Interactive Investor

Baillie Gifford wins another new investment trust mandate

8th December 2020 11:33

Hannah Smith from interactive investor

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If given the green light, the trust will be run in line with Baillie Gifford’s Positive Change investment strategy. 

Scottish asset manager Baillie Gifford is to take over the management of the Keystone Investment Trust (LSE:KIT), the latest in a series of trust mandates the group has won.

The board of Keystone wants Baillie Gifford to run the trust in line with its Positive Change investment strategy, replacing James Goldstone of Invesco, who has run the trust since 2017. 

Positive Change is a global equity strategy that aims to bring investors attractive returns while contributing to a more sustainable and inclusive world. Under the new management, the trust will be renamed the Keystone Positive Change Investment Trust. It will be run by Kate Fox and Lee Qian, co-managers of the £1.3 billion Baillie Gifford Positive Change fund, which has returned 34% since launch in 2017. 

Its investment objective will change to focus on generating a return of at least the MSCI AC World index plus 2% a year through a ‘best ideas’ concentrated portfolio of 30 to 60 companies, both listed and unlisted. The unlisted portion will account for 5% to 10%, and no more than 30%, of the fund, supported by Peter Singlehurst, head of Baillie Gifford’s private companies team. The listed part will comprise stocks of $500 million market cap or above, compared to $1 billion in the open-ended strategy.

The trust currently invests in UK equities, targeting cash-generating companies with strong balance sheets. Although the fund’s objective is to provide long-term growth of capital, it pays a quarterly dividend and has a yield of 4.6%.  

Lower dividends ahead

The trust’s dividend is unlikely to be covered by future investment income, and will be “significantly lower” following a 12-month transition period during which the board will use cash reserves to cover payouts.

The board will consider return of capital, share buybacks or share issuance to address the discount or premium in the short term, and will bring in a policy on this to reduce share price return volatility relative to net asset value.  

Baillie Gifford will charge a management fee of 0.7% on the first £100 million of market cap, 0.65% on the next £150 million, and 0.55% thereafter, with the fee waived for the first six months. 

The proposed changes are subject to shareholder and regulatory approval, and will go to a shareholder vote at its annual general meeting on 10 February 2021.  

Shares in the Keystone trust ended 9% higher on Monday after the plans were announced. 

‘Extraordinary growth potential’

Labelling the trust a ‘buy’, the head of Investec’s investment trust research team Alan Brierley welcomed the move after a “highly challenging” few years for Keystone. He said indifferent net asset value (NAV) returns and a supply and demand imbalance had resulted in disappointing total returns for shareholders, but said the “exciting” new investment mandate should reverse this trend. The trust returned -4.4% over the last three years versus a 12.2% average return for the peer group, according to FE.

“We see extraordinary growth potential for impact investing over the coming years. Meanwhile, we expect Baillie Gifford to fully utilise the inherent competitive advantages of the closed-ended structure, and this combined with a frugal fee structure should enhance returns,” he said. 

Baillie Gifford has won a number of investment trust mandates of late. In September, Baillie Gifford took over Witan Pacific, and last October it took over European investment trust  from Edinburgh Partners, renaming it the Baillie Gifford European Growth Trust (LSE:BGEU). Invesco, meanwhile, has lost mandates including the Edinburgh investment trust  (LSE:EDIN) to Majedie, and Perpetual Income & Growth (LSE:PLI), which last month merged with the Murray Income Trust (LSE:MUT)

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