companies’, preferring to think of the holdings as
immature businesses that will grow. “The global
small-cap universe is vast; our investable universe is
roughly 20,000 companies, but the awkward truth –
which most small-cap managers won’t admit – is that
a huge proportion have limited growth potential and
are small for a reason,” says John MacDougall, EWIT’s
deputy manager. “Our focus is on a small subset – those
that we think could be the large-cap companies of
tomorrow. But we’re investing in them today.”
Both managers have experience in smaller company
investment. Douglas, who has a DPhil in molecular
immunology, continues to manage the Baillie Gifford
Global Discovery Fund and, until last year, managed
the Baillie Gifford British Smaller Companies Fund.
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automation, backed by the proliferation of outsourcing,
are helping high-quality small companies to grow a lot
more quickly and internationally than they once did.
While more than 20 per cent of the trust is invested
in UK companies, most of EWIT’s stocks have global
opportunities for their products, with perhaps one
exception – Rightmove, the online property portal.
However, this company showcases at least two of the
managers’ other investment biases. It’s a business with
very strong network effects, and it illustrates the power
of first-mover advantage in the digital age – in effect
Rightmove has become the dominant platform through
which house hunters in the UK consume real estate
related content. The managers are attracted to platform
businesses because, once they are in place, they can
be used to enforce dominance or roll out new products.
“Platforms allow a breakthrough to be exploited in
adjacent areas, and we like that because it tends to
de-risk growth,” notes Douglas.
Another stock in the portfolio, US company
Alnylam Pharmaceuticals, has a platform for
17 | t
developing a whole new class of medicines. By
interacting with human genes at an early stage,
they may transform the treatment of many diseases.
Once Alnylam has perfected the first drug, others
might follow more rapidly.
There are many other examples. The UK online
supermarket, Ocado, has a technology platform that
may transform grocery shopping in the future. US
company Stratasys manufactures 3D printers and
production systems, providing a platform for designers
to rapidly make any object or part they desire.
At least two companies in the trust are not small by
any measure, though they once were. One is Tesla, the
US electric car maker, which has a current market
value of nearly $25bn. The other is TripAdvisor, the
Massachusetts-based travel website, worth around $12bn.
As such, they typify exactly what EWIT hopes to achieve.
But they also raise the issue of just how big or small a
company must be in order to be held by the trust.
Traditional small-cap funds look at stocks in a
compartmentalised way, with managers being forced
to sell a holding once it grows beyond a particular
t | 18
market cap threshold. “That’s frustrating,” says John.
“You get to know the company really well, but then you
have to sell it because it has been successful and grown.
So we have given ourselves flexibility. We typically
won’t buy a new holding in a company that is worth
more than $5bn. But we won’t sell a stock simply
because it has grown through that figure.”
This interview took place in April 2014.
Please remember that the value of a stock market
investment and any income from it can fall as well as
rise and investors may not get back the amount
invested. Investments with exposure to overseas
securities can be affected by changing stock market
conditions and currency exchange rates. Investment in
smaller, immature companies is generally considered
higher risk as changes in their share prices may be
greater and the shares may be harder to sell. Smaller,
immature companies may do less well in periods of
unfavourable economic conditions.
www.bgtrustonline.com
The power
of influence
Identifying personality types can
be useful, especially for investors
meeting company management
WORDS: JOE FARADAY
Malcolm Gladwell believes there are
three types of people that facilitate
the spreading of information –
Connectors, Mavens and Salespeople
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Investors at Baillie Gifford have thousands of
meetings every year with company management
teams. Each meeting will be different because
we must think about how we rate each team and
whether we can trust them. We have to be openminded about what we think management is
capable of. We learn from what we see and hear,
as we do in daily life.
This reflects an innate human trait: we are
all influenced by the people around us. Malcolm
Gladwell, the Canadian author and journalist,
explored this concept in his book, The Tipping
Point, published in 2002. He looked at how the
kinds of people we meet can influence us, and
how very often it’s the small things that make
a big difference to the outcome of events.
When working as a reporter for The
Washington Post, Gladwell covered the AIDS
epidemic. He began to take note of “how strange
epidemics were”, and how epidemiologists “have
a strikingly different way of looking look at the
world”. The key moment in an epidemic, he
realised, comes when the virus reaches critical
mass and begins to spread at a much faster rate.
A similar process can be applied to ideas. In
his book, Gladwell explains how ideas and trends
spread through populations. Some will spread
like wildfire, causing everything to change all at
once: this is what he terms “the tipping point”.
It brings change and the message is contagious
and irresistible. He applies this to all kinds of
examples from disease and crime to fashion
and TV programmes.
Gladwell’s observation can easily be applied
to the investment world. As investors, a tipping
point occurs when management teams inspire
confidence in us and other potential investors.
We need to be open minded enough to see
possibilities, but at the same time be wary of
becoming overconfident.
People spread ideas rapidly; we are all closer
to one another than we might think. The concept
of ‘six degrees of separation’ was conceived by
Hungarian writer Frigyes Karinthy in 1929 and
developed by US social psychologist Stanley
Milgram in the 1960s. It posits the theory that
each individual is six or fewer steps away, by way
of introduction, from any other person. What is
important is who makes these connections.
Again, this concept is pertinent to the
investment world. This is because certain
19 | t
ARE YOU A CONNECTOR,
A MAVEN OR A SALESPERSON?
What would you normally say?
1 A colleague asks for your opinion
on a new idea.
Do you say:
A Joe would be very interested in that, let me introduce you
B That looks interesting, Joe did
something similar
C Great idea, I’m quite excited...
let’s go ahead
2 You’ve just bought the latest
smart phone.
Do you:
A Tell everyone you know about
how great it is
B Spend hours working out what
it can do
C Convince everyone else to buy one
people seem to be crucial in spreading information, and
investors rely on information to help them make decisions
about where to invest.
There are some exceptional individuals who find ideas,
trends and situations, and they spread the word through
their connections, energy, enthusiasm and personality.
Gladwell believes there are three types of people that
facilitate the spreading of information – Connectors,
Mavens and Salespeople. Each has equally important
strengths, and all have an equally vital role to play.
CONNECTORS
Connectors build bridges. They tend to know lots of people
and have a habit of introducing them to each other. They
have a knack of making friends and acquaintances – in
a sense, they collect people. They possess a combination
of curiosity, self-confidence, sociability and energy.
Connectors don’t need to know everything; it’s more about
who they know than what they know. They are the social
or corporate glue – one example would be a flamboyant
and charismatic chief executive officer.
IF YOU ANSWERED WITH:
A You’re a CONNECTOR – You think about how to bring people together
B You’re a MAVEN – You know a ll the specific, detailed and
relevant information
C You’re a SALESPERSON – You will
take an idea, package it up, price it
and sell it
DEFINITIONS
TIPPING POINT – The point at which
a few people provide the catalyst from
a series of small changes to become
significant enough to cause a much
larger, more important change.
CONNECTORS – Know everyone
MAVENS – Information specialists
SALESPEOPLE – Influence and sell
t | 20
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“The key to good decision making is not knowledge. It is understanding.
We are swimming in the former. We are desperately lacking in
the latter” From Blink by Malcolm Gladwell
SALESPEOPLE
Salespeople influence and sell, persuading us, exuding
an indefinable trust as well as energy, enthusiasm and
charm. The typical investor relations executive is this
kind of person: optimistic, willing to be promotional,
and with an if you don’t try, you’ll never succeed
outlook. Salespeople are good at expressing emotions
and feelings.
MAVENS
Mavens are information specialists. The word stems from
the Hebrew word mevin, meaning ‘understanding’; in
this sense, a maven is ‘one who understands’, and the
term is more widely used in the US. In the UK, we would
call them information experts. They like to research
deeply and always have lots of information on such topics
as products or prices. Mavens tend to be curious about
everything factual and know all the important details –
for example, a chief financial officer or chief operating
officer will always have relevant details to hand. Mavens
tend to be relatively open-minded and less opinionated
than other types of information spreader.
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As individuals, some of us may feel we are all three
types. However, what’s important is that these
characteristics all play a part in how we are influenced.
It’s helpful to recognise which of these you might be,
and who you are interacting with, and look for the
people who compliment you.
In terms of human interaction, this is nothing new.
The evolutionary biologist, S.L. Washburn, wrote:
“Most of human evolution took place before the advent
of agriculture when men lived in small groups, on a
face-to-face basis.” Influence has always been a vital
part of evolution.
As investors, it’s always useful to think about who
we are meeting in terms of what we might be able to
find out from them, how we should go about finding it
out, and how they can help us. There’s no point in asking
people questions they won’t know the answers to. For
instance, there’s not usually much point in asking an
investor relations executive about strategy because he
or she won’t know as much about that as a CEO or
another key decision maker. On the other hand, an
investor relations executive can be very useful when
we don’t know a company very well and are trying to
get a broad understanding.
Simply knowing these three kinds of people exist
and being conscious of them can help to give us an
edge by being better prepared, asking the right kind of
questions and knowing what to believe or not believe.
It also helps us to make the most from their time.
21 | t
EYES ON
THE EAST
China’s new leaders are driving
far-reaching economic reform
WORDS: BEN MCLANNAHAN
t | 22
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These days many investors in China can rattle off a long
list of worries – from slowing growth and bond defaults,
to elder statesmen imprisoned for corruption. But
according to the managers of Baillie Gifford’s Pacific
Horizon Investment Trust PLC, these are all signs that
the world’s second largest economy is heading in a better,
healthier direction.
The new government appointed at the end of 2012 has
made it clear that China can no longer simply pursue
economic growth at all costs. In particular, policy makers
are aiming to reduce reliance on credit-fuelled property
and infrastructure investment, while clamping down on
highly polluting, low-cost manufacturing by withdrawing
subsidies or more directly forcing consolidation. A more
flexible currency, a looser grip on interest rates and a
streamlining of the state-owned enterprise sector are
all part of this effort to make the market play a “decisive”
role, rather than a “basic” one, according to last
November’s reform plan.
Even with the slowdown in growth,
the rate of income expansion
will be significantly higher than
anywhere in the developed world
If the pace of economic expansion slows in the process,
it is seen as a price worth paying. “China is in a period of
great transition,” says Ewan Markson-Brown, investment
manager of Pacific Horizon. “The new government has
woken up to the realisation that, over the last 10 years,
they’ve driven tremendous economic growth and a rise in
incomes but with serious side-effects, ranging from excess
credit and misallocation of capital, to severe environmental
degradation. The new policy aims to identify these issues
and solve them.”
No longer is the State Council taking aim at an 8 per cent
growth target, then doing whatever it takes to achieve it.
Premier Li Keqiang has set a target of about 7.5 per cent
expansion this year but the pace is likely to dip much
further in the years ahead, says Ewan, as China comes to
terms with “structurally slower growth”.
He adds: “Within 18 months or two years, a 5.5 per cent
number is probably quite likely. The perennial question,
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23 | t
as they progress from one state to the other, is to what
extent they will continue to pump-prime (stimulate the
economy by investment) when growth slows too fast.”
For now, Pacific Horizon is steering clear of stocks
that did inordinately well from the old regime.
The fund’s £136m portfolio is notably light on the
construction and heavy industry stocks that benefited
from China’s stimulus-laden response to the Lehman
crisis, for example, while giving a wide berth to
companies that bet on a steadily-appreciating renminbi
by aggressively borrowing in foreign currencies.
But the portfolio is very heavy on stocks that stand
to gain from more money in the pockets of consumers,
such as fast-growing internet companies Tencent,
Baidu and Youku, the latter of which is often called
‘China’s YouTube’.
“Even with the slowdown in growth, the rate of income
expansion will be significantly higher than anywhere in
the developed world,” says Ewan.
Another high-conviction bet is Haier Electronics Group,
the white-goods retailer, which announced in December
that it would sell shares in its logistics business to
Alibaba, China’s leading e-commerce company, to help
expand its distribution network.
“With deliveries in China tending to be slow and
uncertain, coupled with the need to be able to return
goods, logistics is the biggest bottleneck for e-commerce
in China today,” says Roderick Snell, deputy manager of
Pacific Horizon.
The endorsement from Alibaba is clear testament to
the quality of Haier’s logistics business, and will lead to
significant growth as billions of dollars worth of internet
goods are distributed by Haier.
Another good way to play a rise in disposable incomes,
says Roderick, is to look at gaming stocks in Macau – the
only place within Greater China where casino gambling
is legal. Pacific Horizon has a position in the Hong
Kong-listed Galaxy Entertainment Group, attracted by
its politically “savvy” management and a huge piece of
undeveloped land in the Cotai Strip.
The pick-up in gaming revenue has been very strong
over the past few years, but as more visitors from
the mainland pour over the border of the special
administrative region on the southeast coast of China,
plenty more growth is possible.
“Macau is an area they can control,” says Roderick,
alluding to Beijing’s central planners. “The argument
is that it is better to contain activity in Macau, to know
what is going on and make money from it, while keeping
illegal gambling out of the mainland.”
Meanwhile, Baillie Gifford managers are particularly
excited about the opportunities created by the effort to
clean up China. GCL-Poly Energy Holdings, for example,
is China’s leading producer of polysilicon, well-positioned
to capture new business as the government shifts “energy
production towards non-coal assets”, says Ewan.
There is also scope to make money from the toughest
anti-corruption drive in decades. In the wake of President
Xi Jinping’s promise to purge powerful “tigers” (highranking bureaucrats) as well as lower-level “flies”,
some senior Communist party elders warned him not to
disturb powerful families or patronage networks at the
top of the hierarchy.
However, cuts to capital expenditure at big stateowned companies could be one sign of this new policy
coming into play. Inflating capital expenditure budgets
by awarding dubious contracts to linked companies has
long been a popular way of concealing graft, says Ewan.
And judging by spikes in share prices after state-owned
enterprises trim spending, investors appreciate the
potential new-found “capital discipline”, he adds.
Article continues overleaf
t | 24
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A TALE OF
TWO LEADERS
The influences that shaped the men
in China’s top political roles
WORDS: RICHARD SNELLER
China’s new president Xi Jinping and premier Li
Keqiang were brought up during the most tumultuous
period in the country’s recent history, and were
encouraged by highly placed parents who lived
through a period of chaotic power struggles.
Unlike previous leaders – typically bookish children
who excelled in the classroom – Xi and Li honed
their skills in the playground. During the Cultural
Revolution, they were even “sent-down” following
Mao’s 1968 edict that “young students should be sent
into the countryside to learn from the peasants”.
The son of a veteran Communist leader who had
fallen foul of party machinery, Xi spent his teenage
years digging ditches in the countryside.
Xi’s father was rehabilitated in 1978 and appointed
party secretary for Guangdong province. Thanks to
his father’s contacts, Xi enjoyed a comfortable
Beijing career between 1978 and 1982, before
working in different provinces as he worked his
way up the ladder.
Li was a “sent-down” youth at an agricultural
commune. A dedicated member of the Chinese
Communist Youth League (CCYL), Li met Hu Jintao,
who went on to be China’s president, at the CCYL
Central Committee in the early 1980s and had access
to the highest echelons of power.
Xi and Li are from a generation of Chinese elite
educated mostly at home in mainland China,
denied the overseas adventures enjoyed by earlier
generations. Previous members were brought up as
engineers, dealing with inert, predictable entities
such as steel, cement and electricity, well suited to
building one of the most magnificent and modern
infrastructures of their time.
Instead, the new leaders were trained in the social
sciences of law, history, Korean language, teaching
and statistical economics. These individuals are
perhaps equipped with a better understanding of
people and because of their “sent-down” experiences,
they may also understand that success in achieving
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headline measures may not trickle down as efficiently
as market economics might suggest.
Having watched their predecessors enrich
themselves through the abuse of power, they have
come into the party leadership at a pivotal time.
Richard Sneller is manager of Baillie Gifford’s
Emerging Markets Growth Fund.
25 | t
Meanwhile, China’s new path is causing Ewan and
Roderick to re-think their exposures elsewhere in Asia.
Higher wages for Chinese workers, for example, mean
that companies will have to automate – an “imperative”
made more urgent by laws to cut emissions. That implies
a good outlook for Taiwanese companies such as Hiwin
Technologies and Hon Hai Precision Industry, both of
which Pacific Horizon has a stake in.
“Both from bottom-up cost pressure and top-down
government regulation, automation is the way for many
companies in China to maintain margins and output over
the next decade,” says Ewan.
There are some possible blips on the horizon; some
local government bonds might be allowed to default
towards the end of the year, which could cause people
to question whether China is experiencing “another
Lehman moment”, says Ewan.
However, with China poised to become the world’s largest
economy this year according to the latest estimates, these
are the sort of issues it will have to deal with as it becomes a
country of sustained long-term growth. Considering China’s
underlying economic strength, it is still in a highly enviable
position relative to most countries.
And the challenges are reflected in stock valuations,
which Roderick says are “very cheap versus history”.
t | 26
The MSCI China index was trading at about 1.3 times
book value in early May, against a ten-year average
of more than 2.1 times.
“Some companies certainly deserve to trade at low
valuations given the negative impact that China’s
substantial reforms could have on their business
models,” says Roderick, “but there are many companies
that stand to benefit enormously from China’s
transformation. Long-term investors that can identify
these businesses are likely to be investing in some of
Asia’s most attractive long-term businesses, and the
rewards could be significant.”
Please remember that the value of a stock market
investment and any income from it can fall as well
as rise and investors may not get back the amount
invested. Investments with exposure to overseas
securities can be affected by changing stock market
conditions and currency exchange rates. Investing
in emerging markets is only suitable for those
investors prepared to accept a higher level of risk.
This is because difficulties in dealing, settlement
and custody could arise, resulting in a negative
impact on the value of your investment.
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A world of
possibility
Dominic Neary on SAINTS and
the quest for income from equities
WORDS: JEFF SALWAY
He may be the new name at the helm of The Scottish
American Investment Company P.L.C., but Dominic
Neary is very clear about his aims. His job as the
manager of the 141-year-old trust, also known as
SAINTS, is to scour the world for dividends, with the
objective to pay investors an income that rises with
inflation each year, while also aiming to generate
capital growth.
“I think investors in SAINTS really value the
dividends and always have done,” says Dominic.
“SAINTS’ investors own shares primarily because
the trust has provided dependable dividend growth
in real – above inflation – terms.”
The trust’s change of investment manager is its
first since Baillie Gifford took over the mandate from
First State in 2004. Dominic, an Oxford mathematics
graduate and holder of an MSc and PhD in Statistics,
became manager on Valentine’s Day, taking over from
Patrick Edwardson who is now concentrating on the
Baillie Gifford Diversified Growth Fund.
Dominic wasn’t completely new to SAINTS when he
arrived at Baillie Gifford in 2009, however. His first role
in fund management was at Stewart Ivory, which held
the SAINTS mandate at that point. His experience in
equities was developed at Henderson Global Investors,
[email protected] and 0800 917 2112
27 | t
SAINTS DIVIDEND HISTORY
YEAR
DIVIDEND (p)
YEAR ON YEAR (%)
20046.00
6.2
20056.53
8.8
20067.40
13.3
20078.25
11.5
20088.80
6.7
20099.05
2.8
20109.25
2.2
20119.45
2.2
20129.80
3.7
201310.20
4.1
source
Thomson Reuters Datastream/Baillie Gifford & Co
SHARE PRICE Annual Performance to 31 March
2010
78.9%
source
2011
20.0%
2012
0.8%
2013
9.9%
2014
3.1%
Morningstar, total return
Past performance is not a guide to future returns
where he took on responsibility for US small-cap
equities, and then Insight Investment, where he ran
global growth and absolute return funds.
He has been involved with SAINTS for most of his
time at Baillie Gifford, and when he became deputy
manager in 2012 he assumed responsibility for the
trust’s equity component, currently about 80 per cent
of its investments. For Dominic, head of Baillie Gifford’s
Global Income Growth team, it was a logical step as
SAINTS, at its heart, is a global equity income trust.
Changing the trust’s benchmark at the beginning
of this year to the FTSE All-World Index, which closer
reflects the reality of the underlying equity portfolio,
has also helped to reinforce the trust’s focus on global
equity income.
SAINTS’ objective is to provide investors with capital
growth and rising dividend income by investing in a
wide range of companies and assets. Its approach is
quite unusual in the sense that it will hold non-yielding
stocks to generate profits that can then be invested in
income-producing assets. Those non-yielding stocks are
less prominent than they used to be, says Dominic.
“For a stock with a zero yield, we need great
confidence that it provides strong capital returns,”
t | 28
he points out. “The hurdle rate is now higher
because we’re moving the equity portfolio yield
up – we believe we can meet our income and capital
growth objectives while working a little harder to
generate equity income, so you can expect a thinning
out of zero-yield stocks. We’re looking for stocks
that will meet our objective to provide a dependable
income stream that we expect to grow in real terms.”
He is also reducing the trust’s exposure to bonds,
reversing an increase in holdings during the debt
market bull run that followed the financial crisis.
“What was a once-in-a-lifetime opportunity in
2009 and 2010 has passed, certainly with the
withdrawal of quantitative easing. The valuation
of bonds relative to other assets is generally high,”
notes Dominic.
But perhaps the most notable long-term trend is
the widening geographical scope of the trust and its
decreasing reliance on the UK for its investments
(see infographic opposite).
The worldwide flavour of SAINTS is immediately
evident from an equity holdings list that includes
stocks from Brazil, China, Russia, Israel, Thailand,
Japan, South Korea, Taiwan and Egypt. While the
The trust’s management
looks for companies
committed both to a
dividend policy and
to a business model
that supports
sustainable growth
and earnings
www.bgtrustonline.com
CHANGING SAINTS How the trust has become increasingly global
2004
¢
¢
¢
2014
UK
North America
Continental Europe
source
¢
¢
¢
Emerging Markets
Asia Pacific
Japan
Baillie Gifford & Co, as at 31 December 2004
portfolio includes UK telecoms company, Vodafone,
it also includes South Korea’s multinational
conglomerate, Samsung, and Thai mobile telecoms
operator, Total Access Communications, the latter
of which, says Dominic, “benefits from improving
regulatory regimes and, like a lot of companies, it
has learned lessons from the West”.
The global income outlook is also strengthened by
a cultural change that Dominic has detected in
corporate attitudes towards dividends. “Companies
whose total return to shareholders had been entirely
based on the share price found it much harder after
the financial crisis to raise funds than those that
had supported returning cash to shareholders over
time,” he explains. “It was a real wake-up call in
terms of the value of dividends.”
The trust takes a bottom-up approach – in line
with Baillie Gifford’s broad investment approach –
so the management looks for companies committed
both to a dividend policy and to a business model
that supports sustainable growth and earnings,
says Dominic.
“There is recognition now that if you have a little
extra cash and the balance sheet is strong, returning
[email protected] and 0800 917 2112
¢ UK
¢ North America
¢ Continental Europe
source
¢ Emerging Markets
¢ Developed Asia ex-Japan
¢ Japan
Bloomberg, Baillie Gifford & Co, as at 31 March 2014
cash to shareholders doesn’t mean you’re not going
to deliver growth any more.”
All of this creates a positive backdrop, he says:
“Balance sheets are strong and there are rich pickings
in companies that can support dividends in times of
stress. If we do our job right, and as long as inflation
doesn’t go crazy, we should be able to continue
growing the dividend ahead of inflation.”
Please remember that the value of a stock
market investment and any income from it can
fall as well as rise and investors may not get
back the amount invested. Investments with
exposure to overseas securities can be affected
by changing stock market conditions and
currency exchange rates.
Investing in emerging markets is only suitable
for those investors prepared to accept a higher
level of risk. This is because difficulties in
dealing, settlement and custody could arise,
resulting in a negative impact on the value of
your investment.
29 | t
More choice
for investors
Using an online platform can be an easy
and cost-effective way to invest
WORDS: JENNIFER HILL
Buying investment trusts through a platform is an
option worth considering. Investors can invest through
a platform by using an authorised intermediary – these
kind of platforms are called advisory-only platforms.
Investors can also invest directly, buying and managing
their holdings online. The investments purchased can
then be held on the platform and, if appropriate, in a
tax-efficient wrapper.
James Budden, director of marketing and distribution
at Baillie Gifford, says: “Online investing by individuals
has come a long way in the last 10 years. Platforms
now offer a plethora of investment choice within a
variety of wrappers.”
Buying investments through a platform brings many
benefits. Charles Galbraith, managing director of
the AJ Bell Youinvest platform, says: “You are able to
consolidate all of your investments in one place, and
access share and fund prices as well as investment
research. This really helps investors to manage their
investments more effectively.”
James believes there are “clear signs” that platforms
are willing to step into the advice gap created by
the Retail Distribution Review (RDR). The change in
regulation compelled financial advisers to charge fees
for their advice because they were no longer being
paid a commission, and this has left many smaller
investors feeling they have been priced out of the
market. However, as James points out: “Platforms
are assembling lists of recommended funds, building
model portfolios and offering worthwhile research and
opinion. All of this is good news for the consumer.”
Unfortunately, the three biggest platforms
accounting for more than half of advised assets under
administration – Cofunds, FundsNetwork and Skandia
– still don’t give investors access to investment trusts.
On the other hand, Hargreaves Lansdown, the largestdirect-to consumer platform, does offer investment
trusts, as do a host of smaller platforms.
t | 30
PLATFORMS THAT OFFER
BAILLIE GIFFORD’S RANGE
OF INVESTMENT TRUSTS
7IM
Alliance Trust Savings
Ascentric
Charles Stanley
Hargreaves Lansdown
Hubwise
Interactive Investor
James Hay
www.bgtrustonline.com
Platforms are assembling
lists of recommended
funds, building model
portfolios and offering
worthwhile research
and opinion
Novia
Nucleus
Pershing Nexus
Raymond James
Standard Life
T D Waterhouse
Transact
Wealthtime
Winterflood
Some platforms can only be
accessed through an intermediary
note
[email protected] and 0800 917 2112
The RDR has provided another major benefit to
investors: lower costs. With a new focus on the
cost of investing, fund managers have been cutting
fees to boost their competitiveness in the post-RDR
world. Investment trusts, which have often provided
a lower-cost way to buy shares than open-ended
funds, have remained popular with investors,
according to Galbraith.
Many investment trusts have reduced both ongoing
and performance-related fees. Last year many
trusts removed performance fees, according to the
Association of Investment Companies, and costs have
continued to fall this year. In April, Scottish Mortgage
trimmed its annual ongoing charge from 0.32% to
0.30% after gross assets rose to £3bn.
Buying through a platform does introduce an extra
layer of cost. From April 2014, all platforms will charge
an administration fee for new clients. Some will charge
a percentage of the investment, others a flat rate. As
an investor, you need to choose what suits you best,
which will depend on how much trading you are likely
to do and the particular features of each platform.
Watch out for the hidden extra costs, too. Research
the transaction charges before deciding which
platform is best for you, and there may be exit fees, too.
There are other ways to buy investment trusts:
you can still access them through a traditional broker
or you can buy from a fund manager directly. The
latter tends to be the cheapest option for investors who
want to access a range of investments run by the same
fund manager.
The Baillie Gifford Investment Trust Share Plan
gives access to seven investment trusts, has no
initial or annual plan charge, and allows lump sum
investments from £250 and monthly savings from £30*.
For more information about Baillie Gifford’s products
see pages 35–38.
* Please note that other charges include a
withdrawal charge, the dealing price spread
and the stamp duty costs of 0.5% on purchases.
The investment trusts also incur costs in managing
and administering their portfolios (including
dealing costs).
Baillie Gifford does not provide investment advice.
As with all stock market investments, the value
of your investment may go down as well as up
and you may not get back the amount originally
invested. The value of any tax reliefs will depend
on your individual circumstances.
31 | t
A zone apart
David Smith on the state of Europe’s economy
THE EUROPEAN CENTRAL
BANK, FRANKFURT
The eurozone crisis has seemed ever-present for
investors and the long-suffering populations of some of its
member states. In Greece, where the recession began in
2008, it is only just ending. For Spain, which like Greece
has an unemployment rate of more than 25 per cent – and
more than 50 per cent for young people – the pain has
been very real, as it has for the Irish, the Portuguese and
many others. Recession, austerity and unemployment
have been the eurozone diet for five years.
Few countries have escaped difficulties but the
eurozone has struggled more than most. The deep
recession of 2008 to 2009 was followed by a second,
shallower recession from 2011 till 2013. This second
bout, when most other parts of the world were
recovering, sparked worries that the eurozone would
never emerge from the crisis and that ultimately the
system would break up. This hit confidence in financial
markets within and beyond the eurozone.
Recently, however, the eurozone economy has begun to
look up. Eurozone gross domestic product began to grow
t | 32
modestly in the second quarter of 2013 and continued for
the rest of last year. Encouragingly, two of the strongest
performers were Ireland and Spain, which until recently
had been in the currency union’s emergency ward.
Unemployment, still disturbingly high, has begun to edge
lower, dropping below 12 per cent. The pace of the fall is
glacial but at least the change is in the right direction.
The economic numbers have been mildly encouraging
but perhaps nothing illustrates the change of mood better
than developments in bond markets. Government bond
yields for the troubled eurozone economies surged to
sky-high levels on fears of a break-up, but are now at
record low levels. In April, Spanish five-year government
bond yields fell below their US equivalents for the first
time since 2007 – two years ago they were more than
7 percentage points higher. At the same time, the yield
on Italy’s 10-year debt fell to its lowest since 2005 and
the equivalent for Ireland to its lowest since 1991.
The markets have been starting to behave as if the
eurozone crisis is over. But is it? There is no doubt that
www.bgtrustonline.com
The economic numbers have been mildly encouraging but nothing
shows the change of mood better than developments in bond markets
the actions of the European Central Bank (ECB), and
the 2012 pledge by its president Mario Draghi to do
“whatever it takes” to keep the system together and
support its troubled economies, has worked. That
pledge included the launch of a scheme known as
outright monetary transactions, a commitment by
the central bank to buy the government bonds of
vulnerable eurozone countries. In the event, it was not
necessary. Economies and bond markets recovered
under their own steam. Confidence has returned. It has
been a confidence trick in the best sense of the word.
So is everything now fine? When one problem is
solved, another arises. The new fear in the eurozone
is that of deflation – in other words, falling prices.
The inflation rate fell to just 0.5 per cent in March 2014.
Deflation, experienced by Japan for most of the past
25 years, is usually associated with economic
stagnation and rising real levels of debt. In the past,
countries have often inflated their way out of debt.
How big a worry is this? The ECB appears
relatively relaxed. Much of the fall in inflation reflects
global price decreases for food, energy and other
commodities, rather than falling domestic prices.
The fall in inflation is a reminder, however, that the
eurozone is a long way from normality.
A recent House of Lords European Union
Committee report summed this up. While welcoming
the abatement of the crisis, it noted a number of
weaknesses in the eurozone, including “immense”
economic imbalances between core and periphery
countries, the absence of structural reform in
many countries, anaemic growth, the threat of a
“deflationary spiral” and political tensions from
austerity. “Such weaknesses will continue to test the
economic and political stability of the euro area for
as long as they persist,” it concluded.
We should celebrate the fact that the immediate
crisis is over, and with it the destabilising effect on
other countries. There is a long way to go, however,
before we can be confident that Europe has returned
permanently to stronger growth, or that it has
developed enough resilience to cope with future
crises. But let us enjoy it while it lasts.
[email protected] and 0800 917 2112
note There is a gap in the data for Ireland and Portugal. This is because
there were no 10-year bonds due to mature for the periods from October
2006 to March 2007 & November 2011 to February 2013 in Ireland and
from April 2005 to June 2005 & March 2006 to June 2006 in Portugal.
33 | t
BOOK REVIEW
Capital in the
Twenty-First Century
Philip Coggan reviews Thomas Piketty’s new book
It is an unlikely bestseller; a 685page book on economics, translated
from the original French, written
by an academic of whom few
outside the profession will have
heard. But Thomas Piketty’s book
on inequality is a sensation among
the intelligentsia; it featured on
BBC Radio 4’s Today programme,
and attracted the lead review in
The New Yorker and three separate
opinion pieces in The American
Prospect magazine.
The plaudits are understandable.
This book is groundbreaking and
thought-provoking, and its opening
chapters especially are lucid and
readable. The general reader should
not be intimidated; this is not one
of those dense economic tomes with
impenetrable equations.
It details how the rich own
an increasing proportion of the
developed world’s wealth and earn
an increasing proportion of its
income. As they pass that wealth
on to their heirs, the West seems to
be returning to a Downton Abbeystyle society of inherited privilege.
Inequality was sharply reduced in
the middle of the 20th century but
Piketty argues that this was due
to a number of temporary factors
– wars that destroyed capital,
nationalisation and high taxes –
that have now disappeared.
The key determinant of inequality
is the gap between the return on
capital and the economic growth
rate. If the former is higher than
the latter, then inequality increases
as the rich earn more from their
existing wealth than the rest of
not return us to the annual 3–4 per
cent growth rates once thought to be
normal, more like 1–2 per cent.
Rates of return will be higher than
that, as they were in the 19th century
when landlords such as Jane Austen’s
Mr Darcy could expect rental yields of
4–5 per cent. True, the returns on cash
and bonds may be low, but those are
the main assets of the middle class.
Piketty’s answer to the problem
is both unpopular and politically
unfeasible; a global tax on capital,
depending on a kind of Domesday
book register of wealth, and a return
to 1970s-style top rates of tax. But in
the absence of such taxes, inequality
will increase, putting great strains
on our political systems; witness
the increased support for extremist
parties in recent European elections.
Anyone who is interested in politics
and economics should read this book
– maybe they can come up with a
better answer.
us get from our income. The gap
seems likely to remain wide, in his
view. Economic growth is set to
slow because of stagnation and, in
some cases, falling populations in
the developed world. Productivity
improvements will help but they will
Philip Coggan’s latest book is
The Last Vote: The Threats to
Western Democracy.
Capital in the Twenty-First Century
by Thomas Piketty (Harvard
University Press, £29.95, Hardback)
OTHER BOOKS BAILLIE GIFFORD IS READING
• Berlin: Imagine a City by Rory MacLean
• The Second Machine Age: Work, Progress and Prosperity in a Time of Brilliant Technologies
by Erik Brynjolfsson and Andrew McAfee
• The Everything Store: Jeff Bezos and the Age of Amazon by Brad Stone
• The Entrepreneurial State: Debunking Public vs. Private Sector Myths by Mariana Mazzucato
t | 34
www.bgtrustonline.com
It’s easy to find out
more about investing
with Baillie Gifford:
REQUEST A BROCHURE USING
THE REPLY PAID CARD
CALL OUR CLIENT RELATIONS TEAM
ON 0800 917 2112
PAY A VISIT TO OUR WEBSITE
AT WWW.BAILLIEGIFFORD.COM
This publication is a financial promotion and has been issued and approved
by Baillie Gifford Savings Management Limited (BGSM). BGSM is the manager
of The Baillie Gifford Children’s Savings Plan, The Baillie Gifford Investment
Trust Share Plan and The Baillie Gifford Investment Trust ISA. BGSM is
wholly owned by Baillie Gifford & Co, which is the manager and secretary
of all the investment trusts listed overleaf.
BGSM and Baillie Gifford & Co are authorised and regulated
by the Financial Conduct Authority and are based at:
Calton Square, 1 Greenside Row, Edinburgh EH1 3AN.
[email protected] and 0800 917 2112
35 | t
A view
to invest
opportunities for our clients through
extensive and exhaustive independent
research – and we are fully committed to
our clients’ long-term investment success.
Read on for a guide to the seven investment
Since 1909, Baillie Gifford’s success
trusts we manage, and for information
has been built on finding investment
about the investment plans we offer.
Investment trusts are listed companies
whose principal purpose is to invest in other
companies, with the aim of making money for
you, the shareholder. Your money is combined
with that of other investors to provide a
spread of risk through a wide range of shares.
One of the main benefits to shareholders
is that your money is being professionally
managed by our investment fund managers.
This means that you don’t have to worry
about when to buy or sell individual shares
in companies. Baillie Gifford manages a range
of seven global and specialist investment
trusts – some aim to provide an income that
will grow over time, some have a complete
concentration on capital growth.
SCOTTISH MORTGAGE INVESTMENT TRUST PLC
Managed by: James Anderson
Deputy Manager: Tom Slater
Sector: Global
Trust aims: a low-cost global portfolio
designed to maximise overall returns.
Total Net Assets: £2,433m
www.scottishmortgageit.com
THE SCOTTISH AMERICAN INVESTMENT
COMPANY P.L.C.
Managed by: Dominic Neary
Sector: Global Equity Income
Trust aims: to increase capital and grow income
in order to deliver real dividend growth.
Total Net Assets: £319m
www.saints-it.com
THE MONKS INVESTMENT TRUST PLC
Managed by: Gerald Smith
Deputy Manager: Tom Walsh
Sector: Global
Trust aims: long-term capital growth from an
internationally diversified equity portfolio.
Total Net Assets: £971m
www.monksinvestmenttrust.co.uk
EDINBURGH WORLDWIDE INVESTMENT TRUST plc
Managed by: Douglas Brodie
Deputy Manager: John MacDougall
Sector: Global
Trust aims: capital growth from a global portfolio
of immature entrepreneurial companies.
Total Net Assets: £185m
www.edinburghworldwide.co.uk
Our monthly Investment Trust Bulletin contains
investment reports, performance data and
holdings information for all of the trusts we
manage. Copies can be obtained by contacting
us, or downloaded at www.bailliegifford.com.
The website also contains up-to-date analysis,
performance and prices as well as the latest
Report & Accounts for each trust.
t | 36
www.bgtrustonline.com
SPECIALIST INVESTMENT TRUSTS
RISK FACTORS AND IMPORTANT INFORMATION
The Baillie Gifford Japan Trust PLC
Managed by: Sarah Whitley
Sector: Japan
Trust aims: seeks capital growth through
investment in medium to smaller
Japanese companies.
Total Net Assets: £214m
www.japantrustplc.co.uk
•
•
Pacific Horizon Investment Trust PLC
Managed by: Ewan Markson-Brown
Deputy Manager: Roderick Snell
Sector: Asia Pacific excluding Japan
Trust aims: seeks capital growth through
investment in the Asia Pacific region (excluding
Japan) and the Indian Sub-continent.
Total Net Assets: £127m
www.pacifichorizon.co.uk
Baillie Gifford Shin Nippon PLC
Managed by: John MacDougall
Sector: Japanese Smaller Companies
Trust aims: seeks capital growth through
investment in small Japanese companies.
Total Net Assets: £99m
www.shinnippon.co.uk
[email protected] and 0800 917 2112
•
•
•
The information given in this publication is based
on Baillie Gifford’s understanding of current tax
law and HM Revenue & Customs practice, which
may change at any time.
The trusts are listed on the London Stock Exchange
and are not authorised and regulated by the
Financial Conduct Authority.
The trust directors and the staff of Baillie Gifford
& Co may hold shares in the trusts, or may buy or
sell such shares.
Baillie Gifford does not provide investment advice,
nor should the contents of this publication be taken
as investment advice.
If you have any doubt about the suitability of an
investment, please contact an authorised
intermediary for advice.
FURTHER INVESTMENT INFORMATION
For more information about how to invest with
Baillie Gifford visit www.bailliegifford.com
or call us on 0800 917 2112.
All data as at 30 April 2014.
37 | t
Baillie Gifford aims to make investing in global stock
markets as simple as possible. Our investment trust
plans are designed to be flexible, accessible and costeffective ways to invest directly in the investment
trusts we manage.
INVESTMENT TRUST SHARE PLAN
A flexible, cost-effective and simple way to invest
in a spread of shares for the long term.
• No initial charge*
• No annual management charge*
• Flexible investment options: lump sum
investments from £250 and monthly savings
from £30
CHILDREN’S SAVINGS PLAN
A straightforward way to invest over the long
term for children.
•
•
•
Can be opened for any child under 18
Comes with no initial charge or annual
management charge*
Can be a bare trust or a designated account:
lump sum investments from £100 or monthly
savings from £25
INVESTMENT TRUST ISA
You can choose to open a new stocks and shares ISA or
you can transfer the management of your existing ISAs.
•
•
•
•
Invest a lump sum from £2,000 (with a minimum
of £1,000 per trust) or from £100 a month per
trust (subject to investment limits)
Invest up to £15,000 in a stocks and shares ISA
this tax year
Transfer existing ISAs with a minimum value
of £2,000
No initial charge and an annual management
charge of £32.50 plus VAT*
* Charges are subject to review in April each year.
Other charges include a withdrawal charge of £22, the dealing price spread, and a stamp duty cost of
0.5 per cent on purchases. Investment trusts also
incur costs in managing and administering their
portfolios (including dealing costs).
t | 38
RISK FACTORS AND IMPORTANT INFORMATION
Any investment in an investment trust involves risk.
You should be aware of the following risk factors that
apply to all of the investment trusts and to investment
in the Share Plan, Children’s Savings Plan and ISA:
• The Investment Trusts managed by Baillie Gifford
& Co are listed UK companies. As a result, the value of their shares, and any income from them, can fall as well as rise and investors may not get back the amount invested.
• The trusts invest in overseas securities; changes in the rates of exchange may also cause the value of your investment (and any income it may pay) to go down or up.
• All the trusts can borrow money to make further
investments (sometimes known as ‘gearing’). The risk
is that when this money is repaid by the trust, the
value of the investments may not be enough to cover
the borrowing and interest costs, and the trust will
make a loss. If the trust’s investments fall in value,
any borrowings will increase the amount of this loss.
• You should note that tax rates and reliefs may
change at any time. The value of any tax benefits
will depend on your individual circumstances.
Details of the other risks associated with the investment
trusts and ways to invest in them are in the information
we will send to you.
All data as at 30 April 2014.
www.bgtrustonline.com
THE SCOTTISH AMERICAN INVESTMENT COMPANY
SAINTS AIMS TO
BE A CORE
INVESTMENT FOR
PRIVATE INVESTORS
SEEKING INCOME
AND GROWTH.
Two for joy.
The Scottish American Investment Company aims to deliver dividend growth by pursuing income from a variety
of UK and overseas investments. It targets a level of dividend growth which aims to beat inflation over the medium
to long term and pays out a dividend regularly every quarter.
On top of this, the fund also seeks to team up income with capital appreciation by investing in a portfolio of high
quality companies on a global basis, each selected for their potential to offer sustainable earnings growth or highyield characteristics. It’s a relationship designed to mature over the long term.
The Scottish American Investment Company is an investment trust managed by Baillie Gifford
and is available through our Share Plan and ISA.
Please remember that changing stock market conditions and currency exchange rates will affect the value of your
investment in the fund and any income from it. You may not get back the amount invested.
Open a Share Plan to receive a £10 Amazon gift card*.
For investment that aims to provide dual rewards over the
long term, call 0800 917 2112 or visit www.saints-it.com
Baillie Gifford – long-term investment partners
*For a limited period and new eligible Share Plan customers only. Terms & Conditions and minimum investment amounts apply. Please refer to our website or the application
pack that we will send you for full details. Your call may be recorded for training or monitoring purposes. Baillie Gifford Savings Management Limited (BGSM) is the
manager of the Baillie Gifford Investment Trust Share Plan and Investment Trust ISA and is wholly owned by Baillie Gifford & Co, which is the manager and secretary of the
Scottish American Investment Company P.L.C. Your personal data is held and used by BGSM in accordance with data protection legislation. We may use your information to
send you information about Baillie Gifford products, funds or special offers and to contact you for business research purposes. We will only disclose your information to other
companies within the Baillie Gifford group and to agents appointed by us for these purposes. You can withdraw your consent to receiving further marketing communications
from us and to being contacted for business research purposes at any time. You also have the right to review and amend your data at any time.