Morningstar

Baillie Gifford WW Discovery B USD Acc

Analyst Report
Morningstar's Take
|31/07/2023
by Daniel Nilsson
We have lessened our conviction in Baillie Gifford WW Discovery’s ability to beat its Morningstar Category index in varying market environments. The reduced conviction in the portfolio construction process, issues around sell discipline, and recent team turnover have resulted in a downgrade of the People and Process pillars to Average from Above Average, respectively.

The global discovery team was established in 2009. It seeks to identify immature, ambitious, and entrepreneurial companies that are looking to scale up their operations on a global level. These firms typically offer solutions that larger companies are failing to address, and if successful, can offer investors asymmetric returns as they take market share and disrupt incumbents.

The process focuses on immature companies with a market cap of typically (but not always) less than USD 5 billion. Potential ideas are primarily unearthed through internal discussion, company meetings, and trade shows. The focus on disruption and innovation means that technology and healthcare names form a substantial part of the portfolio, while energy and basic-materials stocks feature sparingly. In addition, given where they are in their evolutionary development, around a third of the portfolio consists of firms that are not yet making a profit. The resultant portfolio is typical of many at Baillie Gifford in that it is benchmark-unaware with a very high active share relative to its S&P Global Small-Cap Index prospectus benchmark.

While the process has been consistently applied since launch, more recently we have observed inefficiencies in the execution of sell discipline, which has contributed to unfavourable performance outcomes. We also have somewhat reduced conviction in the portfolio construction process, which has culminated in a portfolio with sizeable sector and industry concentrations.

Results for the longer-running and broadly similar OEIC under Douglas Brodie since 2011 had been strong for many years, but the severe drawdown in the past 24 months has pulled down the fund’s relative performance figures. It remains slightly ahead of the index and peers from its inception to 30 June 2023, although three- and five-year numbers are substantially worse, 10-year numbers are modestly worse, and its Sharpe ratio is now significantly below peers since inception. Some of its recent underperformance can be explained by the reversal of the strong returns from perceived pandemic winners, and from the impact of the market's rotation away from growth and towards more-cyclical stocks that this fund is not exposed to. However, this has been accompanied by a handful of stock-specific missteps; some operational disappointments are of course somewhat unavoidable given the large number of holdings in the portfolio. That notwithstanding, this has been an undeniably volatile period of performance for the fund.

Recent performance should act as a reminder that investors here must maintain a long-term view. While it is impossible to know for sure whether we have reached a performance nadir—there may well be further to go—this remains a differentiated portfolio of companies that could take advantage of new areas of secular growth in the coming decade.
 
Morningstar Medalist Rating™The unconstrained approach has resulted in disappointing return outcomes over the past two years.
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Morningstar Pillars
PeopleAverage
ParentHigh
ProcessAverage
 
Morningstar Medalist RatingMorningstar assigns the Medalist Rating to funds that are qualitatively and quantitatively assessed through manager research and algorithmic processes. The assessment turns on three key “pillars” – People, Process, and Parent – that yield an estimate of how well a fund will perform before fees but after adjusting for risk.
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