The fund invests in a portfolio of 40 to 60 stocks in mainland China, Taiwan and Hong Kong. It is benchmarked against the MSCI Golden Dragon index and is up 56 per cent since launch, outperforming the benchmark by 8 per cent.
Fund managers Richard Sneller and Mike Gush take a bottom up approach to identify successful growing businesses that have a sustainable competitive advantage. Sneller is head of Baillie Gifford’s emerging markets investment team and joined the company in 1994. Gush joined in 2003.
The managers are prepared to back their beliefs by taking significant stakes in companies and will sometimes invest in businesses that are not part of the benchmark index. They aim to invest in companies with above average growth prospects that can be bought at a reasonable price.
Every member of the emerging markets team is responsible for stock research., generating ideas and analysing companies they think should be included in the fund. Research includes a qualitative assessment of a company’s competitive edge, its management, financial statements and valuation. The aim is to find undervalued companies that can produce sustainable returns that are higher than the cost of capital.
The emerging markets investment team also meet the companies they are investing in to understand their long term business models and assess their strengths and weakness.
Investments in the portfolio are reviewed and sell decisions may be prompted if valuations are high and there are equally attractive firms with lower share prices.
The managers may also sell a stock where there is a negative change such as deteriorating demand. A loss of confidence in the management, for example, after an acquisition or move into a new market, may also prompt a sale. Other triggers for a sale are where a stock has become overvalued or if the managers want to reduce exposure to one region in favour of another.
Baillie Gifford expects China to emerge quicker and stronger from the global downturn than other parts of the world. Over the long term, it believes that factors such as urbanisation, high savings levels and infrastructure investment will continue to drive growth. Against this backdrop, it may find investments at attractive prices. However, currency risk could be a problem, as the strength pof sterling has had a negative impact on returns.