Baillie Gifford’s Roddy Snell: 'We have too many buy ideas'

For fund investors, 2020 has been the year of Baillie Gifford. While Scottish Mortgage is its most famous fund, all four of the Edinburgh firm’s Asia-focused vehicles have had remarkable success recently, making gains of more than 50 per cent in the first 11 months of the year. 

Market conditions have been perfect for Baillie Gifford’s investment style across its Asia range. A focus on long-term growth has led it to a lot of internet companies that have had a sudden surge in demand amid lockdowns. Countries such as China, Taiwan and South Korea have also emerged from the pandemic with far less economic damage than the west, as they were able to contain the virus more effectively.

“I’ve rarely been so bullish on Asia, the competition for capital has never been stronger,” says Roddy Snell, co-manager of Baillie Gifford’s China fund (GB00B39RMM81), Pacific fund (GB0006063126), China Growth Trust (BGCG) and deputy manager of Pacific Horizon Investment Trust (PHI).

Across the portfolios, Mr Snell looks for companies that will grow rapidly, as he aims to at least double his money over a five-year period. He thinks the quality of companies found in Asia, particularly China, has transformed over the past decade and you can now find world-class businesses with enormous growth potential at attractive valuations.

“Take our two largest holdings – Alibaba (HKG: 9988)  and Tencent (HKG: 0700) – these are companies that are growing at 20 to 30 per cent per annum still,” Mr Snell says. “If we look at their core business, I think they are trading at about 15 to 20 times price to earnings multiples, which just looks incredibly good value for that kind of growth. It’s 50 to 75 per cent cheaper than what you would be paying for a US peer.”

The sheer size of many Asian countries and the rate of economic growth, with fast-growing middle classes, is why many investors are looking to Asia for long-term growth. China is the only major economy in the world forecast to grow this year and its stock market rose 25 per cent over the year to 4 December, as measured by the MSCI China index.

Mr Snell is also excited about opportunities outside the country, as the pandemic has turbocharged tech adoption across some of the less tech-savvy parts of Asia in the Southeast (Asean) region. “Just as Sars [Severe acute respiratory syndrome] catalysed e-commerce in China and gave birth to the rise of the likes of Alibaba and JD.com (US:JD) you’ve seen that happen due to Covid across parts of Asia such as Indonesia and Vietnam, and that’s been very beneficial to a number of our holdings,” he explains.

According to Mr Snell, the Association of Southeast Asian Nations (Asean) is currently 10 years behind China, with a $100bn (£74.87bn) internet economy, which he expects to grow to $300bn or 400bn over the next five years. The Asia Pacific funds’ biggest holding and star performer this year has been ecommerce and gaming company Sea Ltd, which is listed in Singapore, but operates across Asean, with Indonesia serving as its dominant market. The stock has risen by more than 390 per cent for the year to 4 December.

“They’ve done something I don’t think anyone else has done, which is come in as a third player, late to the party, and out-compete much more financially secure businesses such as Alibaba and Softbank-backed enterprises to become the number one player,” Mr Snell says. He adds that Sea now has a 40 per cent market share, which he reckons will grow to 60 or 70 per cent, making it “certainly the most attractive company across Asean”.

Chinese shopping platform Meituan Dianping (HKG:3690) is another dominant company across Baillie Gifford’s Asia funds that has seen very strong growth. The company’s online grocery service enjoyed growth of 400 per cent over a three-month period, which “massively condensed the time it takes to scale up and reach dominance”, Mr Snell points out, adding “that means there is less competition in the space, and less time for competition to come about and for returns to accrue to a small number of players. The strong have got stronger.”

In other parts of the market, however, there has been a flurry of initial public offerings in China, which has led to Baillie Gifford taking part in many more than normal. Examples include KE (US:BEKE), the equivalent of Rightmove in China, Dada Nexus (US:DADA), the Ocado of China, financial marketplace Lufax (US:LU) and Burning Rock Biotech (US:BNR) – a business with promising cancer diagnostics offerings in its pipeline. "The issue is we have too many buy ideas," Mr Snell says, adding that the total number of companies held across Baillie Gifford's Asia funds has grown this year as a result.   

Addressing the challenges

It’s difficult to argue with the structural growth story that makes Asia an important market, but many investors shy away from the region because of poor transparency and governance practices, hostility to foreign investors, corruption, and questionable government intervention, which make investing much harder than in the west.

The Chinese government’s decision last month to halt Ant Group’s initial public offering (IPO), two days before it was due to be the world’s biggest ever public listing, is a timely reminder of who is in charge. Rumours have circulated as to why it was pulled at such late notice, but founder Jack Ma is reported to have upset the Chinese authorities with his views on regulation.

“In China, when you are running a business, you ultimately have to adhere to what the state wants – no man is bigger than the state. [Mr] Ma possibly fell foul,” Mr Snell says, adding,  “We think it is likely to come back in the next two to three months, but we will have to wait and see.” 

Concerns about irresponsible lending by Ant Group have also been touted as a possible reason for the delay. For years many people have worried about a reckless expansion of credit across China, which could at some point lead to an almighty crash in the Chinese economy. Mr Snell, however, does not think this will happen. 

While he admits there may be some issues with debt that has built up very quickly in the system, Mr Snell adds: “Let’s not forget the enormous tools that China has at its disposal. Chinese government debt to GDP is one of the lowest in the world so they have a huge amount of firepower and monetary tools at their disposal should they need to do anything, and they control the banking system.”

Rising tensions between the US and China look set to increase and talk of a ‘trade war’ turning into a ‘tech war’ has raised questions over how this will affect intellectual property in China and demand for their products in the tech supply chain. But Mr Snell thinks that China is the winner here.

“What we see at the moment is China really doubling down on everything it can to make sure it succeeds in terms of research and development and innovation. In the long run for a stock picker this is quite an exciting opportunity and probably makes China a more competitive economy over the next decade than had they just been left alone,” he says. There is also the possibility that the US will cease to permit Chinese companies to list on its exchanges, but Mr Snell thinks those affected would have no problem raising money on the Hong Kong Stock Exchange or elsewhere if necessary.

Mr Snell also shrugs off the difficulty of navigating poor reporting quality by Chinese companies, and corruption which some experts say is rife across China. To help with research, Baillie Gifford recently opened a Shanghai office, its first outside of its home city Edinburgh. It also employs a team of ex-journalists in China who do due diligence on potential investments for them. “There have been times when they have come back with red flags saying you should not invest, so we don’t,” Mr Snell says.

Comparing the funds

For broad Asia Pacific exposure, investors can choose between Baillie Gifford Pacific Fund and Pacific Horizon Investment Trust, both of which aim to capture long-term growth. While the two funds have a heavy crossover in what they own, with six of the top 10 names appearing in both, there are some key differences. 

Pacific Horizon is a closed-ended vehicle, meaning it can invest in unlisted companies. While very few unlisted companies are currently included in the portfolio, Mr Snell expects the allocation to unlisted stocks to grow. The trust can also use gearing, which broker Winterflood said stood at 6 per cent on 30 November, which will amplify both gains and losses. 

Pacific Horizon has also been trading at a very large premium to net asset value (NAV) (16 per cent on 4 December) following a run of outstanding performance. Investors should bear in mind that shares bought at a high premium to NAV can quickly lose substantial value if the premium is eroded. 

Source: Baillie Gifford as at 31 October, *Hargreaves Lansdown, ** Annual report, 31 July

For targeted China exposure, Baillie Gifford has been running its open-ended China Fund since 2008. Earlier this year the firm took over the management of Witan Pacific, which has been renamed as Baillie Gifford China Growth Trust.  

Both funds are trying to capture long-term growth in China. Like Pacific Horizon, the China Growth Trust has the option of investing in unlisted companies and using gearing, but it has also been trading at an eye-watering premium to NAV (21.9 per cent on 4 December). Nine of the same companies appear in the two funds’ top 10 holdings.  

Source: Baillie Gifford as at 31 October, *Hargreaves Lansdown

Roddy Snell CV

Roddy joined Baillie Gifford as a graduate in 2006. He co-manages the firm's China Fund, China Growth Trust, Pacific Fund and Emerging Markets Leading Companies fund, and is deputy manager of Pacific Horizon investment trust. He has a first class degree from the University of Edinburgh in Medical Biology.