Rising to the challenge

As with any investment, your capital is at risk. Past performance is not a guide to future returns.

Amy Maxwell (AM): Hello and welcome to this live programme from Baillie Gifford. The latest in a series of webinars, where we talk to the managers of the business’ different investment trusts and funds. Today, we’re talking to Lee Qian, investment manager of the Baillie Gifford Positive Change Fund. My name is Amy Maxwell, I’m from Citywire and I’ll be talking to Lee about how he runs the fund for about 25 minutes.

Welcome Lee, thanks for joining me here today.

Lee Qian (LQ): Thank you for having me.

AM: Let’s begin with the big one up top. The US and the impact of the Trump administration. Given the recent policy changes, how do you think the Trump administration’s tariffs might impact the companies within your portfolio? Especially those involved in the green transition or the energy transition.

LQ: The start of year, the Trump administration has certainly provided plenty of headlines that keep investors and the market on their toes. Thinking of one of the concerns that investors might have for a strategy like positive change, as you identified, is the impact of the Trump administration on the energy transition and the broader uncertainty that his policies can have on the wider economy, as well. One aspect here is that the environmental exposure for positive change is actually, well-diversified and it’s not focused purely on renewable energy and on solar and wind. Rather, it has a range of companies that tackle areas such as infrastructure and construction, which will be provided with more support if you, as indeed, reshore of its manufacturing capacity.

On top of that, we have companies like Xylem, involved in water and John Deere that are involved in agriculture and good. We believe those companies will be broadly unaffected by the pace of the energy transition itself. Indeed, some companies like Autodesk, which provides software for construction engineering and the architecture sector, could benefit if infrastructure and construction actively picks up in the US. We are cognisant of the potential uncertainties and changes that policy could bring about, but we believe the portfolio is well-placed in that respect.

AM: Interesting, that reshoring idea. You’re looking at something like Ashtead, which is in construction and infrastructure, to really be a beneficiary there.

LQ: Indeed. We do think there will be a couple of companies that could be well-placed in light of some of the policies that the Trump administration has laid out. For example, the aggressive investment in AI infrastructure. That would be a beneficiary for a company like Schneider Electric, which provides electrical equipment and has a 20 per cent exposure to the datacentre end-market. So, if America does build out more data centres to power AI innovations, then that will be a beneficiary for a company like Schneider and indeed, elsewhere around infrastructure, construction. Those could also be areas where growth rate could be higher, given the more investments that are being put into the domestic economy.

AM: Staying with some of these innovations, let’s move on to agriculture. It’s a big theme within the portfolio and your investment, say, in John Deere hones in on precision agriculture, in particular. Where technology is playing a big role in transforming how we farm. Can you talk to us about some of the developments going on here in agriculture and precision agriculture, in particular?

LQ: We are hugely excited about this area. We are excited about the application of digital technology of increasing computer power and artificial intelligence in traditional sectors like food and agriculture. John Deere really exemplifies some of the cutting-edge innovation in this area. The company well-known for making their iconic green tractors, but for the last 20 years have been investing heavily in digital technology. The have created a portfolio of products and solutions that are leveraging on hardware and software innovations, to help farmers farm more efficiently. Use less resources like chemical fertiliser and pesticides, yet grow more food and increase the output.

One really clever example of that is their See & Spray technology. Those are large sprayers. You might see some of those if you ever drive past a farm. Wide broom that sprays fertilisers or pesticides onto the farm. What this technology have is they have loads of cameras in front of the sprayer and as it moves across a farm in real time, the camera takes a picture of what’s in front of it and the onboard GPU is able to use artificial intelligence to identify what is a weed and what is a crop. Then the sprayer will only apply the pesticide onto the weed and not the crop. It drastically reduces the amount of pesticides that farmers have to use. Up to 60 per cent, 70 per cent in some instances.

An enormous economic saving for farmers because they are using less pesticides and less input materials, but also, has a great environmental benefit because we have less chemical being sprayed onto our food and being sprayed into the wider ecosystem as well. This is just one example from John Deere, but it highlights the potential of applying technology to the food and agg sector to create both economic value and environmental benefit as well.

AM: It's really interesting. They’ve spent 20 years developing this technology and what a result. Reducing pesticide usage by 60 per cent. That’s a sizeable margin, isn’t it?

LQ: That’s an enormous saving. Pesticides and chemical are one of the larger cost-base for farmers. So having the ability to reduce a key cost input for farming by such a huge percentage has a real value for farmers. Elsewhere, the use of autonomous technology. Tractors that literally drive themselves on the farm, without needing a person to be inside, that reduces the labour requirement for farming and a lot of farmers are struggling with finding the right people and the skilled people that can farm. This also helps to alleviate some of the labour shortage issues that farmers are experiencing when it comes to growing food. Both environmental and social benefits as well.

AM: Was talked there, about the impact of the pesticides entering the food system. Let’s move into more food related companies. We’re seeing a diabetes epidemic, some of it diet and lifestyle related, some of it obviously, with type I diabetes naturally occurring. The usual way to access this theme as it were, would be via Novo Nordisk, but you are taking a very different route to the diabetes story. Do you want to tell us more about that?

LQ: We have been investing in the diabetes area for a long time. One of our longest holdings and company is Dexcom, which make continuous glucose monitoring devices for people who are living with diabetes. Those are small patches that are attached to people’s skin and are able to measure the blood sugar level in real-time and send that information to a person’s smartphone, for example. So, they can see the fluctuation and the level of their blood sugar, without needing to constantly do the finger prick test and take blood measure that way. This improves the lived experience of people who have diabetes dramatically. It also reduces the chance of complication from diabetes.

One really telling example of that is for children who have type I diabetes. In the past, their parents had to wake the child up at night, every couple of hours to do a finger prick test, to see the blood sugar level. Now, with the patch, they can see that in real-time throughout the evening without needing to wake their child up. The huge improvements in how people with diabetes can live and manage their condition is tremendous. We think the benefits from that is people are able to better manage their disease, reduce the chance of complication and increased healthcare expenses down the road. The fact that the device is so easy to use and so convenient has meant the company have seen rising demand for their continuous glucose monitoring devices.

Since the inception of the strategy, Dexcom is one of our top contributors to performance. It has grown significantly in terms of number of users and then contributing to fast topline growth, as well as profit growth for the business. A nice example of a business that is providing something really valuable for patients, that enhances their lived experience. By doing that, creating a growing and scalable business that rewards shareholders over the long-term as well.

AM: Insulet is another company within this same ilk, do you want to tell us more about the addition? That’s a more recent addition, isn’t it?

LQ: That’s right. Insulet is a more recent additional to the portfolio. We took a holding in the company last year. Whilst Dexcom is focused on the blood sugar monitoring, Insulet is focusing on injecting insulin to manage the fluctuation in blood sugar levels. We hope that Insulet will follow a similar playbook that Dexcom has done, in terms of creating a novel and well-liked product by people who have diabetes. Enhance their lived experience and from that, able to grow their revenue and profit over the long-term. So far, the company is delivering on that. It’s achieving fast revenue growth in the quarters that we have held the shares in. We hope that the company can continue its track record, continue to grow at a fast pace, by providing something that the consumer and patients really desire.

AM: I suppose, it’s fair to say that both of these companies are focusing on diabetes management rather than a pharmaceutical cure. Why have you chosen that rout in particular?

LQ: There is a lot of excitement around GLP1 at the moment. It’s a very interesting area and we have spent a lot of time learning about it from our own research and speaking with colleagues within Baillie Gifford. We think that it’s interesting, but we believe it’s going to be a very competitive area as well. We are not yet sure that the companies which are leading GLP1 at the moment, like Novo Nordisk, will necessarily be the winner five or ten years out in the future. We think there are new entrants coming in the market, which are providing interesting therapeutics that help to reduce some of the negative side effects of GLP1 drugs like nausea and vomiting and just generally feeling unwell.

They might have the opportunity to start taking share away from Novo Nordisk over the long-term. It’s still an open debate and area we are following and researching, to see what is the competitive shakeout going to look like. What are the responses from Novo Nordisk and Eli Lilly that they want to do, to make sure they can maintain their market share. It’s an interesting area, but we have more questions than answers at the moment, that give us the conviction to invest in those businesses.

AM: Valuations, I imagine, are already quite high in that space.

LQ: Indeed, indeed

AM: Let’s move on to another area of interest within the fund. You have significantly more exposure to emerging markets compared to the benchmark. You’ve got 25 per cent of the fund in emerging markets, compared to 10 per cent in the benchmark. Obviously, you’re seeing lots of opportunity there. Do you want to break that down for us? Some of the most compelling stories here.

LQ: We are excited about the opportunity in emerging markets. Taking a step back, six out of eight billion people in the world live in emerging markets. Emerging markets economy account to around 50 per cent to 60 per cent of the global GDP as well. Yet, as you pointed out, they only account for 10 per cent of the global equity benchmark. We believe that as the emerging market economy continues to grow, they should see their share of the global equity benchmark increase and we believe, there are exciting opportunities within this growing area as well. One particular section which is very interesting to Positive Change is those companies which are providing improved access to financial services in emerging markets. Leveraging on smartphone and internet, to provide mobile banking and online banking to people who previously didn’t have access to those services.

A nice example of that is Mercado Libre in Latin America. The company’s roots are in ecommerce and it’s one of the largest ecommerce platforms in the region. Through that, it’s helping to enable small merchants to sell more goods, reach more customers and have a beneficial impact in economic development of that region. On top of that over the last few years, Mercado Libre has been using its core competency in digital technology to build out a suite of financial services offerings, which covers everything from deposit gathering to lending to insurance and wealth management. Today, Mercado Libre has more than 60 million active users of its financial services products.

So, a huge number of people accessing financial services through Mercado Libre and by doing that, they can participate in the real economy more efficiently. It reduces the cost of doing business for small businesses and it enhances the ability of people to save for a better future as well. Now, this has a tremendous positive impact on the individuals that are using those products, in the economic development for that region. By doing that, once again, Mercado Libre is growing its business and seeing increasing revenue and profit growth as the adoption of those products increases.

AM: I think this all plays into the idea of enablement, doesn’t it? That is a key theme across the portfolio. I can see some of the top holdings. TSMC, Shopify, Microsoft, they are all enabling business to transact or infrastructure to grow these companies. Do you want to talk to me a little bit about some of the technology and innovation-based companies that they’re at the top of the exposure list?

LQ: You’re exactly right. There are companies which are enabling progress in society and enabling new technologies and new innovations. A lot of the companies I’ve already mentioned are able to deliver their impactful products and services because of the advancement in digital technology. In more powerful and more efficient semiconductors, in cloud computing. Those technologies are the backbone which is enabling those new services and product to be delivered. Businesses like TSMC and Microsoft, ASML, are exactly the ones which are driving the innovation in those enabling technologies. ASML and TSMC are leaders in the semiconductor value chain and ASML produces lithography equipment and that allows smaller and smaller semiconductors to be made.

TSMC is the world’s largest semiconductor foundry, producing semiconductors cheaper and cheaper, allowing them to go into products like the continuous glucose monitoring devices that Dexcom are producing or the smartphones that are powering the mobile banking devices that Mercado Libre are providing. Then we have Microsoft, whose cloud and AI technology are enabling a lot of those services to be hosted and to be accessed by individuals as well. We are excited, through looking at our portfolio, in the opportunity for digital innovation in the growing demand for semiconductors and cloud computing. We think that businesses like TSMC and Microsoft are well-positioned to ride the growing demand for their technologies.

AM: As you say, it is going to be a very competitive space. The semiconductor and the cloud space. Do you think these businesses then have wide enough moats to ensure that they’re going to be the winners in the next five to ten years?

LQ: An area that we focus a lot on when we analyse companies is the size of the competitive moat and what drives the differentiation in that business. With TSMC, they are the global leader in making semiconductors. There are many reasons which underpins their competitive advantage. Those include the strategic choice to only focus on manufacturing semiconductors. So, they don’t compete with their customers. This is not a business like Samsung, for example, which will have its own smartphone business, alongside making semiconductors. So, there is conflict of interest. In addition, TSMC have benefitted from scale economy. Each new semiconductor fab now requires billions of dollars. Up to $10 billion of investment.

This is not something that any company can go in and is able to invest. In addition to that, the process know-how of operating those facilities at efficient scale, at low-cost, at high throughput is something that requires decades of experience to build up. We believe TSMC had a very strong competitive edge in manufacturing of semiconductors. Then with Microsoft, the broader ecosystem the company has created. Everything from Office that we use for our day-to-day work to enterprise software that help businesses to keep up their IT infrastructure. As well as the cloud services they provide. All of that creates a very powerful ecosystem that is the competitive advantage for Microsoft.

Those are some of the aspects which we look for, that give us conviction and confidence that they are not only going to be profiting from the opportunity today, but will continue to do that three years, five years down the line as well.

AM: This is my final question before we get into the Q&A. You grew up in China. Your personal background has seen you witness, first hand, tremendous economic progress. I was just wondering how that has shaped you and your experience of running this fund?

LQ: I grew up in China in the 1990s. I witnessed how a flourishing economy can have a tremendous positive impact on society. It was a period when the government was experimenting with market reform allowing a greater role for entrepreneurs and private enterprises in the economy. They created better paid jobs. They created economic growth and new products and services in food, water, education that people have access to and improve the lived experience of people in China. I believe that when businesses and capitalism function well, they should have a positive impact like that. Today, clearly, our society have some big challenges we need to resolve.

Whether that is solving climate change or making sure we are well-prepared for if there’s a next pandemic or just improving access to education and training, so people have the right skills to flourish in an economy where technology changes every year. All of that presents opportunities for mission driven businesses and entrepreneurs to create innovative products and services. Some of those, we have mentioned so far. By doing that, create profitable growing businesses that will reward shareholders as well. That is something that I’m hugely passionate about. It’s something that I experienced growing up in China and I believe will have huge potential in terms of creating economic prosperity and a sustainable future for future generations.

AM: It certainly feels like the portfolio is filled with companies doing just that. Thank you for your time in this interview. We’re now going to move to the audience Q&A, for which I’ve got a few questions lined up here. We do have a question around performance. “Since the end of the pandemic, when technology funds recovered, why has the fund not kept apace?” Perhaps we could address any performance related concerns here.

LQ: Absolutely. We’re not going to shy away from the fact that the performance over the last three, four years has been disappointing and been below our expectation. I think there are a couple of areas to highlight. 1) Is that we had a bigger exposure to healthcare and that has been a headwind against us. The last two, three years have been a downcycle in the healthcare industry. Some of the investments that were made during the COVID period have led to excess inventory levels in some of the companies that we invest in. Then a higher interest rate environment meant funding for biotech and smaller pharma companies is becoming harder.

That has led to a cyclical downturn in the healthcare industry over the last two and three years. Our higher exposure to that end-market has been a headwind. Now, we continue to believe that innovation in healthcare over the long-term will be very exciting and provide a lot of investible opportunities, such as Dexcom and Insulet that we mentioned earlier. One of the lessons that we have taken away from the last few years is just to be more conscious around managing some of the position sizing and the overall exposure to the healthcare sector, which can be volatile in the near-term. That’s one of the factors I would highlight.

The other is that we had a fairly low exposure to the so-called Magnificent Seven in the index, which has driven a lot of the investment returns over the last 18 months. Some of that is because we felt it would be a struggle to meet our sustainability and impact hurdles. Business like Meta, for example, social networking can be quite tricky for our fund to invest in, given our impact focused objectives. In other areas where we can invest, such as Microsoft, given that role in enabling cloud technology and innovation, we are looking for those types of businesses to give us exposure to the types of exciting growth drivers that underpin the Magnificent Seven. So, we’re being more conscious about our underweight to that area as well.

Those are two high level factors that have affected performance. Then, when we look at our stock picking, our overall exposure to the stock return at an individual company level, has been broadly favourable. There have been some very big winners we have identified, including Tesla and Dexcom over the long-term. As well as some that have just provided very steady returns, such as John Deere. We’ve also had a few companies where we picked the wrong business and we learnt from those mistakes and we learnt how to avoid picking some of those companies that underperformed and didn’t execute. All of that formed part of our learning, which we believe will help us be better investors over the long-term.

In addition to that, we are still hugely excited about the long-term opportunity for Positive Change. Whilst the near-term performance over the last three years has been somewhat disappointing, since inception for Positive Change, it’s still comfortably above the benchmark. We believe that investing with an impact focus by looking for businesses that can add value for society, will be a promising way to deliver financial and investment returns for our clients over the long-run.

AM: You spoke there about the forward-looking case. There’s another question here, “Can you name some of the sectors that you are feeling most excited about in the coming years?” We’ve touched on quite a lot. Agriculture, med-tech, some of the financial services in emerging economies. Enablers. Are there some below the radar sectors perhaps, that you might be able to share with us? Some pockets of excitement.

LQ: I think there are pockets of excitement around education. Obviously, with fast-moving technology landscape, the skillsets that are required to flourish in the workplace changes over time. We believe better access to education can be a very helpful tool and an area of growing opportunity. One of the companies in the portfolio is Duo Lingo, which provides language learning. In developed markets, some of that might feel like language learning is more for fun. Actually, in emerging markets, having a second language can be a really helpful skillset for people to either find a better job or even go abroad and get training and academic experience at a top education institution in Europe or America.

We’ve seen rising demand for Duo Lingo’s approach to education and to language learning, where they are using a mobile app that combines gamification, along with a competitive element and scoring and ranking against your friends, to create an addictive element and get people to learn language regularly and improve their language skill. The business has more than 100 million active users, leaning language with Duo Lingo. Hugely exciting opportunity. We think it’s still in the early innings of growth and monetisation and revenue and profits growth. That’s just one example. We are confident over the coming years, we’re able to see other innovative businesses leveraging on technology and innovation to deliver better education and training experiences to individuals.

AM: We’ve got another question here. “Earlier you spoke about how higher interest rates were impacting biotech funding. How are higher interest rates impacting the portfolio in general?”

LQ: Higher interest rates, if everything holds the same, would mean that the market is discounting future cashflow at a higher discount rate. So, there will be a negative impact just on the valuation. There’s also an impact on the business fundamentals and here is where our focus on businesses with strong competitive advantage. Good return on capital is a helpful differentiation and protection against the higher interest rates. In some instances, higher interest rates can actually be beneficial because it leads to a more rational competitive environment. So, the companies with the strongest competitive advantage are able to leverage their competitive edge and grow more profitably. We saw that with the case of Mercado Libre over the last few years.

With a higher interest rate, some of its competitors have fallen away because they couldn’t simply raise loads of cheap financing and then spend it on marketing and promotion just to grow user accounts, without the prospect of breaking even and earning a profit. As competition becomes more rational, those businesses have fallen away and Mercado Libre has actually been gaining market share and outgrowing the market as a result. So, there will be instances where higher interest rates can be a tailwind for some of the businesses we invest in.

AM: A question has come in about, “What is the fund’s perspective on holding a significantly large holding in Tesla?” The Tesla perspective. In the news a lot. What’s the management of the fund’s view on it?

LQ: We have been a long-term investor in Tesla and it has been a posterchild in terms of the energy transition and popularising electric vehicles and really driving the industry forward in the adoption of a cleaner form of transportation. At the start of this year, however, we actually sold our Tesla holdings for Positive Change and a big part of that is valuation. The share price of Tesla has increased significantly following Trump’s election last November, but we felt that the Trump presidency doesn’t really affect Tesla’s long-term prospect significantly. The huge increase in valuation provided an opportunity for us to sell and move on from that holding. We felt that at the start of the year, the higher share price meant the risk reward of continuing to own Tesla no longer made sense and we exited that holding earlier this year.

AM: It was a nice high to exit on.

LQ: Yes.

AM: “Have you considered Starlink and possibly, kit suppliers to Starlink?”

LQ: Space exploration is an interesting topic. Actually, John Deere partners with Starlink to bring some of the satellite communication to rural farming communities that don’t have very good 4G, 5G coverage. So it’s definitely having an impact on the real world. We can’t invest in Space X within the Positive Change fund, given it’s a private company, but we are on the lookout for potential suppliers or other companies which are helping to drive forward the space exploration industry. So, it’s an active area of research and who knows, maybe in a few years’ time there will be companies in the portfolio exposed to that theme.

LQ: That’s all the questions that we’ve had. That’s all we’ve got time for. Thank you, Lee, for your time and thank you to our audience for your insights and for your questions. We’ve some more sessions coming up like this, so do keep an eye out for those if you did find today useful. Thank you very much.

Annual past performance to 31 December each year (net%)

Source: FE, Revolution, MSCI. Positive Change Fund Class B-Acc. Total return in sterling.
Share class and Sector returns calculated using 10am prices, while the Index is calculated close-to-close.

Legal Notice: Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indexes or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

The manager believes the MSCI ACWI plus at least 2 per cent a year is an appropriate target given the investment policy of the Fund and the approach taken by the manager when investing. In addition, the manager believes an appropriate performance comparison for this Fund is the Investment Association Global Sector.

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This communication was produced and approved in March 2025 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

Investment markets can go down as well as up and market conditions can change rapidly. The value of an investment in the Fund, and any income from it, can fall as well as rise and investors may not get back the amount invested.

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Baillie Gifford & Co Limited is authorised and regulated by the Financial Conduct Authority and is an Authorised Corporate Director of OEICs.

The specific risks associated with the Fund include:

• Custody of assets, particularly in emerging markets, involves a risk of loss if a custodian becomes insolvent or breaches duties of care.
• The Fund invests in emerging markets where difficulties in trading could arise, resulting in a negative impact on the value of your investment.
• The Fund’s concentrated portfolio relative to similar funds may result in large movements in the share price in the short term.
• The Fund has exposure to foreign currencies and changes in the rates of exchange will cause the value of any investment, and income from it, to fall as well as rise and you may not get back the amount invested.
• The Fund’s share price can be volatile due to movements in the prices of the underlying holdings and the basis on which the Fund is priced.
• The Fund invests in companies whose products or behaviour make a positive impact on society and/or the environment. This means the Fund will not invest in certain sectors and companies and the universe of investments available to the Fund will be more limited than other funds that do not apply such criteria. The Fund therefore may have different returns than a fund which has no such restrictions.
• There is no universally accepted definition of impact. Furthermore, there is a risk that individual investments fail to make a positive contribution to society and/ or the environment, and that overall the Fund fails to meet its objective.

Further details of the risks associated with investing in the Fund can be found in the Key Investor Information Document, copies of which are available at www.bailliegifford.com, or the Prospectus which is available by calling Baillie Gifford on 0800 917 2112.