Baillie Gifford China Growth Trust (BGCG) aims to produce long-term capital growth by investing in Chinese companies. The managers seek out businesses with competitive advantages, strong corporate cultures and scope to double earnings over the next five years. The trust has assets under management of over £160m and is managed by Linda Lin and Sophie Earnshaw of Baillie Gifford & Co, an Edinburgh-based investment management company.
1. The long-term investment case for China remains compelling.
China boasts the world’s second-largest economy and is home to the second-largest stock market. The country’s scale and dynamism are producing some of the most exciting companies on offer across global markets. After a more difficult period in the market, the valuations of these companies are very compelling today and do not seem to reflect the significant growth opportunities available in some of China’s best companies.
In addition, China’s middle class has become the biggest in the world, and Baillie Gifford expects it to keep expanding rapidly – almost doubling in size in the next 15 years. Such strong underlying growth in incomes will support consumption over the medium term and be an important driver of growth opportunities for companies.
Meanwhile, in September and October 2024, the Chinese government announced a significant policy shift, including a stimulus package intended to boost activity and support the troubled property sector.
Furthermore, the government wants to broaden the drivers of growth beyond domestic consumption, towards innovative, so-called ‘new productive forces’ intended to increase the country’s self-sufficiency across various sectors.
2. The trust’s portfolio is positioned to benefit from China’s transition to a more diversified, innovation-led growth model.
The managers focus on innovative, growing Chinese companies, which are likely to gain the most from the massive opportunities generated by China’s vast market. The portfolio includes companies with exposure not only to domestic demand, which will remain a significant growth driver, but also to renewable energy, electric vehicles, advanced semiconductors, industrial automation and other cutting-edge technologies.
Examples of companies that the managers view as leaders in their fields and potential next-generation winners include PDD, an e-commerce company, Anker Innovations, a supplier of consumer electronics, Midea, a manufacturer of home appliances and automation systems, Moutai, China’s leading consumer brand, and CATL, which has the leading global market share in batteries for electric vehicles.
3. Portfolio holdings have been performing very well at an operational level.
The portfolio holdings are delivering earnings growth above the trust’s benchmark, the MSCI China All Shares Index, with resilient characteristics such as net cash, versus the net debt position of the index. Yet these growth opportunities are not being reflected in today’s valuation multiples.
4. The managers’ approach differs from most other investors in the Chinese market.
The managers believe their patient, long-term view differentiates them from the average Chinese equity market investors, who adopt a very short-term view.
Baillie Gifford opened a Shanghai office in 2019 to enhance the quality and breadth of its China research. It now comprises seven investment staff dedicated to discovering the best growth companies and nurturing long-term relationships with potential holdings and existing holdings.
The teams in both Shanghai and Edinburgh bring together global perspectives with local insights and are supported by a further 80+ investors who cover China within broader international and global mandates.
The trust’s managers also employ several specialist third-party consultants to provide in-depth analysis on policy, regulatory and geopolitical issues.
Consistent with this long-term approach, the trust’s managers ask investors to judge their performance over five years and more.
Published 1 November 2024.
