As the economic backdrop has deteriorated so investor appetite for investments with a focus on ESG (environmental, social, governance) factors has dipped.

Shares recently chatted to Baillie Gifford Positive Change Fund’s (BYVGKV5) Rosie Rankin, about the case for investing to achieve a positive impact after a difficult period performance-wise for the fund.

The investment strategy revolves around four impact themes says Rankin: ‘We have social education and inclusion, environment and resource needs, healthcare and quality of life and finally we look at companies which provide solutions at the very bottom of the income ladder.’

Rankin says astonishingly that approximately four billion people in the world earn less than $3,000 a year. The fund also invests across a range of asset classes which could add to its attractions for an investor who wants to gain exposure to the ‘impact investing’ approach.

RANGE OF ASSET CLASSES

‘Positive Change covers: infrastructure, fixed income, private equity and public equity. Impact investing is incredibly exciting it terms of offering people the ability to have an investment return and contribute to a more sustainable world,’ says Rankin.

The fund invests in a range of companies from those in the ‘early investing stage’, to those in a ‘start up’ phase, to those which are ‘long-term established’. Rankin says: ‘We give absolutely no guarantee on investment returns what we do say is that we invest in 35 exceptional businesses. They will be businesses at every stage of evolution, for example Moderna (MRNA:NASDAQ), we invested in the IPO in 2018 at an early stage, whereas Deere & Co (DE:NYSE) has been around for well over 100 years.’

DIVERSE RANGE OF COMPANIES

‘So, there is real diversity with the types of companies that we invest in and what they are solving as a challenge. In terms of structuring the portfolio it is completely benchmark agnostic.’

Consequently, Rankin explains, the portfolio is vastly different from the MSCI ACWI benchmark (an index of global companies) and this is something investors need to be comfortable with. Drilling down further into the sort of companies the fund invests in you can see they focus on challenges around climate change, inequalities, water scarcity and poverty.

STRESS-TESTING THE PORTFOLIO

Rankin says the past 12 months has taught their investment managers a lot in terms of testing the resilience of the companies within their portfolio against a difficult macroeconomic background.

‘We have been looking at every single company in the portfolio in terms of rising interest rates and inflation and how it impacts individual companies.’

Rankin explains that several companies left the portfolio because of this exercise, for example Beyond Meat (NASDAQ: BYND) the plant-based meat substitute company, and cell-based products company Berkeley Lights (NASDAQ: CELL). ‘The work of understanding the resiliency of companies never finishes,’ she adds.

‘In relation to healthcare, we are looking at companies that better understand human biology and diseases, so it might be companies which are active in gene sequencing or single cell analysis for example.

‘Companies that are developing innovative therapeutics, like Moderna which is well known for its Covid vaccine. But is developing almost 50 other vaccines and therapeutics in areas such as HIV vaccines and personalised cancer vaccines which is exciting in terms of impact and investment opportunities,’ says Rankin.

TAKING ON ENVIRONMENTAL CHALLENGES

‘Looking at challenges related to environment we are looking to companies which can reduce our use of water and increase water quality, like water technology company Xylem (XYL:NYSE) which produces water infrastructure systems or John Deere which, through its precision agricultural technology company, allows farmers to use far less fertilisers and pesticides which is great for farmers as it keeps costs down and mitigates some of the environmental impact of farming.’

After a strong start from the fund’s inception in January 2017, it has struggled of late due to the macro environment of higher interest rates and higher global inflation.

The fund’s performance over one year (up to 31 March 2023) of -9.3% is disappointing but over three years the performance has been significantly better with an annualised return of 18.4% and over five years this figure is 16.4%. This compares with -2.7% for its Investment Association Global sector for the last 12 months and 14% and 8.7% for the last three years and five years, respectively.

The three-year and five-year performance of the fund is in line with its two objectives of generating attractive long-term returns and contributing to a more sustainable and inclusive world.

‘We define attractive long-term returns as 2% per annum ahead of the MSCI ACWI over a five-year timeframe. It has been hard to achieve the returns we wanted [over the past 12 months] but what can be said [on the upside] is that many of the companies in our portfolio are making strong operational progress which is set to continue in the future.’

WHAT NEXT FOR THE FUND?

Capital appreciation is the focus of the fund and is not a ‘facilitator of steady income’ says Rankin. The negligible historic yield of 0.22% reflects this.

‘We see clients positioning the Baillie Gifford Positive Change Fund in their portfolios as a driver of long-term growth.’

Rankin does not expect any dramatic changes to their portfolio going forward. ‘We are very long-term in our investing horizon, five or 10 years ahead.’

In terms of emerging themes, the fund’s investment managers have been looking towards ‘financial inclusion’.

‘Within the portfolio we have a Kenyan-based mobile communications company Safaricom (SCOM:NASE) which has its M-Pesa platform – a mobile phone-based money transfer service launched in 2007 by Vodafone (VOD) and Safaricom. Safaricom has helped drive financial inclusion in Kenya, particularly our research showed in female-headed households.

‘We are also investing in language technology company Duolingo. The ability to offer high quality language technology for free is transformational for some people.’

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