As the newest member of the Hamilton Financial team, Andrew has invited me to write this edition of our Coronavirus series of Bulletins.
Markets never fail to surprise and in the wider world there have been some extraordinary trends which threaten to upset the delicate balance of asset growth. The easy money of 2020 has made investors careless. The eclipse of fear by greed has heightened volatility and with it brought risk. The HF philosophy, based on the long-term growth of real assets, will be tested and must adapt to meet the challenge.
Risk is an alarmingly consistent influence; it is also a severely destructive companion to the investor. The attributes of risk are in flux – the well-embedded portfolio construction mantra of ‘60/40’ (60% equities and 40% bonds and alternatives) is under scrutiny. Markets are being disrupted by exponentially expanding technology and indiscriminate social media. Some of the pillars which have stood firm through the market crashes of fifty years are being undermined. Risk patterns – the Novichok or Covid of markets – are mutating and early recognition will be critical. But fortunes would never be made without risk and so it is hard to see it solely as negative. It is there to be managed, not avoided.
It is not an idle challenge. The investments which withstood the fall or exceeded the heights last year’s markets now look expensive or at least overvalued. Short term panic becomes the more imminent, but with it opportunity. It is the constancy of the long term and the faith in the principle of responsible capitalism that will realise this opportunity.
In 2020 Baillie Gifford emerged at the top of almost every performing asset class. For HF this made for a strong year of performance and Baillie Gifford has justifiably earned its crown. But with success comes responsibility: the phenomenon is ephemeral say some, others a supernova in a vast universe – or perhaps a ‘tall poppy’, and we know what happens to those. We need to put to the test those qualities which brought this success.
Baillie Gifford, founded in 1908, has long been a force with which to be reckoned. Spearheaded by its investment trusts, the firm has grown consistently over the last 50 years, steadily building its reputation in open ended funds, in pensions and globally.
Several factors are behind the firm’s success. Most evident is its professional excellence and individuality in thinking outside the box. It has enabled the firm to build on a broad foundation and is the very exponent of one of its key principles – success builds on success.
The foundations are laid by a partnership structure. It is this that has shielded it from the temptations and pitfalls of public ownership and has fostered the practice of individual accountability – now described variously as ‘eating your own cooking’ or ‘skin in the game’. It is a sure way to channel productive thought and demand loyalty.
More tangible factors are early identifying company ‘game-changers’ of the way we live, the determination to support their managements – often before stockmarket quotation – and the constancy of that support when they face challenges. An ability to move ahead of the times is seldom more evident than in ‘ESG’ – the acronym for Environmental, Social & Governance. Once a fad, now an investment prerequisite – ESG is rapidly becoming central to investors’ perceptions. It is complex to define, and many hours will be wasted in regulating it while asset managers scramble to meet the rules – many without grasping the principles.
Characteristically Baillie Gifford does not refer directly to ‘ESG’. But the firm’s early perception and research enabled it to grasp the messages from climate change, inequality and social ostracism and integrate them through a specialist team into its corporate philosophy. The fund that emerged at the start of 2017 was called ‘Positive Change’ and over the last year end Positive Change’s assets went through the £2 billion mark.
Last year the firm won the mandate to manage the assets of Keystone, a UK equity trust. It will shortly reshape it into a very different vehicle to pair with Positive Change. Investment trust status will allow it to engage with a company’s management long before they even think of public listing. The announcement of the Keystone mandate instantly evaporated a 14% discount to net asset value.
ESG will become a fixture. It is a state of mind, not a regulation, or a standard, or an index, or even a definition of altruism. You cannot measure it, but it should be embedded in your psyche and it is best demonstrated by a long-term discipline, not a passing thought. We have much to learn.
For Baillie Gifford, the wider issue now comes from the age-old argument between growth and value. As we search for a holy grail in a post-Covid world the debate is again raising its head. The wisdom and stamina are being challenged of the firm’s championing of long held and successful but now expensive companies.
The challenge is building as I write. HF clients have a dilemma – do they stem enthusiasm with caution or back the leader to the finish? There is no right answer – it is a matter of individual comfort. For us, the long-term argument makes the better sense – and our principle is construction of a portfolio designed to last through generations. The principle will be tested – perhaps more brutally. But for the long-term investor it should be an opportunity to participate in the potential of the impending air pocket.
Very best wishes,
Peter Forrester, March 2021
Financial Advice | Investment Management
We are proud of our 5 year performance. If you would like to see how we’ve done, go to the PERFORMANCE page of the HF website.
The information contained in this document is for guidance only and does not constitute advice which should be sought before taking any action or inaction. The value of investments can fall as well as rise. You may not get back what you invest.
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