‘A phoney sophistication offering a race to nowhere’ is Baillie Gifford’s damning assessment of today’s asset management industry.
Lamenting what it sees as a world where money managers fight over existing returns rather than create them, Baillie Gifford has called for fund managers to return to ‘actual investing’, i.e. putting cash into tangible, sustainable activities and giving firms time to grow and prosper.
Accompanying its campaign is a strongly-worded document written by partner Stuart Dunbar (pictured), who has criticised the industry’s focus on sector allocations, underweights and overweights, factor tilts, momentum, style and ‘any number of other artificial measures that tell you everything except what your actual investment risks are’.
You can measure your tilt towards developed market growth momentum stocks all you like, he wrote, but it still will not tell you, for example, how falling gene sequencing costs are combining with big data to upend the healthcare industry as we know it.
James Budden, marketing and distribution director at Baillie Gifford, said that it’s an issue that has been on the firm’s mind ‘for some time’. He argued that the industry has been caught up in the wrong debate – active versus passive – when it should be talking about active versus actual investing.
He said: ‘We’ve got no problem with passive. The issue is really around active management. There’s a bigger picture here.
‘We have a social licence as fund managers, one of our jobs is to convince people we’re a force for good, deploying capital into the right companies looking to solve problems – whether it be on healthcare, climate change, etc – not focusing on whether to overweight or underweight oil and gas or pharmaceuticals.’
Are others in the industry on board?
It is an admirable stance, according to Colin McLean, founder and CEO of SVM Asset Management, who pointed out that many boutiques would also say they are doing this same sort of thing.
He added that Baillie Gifford’s perspective comes from being an out and out growth manager, an area where the company has done better than a lot of its rivals.
McLean said: ‘They are articulating a trend that has been going on. Additional alpha has been coming from mid-caps, and a lot of boutiques would say they have been doing this for a while.’
He added: ‘The biggest managers have struggled to get ahead in the high growth, mid-cap space. There are a few others who are trying to move into that area more, but Baillie Gifford is the biggest who have managed to implement that.’
Through thick and thin
In the document accompanying the campaign, Dunbar wrote that ‘good fundamental managers stick to their approach through thick and thin’, and criticised firms who are ‘blown off course by the investment industry’s incessant need to build assets, grow profits [and] merge together’, which he argues is not in the interest of clients.
Unlike listed investment firms, Baillie Gifford can afford not to be too concerned about this, according to Peter Sleep, senior portfolio manager at Seven Investment Management.
He said: ‘A public company might run a mix of growth and value funds or funds with less conviction or tracking error. That way their earnings get a smoother ride through the cycle.
‘But [Baillie Gifford] is still structured as an independent investment partnership, so they don’t mind when growth is out of fashion and all of their funds are under.’
In Baillie Gifford’ view, the industry has been overly and needlessly complex, and should simply be about talking to clients on the progress and risks of their long-term investments, rather than the ups and downs of its short-term share price performance.