Fund of the week ‘We’ll sell a profitable stock if it stops doing good’

Lee Qian, who runs Baillie Gifford’s Positive Change fund, tells Sam Benstead how such decisions have not detracted from stellar returns

Investors who are convinced that owning “ethical” companies limits returns will have their views challenged by the £770m Baillie Gifford Positive Change fund.

It has returned a staggering 175pc since its launch in January 2017 and is the best-performing global stock fund over this period, beating the star managers Terry Smith and Nick Train and keeping pace with Baillie Gifford’s £13bn Scottish Mortgage Investment trust.

The fund invests in companies that deliver “positive change” in one of four areas: social inclusion and education, environment and resource needs, healthcare and quality of life, and helping the world’s poorest populations. It is on Telegraph Money’s list of top 10 ethical funds.

Lee Qian is a member of the fiveperson team in charge of the fund. He explains why companies that do good can make great investments and why most other ethical investors take the wrong approach to stock picking.

WHO IS THE FUND FOR? It is for investors who want to own the most exciting and exceptional businesses on the planet, which also contribute to a sustainable future.

While we have a lot of younger investors who like our approach to ethical investing, we also have large institutional investors in the fund.

HOW DO YOU PICK STOCKS? We need companies that are not only innovating today and that also have a track record of doing it well.

We look for evidence of developing new products and a pipeline of new initiatives. Companies have to spend a large share of their revenue on research and development and be willing to take risks.

They also need exceptional leaders who have a large stake in the business. This encourages a long-term approach with success measured in five-year or 10-year periods, rather than quarterly results.

Lee Qian

Tesla – Tesla is the largest holding in the fund. The American firm is the leader in electric vehicles globally and will play a crucial role in the decarbonisation of the planet. It is now the most valuable car company in the world. It has factories in China and America, and is building one in Germany. We bought it when the fund was launched and it has returned more than 500pc since then.

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HOW DO YOU ASSESS ‘ POSITIVE CHANGE’? Some fund managers avoid owning stocks in “bad” industries, such as oil and gas, and then tell investors the fund is “sustainable”. We think this is crude and unsophisticated.

We focus on companies that address a sustainability challenge. We look for good companies to own rather than bad ones to avoid. This leads us to firms that mix growth and sustainability.

If we think a company no longer creates positive change, we remove it from the fund, even though it might be performing well.

We used to own Kroton Educacional (now Cogna Educação), a Brazilian education company. Its focus when we bought it was providing a university education to people from poorer backgrounds.

Regulatory changes meant government funding dried up and the company shifted to serving wealthier private school students instead.

We sold our shares at a similar price to where we bought them.

WHICH SECTORS DO YOU LIKE AT THE MOMENT? We like companies that innovate in the food sector. More and more studies show that our current food system is unsustainable from an environmental perspective and the consumption of meat has negative impacts on our health.

We invest in Beyond Meat, which makes plant-based meat alternatives, and John Deere, which uses technology to help farmers use fewer pesticides.

WHAT HAS BEEN YOUR BEST INVESTMENT? Dexcom, the leader in glucose monitoring for diabetes.

Before Dexcom, diabetics had to use a blood test to know their blood sugar level. This was very inconvenient and intermittent, as they would do it only twice a day. Now they can get continuous readings.

We bought the stock in 2017 at $60 a share. It is now worth $400.

AND YOUR WORST? A Japanese company called Euglena. It was a young business that commercialised biofuel from algae. However, the management team was easily distracted and expanded into other markets such as cosmetics. It didn’t make much progress and we lost faith in the team. We sold our shares after losing half of our money. It was around 1pc of the fund at its peak, so not a disaster.

DO YOU HAVE YOUR OWN MONEY INVESTED IN THE FUND AND HOW ARE YOU PAID? I have invested my own money in the fund. I have a salary and my bonus is linked to investment returns over five years.

What £1,000 invested in 2017 would be worth now

WHAT WOULD YOU BE IF NOT A FUND MANAGER? An artist. I love painting.