IT S ABOUT CLIMATE, NOT THE WEATHER

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1 IT S ABOUT CLIMATE, NOT THE WEATHER First Quarter 2017 THIS PAPER HAS BEEN PREPARED FOR USE BY PROFESSIONAL ADVISERS AND INTERMEDIARIES ONLY. IT IS NOT INTENDED FOR USE BY RETAIL CLIENTS.

2 It s About Climate, Not The Weather Baillie Gifford IMPORTANT INFORMATION AND RISK FACTORS JAMES BUDDEN Director The views expressed in this article are those of James Budden and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions. This article contains information on investments which does not constitute independent investment research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned. James graduated MA in Classics from the University of Cambridge in He joined Baillie Gifford in 2008 having worked at Witan Investment Trust and Henderson Global Investors. James is a Director of Marketing and Distribution in the Clients Department. Investment markets and conditions can change rapidly and your clients capital may be at risk. This information has been issued and approved by Baillie Gifford & Co Limited and does not in any way constitute investment advice. All information is current and sourced from Baillie Gifford & Co unless otherwise stated. The images used in this document are for illustrative purposes only. Calton Square, 1 Greenside Row, Edinburgh EH1 3AN Telephone + 44 (0) It s about Climate Q117.indd Ref: INT AR 0110

3 First Quarter 2017 IT S ABOUT CLIMATE, NOT THE WEATHER BY JAMES BUDDEN 3

4 It s About Climate, Not The Weather What of the short term, the next few decades? MURRAY GELL-MANN, THE QUARK AND THE JAGUAR. 4

5 First Quarter 2017 Having lived in Scotland for almost a decade, and having grown up in Cumbria, you ll perhaps understand if I begin with a reference to something never far from my thoughts: the weather. Specifically, the distinction meteorologists make between weather (the state of the atmosphere at any given point) and climate (the average of weather over a period of time). I note this distinction as it is a useful analogy for how we at Baillie Gifford think about what we believe is one of the most fundamental aspects of investment: time horizon. For us, the weather short-term fluctuations in the markets is of considerably less interest than the climate long-term trends. Guessing the direction of stock prices and bond yields in the next week, month, or even year, is a fool s game. Although the time horizon in the quotation above from physicist Murray Gell-Mann is perhaps too long even for us, we believe it is only possible to make sensible investment decisions when you are prepared to look out three years, five years, or possibly further. Time horizon is of particular importance for investors who have a significant proportion of their assets in equities. Over the past 15 years, they will have been painfully reminded that share prices can and will be extremely volatile year-to-year. Hence the understandable interest in multi-asset portfolios which have the ability to buy assets other than equities in order to dampen some of the wilder swings in the stock market. However, we believe equities are the most appropriate home for long-term savings, and equities have traditionally been, and will in all likelihood continue to be, the backbone of many portfolios. The investment goal for many clients is to achieve good returns, while not taking too much risk with their assets and all at a sensible cost. The 1.1 billion Baillie Gifford Managed Fund is a simple one-stop investment solution that has been meeting these needs for over 25 years. It has an ongoing charge of 0.44% *. The fund follows a multi-asset strategy holding equities, bonds and cash. Each of these asset classes is attractive in its own right but when put together in a multi-asset portfolio they combine to reduce volatility. We start from a neutral position of 75% equities, 20% bonds and 5% cash. Equities are real-world productive assets which grow over time and, in a portfolio context, have the highest returns historically, albeit they are the most volatile. Exposure to bonds gives a stream of income and the promise of repayment. We would expect a reasonable return, and it is a good diversifier from equities. Additionally, within bonds, we can achieve further diversification through investing in different flavours of bonds government bonds, corporate bonds, emerging market debt to name but a few. Cash provides security of capital and, from a portfolio perspective, allows some tactical allocation in periods when the market is particularly stressed or when we think there is over-exuberance. * Class B Accumulation shares as at 31 July

6 It s About Climate, Not The Weather There are clearly numerous alternatives available to today s investor, for example, property, infrastructure, hedge funds, etc. These will all have their place in a diversified portfolio, but one has to have a clear understanding of their risks and rewards, and one has to accept that they can have their limitations with regards to liquidity and costs. So, we recognise that share prices can fall considerably in the short term, but we also contend that this doesn t matter in the long run. You will thus understand why our ability and willingness to be long-term is crucial, as is the corresponding patience and understanding of our clients. Returning to my opening analogy, the weather (for example trying to predict the date that interest rates might rise or that quantitative easing might end) is of less importance to us than the climate: does there continue to be a deep, wide universe of attractive listed companies to invest in? Moreover, in our opinion a long-term approach offers additional benefits. The stock market, when measured by portfolio turnover, has become dramatically shorter-term when compared with its history: the overall average holding period for UK equities has declined since the mid-1960s from around eight years to just seven and a half months in Our willingness to buck this trend gives us more opportunities to buy into what we consider to be excellent businesses during periods when the herd is feeling gloomy, and hence share prices are artificially depressed. More prosaically, it helps keep costs low, as longer-term horizons mean less frequent trading, and thus less money leaking away in transaction costs. (Stepping back a little, a longer-term approach should also have beneficial implications for overall corporate health, as there is evidence to suggest that shortterm timeframes imposed by short-term investors influence the actions of real investee businesses, in relation to R&D, investment etc.) Geographic Analysis of Managed Fund 1 UK 26.0% 2 Europe (ex UK) 16.9% 3 North America 16.7% 4 Developed Asia Pacific 11.3% 5 UK Bonds 11.0% 6 Overseas Bonds 9.8% 7 Emerging Markets 2.7% 8 Cash 5.6% Managed Fund Periodic Performance to 31 December Months 1 Year 3 Years 5 Years Class B Acc 12.4% 17.7% 30.4% 72.7% Source: FE, single pricing basis, total return. Returns reflect the annual charges but exclude any initial charge paid. Past Performance is not a guide to future returns

7 First Quarter 2107 CONCLUSION In conclusion, while not ignoring the opportunities presented by short-term moves in different investment markets, particularly for multi-asset funds such as our Managed Fund, we believe it is more important to always keep our eyes on a longer-term investment horizon. With this in mind, we still consider equities to be a core holding and vital to the health of long-term returns. And as for myself, I long ago stopped worrying about the Scottish weather and have adapted to my adopted climate. I have made a sensible long-term investment: I bought a good coat. 7

8 CURIOUS ABOUT THE WORLD If you require further assistance or information, please contact Baillie Gifford & Co Limited, Calton Square, 1 Greenside Row, Edinburgh EH1 3AN Or telephone the Client Relations Team on: for intermediary enquiries or fax us on You can us at trustenquiries@bailliegifford.com or visit our website at Your call may be recorded for training or monitoring purposes. Copyright Baillie Gifford & Co Copyright Baillie Gifford & Co 2015.