The very first sentence on the assets under management (AUM) page spells it out for you – “Baillie Gifford are long-term investors, not speculators.” You can expect that philosophy to pervade across all their funds, of which there are many.
People who start with nothing and manage to accumulate large sums of wealth usually share a few common characteristics. They don’t talk about how much money they have, they understand the notion of value for money, and they realize that most financial “advice” that’s given by mainstream pundits is a bunch of malarkey. It doesn’t take wealth to see that the finance industry is filled with rubbish because the numbers speak for themselves.
It’s Tough to Beat a Benchmark
If you want to invest in technology stocks, that’s easy enough. The simplest way is to buy an ETF that tracks the Nasdaq, like the Invesco QQQ Trust (QQQ), and enjoy the returns of the Nasdaq minus a 0.20% expense ratio. The past performance of that single well-diversified investment vehicle is quite spectacular:
- QQQ 5-year return +222%
- QQQ 10-year return +471%
- QQQ 20-year return +596%
If instead, you decided to stock pick, you better have beaten the returns seen above by a wide margin because you took on a lot of additional risk by stock picking. Trying to beat a market benchmark is extremely tough to do over the long run, which is usually the time horizon most young investors have. When 95% of all professional active fund managers can’t beat their benchmarks, the odds are not in your favor.
Still, many investors, even self-directed investors, will find themselves gravitating towards active managers for any number of reasons. We’re presently holding four ETFs in our Nanalyze Disruptive Tech Stock Portfolio, all of which rely on indices which employ a certain amount of subjectivity in the themes they’re targeting. One reason investors are attracted to actively managed funds is that sometimes they hold assets you can’t get exposure to elsewhere.
Baillie Gifford
One of our readers recently remarked that he found a way to invest in SpaceX through a publicly traded vehicle, something that was news to us. After poking around a bit in their fund literature, we found that the Baillie Gifford US Growth Trust (USA.L) holds shares in SpaceX.
Anyone who lives in the U.K. would be familiar with the name “Baillie Gifford,” as they’re a U.K. asset management firm which manages around $450 billion in specialist equity, fixed income, multi-asset, and balanced portfolios for a global client base, about 40% of which are pension funds.
The very first sentence on the assets under management (AUM) page spells it out for you – “Baillie Gifford are long-term investors, not speculators.” You can expect that philosophy to pervade across all their funds, of which there are many.
The Baillie Gifford US Growth Trust
One of Baillie Gifford’s funds is the Baillie Gifford US Growth Trust which has around $1.48 billion in AUM being managed for a fee of 0.75%. The stated mandate is to “invest predominantly in listed and unlisted US companies which the Company believes have the potential to grow substantially faster than the average company, and to hold onto them for long periods of time, in order to produce long-term capital growth.”
(That’s a long-winded way of saying they invest in growth companies with a five-year view.) Since the lightening-fast market crash of 2020, shares of USA.L have soared, thanks to some well-placed bets on some high-flying stocks:
While ten stocks make up 42% of the fund’s holdings, there are privately held companies in there as well. The company’s latest fact sheet talks about how “up to a maximum of 50% of assets may be invested in companies not listed on a public market.”
The firm last published their list of holdings on Dec 31 2020, and at that time 11.6% of their assets were in private companies like Affirm, Butterfly Network, Convoy, Ginkgo Bioworks, Indigo Agriculture, and of course SpaceX – the world’s third biggest startup with a current valuation of $46 billion according to the CB Insights unicorn list.
Investing in SpaceX
Around 44 holdings make up 90% of the Baillie Gifford US Growth fund with position #21 being Space Exploration Technologies (SpaceX) with a weighting of around 1.6%.
What’s cool about this is how we can see the SpaceX holding evolve over time. Here’s what that holding looked like back in May 2020:
We can see that the Series J/K investments appreciated by about +35%, and that the fund also purchased additional shares in the Series N round.
Let’s say that SpaceX has an IPO and Baillie Gifford reaps the rewards when shares go through the roof because of the wankers over at Robinhood. Once that SpaceX position has been liquidated (assuming they decide to liquidate it), Baillie Gifford doesn’t write all their investors a check with the profits. Instead, that money is used to invest in other companies that are expected to have superior returns with a five-year view.
SpaceX is just one of many investments they’re holding. Like any other portfolio, high-performers will be accompanied by not-so-high performers, so the overall fund performance is what matters. Below, you can see what the fund’s income statement looks like from last year:
At the moment, the fund does not pay dividends, opting instead to reinvest their gains and create even more value.
To Buy or Not to Buy
The Baillie Gifford US Growth Trust is relatively new, having only come about in 2018. Consequently, historical performance isn’t available. What performance they do show is benchmarked to the S&P500, something that will make their large tech stock positions – Alphabet, Amazon, Tesla, and Netflix – really shine.
With AUM of $1.48 billion, they have plenty of money to pay the salaries for some rock star managers and whatever else they need to run the fund. We still prefer Scottish Mortgage (they’re also managed by Baillie Gifford), but you couldn’t’ do wrong investing in the Baillie Gifford US Growth Trust for a diversified collection of actively managed stocks. Just don’t do it solely because they’re holding SpaceX.
The Importance of AUM
In the past several years we’ve taken a look at some very interesting publicly traded investment firms. Some, like Draper Esprit, only invest in startups. Others, like Scottish Mortgage, invest in both public and privately held companies.
In either case, the ability to attractive investment dollars is a critically important success factor because it’s what pays the bills. The Baillie Gifford US Growth Trust has managed to attract substantial AUM (anything in the billions would be considered substantial by any measure). That means they have the money needed to manage the fund effectively.
Most investment funds work for fees expressed as a percentage of assets under management (AUM). The more AUM you have, the more money you make. Put another way, the more AUM you have, the less you need to charge to pay the bills.
You get what you pay for. The most competent money managers out there usually know who they are, and expect to be compensated accordingly. If you don’t have sufficient AUM, you’ll either be charging too steep of a fee structure, or you’ll be compromising on the talent you’ll need to succeed where so many others have failed.
In order to accumulate AUM, you need to spend money on marketing your products. Being publicly traded adds another cost layer. You need to spend money on legal fees and deal with all the added responsibility that comes with that. The fact that this fund has amassed such a large AUM number is a very positive sign for investors.
The Dangers of D&I
There’s one other thing we noted in Baillie Gifford’s collateral that they should be commended for. It’s this paragraph right here:
Anyone who has served hard time in a top-tier financial institution as a hiring manager in The City, or Hong Kong, or New Yawk, knows exactly how damaging it is to high performing teams when you’re forced to start hiring based on criteria outside of pure merit.
Rock star managers know that nothing is more important than hiring and rewarding based on merit. Good job Baillie Gifford for saying exactly what the silent majority of competent hiring managers are thinking. Make sure you enact this policy at every level, not just in the boardroom.
Net Asset Value
The last thing we want to talk about is net asset value (NAV). Think about NAV as the actual value of all assets being held at any given moment. With publicly traded stocks, you can calculate their value at any time because the market provides that for you.
In the case of privately-held companies like startups, the value is based on what investors were willing to pay for shares in the last funding round. NAV is a useful measure for investors because it’s what you get for what you pay.
In the ideal world, the NAV is always what shares trade at. Sometimes, shares trade at a discount to NAV, as is often the case with publicly traded venture capital firms. In the case of the Baillie Gifford US Growth Trust, it typically trades at a premium to NAV as seen below (yellow highlight shows where is trades at a discount to NAV):
When considering a position in the fund, you can’t go wrong buying shares when they’re trading at a discount to NAV. The same rule applies when buying shares in any publicly traded fund.
Originally published at Nanalyze