A more specific focus on growth companies in “the most exciting market of the coming decades” has helped the Baillie Gifford China Growth Trust return 27.05 per cent in little over six months since it rebranded from the Witan Pacific Investment Trust.
Under its former guise, the trust took a multi-manager approach to investing in the Asia Pacific region, including countries such as Japan, Australia and India.
However, after struggling to keep up with its IT Asia Pacific sector and narrow its double-digit discount, the board proposed a full exit at NAV before deciding to award the mandate to Baillie Gifford instead.
Investors reacted positively and the trust moved to a significant premium.
Discount/premium of trust over 5yrs
Source: FE Analytics
The portfolio is now similar to the top-performing Baillie Gifford China fund, but also invests in smaller and private companies, the latter of which managers Roderick Snell and Sophie Earnshaw are particularly excited about.
“With a number of companies increasingly putting off listing until much later in their development, a key benefit of the company is its ability to take advantage of this growing opportunity set, supported by Baillie Gifford’s significant experience in this area,” they said.
Baillie Gifford took charge of the trust on 16 September 2020, with the portfolio re-organisation completed by 7 October.
It now reflects the three core principles of the managers’ philosophy, the first of which is a long-term approach: Snell and Earnshaw said their investment horizon of five to 10 years is a significant differentiator and a strong driver of returns in a country where the average holding period is only a couple of months.
“Our incentivisation is also staunchly long term,” they added. “The variable portion of our remuneration is based on five-year rolling investment performance – something we believe to be almost unique in the region.”
Next up is their active approach: they hold 40 to 80 of the best Chinese companies regardless of sector or industry and are willing to differ significantly from their benchmark, regardless of what this does to short-term performance figures.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
Last up is growth, with the managers referring to China as home to “some of the most exciting and transformational companies in the world”.
They added that Baillie Gifford’s size and track record of investing for the long term have given the group a strong reputation and allowed the managers to develop close relationships with China’s leading companies. This comes with many benefits, including being sought out as early investors in the best unlisted Chinese firms. The trust has already made its first foray into the private market with the purchase of social media company ByteDance, which owns TikTok.
Since being founded in 2012, ByteDance has grown to become the world’s leading short-form video app, with more than half a billion users.
“Monetisation of these users has only just begun and ByteDance has a very large growth opportunity in advertising in addition to more nascent areas,” said Snell and Earnshaw.
“The company benefits from a technological edge in AI and machine learning which has allowed it to continually innovate by bringing out new applications in different media forms and for different demographics.
“We believe ByteDance has the potential to be a generation-defining media company and one that will deliver exceptional returns to shareholders.”
Baillie Gifford China Growth Trust has a high weighting to consumer discretionary, healthcare and technology related businesses. However, the managers said it is important to note that this sector bias is an output rather than an input: their process is bottom-up and their portfolio exposure is a function of where they find the best ideas.
“China has the largest middle class in the world and one that’s growing substantially every day,” they explained.
“Importantly, the middle class exhibits an appetite to consume and adopt technology that’s arguably greater than anywhere else in the world.
“This, combined with a corporate base that continues to ramp up investments in research and development, creates a wealth of opportunities for growth investors in both consumer and technology related businesses.”
Despite the trust’s surge since Baillie Gifford took charge – the NAV alone is up 18 per cent over this time – the managers said it would be unwise to infer anything meaningful from such a short period of performance.
Price, NAV and total return of trust under manager tenure
Source: FE Analytics
Instead, they asked shareholders to judge their efforts over similar timeframes to those they apply to their underlying investments, namely five years or more.
Here, they are optimistic.
“The long-term growth story for China is only just beginning,” they said.
“The combination of a vast and growing domestic market, significant investment in research and development, and private and public equity markets that are poorly understood and indelibly short term, give long-term growth investors like ourselves a real opportunity to add alpha.”
Baillie Gifford China Growth Trust is on a premium of 5.48 per cent compared with 4.09 per cent and a discount of 6.51 per cent from its one- and three-year averages.
It has ongoing charges of 1 per cent.