Fund focus: Baillie Gifford International

The Baillie Gifford International fund is benchmarked against the MSCI World ex-UK Index, which it aims to outperform over a rolling five-year period.

Charles Plowden, a joint senior partner, leads the investment team, which also includes investment managers Spencer Adair and Malcolm MacColl. The Portfolio Construction Group (PCG) ensures that the best investment ideas from across Baillie Gifford are considered for the fund.

The group comprises the three named portfolio managers, three investors from the regional equity teams, the head of the global research team and two experienced client service directors. The three managers have specific accountability for overall strategy, stock selection and portfolio construction.

Baillie Gifford’s investment philosophy is that the market consistently undervalues sustainable earnings growth and that superior profits growth leads to long-run outperformance. It takes a long-term approach to investing, believing in the power of compounding, and analyses companies from a bottom-up perspective rather than attempting to read macroeconomic trends.

The analyst team aims to cover the global universe of companies, condensing its research to a focus list of about 750 stocks. This list is then condensed further by the PCG which meets both formally each month and informally on an ad hoc basis to discuss the investment views of the group and establish the levels of conviction it has in the stocks. The final decision rests with the investment team, which operates on a one-person one-vote basis and seeks to include only the very best ideas in the fund by focusing on three key questions: how does the stock compare globally; where does its analysis differ from the market; and what does it add to the portfolio?

In constructing the portfolio the managers adopt a matrix approach, breaking its growth ideas into four buckets, namely rapid growth, latent growth, cyclical growth and those deemed to be growth stalwarts, with the intention of constructing a portfolio of uncorrelated growth drivers.

Stocks are sold when the managers believe the opportunity has become overvalued, to raise cash for a better opportunity, in the event of an adverse change to the fundamentals of the business or when the team loses confidence in the management of the business.

The portfolio targets a range of 60 to 110 stocks and more importantly targets an "active share" (defined as the percentage of the portfolio that does not overlap with the index) of about 90 per cent. Position sizes are constructed in terms of the perceived risk/reward trade-off, with the highest-conviction ideas sized above 1.5 per cent, average-sized holdings around 1 per cent and incubator holdings less than 0.5 per cent.

The portfolio is quite likely to diverge from the benchmark as the managers have the freedom to take conviction positions. The formal guidelines state that the maximum stock position can be plus 6 per cent versus the index at the time of purchase, industry positions can be a maximum of the index plus 10 per cent, with no minimum, and country positions can be a maximum of the index plus 20 per cent, with no minimum.

Richard Whitehall, investment analyst at OBSR, said: "We like the managers’ long-term investment philosophy and rigorous process, both in terms of their stock selection and portfolio construction, which results in a well diversified global (ex-UK) growth portfolio. They have shown they can add value over the long term and we are pleased to add the fund to our rated universe."