He says that fund managers and company directors with short-term goals inevitably end up serving their own interests rather than the longer-term goals of the average investor. "Many investors think 'if you are going to fail, fail conventionally', so not having a big bet against the benchmark."
"We tell our clients we are active managers and this is something you need to be happy with," he said.
"I do not think managers should be able to charge what they do for tracking an index. It’s up to the industry in general to question this."
The £61.4m Baillie Gifford European fund, which has five FE Crowns, has an active share worth roughly 80 per cent of the portfolio – meaning that four-fifths of the fund differs from the benchmark.
The fund sits in the top quartile of the IMA Europe ex UK sector over three, five and 10 years, and has a particularly strong record since the crash of 2008.
Performance of fund vs sector over 5yrs
Source: FE Analytics
Over five years the portfolio has made 44.06 per cent while the average fund in the sector has made just 13.74 per cent, according to data from FE Analytics, suggesting that its off-benchmark approach has paid off handsomely.
The management team of Tom Coutts – the lead manager – Paul Faulkner, Paice and Michael Taylor have pay-incentives based on multi-year performance. Paice says this helps to keep their focus on the long-term.
However, long-term thinking is becoming the exception rather than the norm in the investment industry and in businesses, he warns, making it difficult to escape the consequences of others’ short-termism.
"Investment managers on average have an investment horizon of around a year or slightly less," Paice said.
"Managers of companies sometimes look no further forward than the next quarter."
"There are ways of overcoming this. First, invest in companies that are not managed to the next quarter."
"We want management that will leave companies in a better shape than they found them in the longer run."
In Europe, this tends to mean holding a high proportion of the fund’s wealth in companies with a large family presence in their management, which Paice says tend to be those with the "profound alignment between management and our investors" that the fund is looking for.
Being known as a long-term investor helps Baillie Gifford get access to the management and the boards of these companies, he explains.
"Some of the family-run businesses are very secretive and it takes time for them to open up, and being long-term investors, it’s possible to get this access."
The team has become more committed to its buy-and-hold strategy during the years following the financial crisis, and this was when the strategy started to outperform.
Data from FE Analytics shows that the fund underperformed the sector in four out of the five years before 2008.
Paice says that the team learned from its mistakes in the earlier part of the decade, and FE Analytics data shows the fund has outperformed the sector average in every year since then.
"The turnover was very high in 2000 and 2001, and this was a time of underperformance, when there was a lot of pressure to be seen to be doing something; they changed the philosophy and it didn’t work," he said.
Year-on-year performance of fund vs sector 2006-2013
| Name | 2013 | 2012 | 2011 | 2010 | 2009 | 2008 | 2007 | 2006 |
|---|---|---|---|---|---|---|---|---|
| Baillie Gifford - European | 14.79 | 20.41 | -11.75 | 17.38 | 27.27 | -23.18 | 9.08 | 18.31 |
| IMA Europe Excluding | 10.97 | 19.03 | -15.57 | 8.57 | 19.42 | -24.96 | 12.6 | 18.56 |
Source: FE Analytics
"An expert is someone who knows what the pitfalls are and tries to avoid them."
The manager says that the team is happy with occasional periods of underperformance if it is poor-quality companies that are pulling ahead.
"We may not be as good as our numbers suggest. There have been times when we underperform, when low-quality companies are flying, but that doesn’t worry us."
"We don’t want to chase what the market is doing."
Paice says that many management teams get caught up in group-think, but that the three senior managers on the Baillie Gifford fund are each responsible for a "sleeve" of their own stocks, allowing for differing opinions to be expressed.
The team also invites in people that disagree with them – "authentic dissent", Paice calls it – to help the managers develop their views.
"Decision-making is the most important part of the investment process and it is best done in smaller teams."
"We are not trying to cover the whole market, just what we own. It’s the lure of something new and something exciting."
"We spend a lot of time on learning and reading. We do believe we can get better at our job."
"We are not trying to gather assets. We have been quite quick to close strategies because we want to focus on providing the best service we can."
"It’s easy to come up with ideas. We discuss 70 to 80 stocks a year but only buy a handful of those."
The manager says that from a bottom-up perspective, Europe looks very different, with strong companies expanding despite poor economies.
He gives food retailer DIA as an example.
"While the Spanish economy is suffering, it’s able to grow market share from competitors," he said.