PACIFIC FUND BAILLIE GIFFORD - OUR RESEARCH. YOUR SUCCESS - May 2021
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FUND PROFILE
BAILLIE GIFFORD
PACIFIC FUND
April 2021
OUR RESEARCH. YOUR SUCCESS
CONTENTS
BAILLIE GIFFORD PACIFIC FUND __________________________________________4
IA ASIA PACIFIC (EXCLUDING JAPAN) SECTOR________________________________5
BAILLIE GIFFORD______________________________________________________6
Fund Objectives & Targets
BAILLIE GIFFORD PACIFIC FUND___________________________________________7
Investment Philosophy
Investment Process
ESG
PAST & CURRENT POSITIONING/STRATEGY__________________________________12
PERFORMANCE_______________________________________________________16
SUMMARY & EVALUATION_______________________________________________18
ABOUT US____________________________________________________________19
Working with advisers
Working with providers
Ratings
Page 3
BAILLIE GIFFORD PACIFIC FUND
OUR FUND PROFILES provide an in-depth review of our leading rated funds and are designed to give advisers, paraplanners and
analysts an ‘under the bonnet’ view of the fund. In providing more detailed commentary than a standard fund factsheet we believe our
fund profiles set the standard for the next generation of research notes, aiding in fund selection and in meeting the ongoing suitability
requirements expected by the FCA, and helping ensure firms deliver good client outcomes.
All of our rated funds are subject to rigorous and ongoing scrutiny on both a qualitative and quantitative basis. Our fund methodology
is available for download from the RSMR Hub – www.rsmr.co.uk
The Baillie Gifford Pacific Fund has been one of our rated funds since June 2013. It is an unconstrained, high-conviction, long-only
Asian (excluding Japan) equity fund comprising 50 to 100 companies. The fund is differentiated from many other funds in the sector as
it does not invest in Australia or New Zealand and may hold companies which are not included in the benchmark – the MSCI AC Asia
(excluding Japan) Index. The managers are also willing to invest in mid and small cap companies. There is a strong growth bias focusing
on companies that can generate annualised revenue growth of between 10% and 15%. The opportunity set for such companies tends
to be higher in the faster growth areas of the market including Information Technology and Consumer Discretionary, where the fund has
traditionally been overweight, but can include other such as materials if appropriate.
The fund has been managed by Roderick Snell since June 2010 with Ewan Markson-Brown joining as co-manager in May 2014. These
two experienced managers sit within the broader Emerging Market Equity Team, headed by Will Sutcliffe. The team comprises eight
investment professionals who divide country and sector research between them. The two managers have the ultimate responsibility for
executing decisions on this fund. They are long-term, bottom-up investors who are willing to take large position sizes based on their
conviction. This approach, combined with strong selection over the years, has resulted in the fund being one of the top performers in the
sector since 2010.
The fund is a useful addition to an investor’s portfolio, offering something differentiated and backed by a strong investment philosophy
that has been proven by the success of both this fund and the wider Emerging Market team at Baillie Gifford.
Graham O’Neill, Senior Investment Consultant, RSMR
Graham began his career in the investment industry over thirty years ago. After graduating from
the University of Kent with a Degree in Economic Analysis, History and Policy, he joined London &
Manchester, later joining Phillips Drew, then GRE as a UK based fund manager. He then moved to Abbey
Life Ireland, where he held the position of CIO running their Managed and large Equity funds. Graham
joined RSMR in 2010.
Page 4IA ASIA PACIFIC (EXCLUDING JAPAN) SECTOR
The Baillie Gifford Pacific Fund sits in the IA Asia Pacific (excluding Japan) has seen significant growth in wages, which of course has benefitted
sector. Funds in this sector invest at least 80% of their assets in Asia domestic consumption, but its competitive advantage on cost has begun to
Pacific equities excluding Japanese securities, however up to 5% of the disappear, hence the leadership is pursuing different economic goals.
total assets of these funds can be invested in Japanese equities to allow
China has delivered a record growth rate for the first quarter of 2021 with
flexibility for corporate actions.
output leaping 18.3% in the first three months of the year compared to
The IA Asia Pacific (excluding Japan) sector contains over 100 funds for 2020, the fastest rate since records began in the early 1990’s. However,
investors and financial advisers to choose from, covering a large variety of on a quarter-by-quarter basis, growth was a more subdued 0.6%, being
investment strategies and styles, including active, passive and enhanced driven by industrial production and booming exports, although retail sales
index funds. A number of funds adopt style or market-cap based strategies also saw a strong recovery in March.
including value and growth-biased themes, market cap focused or multi-
China remains the country globally that has recovered the best from the
cap strategies. The variation between the funds makes it difficult for
pandemic and even last year it grew by over 2% with growth of 8% plus
an investor to compare them as different strategies will clearly perform
expected this year. The country has now successfully navigated its way
differently depending on market conditions. It is important to recognise
through two crises, the GFC and Covid-19, and has emerged stronger on
this when looking at both absolute and relative performance numbers, and
the world stage from each of these. The whole Asian region is arguably
this is particularly relevant for the Baillie Gifford Pacific fund, which has a
the manufacturer for the world benefitting from a global recovery led by
distinct style of investing.
manufacturing with Western consumers diverting service sector spending
Asia was the first region into the pandemic, and the first to come out in towards manufactured goods.
any form from the Covid-19 related problems, with China actually seeing
a strengthening of its global economic position due to Covid-19. Asian
markets began their recovery from the summer of 2020 led by China and
the positive vaccine news, and a weakening of the US currency saw the
rally broaden across the region.
The attraction of Asian markets is faster growth, and for many countries
this is an attainable goal with the world in recovery mode. Covid-19 has
tilted the economic balance away from services towards manufacturing,
and North Asia and Vietnam continue to be relied upon by the West
for manufactured goods. China has become the factory of the world
and other Asian countries, including Frontier markets such as Vietnam
and Bangladesh, have also seen a significant industrialisation of their
economies. Due to its size, China is suffering from the law of big
numbers, but other countries have taken up the baton. China continues
to focus on the ‘Dual Circulation Strategy’ where it will lower its reliance
on overseas demand and continue to grow its consumer space. China
Page 5BAILLIE GIFFORD
Baillie Gifford & Co is an investment management firm regulated by the
UK’s Financial Conduct Authority (FCA). The company has funds under
management and advice of over £325.8bn as at 31st December 2020,
and is headquartered in Edinburgh. It was established in 1908, making it
one of the UK’s largest independent active investment management firms,
employing over 1,300 people across the globe. Baillie Gifford is wholly
owned by its 46 partners – all of whom work for the firm full time.
In equities, the investment philosophy focuses on growth over the long
term with a view that sustained increases in company profits lead to
higher share prices over time. There is a preference for small teams which
are more dynamic in nature and with clear accountability. There is also a
collaborative culture across the firm where investment ideas are discussed
and debated across the investment teams.
Page 6BAILLIE GIFFORD PACIFIC FUND
Managers Roderick Snell & Ewan Markson-Brown Manager. He is also deputy Portfolio Manager of Pacific Horizon Investment
Trust PLC.
Structure OEIC
IA Sector Asia Pacific (ex Japan) Will Sutcliffe: Head of Emerging Markets Equity Team
Launched 17 March 1989 Will joined Baillie Gifford in 1999 and is an Investment Manager in the
Fund Size £2850.8m (as at 22.4.21) Emerging Markets Equity Team. He became a Partner of the firm in 2010.
He is the named manager of the Baillie Gifford Emerging Markets Leading
Fund Management Team Companies Fund, a member of the Positive Change Portfolio Construction
Group and has also spent time working in the UK and US Equities Teams.
The fund is jointly managed by Ewan Markson-Brown and Roderick Snell,
In addition to his investment responsibilities, Will oversees Baillie Gifford’s
who are members of the broader Emerging Market Equity Team. This
investment graduate recruitment programme, and is a member of the
team is headed by Will Sutcliffe, who took over from Richard Sneller on
firm’s Diversity and Inclusion Group. Will graduated MA in History from the
his retirement in April 2020, and comprises eight investment professionals
University of Glasgow in 1996.
who have specific responsibility for country research and portfolio
construction. Each person in the team is responsible for covering a number
Team Remuneration
of holdings in the portfolio from a variety of industries. There are seven
The partners are the sole owners of the firm and share directly in its
permanent ‘core’ members, each of whom are Investment Managers, and
profits. In this respect, the compensation and incentive package of senior
one analyst.
investment managers who are partners is directly related to both asset
Ewan Markson-Brown: Co-Fund Manager growth and performance.
Ewan graduated with an MA in Politics, Philosophy and Economics from
Non-partner investment managers receive a basic salary and a
Oxford University in 2000. Prior to joining Baillie Gifford in 2013, he was
performance related bonus which is linked to the profits of the firm.
a Senior Vice President in Emerging Markets at PIMCO. Ewan previously
Performance for investment managers is measured in two ways – half of
worked at Newton for five years, most recently as lead portfolio manager
the bonus is based on individual performance which is determined by the
on an Asian Pacific equity strategy, as well as segregated Asian income
individual’s line manager at the annual appraisal where staff are assessed
and Japanese equity strategies. He also previously worked for Merrill
against key competences and pre-agreed objectives. The remaining 50%
Lynch Investment Managers as a portfolio manager in the Asia Pacific
is determined by the three or five-year investment performance of the
region for six years. Ewan is an Investment Manager in the Emerging
individual’s team, which ties in with the overarching long-term investment
Markets Equity Team. He is also lead Portfolio Manager of Pacific Horizon
philosophy of the company.
Investment Trust PLC.
Roderick Snell: Co-Fund Manager Fund Objectives & Targets
Roderick graduated with a BSc (Hons) in Biological Sciences in Medical The objective of the fund is to produce attractive returns over the long
Biology from the University of Edinburgh in 2006. He joined Baillie Gifford term through investing in any of the sectors or regions included in the
in the same year and worked in the UK and European Equity Teams before MSCI AC Asia (excluding Japan) Index. The fund typically holds 50 to 100
joining the Emerging Markets Equity Team where he is an Investment stocks excluding Australia and New Zealand, which differentiates it from
Page 7some of the others in the sector. It is also one of the longest running funds 3. High Active Share
in the sector with only six other managers able to claim a history as long They believe that the fund must have a different composition to the index
as this fund. It has a bottom-up, unconstrained, high conviction approach in order to beat it, and therefore the fund typically has a high active share
where the active share is typically in excess of 80%. There is a strong of approximately 80%. They also think that an index replication strategy
growth bias, focusing on companies that can generate annualised revenue or a lower active share undermines the case for employing an active
growth of between 10% and 15%. The managers are also willing to move manager and reduces the likelihood of producing outstanding investment
down the market cap spectrum to find these companies, resulting in the performance. Within the index, roughly one quarter of the businesses are
fund typically being skewed more towards mid and small cap stocks state owned enterprises whose interests may not be aligned with minority
relative to the index. shareholders.
The managers are long-term investors which results in an average 4. Embracing Uncertainty
turnover of 20% per annum. The maximum stock weight in the portfolio
The team embrace uncertainty in the search for underappreciated growth
is 10% while the industry and country limits are index +20% and index
and the reward of superior returns. They believe that the acceptance of a
+25% respectively. Individual stocks are restricted to a maximum position
wide range of possible outcomes is necessary to deliver outperformance.
size of 8% relative to the index. The managers can invest up to (but no
more than) 10% in collective investment schemes and deposits, although Investment Process
they are usually fully invested in equities.
The investment universe predominantly comprises stocks listed on the
MSCI AC Asia ex Japan Index (which has over 940 constituent companies),
Investment Philosophy
although the team are prepared to invest in securities listed on other
The investment philosophy of the fund focuses on four key areas:
exchanges that derive most of their revenues from, or have most of their
1. Growth Investing assets in, Asian markets. The team do not use quantitative screening in
their investment process, instead they focus on qualitative aspects and on
The team believe that those companies that can sustainably grow their
valuing the company relative to its long-term growth potential. Ideas may
business, while significantly increasing their earnings and cash flow, will
be generated in a variety of ways including research trips, contact with
be best rewarded. They seek quality companies managed by trustworthy
companies in the same or related industries, apparent mispricing of a stock
people who act in the long-term interests of shareholders. In the last
relative to its peer group, or as a result of team discussions. Each member
twenty years the top quintile of earnings growers were rewarded by a near
of the team has analyst responsibilities with company research generally
doubling of in share price and the focus of the managers is finding and
divided by geography. Team members usually visit the region for which they
holding these companies.
have research responsibility at least once a year. Typically, country coverage
2. Long-Term Investment Horizon is rotated every two to three years to give team members alternative
The team are not influenced by the economic cycle and pay little attention investment perspectives which contribute to more in-depth, far-reaching
to short term performance or market noise. They believe that most investors stock discussions. The Emerging Markets Equity Team is also able to draw
overreact to short-term events which can leave companies significantly on the experience of the wider Baillie Gifford equity teams.
undervalued. The managers aim to exploit these inefficiencies by focusing on
Company meetings are an important part of the investment process,
the long-term prospects of a company, typically three to five years and beyond.
although it is not mandatory before an investment. The team will typically
Page 8meet between 300 and 450 companies per year and prior to the pandemic ability of the company to execute on growth expectations is of paramount
roughly two-thirds of those meetings were on site. Other sources of importance to the team while valuation is generally secondary.
information include speaking to competitors, customers and suppliers,
Whilst there is an emphasis on bottom-up analysis for all the teams at
regulators, industry consultants and journalists. All research reports, once
Baillie Gifford, macroeconomic factors are focused on to a greater extent
produced, are published to Baillie Gifford’s centralised in-house Research
by the Emerging Market Team as economic cycles in these markets tend
Library. This is an electronic repository, accessible by all investment
to be shorter. For example, the team consider future currency movements
professionals ensuring that research is readily available to those that need
when determining the potential hard currency returns from investments.
it. The team use third party research to supplement the research produced
They will consider the impact of currency moves on a company’s revenue
in-house including a number of independent providers and consultants,
stream, costs and asset base and if a company has debt, they will consider
including a specialist resource on the ground in India. All external research
the currency of the repayments and how future debt repayments might be
and software is paid for directly by Baillie Gifford.
affected by currency moves. The fund does not conduct currency hedging
Each member of the team will conduct a fundamental analysis framework as the team believe it is costly and difficult to implement. Also, they will
for each company they are researching. This includes a comprehensive never buy a stock just because they like the currency, it will be one of the
assessment of the opportunity, the company’s ability to capitalise on the many factors taken into account during the company research.
opportunity and the valuation that the market has placed on its shares.
Baillie Gifford have identified three specific and persistent inefficiencies:
They consider a company’s opportunity to deliver enhanced returns by
assessing the industry or market in which it operates and whether the 1. Under appreciated growth duration
company possesses any clear and sustainable competitive advantages. These are companies with excellent long-term earnings growth
They will then take a deeper dive into the characteristics of the company but where profits will be volatile from one quarter to the next,
including its financial structure and whether it can fund growth from often as a result of investment or product cycles. The culture
internally generated cash flow. The track record of the management team of the team allows short term volatility in a share price to be
is important as is the incentive alignment with shareholders. The analyst ignored. The focus is on long-term company earnings power.
will then determine the extent to which the market has already priced in
the future growth of the business. Specific valuation measures depend 2. Under appreciated growth pace
on the type of business being analysed. Relative measures include price The market consistently underestimates the likelihood of rapid
to earnings and price to cash flow, with particular interest in free cash growth for a small number of businesses which the process looks
flow measures. Long-term forecasting often involves scenario analysis to uncover. This means investors in the team focus on what can go
and consideration of the potential upside in a bull and base case, or the right rather than what can go wrong. Ultimately stock markets are
downside in a bear case. A minimum hurdle rate for any new holding to driven by a small handful of companies that do extremely well.
enter the portfolio would be a belief that the company held a competitive
3. Under appreciated growth surprises
advantage and had the managerial vision to see its growth potential
through to fruition. The team set a high bar in terms of the rate of growth The final great inefficiency lies in the interaction between
they aspire to, focusing on identifying companies with the potential to at top-down and bottom-up investing. In the region the long-
least double their share price over the next five years. The opportunity and term earnings outlook can be overtaken by exogenous factors
beyond their control. A further area of strong returns comes from
Page 9identifying companies with poor profitability which can become various levels (i.e. stock, industry, sector and region etc.). There are regular
high profit ones, which may include a stock re-rating. oversight meetings comprising senior investment managers and other
senior representatives at the firm and they will review from a top-down
Baillie Gifford has a culture of information sharing and debate and so the
perspective, considering broader macro and political issues, challenging
full team has input into the idea generation process. They meet formally
stock and sector positions and raising particular investment topics. They
on a weekly basis to debate the analyst research which can range from
also review and scrutinise the portfolio’s positioning in conjunction with
a new buy idea, a review of a current holding, or broader research into a
the investment parameters.
particular area of a business or industry. There are regular informal stock
discussions where an investment case is explored, rather than a decision Liquidity analysis is conducted on an ongoing basis by the centralised
being made on whether to buy or sell. The co-managers will make the final trading team and a formal liquidity report is produced on the fund holdings
decision on all transactions within the portfolio and construct the portfolio once a quarter. In these reports the traders analyse the projected costs of
accordingly. They are trying to take advantage of the asymmetry of returns liquidating 100%, 30% and 10% of the mandate in question, and highlight
that pervades markets, and holding sizes reflect the potential upside of an the specific difficulties of liquidating particular lines of stock within the
investment and the likelihood of it being realised. The managers will sell portfolio based on average daily volumes. Additionally, the team will
a holding if there is an adverse change in the fundamentals of a business, limit the amount of the portfolio that can be held in stocks where they
a loss of confidence in the management or where the company’s upside hold more than eight days’ trading volume (based on the average of the
potential is diminishing. previous six months) at the time of purchase across the emerging markets
strategies.
A more recent development for Baillie Gifford has been the establishment
of its first non-Edinburgh location, with a local office in China where three While the strategy continues to see strong inflows, the team are confident
analysts from Edinburgh have relocated. Baillie Gifford have launched an there are no scalability issues and they also now look to support favoured
‘A’ share product for the Chinese domestic market. The team have been companies requiring further equity financing and to find out when supply
looking at over one hundred ‘A’ shares stocks which fit the quality and may become available.
growth requirements for the past three years and have been doing a lot of
preliminary work. Unlike domestic managers within China, there is a focus ESG
on longer term potential. The team do their own work and analysis on any Baillie Gifford has a belief that they always act as engaged long term
China ideas before names are included in the portfolio. investors, and ESG considerations have long been embedded in research
Risk is monitored within the portfolio on an ongoing basis by the and decision-making. They provide oversight through a governance and
investment risk team. The key aim of the portfolio risk management sustainability team (GST) that works with the investment teams to apply
process is to ensure that the fund is managed with a level of risk the best possible strategy and outcomes for these areas. The team (GST)
consistent with performance expectations and they use a range of risk is responsible for Environmental, Social and Governance (ESG) research
models to add value to the investment monitoring process. They monitor and engagement (working closely with the investment managers), and
the fund on an ongoing basis with the performance attribution being coordinating the proxy voting process for all clients’ holdings where they
produced using the StatPro system. Daily stock level valuations are loaded retain the voting rights. The guidelines set by the team are used across
onto StatPro and this information is used to produce attribution reports at the group but are not intended to restrict investment if it is appropriate
and can be backed by beneficial corporate stewardship. The extent to
Page 10which ESG information is incorporated into the investment case is based
on the materiality of any issue to the long-term sustainability of the
company’s business. As a result, the key governance and sustainability
issues will vary depending on the industry sector, geographic region and
core business activities of each company. Once they have invested in
a company on behalf of their clients, the Governance and Sustainability
Team works closely with the investment teams to assess the quality of
management and whether or not shareholder and management interests
are aligned, as well as to engage with holdings on an ongoing basis.
Baillie Gifford has a global restriction in place across all funds for cluster
munitions and anti-personnel mine manufacturers.
In many cases the starting point for Asian companies is far from perfect.
Baillie Gifford are willing to invest in companies where they can see a
positive direction of travel on E, S or G issues. In fact, this sometimes
provides significant opportunities.
Page 11PAST & CURRENT POSITIONING/STRATEGY
The Pacific Fund team consider the macro more than some managers industries that are powered by technology. Technological change remains
at Baillie Gifford and believe the long cycle which started around 2010 the single most important driver for the portfolio. Companies have
has finished with Covid-19. The low rate environment which allowed the found they have been able to scale up and achieve dominance quicker
continuation of many zombie companies has resulted in Covid-19 killing than before, with winners establishing themselves in a matter of years
off many weaker businesses which were marginal competitors, resulting in compared to the decade or more it took previously. In a world where
the potential for market leaders to have less costs and higher margins two returns to scale increased, the large have become larger, benefitting
years forward. The fund managers are positive on the recovery, especially from network effects. While growth companies delivered significant
in Asia, so have bought more cyclical names for the portfolio than at any outperformance in 2020, the team believe that within Asia many decades
other time in the past decade. Balance sheets in Asia are strong. India has worth of evidence back-up the belief that share price returns follow
had 7 to 8 years of policies which hurt the economy and profit as a share earnings over the long term. There is therefore a continued focus on
of GDP is at an all-time low. The team also believe the US currency is on companies with the potential to double in value on a five-year view.
a secular down trend and capital will move further from the West to the Many companies in Asia should continue to benefit from a combination of
East which will strengthen Asian currencies versus the US. The US current structural tailwinds including the rise of the middle class, urbanisation, and
account deficit is likely to increase during an economic upswing which will the unrelenting force of new technologies.
result in a falling currency for the States. The team hope more optimism
China, in response to threats from the West and particularly the United
will encourage human behaviour not to hold cash.
States, has doubled down on innovation, increasing R&D significantly.
The fund continues to follow a fundamental belief that over time returns Media Tek, a chip design holding in Taiwan, can potentially benefit from
follow earnings, so that those businesses with the strongest future earnings Chinese companies shifting away from US alternatives such as Qualcomm.
growth will deliver the strongest return. The fund has three buckets Vietnam could be another beneficiary of this trend.
of stocks – fast growers which are described as Pace, more steady
During 2020 a number of business models proved their worth with
Compounding names such as TSMC and Ping An Insurance, and some
working from home benefitting Alibaba’s DingTalk, food delivery business
special situation type names which come into the Surprise bucket and can
Meituan and Asean gaming and e-commerce business SEA. Vietnam
be more cyclical in nature including Samsung SDI and Vale Indonesia. The
should be a long-term winner from the US China trade dispute and
team look to have an edge by focusing on the prospects for companies
eventually become one of the world’s most important manufacturing
over five years and beyond and 28% of the fund has been in the portfolio
centres and this is a long-term overweight in the portfolio. Asia remains
for over five years, and 30% for 2 to 5 years. Due to the volatility in the
well placed coming out of the crisis, having undertaken less monetary and
market last year, turnover increased to 30-38%. Active share, which had
fiscal stimulus than the West and it continues to have superior long-term
been as low as around 70% a couple of years ago, has now increased to
growth prospects.
just below 80% with the move away from mega caps which are large index
constituents. The fund now has 46% in stocks with a market cap in excess There is also exposure to the anticipated migration to electric vehicles. The
of £25bn versus 57% for the index with overweights to companies below portfolio has exposure to nickel, a key cathode in lithium ion batteries via
£5bn where just over 30% of the portfolio is invested. PT Vale Indonesia and Nickel Mines. It also has holdings in copper through
Zijin Mining and Merdeka Copper Gold. An electric vehicle uses around
During the pandemic the team have done considerable thinking about
four times the copper of an internal combustion engine vehicle. There is
what the recent months have meant for the competitive dynamics across
Page 12also exposure to leading battery maker Samsung SDI and battery supplier from its 2014 peak. Covid-19 forced cost cutting to the tune of $3bn and
Wuxi Lead Intelligent Equipment. There is exposure to two leading auto the company also has EV plays in India and trades on 2-3x future earnings.
manufacturers in China – Brilliance, the BMW joint venture partner and The company has the potential to also become a significant player in
Geely, whose parent company owns Volvo and Lotus. electric vehicles globally by 2025.
The team believe that the pandemic has permanently accelerated the As noted earlier the fund’s holdings fall roughly into three buckets. The
market position of some already fast-growing businesses. In e-commerce Surprise or latent growth bucket includes turnaround plays and three years
SEA had an excellent year, not only in share price, but also in operational ago the fund started to buy into a number of nickel stocks. This part of the
terms. Its Shopee platform has been a primary beneficiary of this trend, portfolio is now around 30% of the fund, having been as low as 5% some
with e-commerce revenues growing 173% year-on-year in the latest years ago. The nickel and copper names are expected to double their
results. Its gaming platform Garena benefitted from lockdowns and earnings over the next five years and this bucket allows the team to exploit
revenues rose 110% in its most recent results with quarterly active attractively valued cyclical stocks which will deliver growth over the longer
users surpassing 570m, an increase of 78% over the previous year, with term, but not necessarily year on year in a consistent manner. For the
paying users reaching 65m. The financial services offering in the Group, first time in a decade the team expect a multi-year reflation in the global
SeaMoney, continues to perform well operationally. The team continue to economy. Baillie Gifford’s knowledge of Tesla has given all the teams
believe SEA has a long runway of growth with parts of South East Asia an idea of the scope of global EV markets with the turn towards these
significantly behind China in Smartphone adoption, allowing for catch up in vehicles happening faster than had been anticipated. Tesla needs copper,
e-commerce and game related activities. cobalt, and nickel for its batteries. The holding in MMG, a Chinese listed
Peruvian copper mine was topped up last year and this is a leveraged play
Meituan Dianping, the online services platform which has a large food
on copper. The operational assets of the business were excellent, but there
delivery business was unsurprisingly a beneficiary of the pandemic,
was too much debt which is how the opportunity to buy in cheaply arose.
however the company is believed to have gained a lot of political capital
The Indonesian nickel miners held are low-cost global producers and also
during the pandemic hiring 800,000 delivery people during the first
a strong play on electric vehicles. There is now an overlap between some
quarter of the year alone. Its workforce is now more than 7 times bigger
commodities and new growth sectors driven by ESG and technology. The
than Foxconn. The company delivers approximately 30 million meals a
last bull market in commodities was back in the 2002-8 period and there
day in a country of 800 million urban residents, with the team believing a
are few analysts left from this cycle on the sell side. The team believe
tripling or quadrupling is possible over the next 5 to 10 years.
there is multiple upside in both the earnings and share prices of these
The team are also happy to invest in cyclical growth businesses and it stocks. Since June cyclical names have actually outperformed the tech
is this area which contains the copper and nickel names. For example, stocks.
Mercado Copper Gold owns one of the largest copper mines in the world
The portfolio had benefitted from overweight positions in Alibaba and
with annual average output 400,000 tonnes and costs of just $1 per pound
Tencent, but when valuations increased and there were concerns,
of copper. Nickel Mines, which is listed in Indonesia, has a strong market
particularly in the case of Alibaba, about slowing earnings growth together
position as the parent owns an integrated steel company. Another favoured
with increased competition and potentially regulation, the fund has moved
cyclical name is Samsung Engineering. Tata Motors is a significant holding
to an underweight position in both stocks. The more cautious view on
in the fund and this owner of the Jaguar and Land Rover brands fell 90%
Alibaba was a view of the two portfolio managers rather than the wider
Page 13firm. This reduction allowed a move into some other fast-growing names, its high, but the team believe it will continue to be a long-term winner. The
including Dada Nexus which is a $7bn company focused on the last mile position size had increased to 10% but was trimmed and has now fallen
of instant delivery from supermarkets. They are looking to make deliveries back to 6%, partly due to the pullback in the share price. The business is
within 30 minutes, and this is a risky stock which could deliver a 10x less mature than Tencent or Alibaba and will benefit from less potential
return or could go to zero. This name was initially aided by the move to competition going forward. South East Asia is around 7 years behind China
anything to do with delivery during the early Covid-19 stages, although which is an economy which is now maturing. The fund managers do not
the market is now becoming more discerning when analysing technology want to be caught in de-rating growth stocks, and whilst Alibaba still has
names and the team believes this sector will now favour active stock the potential to grow at 20% over the next few years, this will then slow
picking , rather than ‘a rising tide lifting every boat’. JD.com has benefitted to around 10%, and so the exit multiple for investors will be lower. The
from the uptick in retail online penetration from 21% to 25% and an team do not want to hold growth companies which de-rate. An example of
improvement in its own net margins to 3%. Its geographic coverage has how this can hit a stock significantly, or to be more precise the investors
extended to nearly all parts of China. in it, was Baidu the internet search engine. The growth prospects for
Tencent are now considered to be superior to Alibaba. Just because stocks
In South Korea, EO Technics specialise in producing laser equipment for
have performed strongly doesn’t mean that they are no longer capable
the semiconductor industry where there is a need for machinery that can
of delivering strong growth, and the managers are still just as keen on
work on ever smaller sized chips and this company has an ASML type
SEA and Dada Nexus despite the strong performance already seen from
business model. This name has the potential for strong asymmetric returns
these companies. They also believe that there are going to be a significant
and if a few of these companies went up 5x over three years, this would
number of Indian tech company IPOs in the next couple of years in an
have a significant impact on a portfolio. Industrial company, Hans Laser, is
economy 10 years behind China.
listed in China and is becoming dominant in the marketplace. Within China
there are many companies who invest significantly in R&D to preserve or With growth in the world coming back, one area the fund is cautious
strengthen their market position, and this is a domestic ‘A’ share listed on is growth defensives. The portfolio is also underweight in Financials
business. Some of the more cyclical names, if re-rating quickly, can be and Real Estate, and whilst some Indian IT outsource companies have
sold, and this was the case for a solar module energy company last year good prospects, the team do not believe they will be great investments,
and 12-month turnover has been much higher than usual due to market a comment that also applies to the generic drug companies in India.
volatility and the relative value opportunities that arose from this. In a global upswing in which Asia is expected by the managers to fully
participate, cyclicals and high growth tech are likely to deliver stronger
One of the biggest long-term winners for the fund has been Sea Limited,
earnings and therefore better share price appreciation than India’s US$
South East Asia’s largest e-commerce and mobile gaming company which
earning exporters in IT services or pharmaceuticals.
was purchased at the IPO and had at one stage risen by over 20x since
then. The management are considered to be visionaries and excellent at The team have high level conviction in certain names in India such as
executing business plans. The company owns the largest battle ground Reliance Industries and HDFC. Reliance raised capital in 2020 by selling
game globally, and is a significant player, not just in the Asean region, but around a quarter of Reliance Jio to outside investors such as Facebook.
also in Latin America, and has significant share of the US gaming market. Reliance Industries is a controversial name and this Indian listed stock is
This name does account for a significant level of the equity risk in the the largest index component in that country. It has been held for 7 years
fund, making up close to 50% of the risk, and has now come off 30% from and some fund managers are not keen on the corporate governance.
Page 14Sentiment towards the management has often been negative but the The fund saw significant changes in its top 10 holdings in 2020, mainly
e-commerce arm of Reliance Industries has grown far more significantly driven by price moves in the market. Unsurprisingly, the fund trades at
than detractors had expected, and the business is now the leading a premium to the market on around a forward PE of 25x versus 16x on
e-commerce play in India and Mukesh Ambani, as well as being India’s consensus type numbers, but earnings growth expectations are 52%
richest person, is known as a very effective operator – he is however versus 23%. The other significant move in the fund has been down the
controversial and is focused on winning. The company has been a huge market cap scale resulting in an increase in active share. The team’s
value creator for the fund, going up 5x since purchase and has now moved higher levels of confidence in strong growth in the Asian region means
from the latent or more cyclical to the growth bucket due to the move into they are happy to have higher small cap exposure, so the number of
e-commerce through Reliance Jio. Reliance created the country’s largest holdings in the fund has increased. The three buckets were split as follows
telecoms company from scratch in three years. at year end: Pace48.8%, Surprise 31.4%, Duration 19.4%.
Historically, the Philippines had been considered to be a growth market,
being a smaller less mature economy in the Asean region, but the only
stock now held is Ayala. The economy lacks scale, and call centres,
once thought to be the strong growth driver for the economy, have been
disrupted by the internet and the listed market does not have any good
commodity plays. The portfolio managers have long favoured Vietnam
which is 6.5% - 7% of the fund and was a slight underperformer over
the past 12-months although little adverse news has happened in the
economy. Vietnam has managed Covid-19 well and will be a long-term
beneficiary of trade tensions between China and the US, and also has a
young population. This is a 10 to 20 year position for the portfolio which
could be added to with bank and property names being looked at. The
Vietnam Investment Trust Dragon Capital, which was the first holding for
the fund, has seen its discount come in. is the managers are positive on
the prospects for both Vietnam and India over the next decade.
Page 15PERFORMANCE
Fund vs IA Sector Fund vs IA Sector
200.0
180.0
160.0
140.0
120.0
100.0
80.0
60.0
18
18
18
18
18
18
19
19
19
19
19
19
20
20
20
20
20
20
21
1/
1/
3/
5/
7/
9/
1/
1/
3/
5/
7/
9/
1/
1/
3/
5/
7/
9/
1/
/0
/0
/1
/0
/1
/0
/0
/0
/0
/0
/0
/0
/0
/0
/1
/0
/0
/0
/0
01
01
01
01
01
01
01
01
01
01
01
01
01
01
01
01
01
01
01
Baillie Gifford - Pacific B Acc TR in GB IA Asia Pacific Excluding Japan TR in GB
Data supplied by Baillie Gifford, sourced from FE Analytics
Roderick Snell has been a named manager on the fund since June 2010 over the shorter term and there will always be relative down years as
with Ewan Markson Brown a co-manager since 2014, and the fund has was the case in 2018. The strong performance of 2020 was aided by the
been one of the top performing funds in the sector over these periods to the pandemic in that there was an acceleration of long-term structural change
end of March 2021. This outperformance has largely been driven by strong and a number of the stocks held have seen their competitive position
stock selection within higher growth areas of the market. The fund has strengthened through market share gains. Some parts of the portfolio,
consistently been on the right side of structural change. Over the past five where the team remain highly positive over the longer term such as
years top contributors include, Accton Technology, Kingdee, Samsung SDI, Vietnam, were neither positively nor negatively impacted by the pandemic.
Tencent, Geely, Zai Lab and JD.com. Position sizing has also contributed to With the portfolio seeing a shift away from mega caps into smaller cap
the outperformance with the manager taking high conviction exposure to names turnover picked up over the twelve months.
a number of companies (such as Sea ltd, the fund’s top contributor over 5
Looking at the top performers over the last 12 months, Sea Ltd. with
years) which have generated strong returns. This approach has resulted in
gaming, ecommerce and financial services all performing strongly, was
the fund exhibiting a higher level of volatility at times.
the top contributor to the fund. JD.com was a clear beneficiary of the
The fund had a very strong 12 months in the year to 31st December 2020 pandemic and significantly improved net margins over the period. Its
returning 60.4%. Three-year numbers are also strong with an annualised geographic coverage on china has widened to nearly all areas.
return of 20.4% (to end 2020). The team want the performance focus to
Baillie Gifford are happy to take on risk, so there will always be some
be on the longer term and the fund delivered 24.2% p.a. over five years
negatives in the fund, with the managers believing that over the longer
(to end 2020). An approach such as this will be volatile versus the market
term the largest winners in the portfolio will comfortably outstrip the losses
Page 16from the largest losers. In 2020 the largest detractors in positive active volatility is to be expected. As the business is scaled up it has reduced
positions were CNOOC and Jadestone. One of the key points to the portfolio delivery costs as a percentage of revenues. There is also scope to diversify
construction is not to add more to businesses which are going into a into other services such as mobile phones, electronics, and pharma.
downward spiral as then more than 100% of the original capital can be lost. Kindgee also detracted over the quarter with the shares seeing profit
taking after a strong run despite strong operational progress.
The fund outperformed in the first quarter of 2021 returning 3.6% versus
an index return of 1.8%. The portfolio assets are split between structural
growth and cyclical growth, and the team believe emerging Asia will
continue to benefit from capital flowing east over the longer term.
The three top performers over the quarter were Tata Motors, SEA, and
MMG. Tata Motors is a relatively new holding in India with the company
seeing recovery in the short term with revenues rising 35% from the prior
quarter at the end of 2020. There is believed to be an improving business
outlook with a real chance profitability could improve for the long term
driven by product mix, cost cutting, and operating leverage.
The fund has maintained a large weighting in SEA Limited which is
around a 7% position in the portfolio and has continued to deliver strong
operating results. The market cap has risen around five-fold in the past year.
Assessments of the digital economy in south east Asia by Google, Temasek,
and Bain predict a tripling by 2025 so the team still see a significant runway
of growth for the company. Strength in gaming is being utilised to invest
more in e-commerce, food delivery, and financial services capabilities.
A strongly performing cyclical in the fund has been MMG which is a copper
orientated miner. The team continue to believe there is a supply deficit in
this commodity and therefore prices will need to rise, with on the supply
side both a lack of new mines, grade decline and resource depletion
hitting output. Furthermore, electric vehicles and renewables are very
copper intensive.
Detractors over the quarter included Dada Nexus, a business owned by
JD.com and Walmart. One part of the business is focussed on last mile
delivery for Chinese supermarkets, together with other logistics and
services for these businesses. It is an early stage business growing at
close to triple digit rates, but as with any early stage company, price
Page 17SUMMARY & EVALUATION
This is a very distinctive Asian equity portfolio investing in secular growth the Asian region. The fund has been one of the top performers in the sector
companies and those with the potential for significant earnings surprises since the refinement of the approach in 2010.
often through the duration of this growth. The approach is multi-cap and
Unsurprisingly, the investment process remains unchanged. There is
there is now approximately 17% invested in companies with a market cap of
a fundamental belief that returns in the Asia Pacific region will follow
$2bn or lower. The managers take a high conviction, bottom-up ‘best-ideas’
earnings over the long-term with the top two earnings growth quintiles
approach focusing on companies which they believe will benefit from the
having significantly outperformed the lowest earnings growth quintiles
technological change and disruption driving the world today, together with
over the last 20 years. The team are long-term growth investors focused
other long-term secular growth themes such as electric vehicles. They are
on three under-appreciated growth opportunities: duration of growth which
aiming to identify these companies early and hold them for the long term,
takes in stocks such as TSMC, and Ping An Insurance, pace of growth
benefitting from significant revenue growth through scale and network
which takes in names such as Sea Ltd, JD.com and Meituan, together with
effects. Owner-managed companies are preferred where there is better
earning surprise stocks which includes Vale Indonesia, Merdeka Copper
long-term stewardship and alignment with shareholder interest. Domestic
Gold, Tata Motor and Zai Lab. In this latter category the market expects
Asia exposure is focused on India, where the long-term structural reform is
earnings in a company to remain on a plateau, whilst the team believe that
ongoing despite the difficulties caused by the pandemic, and Vietnam, where
in reality there are factors which would drive a spike in earnings in a few
export growth is driving the economy with the country becoming a leading
years’ time which can lead to a significant re-rating of these stocks.
low-cost manufacturing base. Many investors look to Asia to provide growth
in their equity portfolios and this fund is heavily focused on companies which The holding period for stocks is longer than for many managers of Asia
are expected to deliver above average and sustainable earnings growth over Pacific equities with 28% of the portfolio having been held for more than
a multi-year time horizon. five years, and 30% of the portfolio has been held for between two and
five years. When looking at companies, the team continue to focus on the
2020 was a year which favoured the investment approach, but the fund
business potential over five years or longer and to look for companies
had outperformed prior to the pandemic. The fund’s positioning is not
which have the potential to at least double either revenue or earnings and
static and the most significant stock changes included the reduction in
expect the share price to follow suit. There is a focus on sustainable long-
Alibaba and Tencent, with an increased level of exposure to small cap
term growth which the team argue is ultimately rewarded by the markets.
names as the managers’ confidence in the economic upswing increased.
This included additions in new economy/green revolution resource stocks An approach such as this can result in lumpy performance and the team
with Materials now the largest sector overweight. Fund active share has are not trying to deliver consistent incremental index outperformance
increased as the exposure to mega cap stocks has declined. The largest on a year by year basis. The co-managers have established an excellent
country overweight is to non-benchmark Vietnam – this is a long term track record and clearly work well together. While there is a definite bias
positive structural view which had little impact on performance in 2020. to growth names, the managers look for long term secular growth trends,
which has resulted in the increased weighting to the materials sector,
The fund is co-managed by Roderick Snell and Ewan Markson-Brown who
favouring businesses with exposure to copper and nickel. The fund is
clearly work well together and are part of the well-resourced Emerging
suitable for investors looking for above average returns from the region
Markets desk headed by Will Sutcliffe. There are seven permanent ‘core’
over five year plus periods, and who can tolerate some level of volatility on
members, each of which are Investment Managers, and two analysts. Both
the journey to achieve this.
co-managers have extensive experience covering various regions across
Page 18ABOUT US
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