The Big Broadcast: Stocks that can change the world


Thanks to everyone who tuned in to The Search for Growth Stocks that can Change the World, an event presented by Citywire in association with Baillie Gifford.

You can watch the whole thing, including a discussion and Q&A with Catherine Flockhart, a director at Baillie Gifford and specialist on the Baillie Gifford Positive Change Fund, and Damien Lardoux, head of impact investing at EQ Investors, by playing the video above.

Can’t watch now? Read the transcript

Daniel Grote: Hello, good morning and welcome to The Search for Growth Stocks that can Change the World,  a broadcast brought to you buy Citywire Financial Publishers and Baillie Gifford. 

My name’s Daniel Grote, I’m from Citywire and together with my colleague, Gavin Lumsden, we’ll be presenting today’s programme. This broadcast is the first that we’ve brought to our Funds Insider audience and the first to examine impact investing. Impact or ethical or responsible investment, however you want to define it, is on the rise with assets held in these funds nearly doubling in the 18 months to June this year. 

I’m delighted to welcome our two guests, who are both experts in this field.  Catherine Flockhart is a director at Baillie Gifford and a specialist on the Positive Change Fund, which aims to generate returns by investing in companies that are delivering positive change in society. Damien Lardoux is head of impact investing at EQ Investors and runs the firm’s positive impact portfolios for investors, financial advisers and charities. Thank you both for joining us.

Right so, let’s get started! We want to kick off the session with a vote to find out whether the growth in impact investment has taken hold amongst you, our audience. So, it’s a straightforward question with a yes or no answer.  Do any of the funds in your portfolio feature an impact focus? So please vote now. 

As we’re waiting for the results to come in, I mentioned earlier that assets held in what are deemed responsible investment funds in the UK, have been growing rapidly. To put some figures on that, they rose from about £17bn at the start of 2019 to £33bn this summer, according to fund manager trade body the Investment Association. 

Now that’s fast growth, but from a small base, responsible investment funds still represent only around 2.5% of the £1.3 trillion of assets held by UK investors in funds.  Here we have the results.  60%, 58%, 59% of our audience do hold at least one impact fund in their portfolio, while 42%-, well, it was 42%, now 41%, don’t.  So, there’s, perhaps, some explaining or convincing needed for that 40% that don’t.

Let’s start with a simple question for our panel, what exactly impact investment and if I could come to Catherine first, on that point?

Catherine Flockhart: Good morning everyone. Impact investment at a high level is pretty simple. It’s defined by the Global Impact Investing Network, who’s one of the key industry bodies in this area, as very simply, investing with two equally important objectives. So, you’re investing to deliver both measurable financial returns, but also, measurable social or environmental returns as well. So, it’s investing with equal intent to deliver and measure returns in both of those areas.

DG: Damien, your job involves picking impact funds for EQ Investors positive impact portfolios, would your version of impact investment, would that tally with Catherine’s?

Damien Lardoux: Good morning Daniel, it’s a pleasure to be here today.  Yes, I completely agree with Catherine. If I was to, maybe, do it in a slightly different way, I would say that impact investing is definitely about generating high returns, but it’s also about investing in companies, usually, innovative companies that are developing solutions that help tackle the world’s most or largest issues around social issues or environmental issues. 

So really, you’re contributing to solutions.  You want to make the place-, the world a better place to live in and what’s really important, you really focus on what’s core to the business, their products and services, but you take a holistic approach.  So, you look at not only what the business is about, also how the business is run.

DG: I guess the fear among some investors might be that as soon as fund managers are thinking about anything other than pure investment returns, that performance may suffer.  The returns of Baillie Gifford positive change, so far, certainly counter that. It’s up by 200% since its launch in January 2017 and it’s the best performing fund in The Investment Association’s global sector over that period. Catherine, what’s your view of the relationship between the positive impact of a company and its investment returns?

CF: That’s a great question. As you’ve mentioned Dan, there’s been a lot of industry debate about this over the years. I think our perspective is very clear that we feel that if you take a long enough time horizon and this is about taking a long enough time horizon. So, thinking out five years, 10 years plus, as most investors and savers should be doing, rather than thinking about this quarter and next quarter, then it seems very clear to us that purpose complements profits. 

So as you know, we’re bottom-up stock pickers aiming to identify the shares in exceptional growth companies and it’s very firmly our view that if you can find a company that can provide a solution to a major global challenge and it’s a well-run company and a high quality company, then that company is going to have huge growth prospects over the long-run. So, looking forwards and particularly, given some of the changes that we’ve seen within capital markets and capitalism over the past few years, looking forwards, for me, it’s very clear that purpose complements profits. 

Now, I would say that when we think about the performance of our own strategy and I think this goes for any other strategy out there. In many ways, impact isn’t that different from traditional investment in that it’s all about picking great companies and it’s about what’s in your portfolio, if you’re running a truly active portfolio, as we are. Stuff that you don’t hold shouldn’t matter, it’s your ability to identify these great growth companies that is really what should deliver those investment returns over the long-run, but we really do see these positive relationships when we’re looking forward and taking a long-term view.

DG: Damien, looking at the performance of the positive impact portfolios that you run, there’s seven of them and over all timeframes, they’re beating the returns of EQ Investors’ normal portfolios, I guess you would call them. So presumably, you would share Catherine’s view on this positive relationship between the impact of companies and their investment returns.

DL: I completely agree with Catherine. If I was to complement what Catherine said, there are two key drivers for outperformance, we’ve noticed over the years. So, when I talk about impact investing, you take a holistic approach. So, you start with the products and services, then look at how the business is run. 

So, the products and services, what impact investing is doing, is investing and benefitting from this long-term trend. The problems we’re facing, unfortunately, are growing in size. So, if you’re a company and developed a product which is helping tackle climate change issues or health issues or health issues or access to education issues, your market is big and growing. So that’s very much what you’re benefitting from. 

What you’re also benefitting from is more, what we call the ESG angle and ESG acronym stands for environment, social and governance and when you look at how the business is run and you want to invest in the companies that are better run.  By doing so, you avoid these companies that might get caught into scandals, think about Boohoo or Wirecard that just happened recently and then, what you then do, you limit your downside risk. So that’s the two drivers you benefit from. Reducing your downside risk and then, benefitting from long-term sustainable trends.

DG: So, I guess, the crucial question is how you then judge a company’s positive impact. So, looking at Baillie Gifford Positive Change, unlike some ethical funds that are really just trying to avoid companies that are doing bad things, you’re actively looking for companies that are doing good things. Catherine, why that approach and how do you measure it because presumably, that’s more challenging.  If you’re a fund that’s simply avoiding cigarette makers or arms manufacturers, that’s a relatively straightforward thing to do, but defining, measuring and monitoring a company’s positive impact is harder.

CF: There’s a lot in that.  So why do we take this really positive and proactive approach in only picking companies who are doing something good for the world.  Well, it’s very simply because we believe in it. We believe that helps us, it’s just simply more information for us to pick the best companies, but we also believe that it’s the right thing to do. We want to invest in a future that is going to be better for future generations and to our mind, you really deliver progress by finding the exceptional companies that are driving change to investment. 

Orsted, the world’s leading supplier of renewable wind energy or some amazing healthcare companies that are developing treatments for conditions that have previously had no treatment. We want to invest in those types of transformational companies that are really delivering change. 

We don’t just want to screen out the worst offenders, the alcohol, the tobacco, the armaments companies. To us, that’s not really driving forward change. So that’s why we take the approach that we take. How do we measure that? Well, I think also, just coming back to this point about what is impact? For us, we’re looking for companies and Damien’s already alluded to this, but we’re looking for companies who are delivering change through their core products and services. 

So, there are lots of fantastic businesses out there that are good businesses, they’re well run businesses, but they’re not necessarily tackling a specific challenge through their core products and services.  They’re great businesses, but we are only looking to invest in businesses that are addressing key areas like social inclusion and education, environment, healthcare and helping the world’s poorest populations. 

So how we measure that over time is, we will pick a key metric for each company in the portfolio and we disclose that every year, through our annual impact port, which you can find on our website. So, for example, we demonstrated that last year, Teladoc, which is a telemedicine company in the portfolio, based in the US, provided over 4 million virtual appointments with an average cost saving of over $470 each or in the case of Orsted, that I just mentioned, renewable wind supply, we’d be talking about carbon saved. We also map the contribution of the holdings to the UN Sustainable Development Goals, which I’m guessing, 60% of the audience invested in impact funds might be familiar with, increasingly, a common language. Then we aggregate up this information. 

So again, you can see an impact indicator on our website that tells you, if you’d have invested in our strategy last year, how many patients would you have helped to treat, how much financial inclusion would you help to drive, how many tonnes of carbon would you help to save? So, the portfolio as a whole, last year, delivered 170 million tonnes of carbon saving, which is equivalent to taking more than 25 million passenger cars off the road. So, we are able to give an indication and to chart real progress. 

It is important to say that measuring impact and involving discipline, it’s still early on and it’s not perfect. Also, there’s no such thing as a perfect company.  So, we will disclose the negatives associated with the companies in the portfolio, as well. So, it’s all about transparency. An impact can’t always be quantified and that shouldn’t shy us away from investing, just because we can’t put a spuriously precise number on something, but what we are really committed to doing and I really see the industry moving in a positive direction here is, providing this tangible evidence to investors in the fund that we are delivering progress in the relevant areas.

DG: You mentioned this idea that the positive impact that a company’s delivering, that it needs to be core to the business, it’s not just going to be something that’s incremental and this idea that it needs to be changing the status quo for the better. I mean, where we look at companies that are changing the status quo, whether they’re impact investments or not, technology usually plays a pretty strong role in that. I’m wondering what role it plays in the companies that are held in Positive Change?

CF: You’ve absolutely hit the nail on the head, that for us, technology is one of the key drivers behind the amazing change that we’re witnessing at the moment. Just look at how we’ve been able to survive and keep economies going to some extent, at least, during the pandemic. We simply wouldn’t have been able to do that without the incredible advancements in technology that we have.  I couldn’t be speaking to you this morning, for example. So, for us, technology is incredibly important. 

Harnessing and understanding the long-term potential of innovation is critical. Not just through things like investing in the semi-conductor companies we have in the portfolio, like TSMC and ASML that are bringing down the cost of all of these devices that we use and widening access to the internet, but also, things like Moderna, which we hold in the portfolio, who you may have seen in the news. 

We bought that back in 2018 and they’re now a leader in producing a coronavirus vaccine and they were able to sequence the genome for the virus in unprecedented time because they were using new technology. Gene sequencing, but also, machine learning and the power of data to very, very quickly do that. So, there are so many tangible examples in the portfolio where technology is this incredible enabling platform that is allowing leaps forward in lots and lots of different areas. It is, to your point, about really improving the status quo and making transformation and leaps forward.

DG: Damien, we’ve touched on the different approaches to impact investing, ethical investing, responsible investing, what approach are you looking for in the funds in your portfolio? Presumably, among the managers that you hold in your portfolios, their approach and the criteria that they look for, that can differ in terms of their impact investment approach in just the same way that it can differ in terms of their broader investment approach.

DL: You’re absolutely right, Dan. As far as we’re concerned, we’re very aligned actually, with what positive change is trying to achieve and I think is delivering quite well on its objectives is to maximise both the returns and the impacts. So, all the fund managers that we’re selecting and we’re meeting and we’re doing due diligence on, we’re looking first for this intention from the fund manager to look out for those companies that are innovative and bringing new solutions to unmet needs. So that’s really important. 

It’s fair to say that there’s some areas where impact investments might be easier to find than other areas. For example, global equities are much easier to run an impact mandate than it is maybe, if you do it in the UK or if you do it in fixed income asset classes. With global equities, I think you’ve got a fantastic investment universe, which actually allows positive change to put the bar really high in terms of the companies that they put in their portfolios.

DG: You have the whole world, I guess that’s the key isn’t it.

DL: Yes, and just on that point. If we’ve got plenty of investors listening to us today, clearly, for impact more than for any other types of strategies, looking outside the UK is really important because on the point you just mentioned, technology, there are very few options in the UK and many more outside the UK.  So, if anything, impact investing should be done with a global approach.

DG: Just so I’m clear, with impact investing, the portfolios that you’re running, all the managers in there, they would all adhere to this positive strategy in that they were looking for companies that are delivering change.  You wouldn’t have any funds that simply adopt a negative, I’m not holding bad companies’ approach.

DL: That wouldn’t work for us because as I said, we’re looking for fund managers, strategies where they’ve got the intention to do good. What you need to be aware of is which area they operate within and what’s their scope to make a positive impact and we may allow, let’s say for example, in fixed-income, maybe, bring down a little bit the bar in terms of impactful companies because a lot of those growth stories we’re talking about today, they don’t really exist in a fixed income market. So maybe, you’ll have more of the utilities, more of these value type companies where sometimes, the impact can be a bit more diluted than what those growth companies with new solutions can bring to the world.

DG: Catherine’s mentioned some of the statistics about the change that is delivered as a result of investing in the positive change fund and actually, you both have tools on your website which shows the impact that a certain amount of money can have.  So, if you had a million pounds and you invested it in EQ Investor’s portfolios, that would deliver preventative healthcare to 46 people and to 47 people if it’s invested in Baillie Gifford positive change.  So you’re pretty much level pegging on that measure, but I guess the point that these tools illustrate is that this is something that needs to be continually monitored and the impact that companies have, that can change in just the same way that a company’s investment outlook can change and they need to be sold if they no longer adhere to that. Catherine, if I could just ask you on that point, are the managers of Positive Change making decisions as to what’s going in and out of the fund on impact grounds, in just the same way that they’re doing on pure investment grounds?

CF: Yes, absolutely and I think just going back to the point about the statistic of patients treated, for example, that we both show on our websites. I know Damien takes the same approach. Our numbers are robustly put together and, in our case, we are getting auditable numbers from companies and we, in fact, have our report audited by KPMG. 

So we’re doing everything that we can to make sure that that information is accurate, but I think we do all need to be really transparent that this is about an indication of direction of travel and showing that companies are doing something really good, rather than getting too caught up in being overlay precise and the nitty-gritty here because as we all know, we don’t have the same level of standardisation and precision in measuring non-financial outcomes like environmental and social outcomes that we do on the financial side. 

So, I think it’s just really important to be transparent to the audience on that front.  I think it’s also really important to say that impact can’t always be quantifiable. So, this isn’t about trying to be overly-, spuriously precise and quantify everything, but what we do, do is, we do set out clear milestones when we’re going to buy a company for the portfolio and we will monitor its progress against those over time. 

So, a healthcare company, it could be about progress through the drug trials or it could be about carbon efficiency for an environment or a number of people who’ve been provided financial access would be some obvious examples. Going back to what we report in our impact portfolio, we’ll set out what we expect to see and we’ll monitor direction of travel. We’re patient in terms of investment and impact because we’re long-term holders of these companies. 

To me, short-term impact investing is an oxymoron, but ultimately, if a company does deliver on impact and growth, then yes, we will tell from the portfolio we have done that. For example, Kroton, which is a Brazilian education provider was providing tertiary education who couldn’t otherwise access it in Brazil, but ultimately, the growth strategy of that company faltered for a range of reasons. They weren’t providing more access to more students and by the way, they also weren’t growing their revenues at the rate that they were expecting. So, we sold that company. Subsequently sold because the impact wasn’t coming through in the way we’d expected just as we would on investment. So, it’s about maintaining that integrity of the two equally important objectives.

DG: Damien, speaking as a fund investor, rather than a stock investor, is there the same dynamic going on? Are you selling funds ever because the impact story has changed or is it more that you buy into the fund manager’s impact philosophy? That stays a constant and you’re only selling or buying on the basis of investment performance.

DL: That’s a really good question. So, I fully agree with what Katharine said, impact investing is about being-, is about patient capital. So, once we’ve done due diligence on the fund manager and we think from the financial point of view, as well as from an impact point of view, this is a great strategy, great addition to your portfolios, then our idea is to invest for the next three, five or 10 years. Some of the funds we’re investing in, we’ve been investing for nearly 10 years now. 

So I guess what we’re expecting from the fund manager is to keep raising the bar because what’s really important to know and I’ve been doing impact investing for nearly 10 years now, is that this is a journey we are on and year-on-year, we see a lot of improvements in terms of how you define impact and how you measure impact.  So, what we want from the fund manager is, we work with them, we engage a lot with them and Catherine knows that a lot, as well.  We want to see them making progress and improvements.  So, what we could do is to divest on the basis that the strategy has not made progress towards making things more impactful.  This has happened over the years.  So that would be one and obviously, if then the strategy doesn’t deliver on returns, then that could be another reason to divest.  So, you look at both angles.

DG: Catherine, it would be good to focus just a little bit on some of the companies that are and some of the companies that aren’t in the portfolio, just to illustrate how the themes and you mentioned the four themes earlier, how these themes work.  So, for example, Alphabet, the owner of Google, that features on the basis of the access to information it provides, but Facebook doesn’t.  Shopify and MercadoLibre, they gain access as ecommerce enablers, but Amazon, obviously, a giant of ecommerce, that doesn’t.  Why are companies like-, Facebook and Amazon, which are big positions in other Baillie Gifford funds, were they considered and how do their positive change credentials stack up?

CF: So, what we do for every company that goes into the portfolio is, we do detailed fundamental analysis and then we will do detailed-, so that’s fundamental growth and financial analysis.  Then we’ll do detailed fundamental impact analysis, as well, looking at the intent of management to drive forward positive impact.  The business practices so, how well the company’s run and how well it treats its stakeholders and then whether or not it’s delivering positive impact.  On the back of that, we’ll make an assessment of whether or not a company gets into the portfolio. 

So, something like an Alphabet makes it in because-, and it’s probably the most controversial stock in the portfolio because when you look at its products, it is providing access to information for an unprecedented scale of people and that’s really important when you look at the UN Sustainable Development Goals. So much about driving forward social progress and inclusion is simply about access to information, which many of us take for granted. I always remind people; do you remember the days when you had to go to the library and dig out the Encyclopaedia Britannica to find out information that was usually incomplete and about ten years out of date. 

So, let’s not lose sight of the progress that’s being delivered for all of us, but Google handles 80% of global search. The Chrome and Android platforms have been heavily invested in to make them cheap and they’re providing access to the internet for many people in emerging markets. 

Then you have lots of great work that Alphabet’s doing in it’s ‘other bets’ part of its business. So, things like tackling healthcare problems ranging from malaria to diabetes. One of the world’s leading providers of education as well, actually, online education. 

Now, it does have negative business practices, which we’ve engaged with and spoken publicly about. We’d like to see them paying more tax, better diversity and inclusion and frankly, being more on the front foot about engagement with regulators and antitrust, but overall, we think the power of what they’re delivering is fantastic.  With something like a Facebook, its not really so much about access to information, the social interaction is nice, but that isn’t really as critical for driving forward that access to information so it just doesn’t pass that hurdle. 

Also, Shopify and MercadoLibre, which you mentioned, they’re enabling ecommerce within very specific populations that need it. So, Shopify is giving access to small and medium enterprises and allowing them to compete in the digital age and MercadoLibre is opening up ecommerce and also, actually importantly, providing access to finance in Latin America. Whereas, Amazon is operating in an already very developed market where ecommerce is developed and we know there are also social negatives associated with some of what they’re doing although, they’re providing a very valuable service for their customers. 

So that gives you an example of-, it’s about meeting this bar, is the product or service really driving forward one of these four goals? For us, Alphabet, yes, Shopify, yes, MercadoLibre, yes, but some of those other companies which are very good tech companies in their own right and held elsewhere in the firm, just don’t quite meet that bar for us.

DG: Just sticking with you, Catherine, it’s obviously, impossible to have a discussion on investment without covering the coronavirus pandemic, which has claimed over a million lives and wreaked havoc on global economies and healthcare is one of the fund’s four themes and you mentioned earlier the impact that companies like Moderna and Teladoc are having, but what work is going on in the fund?  Not just among those healthcare stocks in fighting the impact of the pandemic.

CF: It’s actually been incredible for us living through this pandemic on two fronts. First of all, we have really seen the growth prospects of some of the companies in the portfolio accelerate and expand and we can talk about that if you’d like, but it’s been really heartening to see the positive impacts that many of them have been making.  So, you’ve mentioned the obvious ones, the health companies operating from the front line, working for a vaccine, products being used to sequence the genome, providing access to medical consultations, but then, there’s a whole host of others like Ecolab whose sanitizers are being used widely, in a range of industrial settings. 

I went down to my local Tesco at the beginning of the pandemic and sure enough, it was an Ecolab hand sanitizer that I’m using as I walk in the door. Although as I say, it’s much bigger scale stuff. Then it is the likes of Alphabet, that I’ve talked about.  Imagine navigating the pandemic without being able to Google, what are the restrictions or what’s going on in my area? Then the likes of ASML and TSMC who I mentioned earlier. Investing a huge amount to make the cost of producing semiconductor chips cheaper, which really is enabling us all to stay connected and allowing technology to keep us all going. 

So the range of contributions of companies across the portfolio has-, we knew these were great companies, but it’s genuinely staggered and surprised us all on the upside, which has been a silver lining in these awful times and also, for us, real proof of the pudding that when things have got really tough, companies in the portfolio have really stepped up and delivered.

DG: Looking at the figures in front of me right now and you can see that the individual stocks in the portfolio, there’s eight of them that have doubled in this year alone. Damien, if I can just bring you in.  We talked about the performance of your portfolios at the beginning of this programme, that they are beating the returns of the other portfolios that EQ Investors offers.  I’m wondering if there’s-, do you have a growth slant in the portfolios that you run and is that a natural byproduct of impact investing because clearly, it’s those growth stocks that have led the recovery from the stock market crash at the beginning of the year.

DL: You’re absolutely right, when Catherine and I describe impact investing, looking for those companies that are innovative by nature and then, developing new solutions. These are the companies that are also seeing growth in their revenues and their profits. So then, being identified as growth stocks. So, having said that, what’s really important, if we just look back on what happened this year, I think a balanced approach across different sectors is really important. 

It was very interesting to see that in the first quarter of this year, that healthcare that Catherine mentioned, as well as utilities, like water companies, for example, outperformed. Whereas, in the rest of the year, in the recovery, we saw technology and climate change related companies outperforming the overall market. 

So, what’s really interesting is that impact investing has really helped perform really well on the way down with some of these defensive sectors helping to limit the downside and then they’re really benefitting from this green recovery. All the governments are talking about building back better and building back better means investing in those companies that are providing solutions. So that’s what’s happened this year and I can’t emphasise enough, the importance of diversification.

DG: Catherine, if I could just bring you in for the last question before we go into another vote and the Q&A. I mentioned earlier that you had these eight companies that have doubled in the fund since the turn of the year. Tesla is obviously, the standout stock, it’s up around 400% in sterling terms since the turn of the year.  Obviously, a huge acceleration of growth’s outperformance of just the broader stock market and value strategies in particular.  How long can this go on for?

CF: A couple of different things. I think first of all, again almost forgetting about the impact element, when you’re seeing exceptional share price performance as an active fund manager, what we do and I think what’s really important is, you go back to the fundamentals of the companies that you’re investing in. So have growth prospects improved and are they meeting your expectations to live up to those increased share price expectations and we have done that for every stock in the portfolio where we’ve seen this big share price move. 

So, it’s always about staying true to that discipline and thinking about company fundamentals. Now, how long can this growth rally go on for? We’re not in the business of predicting the direction of markets and what stocks are labelled as growth, broadly and how they’ll do over the long-run, but what we do know and what we’ve been doing successfully for a very long time at Baillie Gifford is that when we identify these exceptional growth companies have great structural growth prospects, we buy and we hold them for the long run. 

They may well be volatile on a short-term view, but we know that by sticking true to our philosophy and holding these companies that can really deliver great growth, that is how we deliver exceptional long-term returns. That’s actually backed up by information we’ve seen from professor Bessembinder, if you want to Google his work, who observed that over a very long-, 90 year period, following 1926 in the US stock market, the world’s longest and deepest stock market track record that we have, just 4% of companies actually delivered all superior wealth creation above treasury bills. 

So, the point here is, when you’re taking a good long-term time horizon, it is about, for us, finding those few exceptional companies and hanging on to them and not worrying too much about the gyrations of the market on a short-term view. We’re incredibly confident about the positioning of our portfolio, probably, more so now, than we were-, certainly more so now than we were prior to the pandemic because it’s becoming clear and I think the market is catching up to the view that we had, how important these companies are going to be for delivering future growth, as well as all these important solutions to challenges.

DG: Thank you, Catherine. I think it’s time to move on to your questions now, but just before we do, we’d like to gauge your views again with another quick vote.  So it’s another question with a yes or no answer. Will growth stocks continue to outperform the broader stock market? 

So, we’ve just had the bull case for growth investing from Catherine just a few minutes ago.  So, let’s see how many of you agree with her. It’s a question that we could have asked at any point over the last decade when growth investing has enjoyed largely uninterrupted dominance over value strategies, but it seems particularly pertinent to ask it now. Now that we’ve seen stock markets crash at the beginning of the coronavirus pandemic and it’s been growth stocks that have really led the recovery and stretched their lead over value strategies to historic levels and it seems there’s overwhelming agreement with Catherine.  93% of you are still go, go growth. 

So, let’s move on to your questions, Gavin, hopefully they’ve all been coming through as we’ve been talking.

Yes, Dan. There’s a lot of questions been coming in, the enthusiastic response from the audience, so thanks very much.

GL: I’ll start with a question from-, the first one that arrived from Abhijeet Udas, who’s a very happy investor in positive change, but wants to ask about the tools that you use-, that the fund managers use to measure the impact of companies. He notes that there are many ESG rating systems, MSCI, Bloomberg, Corporate Knights, Dow Jones Sustainability and institutions run their own, but the question is, ‘What rating standard is Baillie Gifford Positive Change following and likely to support?’

CF: I may give an answer that may not be entirely helpful to your audience, which is, none of them. We think that these ratings agencies that are just trying to put a single number on the ESG credentials of a business, it’s just to our mind, frankly, nonsense that you can do that. The ESG credentials of a business are far more complex than can be boiled down to a single number. The other thing is, when you look at the output of these ratings agencies, there’s very low or no correlation between what some of them call a good ESG stock and what some of them call a bad ESG stock. I understand that’s very challenging for fund buyers out there. 

So, for me, what we do is, we use our own fundamental analysis.  So, we have access to a range of external research tools, but primarily, we’re doing things like contacting businesses, working with industry experts.  So, for instance, we’ve been working with the James Hutton Institute, who are sustainable agriculture experts or academics, alternative sources of information and we’re pulling that into our own fundamental models. That’s why I think, active investment is really important here because I just don’t think there is a shortcut to understanding the sustainability credentials of a business and similar, I think where Damien and colleagues do an important job of navigating all of the funds out there and helping to shepherd their clients towards the best ones because I understand it’s challenging and it’s difficult, but these ratings providers, if anything, some of the ones that I’ve seen are misleading rather than helpful.

GL: Same question asking if you offer any tools to your own investors or explanations about these issues around measurement.

CF: So we have our impact report on the website, we have our impact indicator, which I’ve mentioned, which are good tools to see what the portfolio’s doing and then, we also have a wealth of information again, on the website, about the methodology of how we produce our report, the types of information that we collect and how we do our impact analysis. So, there’s certainly a lot of information out there if people are interested in reading through it.

GL: Damien, do you share that scepticism?

DL: I perfectly agree. Just two quick comments. The names that have been mentioned in terms of rating agencies, they very much focus on ESG. So, they’re very much focused on how the business is run. What’s very important with impact investing is that we take a more holistic approach where you look at both the product services, as well as how the business is run, the operations.

Then what you want to do is, to invest in those companies that are making high impacts with their products and services, but you don’t want that high impact to be outweighed by the potential negative impact you have to your operations. This assessment is quite a qualitative assessment that you need to do on a stock-by-stock basis and for each company, the indicators will be different. 

So, rating agencies really struggle for that and that’s why active management for impact investing is the way forward. If you want to do ESG investing, then yes, passive investments can do it, but impact investing, both Catherine and I agree very strongly on that, is through an actively managed asset manager.

GL: Dan, there’s another question continuing this topic, which directly put to you, Catherine because I think a lot of people-, following on from your scepticism about some of these providers ratings. Adam Sidbury has got a question about your Morningstar rating, I’ve just checked on their website and they’re a leading provider of fund ratings information so a lot of people will see this, but it rates Positive Change as below average in the global sector for sustainability. So, Adam quite naturally asks, ‘Why does the fund have such a poor Morningstar rating?’

CF: I see Damien laughing. I referenced some of these ratings being nonsense and perhaps being diplomatic, but that was chief in my mind. What’s interesting is that Positive Change was rated above average, Morningstar then made a change to their methodology and we were dropped to below average because we are supposedly, excessively exposed to ESG risks.

So, for example, DexCom, which is a company in our portfolio, makes a continuous glucose monitoring device that can be worn by diabetics to help them monitor their blood glucose fluctuation levels. That company is deemed excessively exposed to ESG risks and therefore, is below average based on Sustainalytics rating that includes some quite historical data. Therefore, it’s deemed below average. 

Tesla would be another one deemed as too risky so it’s below average. We actually think that rating, if anything, should be labelled something like an ESG risk rating and even then, I’m not sure that it’s that helpful. So yes, I recognise this is not helpful to buyers of portfolios out there, but when we speak to really sophisticated institutional investors, Damien and the likes of others, it’s very clear that our portfolio has ESG and impact credentials that are second to none when we think about the listed equity impact market.  o, to me, the fact that we’ve got a below average rating is really just proof of what I was mentioning earlier, this is actually, I think, unhelpful for fund buyers and we do need a system that I think, helps your audience genuinely navigate this area well.

DG: Do keep your questions coming and just as a reminder to do that, you need to use the Q&A box at the bottom of the microsite that you’re using to view us.

GL: People are interested in the geographical spread of positive change. Alan Taylor asks, ‘Can you please comment on the geographical spread?’ Kam Hong Leung also wants to specifically ask about China, interested in Baillie Gifford’s relaunch of a China Growth Investment Trust and wondering, ‘Please comment on China as a potential target country for global impact investing?’ What is the overall global spread and where does China fit in?

CF: First of all, we are truly a global strategy and we are invested right across the world. So, US, UK, Europe, emerging markets including, indeed, China and as Damien mentioned earlier, I think it’s really important to take a truly global perspective when you are impact investing, which we do.

We do have a holding in Alibaba, the Chinese company because we think it’s delivering a really important tool to allow economic advancement in China.  So, it runs an ecommerce platform, similar to what I was mentioning the MercadoLibre earlier. Opening up access to ecommerce for people in China, where we still have people living below the poverty line and that’s really important for driving economic progress allowing them to leapfrog some of the industrial revolution issues that we experience in the west, for example. 

China is going to be the world’s largest economy so it’s certainly not an area that we can simply ignore and purely from a growth perspective, there are so many companies out there that are delivering phenomenal, phenomenal progress and have a huge opportunity and Baillie Gifford, more broadly, as you mentioned with the China Growth Trust, is hugely excited about China. 

From an impact perspective, we’re always very thoughtful about issues involving the Chinese state who, on the one hand have lifted 800 million people out of poverty and done a fantastic job there in driving forward progress, but on the other, we’re very aware of some of the human rights abuses on the back of surveillance and how platforms are used in that area. There is not silver bullet solution, but it’s about where you do invest, investing in well-run and transparent companies, where you think you can have a good relationship with management and understand what they’re doing and it’s about being upfront and really thoughtful about your assessment of how companies are tackling some of these very tricky issues.

GL: Clearly, there’s a lot of research going on in these portfolios. Ajiga Papalia asks, ‘What’s the level of portfolio turnover and how does that compare with regular, conventional funds?’ and then also, ‘With the level of detail going into analysing companies, are impact funds more expensive? Do they charge a higher ongoing charge?’

CF: Our level of turnover is currently about 20% in the portfolio. That’s about as high as-, well, that is as high as it’s ever been and about as high as we want it to be.  That equates to a roughly average five-year holding period for companies in the portfolio. Average since inception’s been about 15%. So that’s an average holding period of between five and 10 years. 

It comes back to this patient capital point. That’s pretty typical for Baillie Gifford, but not for the industry as a whole. So, the average holding period for stocks in Baillie Gifford funds would be between six and eight years, it would be less than a year for the industry, on average. So, this turnover point is really, really important. 

On the charging point, yes, what you will typically see is that impact or ESG funds may often be a bit more expensive. Again, to us, that’s a nonsense. So, our Positive Change strategy is not priced at any sort of premium to our typical equity strategies.  It’s a 0.6% all-in charge for the fund. So, a management fee of 0.5% and other admin expenses of 0.1%, which stacks up extremely, extremely well against anything else I’ve seen out there. We are not looking to make more money by badging this as an ESG strategy because it’s just not in line with what we’re trying to achieve and we want to democratise access to impact.

DG: Damien, you’re a fund buyer. What do you see amongst the funds that you’re looking at to buy for your portfolios? Are impact funds-, do they tend to be more or less expensive or the same as non-impact funds?

DL: It’s really interesting. They were definitely are a bit more expensive if you look back, three to five years ago. A massive credit to Baillie Gifford when they launched their strategy in 2017 because they really went sometimes, 50% cheaper than some of their peers. So, they’ve really democratised, I think, impact investing and they’ve pushed the whole industry, it’s fair to say I think, beyond impact investing is bringing the cost down, but not quite where Baillie Gifford is. They still remain the pioneers in making this wealth investing as accessible as possible.

GL: Ed Hardwick and a couple of others have asked a question that I would really like to ask, as well which Ed asks, ‘Is Positive Change a first step for Baillie Gifford, can we expect future impact products? Might there be an investment trust soon?’

CF: We’re tremendously excited about Positive Change at the firm, this is going to be a strategically important area for us. So, we’re really focused, at the moment, on doing a good job of what we’re doing with the current strategy, but in time, I think we do all hope to be doing more in this area because it’s such a natural extension of our investing philosophy.

GL: Damien, what advantage does that investment trust have if one were to do it?  Presumably, it could invest in private equity a bit more.  Is that an interesting area for these kinds of funds, positive change funds?

DL: Definitely because obviously, Baillie Gifford is-, we would all agree with that, they’re really good at identifying companies that are going to be-, at a relatively early stage are going to be world leaders afterwards. So then that will allow you private equity investments. So, before they go listed on the stock market and actually, in some words, without becoming too complex, it’s quite a way to increase the impact you’re making because you’re providing direct capital to a company which is fast growing and then, helping to increase its impact. So, we’ll be excited to see one, hopefully, launch soon.

GL: Damien, it’s a question around Baillie Gifford, but Baillie Gifford funds and investment trusts have been doing very well, particularly this year and I’ve noticed a lot of people on our forums, like John England here saying they invest in a lot of Baillie Gifford investment trusts and funds. He’s saying he’s got Scottish Mortgage, Edinburgh Worldwide, Pacific Horizon.  So, the question-, he sounds interested in Positive Change, but the question he has is, is he putting too many eggs in one basket? What’s your view on that, someone who looks at the whole market? Baillie Gifford, strong range, but some people find themselves buying a lot of their funds and are they overexposed?

DL: That’s a good question. I guess the first thing to do is to check overlap between strategies. So, I don’t know well enough all the funds you’ve mentioned here, of Baillie Gifford, but in my opinion, when you get beyond 30%, 40% of overlap between two strategies, you really need to assess whether having the two of them in your portfolio is going to bring as much diversification as you’re looking for. So that’s maybe the first step. 

The second step is that as a house, we definitely are biased towards growth. It’s fair to say, a bit less than Baillie Gifford. So, whilst Baillie Gifford is our top position within the equity portion of our portfolios, we’re quite happy to have some strategies a bit less growthy and particularly, when you look in areas like emerging markets, it’s definitely less growthy than for example, some of these Baillie Gifford strategies.  I guess, Baillie Gifford track record speaks for itself.

GL: Catherine, I should let you come in on that.  Obviously, Positive Change is very different from the other funds and trusts in the Baillie Gifford stable, but there was an element of overlap. How do you approach that?

CF: I was just about to say exactly that. So just pick up on that point, the highest degree of overlap that we have with any other fund at Baillie Gifford is with our long-term global growth strategy and that ranges between 25%, maybe a bit higher.  It’s never reached the 30% stage. So, we, typically, have quite a low degree of overlap with any other single strategy that you would be buying at Baillie Gifford. So, it is about-, we take our own approach and our own impact approach. So, whilst we share that great growth objective with many of our colleagues, we are constructing what is a different portfolio here.

DG: Thank you for all your questions and we are running out of time.  So just to bring things to a close, I’d just like to invite our guests to give their closing statements just summing up their key messages to our viewers.  Damien, if you could kick things off.

DL: Maybe my final comment will be, if you think about impact investing, another way to think about it is common sense investing.  You’re investing in fast-growing companies that are growing revenues and profits which are seeing-, which are providing good returns and on top of that, you’re also making a positive change to the world.  So, you have your cake and you eat it. Why not get involved already?

DG: Common sense investing, that’s got a nice ring to it.  Catherine, if you’d like to give your last key messages to our audience.

CF: At the risk of repeating what Damien said, I think this is very simple and for me, the long-term direction of travel is very clear here. There are more and more companies out there that are being run with purpose, who can tackle major challenges and set us on a more sustainable path. Our own focus on finding only the best of those companies that can really grow at above average rates over the long-term, means that we have this opportunity to not only deliver great returns to our clients, which they really need, but also, to deliver for a better future and why wouldn’t you invest like that. People sometimes do say, is impact or is sustainable investing really viable for the long-run and my answer to that is, it’s the only way of investing that’s really viable for the long-run.

DG: Thank you for that, Catherine. That just leaves me to thank Catherine and Damien and you, our audience, for joining us today. 



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