British Smaller Companies Fund

BAILLIE GIFFORD Baillie Gifford British Smaller Companies Fund Quarterly Update 30 June 2021 This document has been prepared for use by professional advisers and intermediaries only. It is not intended for use by retail clients. This document contains information on investments which does not constitute independent investment 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. Investment markets and conditions can change rapidly and as such the views expressed should not be taken as statements of fact nor should reliance be placed on these views when making investment decisions. This document is issued by Baillie Gifford & Co Limited, Calton Square, 1 Greenside Row, Edinburgh EH1 3AN, a company which is authorised and regulated by the Financial Conduct Authority, Financial Services Register No. 119179, and is a member of The Investment Association. Baillie Gifford & Co Limited is wholly owned by Baillie Gifford & Co, which is authorised and regulated by the Financial Conduct Authority. The Fund’s share price can be volatile due to movements in the prices of the underlying holdings and the basis on which the Fund is priced. As with any investment, the clients’ capital is at risk. Past performance is not a guide to future returns. All information as at 30 June 2021 and source is Baillie Gifford & Co unless otherwise stated. Baillie Gifford & Co Limited Calton Square, 1 Greenside Row, Edinburgh EH1 3AN Telephone +44 (0)131 275 2000 bailliegifford.com Copyright © Baillie Gifford & Co 2009 Ref: 53243 INT QR 0008 Executive Summary 01 Fund Objective To outperform (after deduction of costs) the Numis Smaller Companies Index (excluding Investment Companies) by at least 2% per annum over rolling five-year periods. The manager believes this is an appropriate target given the investment policy of the Fund and the approach taken by the manager when investing. In addition, the manager believes an appropriate performance comparison for this Fund is the Investment Association UK Smaller Companies Sector. There is no guarantee that this objective will be achieved over any time period and actual investment returns may differ from this objective, particularly over shorter time periods. Risk Analysis Key Statistics Number of Holdings 65 Typical Number of Holdings 50-80 Active Share 94%* Annual Turnover 8% *Relative to Numis Smaller Companies Index (ex. Inv.Companies).. Source: Baillie Gifford & Co, Numis. The fund is down, in relative terms, over the quarter and one year. Our process targets smaller companies trying to do novel things, which by default will be volatile We remain confident that the portfolio contains a collection of the very best British smaller companies. We firmly believe that over a multi-year timeframe it's these high quality, ambitious businesses that succeed and offer truly outsized returns We've taken positions in three new companies over the period - PensionBee, Oxford Biomedica and Essensys Commentary 02 The blocks to scale and the blocks of scale As a firm we owe W. Brian Arthur a huge debt of gratitude for his ideas on increasing returns to scale. “The value of a technology lies not merely But his writing on the Nature of Technology is also a in what can be done with it but also in what fantastic commentary on these tools of scale. Technology is recursive, as it consists of combinations of other further possibilities it will lead to.” technology. To borrow his example, a jet engine is built W BRIAN ARTHUR on compressors, turbines, combustion systems, all technologies in their own right with multiple applications. That means “technologies somehow must come into being as fresh combinations of what already In our commentary last quarter, we spent some time laying exists”. He describes this as combinatorial evolution, and out the remarkable role of technology and innovation in its power lies in having exponential potential. Each new lowering the barriers for would-be entrepreneurs starting component is capable of building on the components that new businesses. From the internet to the iPhone, the global came before to create new components for what comes tech ecosystem is increasingly providing building blocks after. “The more there is to invent with, the greater will that today empower small companies to innovate quickly be the number of inventions.” and reach the right customers affordably as never before. The portfolio includes a wide range of remarkable British businesses both helping create these blocks, and benefiting from them. The obvious follow up question however is what comes next? It’s great that today a start-up that 50 years ago may have quickly failed can emerge and thrive, but for us as long-term investors, often the most important question is how can that start-up take its early success and turn it into longer-term sustainable growth? This question is at the heart of our recent thinking around the scalability of smaller companies, indeed scalability is one of the core components of our research process. If we get it right it should be one of the superpowers of smaller companies and one of the most plausible ways we can form views that are differentiated from the market as a source of Insight. Often scalability means talking to companies about the bottlenecks they face in growing into their opportunity. Some of those challenges differ across the portfolio – for Victoria it’s finding attractive acquisitions, for Creo Medical it’s training doctors, for Fevertree, international distribution – but many will be common. An obvious example here is the challenge of recruiting and assimilating people quickly and effectively. These The likelihood is evidence of accelerating constraints are the reason why businesses traditionally combinatorial evolution lies within those business grew slower as they got larger, an important dynamic for formation trends. Companies are a form of technology us to understand. But we’re finding those building blocks and they too are increasingly recursive. Companies build are increasingly shifting the balance of power from on companies. DotDigital within our own portfolio scalability constraints towards accelerants. It means more demonstrates this in action. Dot builds on existing time focused on the opportunities rather than the technologies like email, SMS or WhatsApp to let challenges of growth, a source of immense optimism businesseses communicate with their customers. That about the future. As an entrepreneur’s toolkit expands so communication is only one function a modern business does her possibilities and potential. needs, and so Dot itself becomes a block on which other businesses are built. It is ready to plug and play, abstracting away a huge amount of complexity for its enterprise customers. Another good example of these building blocks within the portfolio would be Clipper Logistics. The business combines broader advancements in logistics and robotics to provide a platform for Commentary 03 businesses looking for warehousing and delivery Portfolio commentary infrastructure. One of the pleasurable challenges for us in thinking about scalability is the endless possibilities our As ever, I will start by emphasising that we do not young, dynamic businesses have to combine technologies believe three months is a meaningful amount of time over to meet new needs. which to judge an underlying business’s performance. This positive aspect of scalability – the combinatorial As bottom-up, fundamental growth investors our job is to possibilities of a modern entrepreneur’s toolkit – is discover a small handful of exceptional businesses that transforming the possibilities for smaller companies to have strong multi-year prospects. If three months is form, grow and succeed rapidly. It took Trustpilot only uninformative in measuring multi-year success for any seven years from opening its first UK office for it to win one of those underlying businesses, then in turn we don’t 14 per cent of all eligible UK businesses as customers. think it will be particularly informative as a measure of But there is something more to the scalability advantage portfolio performance. We’d urge you to look five years of smaller companies than merely size. It is about and beyond, and I’d go as far as saying that if stable attitude, culture and the drive to survive. The venture quarterly-on-quarter returns are what matter to you, we’re capitalist and teacher Jerry Neumann suggests combining unlikely to ever offer you the smooth progress you are technologies to serve new needs or wants means looking for. Small companies trying to do dramatic, confronting uncertainty. New wants are new markets and novel things will almost by default remain volatile, as it is highly uncertain that customers will be interested. will market sentiment towards them. What we firmly That uncertainty is a challenge for large existing believe however is that over a multi-year timeframe it’s businesses, for the behavioural and organisational reasons those ambitious, risk tolerant businesses that succeed, that I think we all recognise, leaving the space open for which may offer truly outsized returns. younger, nimbler, more entrepreneurial companies like This is not to say exciting noteworthy things don’t those in the portfolio. One of our more recent holdings sometimes happen in a quarter. The past three months PensionBee has designed tools that allows users to find saw several such events. Notable progress was made by and merge all their legacy pension pots into one Victoria in its ongoing large-scale flooring company roll- transparent, easy to manage online platform. The UK up with notable acquisitions in the Netherlands and the pension market is currently undergoing significant US. This quarter also saw liquid biopsy specialist Angle change. There is simultaneously a switch from direct launch its initial clinical laboratory, and quickly secured benefit to direct contribution saving, and a growth in the first large-scale pharmaceutical client for its young people changing jobs more frequently throughout proprietary blood-testing service.

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