Underperforming Baillie Gifford trust could merge with sister fund

The board of the Baillie Gifford-managed Keystone Positive Change investment trust is considering winding down the trust and rolling its assets into Baillie Gifford Positive Change, an open-ended fund that invests in similar equities and is managed by the same team.

Baillie Gifford took over the mandate of Keystone in early 2021 from Invesco, during a boom period for the growth shares that the Scottish fund manager specialises in.

• Explore our: Free regular investing | ISA Investment Ideas | Open a Stocks & Shares ISA

Under managers Lee Qian and Kate Fox, it aims to outperform the MSCI All Country World Index by at least 2% per annum over rolling five-year periods, and also contribute towards a more sustainable and inclusive world by investing in the equities of companies whose products or services make a positive social or environmental impact.

Its largest positions are currently include chip stocks ASML and TSMC, as well as biotech group Moderna and Latin American online shopping and banking platform MercadoLibre.

• Baillie Gifford: why these growth stocks will bounce back
• Should you invest in Baillie Gifford funds or investment trusts?

However, since February 2021, the total return of the shares is -32%, compared with a 34% gain for its benchmark. This is because interest rates have risen, which has made “jam tomorrow” companies less attractive, and there have been stock-specific issues at the likes of Beyond Meat, Peloton and Teladoc. 

The trust currently has a market capitalisation of £127 million and trades on a -7.4% discount.

The board of the trust said: “Although the board remains confident in the long-term prospects for the strategy, it recognises that there has been a challenging period of performance during a difficult backdrop for the investment trust sector.”

The board added that over the past 12 months it had taken steps to enhance value for shareholders, such as commencing a share buyback programme, introducing a continuation vote and increasing marketing activity.

However, now it is considering a more extreme option and said intends to consult more widely with shareholders to explore the company's options, which include a rollover into the Baillie Gifford Positive Change fund, which has £1.8 billion in assets.  

• The best income opportunities right now
• Benstead on Bonds: stock market wobble shows why we own bonds

One complication could be the unlisted assets in Keystone Positive Change, which account for 4.3% of its investment as of the end of August and would not suit the daily dealing structure of an open-ended fund.

However, the board noted that any proposal would include a cash exit option at a “modest” discount to the company's net asset value, meaning that investors would not need to move their investment into an open-ended fund if they did not want to.

Baillie Gifford Positive Change has returned 203% since launch in 2017, ahead of the 104% gain for the MSCI All Country World index.

It delivered excellent returns during the pandemic in 2020 and 2021, before collapsing as interest rates rose to combat higher inflation.