The combination of Baillie Gifford’s long-term growth bias and positive impact approach will give the recently relaunched Keystone Positive Change investment trust a first mover advantage, according to analysts.
Baillie Gifford recently took over the Keystone investment trust from Invesco and unveiled plans to changes its approach from being a UK equity income strategy to an all-cap global equity strategy with a focus on growth and ESG.
“One of the most notable trends in the investment industry at present is the growth in sustainable investing,” said Simon Elliott, research analyst at Winterflood. “While there will be those that dismiss this as a fad, it appears to us that there is significant demand behind this.
“As with other Baillie Gifford mandates, the emphasis is on identifying growth companies but in particular those that have the potential to make a positive impact on society.”
The trust will be largely run in line with £2.4bn Baillie Gifford Positive Change fund, but it will also have the ability to invest in private and smaller listed companies that fit with the positive change philosophy.
Since the strategy launched to the public in January 2017, it has become the highest performing fund in the IA Global sector with a total return of 276.80 per cent. This compares with just 55.52 per cent from its average peer.
Elliott said the positive change strategy is unique within Baillie Gifford because of the fact it places just as a high importance of positive impacts as it does financial returns.
“Baillie Gifford’s Positive Change approach marries the firm’s well-known growth bias to companies that are perceived to be addressing one of four thematic global challenges,” he explained.
“The thesis is that by focusing on companies that have a sustainable competitive advantage, the strategy should generate attractive long-term investment returns.
“We believe that Keystone’s dual investment objective is unique in the investment companies sector at present and it has first mover advantage.”
Indeed, the Keystone investment trust has seen its shares go from a 14 per cent discount to net asset value (NAV) in December to a 0.4 per cent premium as of 19 February 2021.
Keystone’s premium/discount over 5yrs
Source: FE Analytics
Ewan Lovett-Turner, head of investment companies research at Numis Securities, also believes that Keystone Positive Change’s unique strategy will attract a lot of demand from investors.
“The new Positive Change approach represents a significant shift in investment approach, but we believe it has the potential to attract widespread demand given almost all investors are seeking to increase the ESG credentials of their portfolios and focus more on the impact of their investments,” he said.
“The big change in approach may see some rotation in the shareholder base, but we would expect the strategy has the scope to attract new investors and it should benefit from the marketing support and strong reputation of Baillie Gifford.”
Baillie Gifford is a well-known name to investors in the UK. The firm’s £19.5bn Scottish Mortgage Investment trust is the largest and best performing investment trust in the IT Global sector.
The Baillie Gifford Positive Change strategy has nine common investment holdings and a 20 to 25 per cent cross over to that of Scottish Mortgage.
Performance of Scottish Mortgage Investment Trust versus Positive Change
Source: FE Analytics
Lovett-Turner said: “There will clearly be some similarities with the thought process and themes that you see in Scottish Mortgage and other Baillie Gifford strategies.
“Reflecting this, around 90 per cent of holdings in the open-ended [Baillie Gifford Positive Change] fund are held somewhere else within Baillie Gifford, but overlap with particular strategies tends to be relatively low.”
However, this figure could reduce since Scottish Mortgage is reducing its holding in Tesla, which was also a significant holding in the Positive Change strategy.
“Some may sigh at the thought of yet another Baillie Gifford fund investing in global equities,” Winterflood’s Elliott said, “However, we maintain that all five funds are clearly differentiated, offering shareholders distinctive approaches.”
He highlighted the ability of Keystone Positive Change to invest in private and smaller listed companies: “We have been impressed with the investment team and it is clear to us that Baillie Gifford has considerable resource in this area.”
He believes Keystone will make good use of the investment trust structure through its investment in smaller and private companies.
With time, he believes this will prove to be a real differentiator and allow the trust’s portfolio to be more diversified than its open-ended equivalent.
Lovett-Turner agreed: “I think the unlisted holdings will be useful as a differentiator for the listed investment company compared to the open-ended fund and unlisted holdings are expected to be a driver of returns over time.
“That said, it is probably going to be a relatively slow burn, with the exposure to unquoted investments increased over a number of years.”
Although the company has the power to invest up to 30 per cent in unquoted stocks, it will likely increase 5 to 10 per cent over the next few years because the timing of investment opportunities is not always easy to predict.
Lovett-Turner added: “The managers of Keystone Positive Change will make the final investment decisions on what goes into the portfolio, but this will be based on opportunities provided by the private team, headed by Peter Singlehurst.
“It is now a pretty established team that has built a strong record in unlisted investment with a focus on minority stakes in fast growing unquoted companies.”
Meanwhile Investec analysts Alan Bierley and Ben Newell welcomed the appointment of Baillie Gifford and the adoption of “an exciting investment mandate”.
“We see extraordinary growth potential for impact investing over the coming years,” they said.
“We expect Baillie Gifford to fully utilise the inherent competitive advantages of the closed-end structure and this combined with a frugal fee structure, should enhance returns.”
The Keystone Positive Change trust is expected to have charges of 0.55 per cent when its market capitalisation exceeds £250m.