Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process and the make-up of the investment team?
The Baillie Gifford High Yield Bond Fund is a portfolio of our team's best ideas drawn from the global universe of higher yielding corporate bonds, predominantly rated below investment grade. We seek to achieve peer-group leading investment returns net of deliberately good value fees with the bulk of returns, over the long-term, coming from income.
The touchstones of our approach are a focus on resilience, at the company and portfolio level, determined through our own in-depth research using clear, positive selection criteria and a long-term investment horizon. We look for businesses with durable competitive advantage, sustainable capital structures and strong governance practices supportive of adaptation to the ever-quickening pace of change in the world around us. Achieving attractive levels of income over the long-term trumps short-term yield chasing. We emphasise strong risk control through a deep understanding of the companies in the Fund and ensuring that we have true diversification across the 50 to 90 companies we typically lend to.
The Fund is co-managed by Robert Baltzer and Lucy Isles, investment managers with 19 and 8 years of investment experience respectively. We draw on the analysis and insights produced by our twelve-strong Credit team as well as the perspectives of over a hundred other investment professionals following the development of technologies, societies and economies around the world. Our independent teams of Investment Risk and Governance & Sustainability experts provide further input and oversight to our processes and portfolio construction.
How have you been trying to weather the storm caused by the Covid-19 pandemic and what could be the longer-term implications for your strategy?
In periods of uncertainty, of which the Covid-19 pandemic is undoubtedly one, the value of our focus on resilience becomes clear. The High Yield Bond Fund saw a very limited impact from defaults throughout 2020, maintaining our long record of experiencing significantly fewer defaults than the market. We remain confident in the resilience of our holdings as we look ahead.
Given the particular nature of this economic shock, emanating from a public health crisis beyond any company's control, we continue to see a lot of support for companies across many sectors which is keeping default rates lower than they otherwise would be. Default rates in 2020, whilst higher than in benign market conditions, were well below the levels we've seen in previous financial shocks.
The big question, which will play out over the next few years, is this: will the companies which have burned through cash and increased their borrowings in order to keep the lights on, be able to grow sufficiently quickly to manage their debt commitments? We only lend our clients' money to companies that are either unlikely to require additional capital raising or will be in a sufficiently strong position to raise capital, if and when required.
Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
Our focus is on identifying companies offering under-appreciated resilience. We have found lot of interesting opportunities in recent months from which a couple of interesting themes emerge - beneficiaries of digitalisation and retail stalwarts.
The largest holding in our portfolio at the start of last year was Netflix. It saw an impressive boost to its subscriber numbers, building on already strong trends of previous years, and has been upgraded by rating agencies as a result. We have made several noteworthy purchases of tech-enabled disruptors that we believe will emerge from the pandemic stronger, not weaker. These include PaymentSense, who provide payment processing services to small businesses in the UK, Mercado Libre, the leading Latin American ecommerce business and CrowdStrike, a fast-growing cybersecurity business.
The retail sector faced existential challenges even before Covid with the rise of online shopping. Many companies have failed to adapt and the lockdowns resulting from Covid only heightened the challenges. They also heightened the opportunities. We recently invested in Marks & Spencer, Asda and US department store chain Nordstrom, each of which we think have the wherewithal to thrive.
