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Baillie Gifford Positive Change: Why we sold Alphabet and Alibaba

19 June 2024

The fund managers lost confidence in the social impact these companies would make.

By Jonathan Jones,

Editor, Trustnet

Edinburgh-based Baillie Gifford is known for its out-and-out growth style of investing, but there are nuances among some of its portfolios.

Baillie Gifford Positive Change, for example, requires companies to jump through environmental, social and governance hoops before they are allowed entry into the portfolio.

The Positive Change team is split in half, with an investment division and an impact team. The former looks at the potential growth and returns a business can make, while the latter focuses on its impact on the wider world and whether the company is making a positive difference to people.

It was this part of the equation that led to the team selling out of Google parent company Alphabet in 2021.

Thaiha Nguyen, co-manager of the £2bn Baillie Gifford Positive Change fund, said: “At the time, we felt that our original impact hypothesis for Alphabet had largely played out, with billions of people around the world gaining access to information through its products and services.

“However, the company’s progress in scaling its ‘other bets’ had been underwhelming and we had concerns about aspects of Alphabet’s business practices which we had been unable to address through our engagement.”

Upon re-examining the case for Alphabet, the team had “less conviction” in Alphabet’s ability to be an agent of positive change, even though it remained a strong proposition from a return-generation perspective.

Another stock on the chopping block was Chinese e-commerce firm Alibaba, which was also sold in 2022 due to concerns about its ability to meet the firm’s impact objectives.

“For Alibaba, the combination of regulatory intervention and internal issues dampened our belief that the company could drive positive change in Chinese society,” said Nguyen.

But the impact side of the equation is not always the trigger for selling out of positions. Vegan alternative food provider Beyond Meat was axed in the same year by the other part of the team: the investment division.

“With Beyond Meat, while we still believe in the long-term prospects of the plant-based meat market and admire the ambition of Ethan Brown, Beyond Meat’s founder and CEO, some operational missteps reduced our assessment of its probability of success,” Nguyen said.

There are lots of companies however that do fit the fund’s criteria, such as Nu Bank, which sits in the fund’s social inclusion bucket. Baillie Gifford first invested in 2021 at the stock’s initial public offering.

It is the world’s largest digital bank serving more than 100 million customers in Latin America although it mainly operates in Brazil.

“Brazil is a peculiar market, home to a few banks with an oligopolist structure and earning very high fees,” said Nguyen.

“Two-thirds of the population in the region are ignored by the traditional banks and charged high fees for things we take for granted here, such as text message alerts or bank withdrawals.”

Nu is an online-only bank, with customers using an app to keep track of their finances. It has no physical branches, meaning costs are lower – something it passes on to customers. Indeed, Nguyen noted that in some cases it charges nothing for services that would otherwise cost a lot more with traditional banks.

“Its products are really loved by the customers, with a net promoter score of 90, which is unheard of for any bank in the world,” she said.

“At the same time, it provides services for people who were previously ignored by the traditional banks. Some 6 million people have access to credit cards for the first time.”

Another example is Remitly, a US company providing remittance for immigrants. The firm fits the fund’s ‘base of the pyramid’ theme for companies providing products and services to the 4 billion people who live on less than $3,000 per year.

“It is estimated that the total global payments from immigrants in high-income countries to their families and friends in low and middle-income countries is higher than the total foreign direct investment and overseas aid to those countries combined. So you can imagine the importance of sending that amount of money,” said Nguyen.

“Remittance plays a very important role for tens of millions of people worldwide in terms of socio-economic development.”

The global remittance market is large with more than $500bn being sent annually, she suggested. Yet traditional services from incumbent players typically involve people having to physically give money to a cashier, which is then sent on, with families overseas having to wait for months to receive it.

“Everything can be done very quickly over the app. It offers one of the best global services for remittance with lower cost, convenience and peace of mind,” said Nguyen.

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