Baillie Gifford funds finish last in race for returns

Inflation fears have cost investors drawn to technology stocks, writes Sam Benstead

The most popular investment manager in Britain among DIY investors now runs more poorly performing funds than any other firm. Markets have turned against highgrowth technology stocks and Baillie Gifford, best known for managing the £20bn Scottish Mortgage investment trust, is feeling the effects.

The Scottish fund house runs four portfolios, with some £10bn of savers’ money, that sit towards the bottom of the charts – an unusual setting for one of Britain’s most successful operators.

The Baillie Gifford American fund has lost investors 0.5pc this year, when a US market tracker has returned 27pc. Its UK Equity Focus and UK Equity Alpha are down 1pc and 3pc while the market is up 15pc. The Global Discovery fund has lost investors 20pc, even as global stocks rose 22pc. Its investors, so used to owning table-topping portfolios, have reason for panic.

Its investment trusts have also struggled. The US Growth Trust has lost 2pc, Edinburgh Worldwide has fallen 21pc and Keystone Positive Change Investment Trust has dropped 6pc. Scottish Mortgage, its flagship fund, has performed worse than its benchmark index and made investors just 11.5pc.

British DIY investors have been burnt this year by the poor performance. Interactive Investor, a stock broker, said there were four Baillie Gifford funds and five investment trusts in the most bought funds so far this year.

The Scottish firm specialises in buying companies on the vanguard of new technology. It was a very early investor in Tesla, Amazon and Moderna. While this opens the funds to huge share price gains, as has been the case for nearly a decade, it also comes with significant risk if businesses fail to deliver on lofty growth forecasts.

High-growth stocks also become less attractive when inflation – and consequently interest rates – rise, as investors turn to lower-risk investments that pay an income today rather than promise profits tomorrow.

One of the biggest losers was Zillow Group, an online estate agent in the US. Still a top 10 position in Edinburgh Worldwide and Global Discovery, shares have fallen 57pc this year. Another misfiring stock this year has been Zoom, which is in the American fund and US Growth Trust. Shares have lost almost 50pc. In Britain, Baillie Gifford has been burnt by Trainline, a rail tickets booking firm, which has fallen 42pc and Ocado, the online grocer, which is down 27pc.

Laith Khalaf, of stockbroker AJ Bell, said the poor performance should serve as a warning to investors to diversify their portfolios.

“Not all fund houses are like Baillie Gifford. They don’t all have a dominant style of investing. But for those that do, savers should be wary about being over- exposed and buying lots of their funds. A balanced portfolio will have a mix of different styles, and often that will mean investing across different fund groups too. That way, a poor year for one particular strategy needn’t take too big a toll on your overall portfolio.”

However, he added that Baillie Gifford funds had been top performers over longer periods: “Performance shouldn’t be judged over one year and its approach to investing will be volatile. There will be good years and bad.”

The Global Discovery and American funds are both in the top 2pc of funds in their peer group over the past decade.

Olly Scott, 43, from Oxford, has invested in Baillie Gifford funds but has not been put off by this year’s below par performance. “I am in it for the long haul. You do not buy these to trade in and out of when there is a good or bad year, you have to commit long-term because that is what the managers are doing. They are experts at backing disruptors and have access to amazing entrepreneurs. These bets can take a long time to play out and can be volatile,” said Mr Scott, who works in public relations.

The best performing sector so far this year was commodities, which includes oil and mining firms. The top returning fund has been the £500m Schroder Global Energy fund, giving investors 48pc. Dzmitry Lipski, of Interactive Investor, said the run for commodity stocks could continue well into 2022.

“The economic recovery and inflation fears, along with infrastructure spending and hence higher demand for materials, make a strong investment case for commodities,” he said.

Ben Yearsley, of Shore Financial Planning, said investors should look to funds which invest in cheaper “value” shares, such as banks, to profit from rising interest rates.

He made the £1.3bn JO Hambro UK Dynamic his top fund pick for 2022. “It will benefit from a recovering UK economy and higher dividends,” he said.

James Budden, of Baillie Gifford, said: “We are clear that we invest with five to 10-year horizons over which we expect our funds to beat the market.

“Our portfolios look nothing like the index and, as such, investors might expect volatility over short-term periods.”