• Douglas Brodie hunts the globe for small companies with strong growth potential
• Brodie is prepared to hold onto companies for long periods of time to generate long-term investment growth
• More recently the trust’s performance has been held back by the value investing style outperforming its growth style

How it fits in a portfolio

Edinburgh Worldwide Investment Trust aims for long-term growth by investing globally in what the management team classifies as ‘immature’ businesses. These tend to be smaller, higher-risk companies focused on innovating and disrupting the status quo. The trust could help diversify an adventurous investment portfolio and complement funds or investment trusts invested in larger companies in the UK or internationally.

Manager

Douglas Brodie has been lead manager of the trust since 2014. He’s spent his entire investment career at Baillie Gifford, after joining in 2001, and became a partner of the firm in 2015. Brodie launched Baillie Gifford Global Discovery in May 2011, which is an open-ended fund that invests in a similar way as this trust but doesn’t have the ability to invest in unquoted companies or borrow to invest, known as ‘gearing’. Given the cross-over between the two portfolios we think he’s comfortably able to manage both.

Brodie is supported by two deputy managers, Svetlana Viteva and Luke Ward, who both joined Baillie Gifford in 2012. After working in several teams across the business, the pair joined the manager on the trust in December 2017.

The team has access to over 100 investment professionals at Baillie Gifford. They have eyes in all corners of the market, which is something we think sets them apart when it comes to identifying the companies of tomorrow.

Process

Brodie, Ward and Viteva look for companies with specific qualities to whittle their universe down to a portfolio of around 75 to 125 companies. A company must typically be less than $5bn in size to be considered for the trust.

While they invest in small businesses, the managers look for innovative ones with a long runway of growth in front of them. They must have a competitive advantage, which could strengthen over time, and be able to thrive as they get bigger. For certain industries, such as platform technology, they evaluate the opportunity for network effects, where a product or service improves with greater user numbers.

Meeting company management is key to the investment process. Many of the companies in the trust are managed by their founders, which the team believes can be invaluable. Business founders often have the vision needed to continue to grow the company in future.

Brodie only invests a small amount of money when he first invests in a company. If the team’s conviction grows, or if the share price falls significantly so they can invest at a cheaper price, they may invest in more.

Sectors like healthcare and technology are where most opportunities are found. While the trust can invest across the world, including higher-risk emerging markets, around 70% is currently invested in the US.

New investments this year include Beam Therapeutics, a biotechnology company focused on precision genetic medicine and in particular the correction of harmful inherited mutations. Fiverr was also added. They are an Israeli-based online marketplace for freelance services allowing companies access to globally outsourced task-based solutions. While the managers are happy to hold on to the companies as they grow into medium-sized or larger companies, they will sell those where the growth story no longer looks attractive. An example of this was the sale of Tesla, one of the trust’s most successful investments. The team had concerns that much of the growth and market share gains had been well reflected in the company’s share price and the further upside was limited. There are various holdings in the portfolio the team believe are earlier in their life cycle and therefore have greater upside potential from here that are more worthy of investment.

The trust can invest up to 25% of its assets at the time of investment in unlisted companies (those not listed on a stock market). This was increased from 15% and approved by shareholders at the latest AGM in February 2022. Investors should be aware that investment in unquoted companies is higher risk and they can be considerably less liquid than those traded on established stock exchanges. At the end of February 2023, unlisted investments made up 20.4% of the trust’s assets. 

Investors should be aware that the trust can borrow money to invest with the intention of increasing returns (known as gearing) to shareholders. At the end of February 2023, it stood at 12%. This could magnify losses in a falling market and increases risk. The managers also can use derivatives, which if used adds risk.

Culture

This trust is managed by Baillie Gifford, an independent private partnership founded in 1908. It’s owned by its partners, including Brodie, who work full time at the firm. This ownership structure means senior managers have a vested interest in the company, and its funds and investment trusts, performing well. This has helped cultivate a culture with a long-term focus, where investors’ interests are at the centre of decision making.

Fund managers are also incentivised in a way that aligns their interests with those of long-term investors and could retain talented managers.

ESG Integration

Baillie Gifford recognises the risks posed by Environmental, Social and Governance (ESG) issues and uses its position to encourage companies to act in a sustainable way. The company has a dedicated Governance and Sustainability Team, which is responsible for producing ESG research that challenges and contributes to the investment decision-making process.

The firm reports all its voting decisions and provides rationale in situations where it voted against management, in a detailed quarterly voting report. There is also a quarterly engagement report which details the companies engaged with, and the topic discussed, and further engagement case studies are available on the website. All this information is brought together in the firm’s annual Stewardship Activities report.

The managers don’t exclude companies purely due to ESG factors but where needed they engage with company management with the aim of improving relevant policies, management systems and helping them to consider how ESG factors could impact long-term investment returns.

Cost

The ongoing annual charge over the trust’s financial year to 31 October 2022 was 0.63%. Investors should refer to the latest annual reports and accounts, and Key Information Document for details of the risks and charging structure. If held in a SIPP or ISA the HL platform charge of 0.45% (capped at £200 for a SIPP and £45 for an ISA) per annum also applies. The platform charge doesn’t apply if the trust is held in a Fund and Share Account.

Investment trusts trade like shares, both buy and sell instructions with HL will be subject to share dealing charges.

Performance

Since Brodie took over management of the trust in 2014, its Net Asset Value (NAV) has grown by 114.83%*. Performance has been volatile at times though and, as always, past performance isn’t a guide to future returns.

The trust performed poorly over its last financial year to the end of October 2022 with its NAV declining by 40.3%, and delivering a share price return of -46.0%. Over this period the trust has faced a headwind posed by its growth style of investing which has been out of favour with investors. With high inflation and rising interest rates across many major economies, high growth stocks, often those with cashflows furthest in the future, have suffered some of the largest share price falls.

In terms of individual stocks over this period, Ocado, the online food retailer was the weakest performer. Rising inflation and food prices has reduced demand for the retailer’s products as consumers purchased fewer items on each visit. The managers remain positive about the company’s prospects as they announced a sizable partnership with the leading grocery chain in South Korea.

Codexis, a protein engineering company that develops enzymes for pharmaceutical, food and medical appliances also detracted in 2022. Despite reporting an increasing revenue, they remain a loss maker. Economic conditions remain unclear, and investors are worried they will run out of cash reserves and be forced to raise more.

On the other hand, some of the trust’s unquoted investments continued to be a source of positive contributions to returns. Space Exploration Technologies (SpaceX) and Shine Medical Technologies were some of the biggest contributors over the year. SpaceX has been pivotal in maintaining internet access to Ukrainians last year as well as launching 61 orbital rocket missions in 2022, the most ever launched in a year.

The long standing holding in gene silencing company Alnylam Pharmaceutical was the largest contributor to returns in the trust’s last financial year. The business had a successful readout on its high-profile phase three clinical trial in TTR-mediated cardiomyopathy. The business continues to move from rare inherited diseases into much bigger aspects of chronic medical need.

The managers’ growth style of investing aims to benefit from investing in exceptional growth businesses and holding them for long enough to reap the rewards. This can lead to periods of volatility though, and performance will look quite different from peers and the broader global market at times. A trust like this should be held as part of a well-diversified investment portfolio and be held for the long term. Investments rise and fall in value, so investors could get back less than originally invested.

At the time of writing the trust trades on a discount of -18.86%.

Past performance is not a guide to the future. Source: *Lipper IM to 31/03/2023

MORE ABOUT The EDINBURGH WORLDWIDE INVESTMENT TRUST INCLUDING CHARGES

VIEW THE EDINBURGH WORLDWIDE INVESTMENT TRUST KEY INFORMATION DOCUMENT

Want our latest research sent direct to your inbox?

Our expert research team provide regular updates on a range of investment trusts.