International Alpha Fund: annual investor letter

Investors should carefully consider the objectives, risks, charges and expenses of the Fund before investing. This information and other information about the Fund can be found in the prospectus and summary prospectus. For a prospectus or summary prospectus please visit our website at https://usmutualfund.bailliegifford.com. Please carefully read the Fund’s prospectus and related documents before investing. Securities are offered through Baillie Gifford Funds Services LLC, an affiliate of Baillie Gifford Overseas Limited and a member of FINRA.

I’ve recently been lucky enough to visit the US to meet with a number of International Alpha clients. As I flew back home over the Atlantic I couldn’t help but reflect on how valuable I find it to get out and spend time meeting with the people for whom I work. Just as there is no substitute for looking a CEO directly in the eye, there’s nothing quite like being challenged in person to explain what I’ve been up to and why I still believe that our philosophy and process stands ready to deliver attractive long-term returns.

I am aware that over the early years of this decade the International Alpha Fund hasn’t delivered the performance that we aspire to and our clients expect. I can point to the fact that the immediate post-Covid period was a trying time for managers with a strong quality and growth bias. I can reflect that periodic bouts of underperformance are inevitable for all active managers. It doesn’t change the fact that you, our clients, didn’t receive the performance that we set out to deliver. And it shouldn’t obscure the fact that we made some mistakes that we need to learn from to improve future outcomes.

We’ve worked to evolve and improve ourselves throughout International Alpha’s 16-year history, but to do so is especially important after a period of such challenging performance. We’ve identified that the balance of new ideas entering the portfolio became a little skewed towards higher growth names with a wider range of potential outcomes. We acknowledge that in a market of inflated valuations our own valuation discipline needed to be tighter. And we recognise that we didn’t do enough on the portfolio construction side to mitigate certain thematic exposures that our bottom-up stock picking had created.

Each of these aspects has been and is being addressed. What remains unchanged, however, is my belief in the value of patience, long-termism and focusing on company fundamentals. I still believe that we have the right ingredients in place and am grateful to our clients for backing us to deliver on this belief. Outperformance in 2023 and over the past twelve months has been encouraging but I recognise we still have more work to do.

This time of year there’s always plenty to do and when not busy in the office or with my family, I often find myself busy in the garden. It’s a time for turning over beds, cutting back this year’s excess growth, planting a handful of new additions, and generally establishing the structure upon which the next few years’ outcomes will depend. I make mistakes here and there, but I’ve found I get more right than I get wrong, and I know that the harder I work on preparation as the Scottish weather turns grim, the better the outcomes when we finally emerge into the brighter days of spring. The parallels to the life of an investor are not difficult to draw.

Much like the plucky Scottish gardener, the International Alpha team’s focus on getting the inputs right remains as rigorous as ever. Fuelled by contributions from our dedicated analyst team, the portfolio construction group itself and, of course, the broader Baillie Gifford investment research engine, we’ve deepened our understanding of existing holdings, identified areas for further work, eliminated many candidates that haven’t made the grade and uncovered new ones with potential to develop for many years to come. We’ve relished the chance to get back on the road after our Covid-induced hiatus, with members of the team visiting 21 countries on 34 research trips and taking part in 641 company meetings across 2023 and 20241.

The variety of ideas at attractive valuations coming through our research pipeline as a result of this effort has been particularly satisfying. In the last few months alone this has included a Kazakh super-app (Kaspi), a Swiss biotechnology giant (Roche), a Canadian producer of electricity pylons (Stella Jones) and a Japanese accounting software developer (Money Forward).

In part the variety has been a function of opportunity, in a market so influenced by short-term macro influences that stock specifics and the long term have frequently been forgotten. In part it has also been a function of a concerted effort to ensure our research funnel remains as wide as ever and that we stay true to the broad church approach to growth investing that has served International Alpha clients so well since its inception. Each stock has entered your portfolio in the expectation that it will enhance its growth, quality and return potential for many years to come.

Just as important has been the work we’ve completed in developing and updating our understanding of existing holdings. Long-standing winners such as Cochlear and Epiroc have been sold as we see their growth prospects more fully reflected in their valuation. Many others have stayed the course and seen our conviction renewed.

True long-term outliers are inherently rare but we believe your portfolio is richly endowed with them and see their outsized influence on performance as hugely reaffirming of our investment philosophy. SAP, held since 2013, accelerating top line growth and dramatically expanding underlying profitability as the cloud transition of its client base finally flips from drag to driver. DSV, held since 2009, continuing to consolidate the world of freight forwarding. TSMC, held since 2005, reaping the rewards of nearly four decades of dedication to excellence that have seen it emerge as the world’s most profitable and irreplaceable semiconductor maker.

We know, based on reported data, that your portfolio is substantially more profitable, more cash generative, higher return and more sustainably financed than the index. We believe, based on our own modelling, but backed up by external forecasts, that it is growing faster and more sustainably than the index. External forecasts must be read with caution, but the key to me is that the ingredients are there and they align with the evidence of our own analysis.

One excellent question I was posed in a recent client meeting is whether our decision-making would have been different had the portfolio construction group been able to sit in the same room through 2020 and 2021 rather than engaging through zoom and the occasional ‘socially-distanced’ catch up. It’s a question to which we can never know the answer but I cannot help wondering: Is disagreement between friends easier when you can properly read their body language and reaction to the message you are delivering? Is challenge and resolution easier when you can follow up on an intense point of debate as you walk back to your desk?

In both cases I suspect the answer is yes. The strength of this strategy has always resided in the strength of the team and its ability to draw on and collaborate with the broader Baillie Gifford investment department. Nothing here has changed.

We cannot change what happened in the past but we can double down on the value of generalism, frank debate and team-based decision making. We can up our efforts to challenge existing holdings and bring forward new ones. We can ensure that the lessons of the past are comprehensively embedded in our process; in our consideration of idea generation, valuation discipline, portfolio construction and all the other elements that combine to make International Alpha what it is.

None of this will show its full value in a day, a month or even a year, but just as I look out with great optimism for the green shoots that I know will emerge in my garden as winter turns to spring next year, so I believe the same will be true for your portfolio in 2025 and beyond.

1 Data for period to end October 2024

Risk factors

This content contains information on investments which does not constitute independent 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.

As with all mutual funds, the value of an investment in the fund could decline, so you could lose money.

The most significant risks of an investment in the Baillie Gifford International Alpha Fund are Investment Style Risk, Growth Stock Risk, Long-Term Investment Strategy Risk and Non-U.S. Investment Risk.The Fund is managed on a bottom up basis and stock selection is likely to be the main driver of investment returns. Returns are unlikely to track the movements of the benchmark. The prices of growth stocks can be based largely on expectations of future earnings and can decline significantly in reaction to negative news. The Fund is managed on a long-term outlook, meaning that the Fund managers look for investments that they think will make returns over a number of years, rather than over shorter time periods. Non-U.S. securities are subject to additional risks, including less liquidity, increased volatility, less transparency, withholding or other taxes and increased vulnerability to adverse changes in local and global economic conditions. There can be less regulation and possible fluctuation in value due to adverse political conditions. Other Fund risks include: Asia Risk, China Risk, Conflicts of Interest Risk, Currency Risk, Emerging Markets Risk, Equity Securities Risk, Environmental, Social and Governance Risk, Focused Investment Risk, Geographic Focus Risk, Government and Regulatory Risk, Information Technology Risk, Initial Public Offering Risk, Japan Risk, Large-Capitialization Securities Risk, Liquidity Risk, Market Disruption and Geopolitical Risk, Market Risk, Service Provider Risk, Settlement Risk, Small-and Medium-Capitalization Securities Risk and Valuation Risk.

For more information about these and other risks of an investment in the fund, see “Principal Investment Risks” and “Additional Investment Strategies” in the prospectus. The Baillie Gifford International Alpha Fund seeks capital appreciation. There can be no assurance, however, that the fund will achieve its investment objective.

The fund is distributed by Baillie Gifford Funds Services LLC. Baillie Gifford Funds Services LLC is registered as a broker-dealer with the SEC, a member of FINRA and is an affiliate of Baillie Gifford Overseas Limited.

All information is sourced from Baillie Gifford & Co and is current unless otherwise stated.

The images used in this article are for illustrative purposes only.

Source: Baillie Gifford & Co, Bank of New York Mellon, MSCI. Share Class launch date: April 28, 2017. Net of fees, US dollars.

The performance data quoted represents past performance and is no guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For the most recent month-end performance please visit our website at www.bailliegifford.com/usmutualfund/internationalalphafund

Returns are based on the K share class from 28 April 2017. Prior to that date returns are calculated based on the oldest share class of the Fund adjusted to reflect the K share class fees where these fees are higher.

The Baillie Gifford fund’s performance shown assumes the reinvestment of dividend and capital gain distributions and is net of management fees and expenses. Returns for periods less than one year are not annualised. From time to time, certain fees and/or expenses have been voluntarily or contractually waived or reimbursed, which has resulted in higher returns. Without these waivers or reimbursements, the returns would have been lower. Voluntary waivers or reimbursements may be applied or discontinued at any time without notice. Only the Board of Trustees may modify or terminate contractual fee waivers or expense reimbursements. Fees and expenses apply to a continued investment in the funds. All fees are described in each fund’s current prospectus.

Expense Ratios: All mutual funds have expense ratios which represent what shareholders pay for operating expenses and management fees. Expense ratios are expressed as an annualized percentage of a fund’s average net assets paid out in expenses. Expense ratio information is as of the fund’s current prospectus, as revised and supplemented from time to time.

The MSCI All Country World ex US Index is a free float-adjusted market capitalization weighted index that is designed to measure equity market performance in the global developed and emerging markets, excluding the United States. This unmanaged index does not reflect fees and expenses and is not available for direct investment. The Fund is more concentrated than the MSCI ACWI ex US Index.

Top Ten Holdings

Data as of 30 September 2024.

It should not be assumed that recommendations/transactions made in the future will be profitable or will equal performance of the securities mentioned. A full list of holdings is available on request. The composition of the fund's holdings is subject to change. Percentages are based on securities at market value.

Legal Notices

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.

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