Keystone Positive Change 24 January 2024

The strategy behind Keystone Positive Change (KPC) is to maximise long-term growth potential by selecting companies which can have a real impact on resolving some of the world’s critical problems. Both elements are written into the formal objectives of the trust, and all holdings have to qualify on both grounds, with strong long-term growth potential and a clear potential impact.

In practice, looking at the market through this lens creates a highly active Portfolio versus a global index, which is highly differentiated from its peers. Companies involved in the net zero transition, the expansion of financial services across developing countries, and biotechnology innovation sit alongside each other. The portfolio has a highly different geographical exposure than the typical global fund, including significant exposure to emerging markets. It also contains a handful of unlisted companies which, while making up a small amount of the portfolio at present, the managers believe have explosive growth potential.

This strategy has delivered exceptional returns in the long run for the open-ended Baillie Gifford Positive Change fund (see Performance). However, the first two years KPC has been managed to this strategy have been tough, with a sharply rising interest rate environment leading to a rush out of growth stocks. Kate and Lee are extremely optimistic for their portfolio, pointing to very attractive earnings growth expectations from lower valuations. Overall, they report their portfolio has been performing well operationally but is not being rewarded by the market. The board, while backing the new strategy, has taken action to reassure shareholders, initiating buybacks, which demonstrate the value they see in the portfolio, and announcing a continuation vote will be held after the strategy has a five-year track record.

In our view, KPC is a stand-out option for investors who want to have a positive impact with their investments. While concepts like ESG and sustainability are bandied about widely, they are often poorly defined and investors are quite rightly concerned about ‘greenwashing’. When it comes to KPC, the Positive Change strategy is clearly defined, with the rationale for each company explained and progress discussed each year. We think it should appeal to the large number of investors who want their investments to have a positive impact.

The strategy also brings exposure to some secular growth themes with exciting potential. These include the expansion of services and the ability to start a business amongst the disadvantaged, the development of drugs for an aging world population, and the development of cleaner ways of generating energy and operating industry. A focus on long-term growth is out of fashion at the moment, as high interest rates see investors look to shorter-term returns, and we note stylistic factors tend to mean revert. Should we see rates start to come down in 2024, we think this could lead to a re-rating of many companies in KPC’s portfolio, and it could potentially lead to the Discount narrowing too.

Clearly the first two years under this strategy will have been disappointing for shareholders (and indeed the managers), but we think a highly active strategy like this needs to be judged over a longer timeframe, such as the five-year period used by the board for scheduling the continuation vote.