BAILLIE GIFFORD Baillie Gifford British Smaller Companies Fund Quarterly Update 31 March 2022
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BAILLIE GIFFORD Baillie Gifford British Smaller Companies Fund Quarterly Update 31 March 2022 This document has been prepared for use by professional advisers and intermediaries only. It is not intended for use by retail clients.
This document contains information on investments which does not constitute independent investment research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned. Investment markets and conditions can change rapidly and as such the views expressed should not be taken as statements of fact nor should reliance be placed on these views when making investment decisions. This document is issued by Baillie Gifford & Co Limited, Calton Square, 1 Greenside Row, Edinburgh EH1 3AN, a company which is authorised and regulated by the Financial Conduct Authority, Financial Services Register No. 119179, and is a member of The Investment Association. Baillie Gifford & Co Limited is wholly owned by Baillie Gifford & Co, which is authorised and regulated by the Financial Conduct Authority. Baillie Gifford Overseas Limited is wholly owned by Baillie Gifford & Co. Baillie Gifford Overseas Limited provides investment management and advisory services to non-UK clients. Both are authorised and regulated by the Financial Conduct Authority. Additional Geographical Location Information Israel: This Report, as well as investment in the Fund described herein, is directed at and intended for Investors that fall within at least one category in each of: (1) the First Schedule of the Israeli Securities Law, 1968 (“Sophisticated Investors”); and (2) the First Schedule of the Investment Advice Law (“Qualified Clients”). The Fund’s share price can be volatile due to movements in the prices of the underlying holdings and the basis on which the Fund is priced. As with any investment, the clients’ capital is at risk. Past performance is not a guide to future returns. Throughout the report all figures are rounded, so any totals may not sum. Not all stocks mentioned may be held by the portfolio. All information as at 31 March 2022 and source is Baillie Gifford & Co unless otherwise stated. Baillie Gifford & Co Limited Calton Square, 1 Greenside Row, Edinburgh EH1 3AN Telephone +44 (0)131 275 2000 bailliegifford.com Copyright © Baillie Gifford & Co 2022 Ref: 18021 10006568
Executive Summary 01 Fund Objective To outperform (after deduction of costs) the Numis Smaller Companies Index (excluding Investment Companies) by at least 2% per annum over rolling five-year periods. The manager believes this is an appropriate target given the investment policy of the Fund and the approach taken by the manager when investing. In addition, the manager believes an appropriate performance comparison for this Fund is the Investment Association UK Smaller Companies Sector. There is no guarantee that this objective will be achieved over any time period and actual investment returns may differ from this objective, particularly over shorter time periods. Risk Analysis Key Statistics Number of Holdings 56 Typical Number of Holdings 50-80 Active Share 94%* Annual Turnover 9% *Relative to Numis Smaller Companies Index (ex. Inv.Companies). Source: Baillie Gifford & Co, Numis. The portfolio underperformed on a relative basis over the quarter as the market is grappling with the second-order impacts of the pandemic and challenging geopolitical backdrop We are confident that the portfolio owns a collection of extremely versatile, resilient businesses, all of which address large unique opportunities and all of which are empowered and able to navigate whatever uncertainties lie ahead During the quarter we have sold a private equity firm IP Group, venture capital firm Mercia Technologies and polymer manufacturer, Victrex. We have also sold Sumo Group, Cliningen and Clipper Logistics as a result of takeovers
Commentary 02 Before talking about portfolio activity over the period, we While the direct exposure of the underlying holdings wanted to acknowledge the deeply upsetting events to Russia and Ukraine is de minimis, there’s no question unfolding in Ukraine. From an economic perspective, the that the past three months have seen severe disruption portfolio is relatively insulated from the war, but from a to markets at a global level. War has added pressure to human perspective, we feel the impact acutely. already highly strained logistics and supply chains, while A number of the businesses we hold have spent the period the severe disruption in fossil fuel supply from Russia has finding ways to aid staff and their families in the conflict thrown energy markets into turmoil, fanning the flames regions. Videogame publisher and developer tinyBuild of inflation kindled over the past year. The long-term has been working around the clock to support the staff in impacts of this remain unfathomable, with second and its Ukrainian and Russian studios, helping evacuate them third-order effects likely to ripple down economies for to safety and even setting up a new studio in Belgrade for years to come. In the short term, however, the clearest displaced workers. We are also happy to see a number of impact on markets has been a retreat from risk assets as holdings work to support the Ukrainians that have found consumer confidence is shaken and central banks begin shelter in the UK. Recruitment specialist Robert Walters the process of tightening the money supply to rein in is one of a group of high-profile UK businesses that have inflation. If 2020 was the year of tech and online retail gone out of their way to help refugees, both stocks, and 2021 the year of reopening and recovery in by hiring a number of displaced Ukrainians into its the wake of relaxing Covid-19 rules, then 2022 so far has business and through representing others as a recruiter. been a year of a more indiscriminate reduction of risk In our small role as shareholders, we will continue to appetite. The FTSE 250 is down almost 10 per cent in encourage these businesses to do what they can to help 2022 so far, as is the Numis small cap index. The sell-off the victims of war. both at an index and portfolio level has been relatively
Commentary 03
sector agnostic, the only big winner over the quarter being acquire all the customers you can while those dynamics
energy producers. Given the overweighting within the hold. Right now, fear in the market seems to be obscuring
portfolio to areas of growth and disruption, and our these types of opportunities so, where applicable, we’ve
minimal exposure to areas like energy and commodities, added to Trustpilot and other similar holdings on
which we believe (as they say on the tin), are largely weakness.
commoditised and cyclical, the portfolio has Other businesses have felt different impacts. Both
underperformed its benchmark over 2022 so far. legal services business Knights and flexible office
At this point, I would reiterate that we do not believe software provider essensys have hurt short-term
that three months or even a year is a hugely meaningful performance as both reported weaker than expected
period over which to measure an individual company’s trading environments. This was driven largely by
performance. The ambitions of the portfolio holdings are ongoing Covid-19 disruption and nervous businesses
significant and will take time to realise. Disruption sentiment reducing activity in the wake of geopolitical
of incumbents and development of new technologies mayhem. In an entirely different vein, livestock genetics
and solutions to solve large problems are all multi-year specialist Genus has had a difficult year so far in
challenges and hence we believe that a three-to-five-year navigating volatile pig prices in its large Chinese market.
view will give a far clearer window on what the portfolio In these cases, where businesses have felt a genuine
hopes to achieve, and I’m happy to note that at present operational blow versus simply falling foul of market
we remain positive over these periods. While remaining short-termism, we will be more nuanced in how we
entirely agnostic to the benchmark will, by definition, approach the situation. The first step is to ensure a short-
lead to divergence from its results, we aim for that term setback doesn’t hinder the businesses’ long-term
divergence to be positive over the longer term. That said, opportunities. If this is the case (as in the examples above)
short-term periods of underperformance like those we’ve then our default position is one of patience. We remain
seen over the past quarter and past 12 months are sadly confident that your portfolio is a collection of the very
inevitable. While they will not cause us to panic and best UK small cap businesses in our investment universe.
forget our core task, it is still worth taking the time to If nothing fundamental is broken in our initial investment
look at where the worst impacts have been felt. This hypothesis then we will support the companies and their
offers an opportunity to reflect on where market management through the hard times no differently than
overreactions may offer buying opportunities or those how we’d support them when times are easy.
occasions where our investment hypotheses may be more Of course, sometimes upon reflection, there has been
structurally challenged. a significant change to an investment hypothesis and
The short-term pressures mentioned above have action is required. The period saw us close positions in
resonated through the fund in several ways. The promise Victrex, IP Group, and Mercia Technologies. Although
of rising interest rates has had a clear negative impact on none of these was in a state of crisis, and indeed were not
‘long duration’ businesses, those investing all today’s the worst victims of recent market selloffs, in each case
earnings to generate returns in the future, as investors we felt that the fundamental investment case had changed
increasingly want their cash sooner rather than later. to the point where we no longer had conviction in return
We’ve seen this manifest clearly within the portfolio. outcomes. In the case of IP Group and Mercia, both of
Profitable growth businesses like Alpha FX or 4imprint, which invest in private businesses, we felt changes in
have performed well over the period, while those still at management structure and their underlying holdings
the early stages of investing heavily in their potential weakened their long-term positioning, whereas in the
have suffered. A notable detractor here would be case of Victrex we have gradually lost confidence in
Trustpilot, a leading platform for online reviews. The its competitive moat and resultant pricing power in its
business released a promising growth update over the market for high-performing plastics. We aim to hold a
period demonstrating strong traction in both old and new small group of the most exceptional small UK businesses,
markets, however, alongside this it announced a businesses with the potential to offer transformational
significant investment to continue driving this adoption. outcomes for shareholders over many years. When we
This choice in this environment contributed to shares believe that there has been a fundamental impairment
falling more than 50 per cent over the quarter. We believe ether in the quality of a holding, or the likelihood of it
that there are strong unit economics developing in achieving strong shareholder returns we will not hesitate
Trustpilot. Spend on customer acquisition today offers to redeploy your investment elsewhere.
clear and attractive returns in years to come, hence the
logical thing to do to generate maximum value is toCommentary 04
The period saw us participate in a capital raise for
videogame publisher Team17, supporting its purchase of
German simulation game specialist Astragon.
Videogaming is another space where despite Covid-19
receding, demand has held up remarkably well. In January
Team17 announced that 2021 growth had been above
expectation despite an exceptionally strong 2020.
Pandemic gamers are here to stay, and the owners and
publisher of the best IP find their content in high demand,
yet markets seem
to have missed the memo with Team17’s shares down
roughly 25 per cent over the period. For us, this feels like
an opportunity.
Overall, we are happy that your portfolio remains
in a strong position. In these times of volatility and
geopolitical turmoil, we won’t pretend to know what
is coming next. What we are confident in, however, is
that you own a collection of extremely versatile, resilient
businesses, all of which address large, unique
opportunities and all of which are empowered and able
to navigate whatever uncertainties lie ahead. Nowhere
better is this illustrated than in the challenges of inflation.
We strongly believe that trying to rotate in and out of
gold miners and energy companies as inflationary
pressures ebb and flow is not an area we, or many others
for that matter, are likely to add value consistently over
the long term. On the other hand, by owning high-quality
businesses delivering significant value for their
customers we believe that when facing inflation these
companies will be able to increase pricing where
necessary without ceding market share. Indeed, we’ve
seen this across the portfolio with businesses as diverse
as flooring producer Victoria, to sports nutrition
specialist Science in Sport raising prices to offset rising
supply costs. We believe this ability to navigate inflation
is indicative of the broader flexibility and strength that
your holdings have and continue to build upon. By giving
them time and space to develop we remain confident they
have the potential to deliver significant value to patient
shareholders over the longer term.
Disruption Week investment webinar series, June 21-24.
Details & registration:bailliegifford.com/DisruptionWeek
.Performance 05
Periodic Performance
3 Years 5 Years
3 Months 1 Year
(p.a.) (p.a.)
Class B-Acc (%) -21.4 -18.9 6.4 2.8
Index (%)* -9.7 -1.1 6.6 4.7
Target (%)** -9.2 0.9 8.8 6.8
Sector Average (%)*** -12.8 -1.7 10.2 8.4
Performance source: FE, StatPro, Numis, total return in sterling.
*Numis Smaller Companies Index (ex. Inv.Companies).
**Target refers to Target Benchmark: Numis Smaller Companies Index + 2%.
***IA UK Smaller Companies Sector.
Discrete Performance
31/03/17- 31/03/18- 31/03/19- 31/03/20- 31/03/21-
31/03/18 31/03/19 31/03/20 31/03/21 31/03/22
Class B-Acc (%) 3.9 -8.4 -17.7 80.7 -18.9
Index (%)* 5.2 -1.2 -25.9 65.6 -1.1
Target (%)** 7.3 0.7 -24.4 68.9 0.9
Sector Average (%)*** 14.9 -2.6 -17.9 65.7 -1.7
Performance source: FE, StatPro, Numis, total return in sterling.
*Numis Smaller Companies Index (ex. Inv.Companies).
**Target refers to Target Benchmark: Numis Smaller Companies Index + 2%.
***IA UK Smaller Companies Sector.Performance Stock Level Attribution Top and Bottom Ten Contributors to Relative Performance Quarter to 31 March 2022 One Year to 31 March 2022 Stock Name Contribution (%) Stock Name Contribution (%) Clipper Logistics 0.5 YouGov 1.8 Petropavlovsk* 0.4 Alpha FX 1.3 Liontrust Asset Management* 0.3 Cineworld Group* 0.6 4imprint 0.3 Clipper Logistics 0.6 Moonpig Group Plc* 0.3 888 Holdings* 0.5 Baltic Classifieds Group* 0.3 Petropavlovsk* 0.5 Alpha FX 0.2 Wetherspoon (JD)* 0.5 888 Holdings* 0.2 Sumo Group 0.5 RHI Magnesita* 0.2 CMC Markets* 0.4 Hipgnosis Songs Fund 0.2 PureTech Health* 0.4 Dotdigital Group -1.6 Boohoo.com -3.0 Genus -1.2 AO World -1.7 essensys -1.2 Creo Medical -1.5 Fevertree Drinks -0.9 Genus -1.5 Naked Wines -0.8 Dotdigital Group -1.4 Team 17 Group -0.8 essensys -1.3 Kainos Group -0.8 Naked Wines -1.2 Knights Gp Hdgs -0.7 Watches of Switzerland -1.0 Trustpilot Group -0.6 Team 17 Group -1.0 Gear4music -0.6 Renishaw -1.0 Source: StatPro, Numis. Baillie Gifford British Smaller Companies Fund relative to Numis Smaller Companies Index (ex. Inv.Companies). Some stocks may have been held part period. *Stocks not held in the portfolio.
Portfolio Overview 07
Top Ten Holdings
Stock Name Description of Business % of Portfolio
YouGov Online market research company 6.1
Alpha FX Corporate foreign exchange (FX) broker 4.1
Victoria Designer, manufacturer and distributor of flooring products 3.8
4imprint Offers wide range of imprinted products 3.8
Burford Capital Finance provider for corporate litigation, arbitration and other disputes 3.3
Fevertree Drinks Producer of soft drinks and mixers 2.8
Team 17 Digital Limited Video game developer 2.8
Kainos Develops information technology solutions 2.7
Focusrite Audio equipment manufacturer 2.7
Keywords Studios IT consultant 2.7
Total 34.8
Totals may not sum due to rounding.
Industry Weights (%)
10 1 Industrials 19.9
9 1
2 Technology 16.9
8
3 Financials 14.1
7 4 Health Care 12.2
5 Consumer Discretionary 8.2
6 6 Personal Care, Drug and Grocery Stores 6.7
2 7 Media 6.1
8 Retailers 5.0
5 9 Household Goods and Home Construction 3.8
10 Leisure Goods 3.5
4 3 11 Travel and Leisure 1.3
12 Real Estate 0.5
13 Cash 1.7
A negative cash position may sometimes occur due to obligations
awaiting settlement.Governance Summary 08
Do the tragic events unfolding in Ukraine pose a moment We have some sympathy with the instinct to challenge
of reckoning for environmental, social and governance ESG investors and what they stand for. It’s hard to
(ESG) investors? Can we continue to assert that ESG is disagree with these rebuttals, although not entirely for the
a force for good or matters in the current environment? reasons suggested by some commentators.
Amid the uncertainties playing out on the world stage, As we see it, ESG is a process of change, constantly
ESG may seem little more than a high-level sorting shifting – not a paint-by-numbers labelling exercise.
exercise, with its binary ‘good’ or ‘bad’ classifications. As active, long-term investors, we understand there is no
Defence companies, to date banished from ESG such thing as a perfect company. Being overly prescriptive
portfolios with other so-called sin stocks such as tobacco, from the outset about what good looks like – for example,
are suddenly rebadged as ESG investments. After all, by placing too much emphasis on a set of pre-determined
what could be more ethical than the right of states to metrics and scores or sectoral exclusions – ignores
defend themselves against tyranny? And, by extension, critical context, complexity and nuance. This is where
with energy prices skyrocketing, it must surely be many commentators have got it wrong.
justifiable to pump money into oil and gas, and possibly It’s not how we go about ESG. The question we
coal, companies? have always sought to answer through ESG is: ‘how
But this creates a dilemma for many. If oil and gas, does the company get better from this starting point?’
coal and weapons are now ESG-friendly, even ethical, We believe that companies that are fundamentally
then perhaps it is time to admit that ESG investing has misaligned with broader societal expectations and ignore
become redundant or meaningless. At least, so says a their environmental impacts are unlikely to be successful
succession of opinion pieces in the media recently, over the long run. Investing in companies, not sectors
calling upon the industry to clarify what purpose and nor themes, we analyse each company on its merits. We
relevance ESG has. ascertain both its positive and negative impacts (and while
we’re clarifying, creating jobs and contributing to a tax
base can be positive impacts).Governance Summary 09
We consider ongoing engagement with company
management as core to our investment activities and
integral to our long-term investment framework.
Sometimes, this engagement will involve reassuring
management of our support during challenging periods;
at other times, it entails pushing companies to ‘do and
be better.’
What that entails rightly continues to change. Societal
norms and expectations do not stand still, and our
understanding of environmental issues, such as climate
change, has become more acute. Likewise, you would
expect the issues that we examine to determine the
investment case and raise with company boards and
management to adapt and grow with the times.
ESG resists easy classification. But that doesn’t make
it meaningless. The consideration of ESG factors, by its
nature, is a process of change. Yes, it involves assessing
the current risks and opportunities, but the emphasis
should be on ascertaining where the opportunities for
improvement (and potentially transformation) lie.
And what ‘better’ looks like will depend on your
starting point. If the starting point changes fundamentally
(as the Russian invasion of Ukraine may prove), then it is
both legitimate and necessary to re-examine the company
and its credentials. We can establish how the company
can improve and the pathways it will need to tread to get
there.
As investors that believe fundamentally in the
importance of due consideration of ESG matters and our
responsibility as stewards of our clients’ capital, we need
to grapple with this complexity. There are no easy answers
– no neat boxes to tick, no simple metrics to apply. There
is only detailed analysis and ongoing engagement, and a
healthy dose of humility.Voting and Engagement Summary 10 Voting Activity Votes Cast in Favour Votes Cast Against Votes Abstained/Withheld Companies 6 Companies None Companies None Resolutions 76 Resolutions None Resolutions None The paths to economic decarbonisation remain in place National energy security will accelerate the adoption of non-fossil fuel sources Supply chains are evolving from price and speed objectives to deliver ESG resilience Company Engagement Engagement Type Company Corporate Governance Burford Capital Limited AGM or EGM Proposals Genus plc Executive Remuneration boohoo group plc
Transaction Notes 11
There were no new purchases during the period.
Complete Sales
Stock Name Transaction Rationale
Clinigen We sold your holding in pharmaceutical business Clinigen ahead of its pending takeover by
European private equity fund Triton. The sale allowed us to redeploy the capital back into the
fund.
Clipper Logistics In February Clipper Logistics announced it was recommending a takeover bid from a US
logistics peer which would see it delisted. Given the likelihood of the transaction taking place we
chose to close the position near the recommended sale price, allowing us to redeploy the
capital into the portfolio faster.
IP Group We sold the remainder of your small holding in IP Group. IP Group is a holding company which
seeks to commercialise a wide-range of early-stage technology. It has had mixed success over
the seven years that we have held it, but recently IPO'd one of its key holdings, Oxford
Nanopore for £3.4bn. We had always felt Oxford Nanopore was undervalued as a a private
company and was the main reason we retained our holding in IP Group who owned 14% of it,
representing half the IP Group portfolio. Now that Nanopore is publicly listed and far more high-
profile we feel our insight over the market has disappeared and that the fundamental investment
case for IP Group has changed for the worse. The retirement of both the long-standing CEO and
CIO was another key factor.
Mercia Technologies We have sold your holding in venture capital firm Mercia Technologies. The business has
undergone several notable restructurings in recent years but we don't believe is has delivered
the track record since listing to justify this increased complexity. We've struggled to build
conviction around the company's competitive edge and have doubts over the likelihood of
successfully scaling operations going forward.
Sumo Group We sold your position in Sumo Group ahead of its takeover by Chinese technology
conglomerate Tencent. This allowed us to redeploy capital into the fund sooner than had we
waited for the deal to formally close and reduced any risk of the deal falling apart given the
recent increase of tension in the Chinese tech sector.
Victrex Victrex manufactures PEEK thermo-plastic polymer. We have sold your holding because the
pace at which Victrex is penetrating its end markets remains disappointing. Whilst many
interesting potential applications remain, the lack of any demonstrable progress in capturing
those opportunities through its downstream strategy combined with the perennial threat of more
competition in its core materials business raise questions over its long-term growth outlook.Legal Notices 12
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