This article appears courtesy of Global Investor.
Baillie Gifford is the classic Scots investment house: independently-owned, level headed, and good with money. It could also be thought of as conservative, because not only has Baillie Gifford not strayed from its birthplace of Edinburgh in the 98 years since it was created, but it has not strayed much from its focus on equities. Far from parochial though, Baillie Gifford has a broad international investment horizon and has done a superb job at acquiring overseas clients – particularly in the US - both directly and through joint ventures.
The strength of its offering is in providing global equity mandates to gain overseas exposure for clients. Alex Callander, CEO, believes this is what clients want, regardless of liability-driven investment (LDI) strategies or other diversifiers like hedge funds.
Baillie Gifford was founded in 1908, although its story really begins in 1978. Until this point the business managed mainly investment trusts and remained undistinguished from its peers. But with the takeover of Baillie Gifford's second biggest trust – which accounted for almost 25% of profits – in 1978, Baillie Gifford awoke.
Now seven of the top 20 pension funds in the world run money through Baillie Gifford, including CalPERS in the United States, which has a global equities mandate with the firm. "That's quite an achievement for a small manager from Edinburgh," says Callander, who joined the firm in 1982.
Baillie Gifford believes it can add value throughglobal equities and multi-asset mandates for institutions and retail clients. Callander feels Baillie Gifford has little value to add for wealthy investors (although the firm has some high net worth business through independent financial advisers) or through running private equity or hedge funds. The business runs approximately £44.8 billion in total, which includes retail money for Vanguard Group on a sub-advisory basis.
The firm's aim has been to sign up a small number of large clients seeking overseas equity exposure. "We have a high share of UK local authorities and US public funds. Signing up public funds was not in itself a strategic plan, but we do have a strategy to focus on a relatively small number of large clients," says Callander.
Client service
One benefit of targeting a small number of large clients is revealed in the level of client service. Servicing relatively few clients is easier than trying to service many, and this is crucial if ever performance is hit in terms of being able to keep investors' confidence.
This back office area of client contact has been managed through a mix of outsourcing and insourcing. Losing control of client contact is one of the key outsourcing concerns for fund managers and Baillie Gifford's experience reflects this. Some years ago, open-ended investment companies (OEICs) that Baillie Gifford offered became a vehicle for specialist clients with whom the firm wanted a tangible relationship. At the time OEIC registration was outsourced and mistakes with registration occurred. So the firm insourced the operation and saw an 80% reduction in errors and breaches, says Callander.
He adds: "We have learnt over the years that once you sign up a big institutional client, your standards are raised to meet their requirements. CalPERS has terrifically high standards and we have to be up there with them."
However, outsourcing is still an important area of interest to the business, and so are joint ventures. Through a joint venture with Mitsubishi UFJ Trust Bank in Japan (MUTB), Baillie Gifford has been able to tap into the Japanese retail base. The partnership has helped maintain client service levels because it has effectively served to roll up a number of small clients into one large client, through MUTB, says Callander.
Client base
This drive into Japan's retail market is a sign of Baillie Gifford's ambitions and it mirrors a similar move into US retail. Already acting as a sub-advisor for Vanguard, it also has a joint venture with Guardian Life Insurance of America, which distributes retail insurance products.
But these areas are still a relatively small part of the client base. Since the early 198os Baillie Gifford has been growing its international and UK pension fund base – both segregated and pooled – and it is now one of the largest providers of specialist and multi-asset mandates to UK local authority pension funds, says Callander. UK pension funds represent 40% of the business, although the firm is also very "American facing", he adds.
The firm has placed more emphasis on fixed-income, but it is still recognised as a predominantly equity house, concentrating on supplying international exposure for clients. "Within mandate types, we have pulled back on products with a very narrow speciality, such as in emerging markets and UK equities, in both of which we are now closed to new business. Our focus is more on global and international funds. For example, we are a supplier of international mandates for US pension funds," says Callander.
"One of our most successful products is our Long Term Global Growth Fund. It is benchmark-agnostic and applies to people wanting a more committed international equities exposure. The vast bulk of risk in a pension fund lies in the fact that it owns equities. Long Term Global Growth is equity, but it takes much bigger bets than an index-benchmarked fund and has bigger tracking error. This provides clients with manager diversification as well as strategic diversification."
He adds: "We thought this would be a niche product but it turns out to be what people want." The fund has collected £3.5 billion in the three years since its launch. "In the US 10 to 15 years ago, everyone wanted us to offer pan-European mandates. That demand has died now. People are seeking less regional products so we've transferred clients to other products run against world indices that include emerging markets."
Survival
The firm does not have product plans to enter into high-profile new areas.
Callander says: "We did have a technology fund that invested in private equity and quoted companies. It did fairly well but we concluded that it was a difficult business and one we weren't tremendously good at, so we wound it up at the end of its life." As for hedge funds: "We looked at the sector, but I think it would not fit culturally with us."
Callander has been thinking about liability-driven investment (LDI). "LDI is interesting, but there are a number of issues with it. I do not think there will be a huge move by pension funds on current terms to bonds. As pension schemes become more mature there will be a shift, yes, but I doubt it will be huge."
But Baillie Gifford could find equity opportunities through any trend towards LDI. "Another side of LDI is that people will look for more diversification in their equity holdings. What are they going to invest in? Well, it does include hedge funds and private equity - but it also includes global equities and overseas allocations."
He adds: "We do not think we have to change to survive – at least not by introducing hedge funds or LDI-centred products."