The Keystone Positive Change Investment Trust is suffering from a rough year since Baillie Gifford took over the trust but investors thinking of selling should stay the course, according to experts.
In February last year, Baillie Gifford took over the Keystone investment trust from Invesco and switched it from a UK equity income strategy to an all-cap global equity strategy.
The trust is run in-line with the £2.8bn Baillie Gifford Positive Change fund, managed by Kate Fox and Lee Qian. One of the main differences between Keystone and its open-ended peer is that it can use gearing, as well as invest in unlisted, small-cap companies.
However, since 10 February – when Baillie Gifford officially took over the reins – the trust is down 22%, compared to a 10.6% return from the wider global equity market. This has pushed it to the bottom of the IT Global sector.
Performance of trust vs since Baillie Gifford took over
Source: FE Analytics
Despite the recent drawdown, Ewan Lovett-Turner, head of investment companies research at Numis, said that the best time to back a manager can be after a period of underperformance.
“It has been an undeniably difficult time for the fund since Baillie Gifford took over in February last year, which would be expected given the rotation from ‘growth’ into ‘value’ stocks,” he said.
“Shareholders familiar with the Baillie Gifford approach should know to expect periods of short-term volatility and deviation from market indices. Over the long-term we still believe the fund has the potential to outperform.”
He rated the management team highly and pointed to its strong track record managing the open-ended sister fund.
Lovett-Turner also suggested that, purely from a price perspective, the trust represented potential value as it currently trades at a 6% discount to its net asset value (NAV).
Many of the high-growth stocks that the trust invests in have been weighed down by the prospect of rising interest rates and a rotation into value stocks driven by inflation fears.
Its largest holding in Moderna is down more than 60% from its highs as its vaccination program decelerates amidst a potential end to the global coronavirus pandemic.
Moderna’s co-founder Noubar Afeyan recently said that the Covid-19 pandemic could start moving into an endemic phase in 2022, which could spell the end for widespread booster vaccinations.
Patrick Thomas, head of ESG portfolio management at Canaccord Genuity Wealth Management, also backed the Keystone trust and noted that its open-ended peer also launched during a period of rising interest rates, but still managed to outperform.
“It’s the right strategy managed by the right team, but launched at an unfortunate time,” he said. “Essentially this is an out-and-out growth strategy with a very concentrated approach that will suffer during very significant value rotations.
“This problem is exacerbated by the fact it is a relatively small investment trust so volatility can be higher.”
He also said the trust is more of a healthcare story than a big-tech play, which has made its shorter-term performance more challenging.
Roughly 34% of the trust’s portfolio is invested in the healthcare sector, which is almost triple the MSCI World Index’s weighting of 12.6%.
“The team are coming up to a five-year anniversary on their flagship open-ended fund and, despite a tough year, it is still one of the top performing global funds anywhere,” he added.
Performance of Baillie Gifford Positive Change since inception
Source: FE Analytics
Managers of the trust Kate Fox and Lee Qian have been running the open-ended Baillie Gifford Positive Change fund since 2017.
Despite the open-ended Baillie Gifford Positive Change fund’s recent drawdown in performance, it ranks as the second best performing fund in the IA Global sector on a five-year basis. It is also the third highest performer on a three-year basis.
Thomas thinks that the long-term drivers that the trust is targeting – such as the climate transition and inclusive growth – are trends that will give the trust a favourable long term structural backdrop.
He said: “Given the opportunity set in slightly smaller companies and unlisted unicorns, we see the investment trust as an appropriate vehicle to access a high-quality investment team.
“When the open-ended fund launched five years ago there was scepticism that a relatively inexperienced team could generate returns in excess of its peers. We would also note it launched during a period of rising interest rates.
“We think the fears over the trust today should be seen in this context – investors with a long-term horizon could be well served by this vehicle.”