Baillie Gifford China Growth Trust: Objectives, Strategies, And Performance

Strategies and objectives of the fund

Baillie Gifford China Growth Trust invests in shares or depository receipts issued by Chinese firms in order to generate cash for its owners. The firm aims to increase the value of its invested cash by actively managing portfolios of Chinese corporate stocks. The fund's time horizon is five years, with a strong bias for capital growth and expectations of high upside potential in the firms in which it invests. The research and investing process is carried out by completing a thorough fundamental examination of firms, as well as a bottom-up analysis that starts with the company, moves up to the industry, and lastly to the economy. The investment process is aided by a specialized staff focused on emerging market operations and performance, as well as inputs from the Chinese local market to better understand the firms and investment structure.

Till the end of 2019, the fund was named as Witan Pacific and has a multi-manager investment approach targeting the market of Asia Pacific. The fund includes active managers looking to invest in a wide range of market belonging to Asia, like Japan, India and Australia. The benefit of a multi-manager method is that it combines the advantages and benefits of numerous managers and subadvisors into one fund. In a multi-manager model, each manager operates according to their style and mandate and are mutually exclusive with each other (Schroders.com, 2022). The multi manager method was supposed to offer value to the fund by allowing it to diversify its portfolio across several asset classes and reap the benefits of those asset classes' return potential with a view of diversifying risk. Managers are appointed with specific expertise in particular fields add value to the firm by executing strategies which are distinct from other managers. Two of the managers Dalton and Robeco who were appointed by the fund add value by investing into value stocks. On the other hand, Mathews Asia invests in stocks having a healthy dividend yield and Aberdeen follows a buy and hold strategy. In the year 2020, three out of four managers employed by the company failed to achieve the desired objective and only Aberdeen earned a return of 14.7 percent which is more than the benchmark return of 8.7 percent in that particular year.

The fund is concerned with investment risk, which includes the possibility of losing money. Investment risk arises because of several factors like market, interest rate movements, currency movements, political instability and sector or industry specific issues. The fund attempted to mitigate the investment risk inherent in the process by appointing at least two portfolio managers and required them to diversify their investment universe across numerous asset classes and sectors in order to minimize strategy concentration. Investors would prefer the diversification of risk the multi manager approach would create but would like to avoid taking unnecessary risks which is associated with active management. In order to keep the risk under control, managers' performance and strategy must be reviewed on a regular basis. Specific regional equity and currency markets had a substantial influence on the firm's Net Asset Value under this approach.

Approach taken by fund management companies to manage the fund

Multi manager approach was clearly not reaping the benefits as expected by the company as two of the managers; Robeco and Dalton have failed to beat the benchmark since their appointment. As the fund only focused on pan Asia pacific region, appointment of additional managers would result in dearth of investment returns due to strategy concentration. The overall performance of the fund may be hampered due to underperformance of one of the many managers, hence there is no guarantee of value addition if 5 or 10 managers are further appointed.

The performance fees charged by the firm of 1 percent is cheaper than compared to other funds especially due to the multi manager approach followed by the fund last year. After the manager has been changed the following are the changes in the fees structure of the fund. Baillie Gifford charges fees on a layered basis and the fees depends upon the Net Asset Values of the company.

The yearly risk premium is determined and payable quarterly as follows:

1. a) 0.75 percent of the first £50 million of Net Asset Value;
2. b) 0.65 percent of Net Asset Value between £50 million and £250 million;
3. c) 0.55 percent of Net Asset Value in excess of £250 million.

As a concession to the expenditures incurred by a Company as a result of the manager changes, Baillie Gifford agreed to forgo its investment management fee for first 6 months following its hiring.

Performance fees charged by the fund should be included in the overall fees as performance fees is directly related to the manager’s risk-taking abilities. If performance fees for a firm is high the managers are incentivized to take additional risk. Hence, performance fees gives an idea about the potential risk that could be taken by the managers of the fund.

The fund was managed by four investment managers namely Matthews, Aberdeen, Robeco and Dalton. The following section highlights the approaches adopted by each of the manager:

• Dalton Investments – The company follows a value investing approach by identifying companies with extraordinary potential available cheaply. The management of the selected companies share an alignment of interest with the shareholders. The approach runs the risk buying overvalued stocks and may result in concentrated portfolios. Emerging markets in Asia Pacific region may provide with ample opportunities for the manager to overachieve its objectives but the manager has failed to match the benchmark let alone beating it (Annual report, 2020).
• Aberdeen Investments – The manager is focused towards buy and hold strategy and it invests into high quality stocks after careful research and considerations. This entails evaluating each firm on five important criteria: the business model's and moat's resilience, the industry's attractiveness, financial strength, managerial skill, and our assessment of the company's ESG credentials (Annual report, 2020).
• Matthews Asia – The fund is invested in a segregated fund and it follows a dividend strategy focusing on companies with long term growth potential. The Asia Dividend Strategy is a total-return strategy that seeks to strike a balance between firms with dividend payment yields and those with promising dividend economic outlook, in order to deliver both capital appreciation and a steady dividend yield. The approach invests in a wide range of firms, with a focus on small and mid-cap equities (Annual report, 2020).
• Robeco – The firm focuses on value investing strategy keeping in considerations the price and business information and avoiding value traps. The manager has a high active share due to the active bottom up stock selection approach.

The above table represents the performance of the managers since the date of appointment. It can be observed that Robeco and Dalton which focuses on value investing approach have failed to beat the benchmark.

Baillie Gifford was appointed as the investment management of the company on 22^nd July 2020 and as a result the company name was changed from Witan Pacific Investment Trust Plc to Baillie Gifford China Growth Trust along with a tender offer of 40 percent of the shares to the company. Changing the portfolio mandate from a focused Asia Pacific mandate to Chinese companies with long term growth prospective, was one of the preliminary things done by Billie Gifford (Annual report, 2021).

Fund performance in last five years

The fund now primarily invests in companies headquartered in China, being quoted, traded and listed in any market and the portfolio including these companies would be managed actively which is a change from the previously active pan Asia pacific strategy. The fund does not take into account the sector and size of the company before making a decision to invest in them. The investment policy is not limited till listed equities, but the fund may also invest in unlisted securities, fixed income and other non-equity securities.

The graph above shows the company's overall return from 2005, when it implemented a multimanager structure. The NAV return and price total return are both growing in tandem with the benchmark throughout the years.

The graph above represents the annual performance of the fund compared to the peer companies and it is evident that the firm has not been able to outperform its peers by a huge margin in the past five years. The difference in performance has increased in the past three years due to the addition of two value investing managers; Robeco and Dalton who have significantly underperformed the benchmark.

The fund's NAV returns are exceptionally low when compared to comparable funds that have had NAV returns of more than 10% in the previous five years. The fund's NAV has been on the lower side when compared to the benchmark, which is much higher (fidelity.uk, 2022).

The table above represents the NAV per share along with the share price returns of the company for the last three, five and ten years. It can be seen that the fund has underperformed the benchmark in terms of NAV for each of the periods analyzed. The three-year annualized NAV yield for the fund was around 4.6 percent which is less than the benchmark yield of 6.6 percent. This underperformance can majorly be attributed to the performance of Robeco and Dalton as they failed to beat the benchmark since their inception into the fund. The returns for the past years were significantly affected by the Covid 19 pandemic.

After the investment management services were taken over by the Baillie Gifford & Co limited in the middle of 2020, the share price of the company began to rise significantly beating the index by a large margin. The NAV of the firm also witnessed a growth after the induction of the new manager only to fall down during the year 2021 (Factsheet, 2022). 

References

Baillie Gifford China Growth Trust plc Price and Performance | GB0003656021 | Fidelity. (2022). Retrieved 13 March 2022, from https://www.fidelity.co.uk/factsheet-data/factsheet/GB0003656021-baillie-gifford-china-grwth-tst-plc/performance

Annual report, (2020). Retrieved 13 March 2022, from https://www.bailliegifford.com/en/uk/institutional-investor/literature-library/funds/investment-trusts/china-growth-trust/annual-reports/baillie-gifford-china-growth-witan-pacific-trust-annual-report-2020/

Annual report, (2021). Retrieved 13 March 2022, from https://www.bailliegifford.com/en/uk/institutional-investor/literature-library/funds/investment-trusts/china-growth-trust/annual-reports/baillie-gifford-china-growth-trust-annual-report-january-2021/

Factsheet (2022). Retrieved 13 March 2022, from https://www.bailliegifford.com/literature-library/funds/investment-trusts/china-growth-trust/baillie-gifford-china-growth-trust-monthly-factsheet/

Schroders.com, (2022). Retrieved 13 March 2022, from https://www.schroders.com/getfunddocument/?oid=1.9.2126802#:~:text=Multi%2Dmanager%20funds%20invest%20in,to%20suit%20that%20particular%20climate.