This annual report covers ten Baillie Gifford overseas growth funds. The key change: all ten funds removed promised returns from their objectives, and the Japanese Smaller Companies Fund relaxed its market-cap and trading limits, giving managers more flexibility. The tone is cautious—no specific market bets, just room to adapt. Notable funds: Baillie Gifford Japanese Smaller Companies Fund loosened its investment rules; Baillie Gifford American Fund and other funds dropped return targets; Baillie Gifford Developed Asia Pacific Fund held a small stake in Japanese Smaller Companies Fund. No hype, just structural tweaks.
The author's market view for this period: The fund family's deletion of target returns across all funds and relaxation of Japanese small-cap investment restrictions signal a prudent shift away from committing to specific returns toward flexible, tactical allocation [Neutral].
This chapter provides a fund-company-level overview, disclosing the umbrella fund structure as of 30 April 2026, investment policy amendments, share class changes, and cross-holdings among sub-funds. The key messages are: the Japanese smaller companies fund's investment policy has been further relaxed, all ten funds in the range have simultaneously removed target returns, and several new share classes have been added.
Fund Structure and Governance
The company is a Scottish-registered umbrella OEIC, with ten sub-funds in issue as of 30 April 2026. Each sub-fund is valued daily with a single pricing model. The ACD is Baillie Gifford & Co Limited, with 31 March each year serving as the value assessment reference date, and the assessment conclusions published by 31 July of the following year. The latest report (as of 31 March 2025) is available on the official website. These governance disclosures are routine and do not involve specific investment decisions.
Investment Policy and Objective Amendments
This section contains two substantive changes:
1. Japanese Smaller Companies Fund relaxes market cap and turnover constraints: With effect from 5 August 2025, the Baillie Gifford Japanese Smaller Companies Fund changed its maximum market capitalisation cap from a fixed amount to a variable amount and removed the turnover rate restriction, simplifying the policy language to reference market capitalisation only. This gives the fund greater flexibility in selecting small- and mid-cap targets.
2. Target returns removed across the entire fund range: Following a fund-by-fund review, the ACD decided that, with effect from 2 February 2026, target returns would be removed from the investment objectives of the following ten funds: Baillie Gifford American Fund, Baillie Gifford China Fund, Baillie Gifford Developed Asia Pacific Fund, Baillie Gifford Emerging Markets Growth Fund, Baillie Gifford Emerging Markets Leading Companies Fund, Baillie Gifford European Fund, Baillie Gifford Global Discovery Fund, Baillie Gifford Japanese Fund, Baillie Gifford Japanese Smaller Companies Fund, Baillie Gifford Pacific Fund. The original text does not state the reason for the removal, but this uniform action means the funds no longer commit to specific return levels in their investment objectives.
Fee and Share Class Changes
Three share-class-related updates occurred during the reporting period:
| Sub-fund | Change | Effective date |
|---|---|---|
| Baillie Gifford Japanese Fund | Introduction of a new fee schedule for W-class shares | 5 April 2026 |
| Baillie Gifford Emerging Markets Leading Companies Fund | Launch of W6-class shares | 3 November 2025 |
| Baillie Gifford Pacific Fund | Launch of W3-class shares | 16 March 2026 |
W-class shares are typically aimed at specific channel investors, and the new share classes broaden investor access. The specific fee schedule is not disclosed in this chapter (referenced to page 287).
Sub-Fund Cross-Holdings
As of 30 April 2026, the only cross-holding between sub-funds was Baillie Gifford Developed Asia Pacific Fund's holding of shares in Baillie Gifford Japanese Smaller Companies Fund:
| Holder | Held fund | Shares | Value (£'000) |
|---|---|---|---|
| Baillie Gifford Developed Asia Pacific Fund | Baillie Gifford Japanese Smaller Companies Fund | 61,412 | 2,823 |
The remaining nine sub-funds had no cross-holdings. This cross-position amounts to approximately £2.82 million, which is modest in size, but it reflects an indirect investment relationship between funds under the same company.
The depositary duties checklist in the subsequent sections (cash flow monitoring, share dealing compliance, valuation oversight, income application) is not merely a mechanical response to regulation; it embodies the dual-core checks-and-balances design of the "manager (AFM)–depositary" structure in UK OEIC governance. The depositary is not simply a custodian of assets, but a key line of defence exercising ongoing oversight of the AFM on behalf of investors:
Comparing depositary duty intensity across jurisdictions (using UCITS V and UK OEIC as examples):
| Duty dimension | UK OEIC (this report) | UCITS V (EU) |
|---|---|---|
| Cash flow monitoring | Explicitly requires "properly monitored" | Requires ensuring cash flows are "properly monitored", but the wording on cash account booking details is more concise |
| Share dealing oversight | Full-process compliance for sale, issue, redemption, cancellation | Emphasises NAV calculation and instruction execution, with a somewhat lower degree of specificity in overseeing share dealing procedures |
| Independence and conflict management | Emphasises "independently" | Also requires "honestly, fairly, professionally, independently", and additionally requires a "responsibility chain" when depositary and custody functions are separated |
| Veto over the AFM | May refrain from executing instructions in case of conflict | Similarly refrains from execution in case of conflict, but must promptly notify the competent authority |
Notably, the depositary's report is dated "Edinburgh 01 May 2026", the very next day after the fund's year-end (30 April). This timing is no coincidence — the depositary must complete its final verification of the full year's operations before the annual report is published, ensuring its opinion can be presented to investors alongside the audit report.
The independent audit report discloses the principal risk areas identified by the auditor, which directly reveals the areas in an ICVC's (open-ended investment company) financial statements most likely to go "wrong":
The logic of audit procedure design (inferred from the report's description):
| Risk type | Specific manifestation | Typical audit response |
|---|---|---|
| Compliance risk (sourcebook) | Incorrect application of valuation rules, distribution calculation deviations | Recalculate NAV for a sample of shares, compare valuation system parameters with sourcebook requirements; check the reconciliation between distribution schedules and revenue recognition |
| Fraud risk (revenue/NAV) | Accountants making manual adjustments to entries | Perform full testing of manual journals in the financial system, with particular focus on year-end adjustment entries; perform substantive analytical procedures comparing each sub-fund's revenue growth rate against deviations from market benchmarks |
| Management override | AFM overriding controls | Test the ACD's review trail, focus on the match between investment instructions and depositary confirmation records; examine unusual related-party transactions |
Notably, the audit report does not contain a separate "Key Audit Matters" section. This differs from the common practice in listed company audits (UK company law requires listed companies to report key audit matters). This may be because the financial statements of fund audits involve relatively lower complexity and judgement (the underlying assets are mostly liquid securities valued in public markets) — but given that this is an "Overseas Growth Funds" umbrella, valuations of overseas market assets and tax treatment may involve judgement, still falling within reasonable audit scope. Investors therefore cannot obtain the level of detail about the areas the auditor considered most challenging as they would in a listed company's audit report.
The auditor's wording on the going concern conclusion has its subtleties:
This wording reflects the inherent limitation of auditing standards with respect to "forward-looking conclusions" — the auditor's assessment is based on information available up to the date the financial statements are authorised for issue, and can only provide limited assurance over a period of "at least twelve months". For open-ended funds, going concern risk is typically associated with waves of large-scale redemptions, depletion of liquidity, or default by key service providers (such as market makers or custodian banks). Although this report does not disclose related stress tests, the auditor benchmarked the liquidity management requirements in the sourcebook and examined the AFM's redemption contingency plans.
A quantitative perspective can be added: the umbrella comprises 10 sub-funds, and different types of sub-funds (such as global growth, emerging markets, small cap, etc.) differ significantly in liquidity and asset disposability. The auditor makes a going concern assessment for "each sub-fund" separately, rather than merely a general judgement at the consolidated level — this is particularly important because heavy redemptions in one sub-fund may not affect the company's overall statements, but would threaten that sub-fund's ability to liquidate. The report clearly shows this granularity of assessment, reflecting regulatory expectations.
Placing the two reports in the subsequent sections side by side (the depositary's report + the audit report) reveals a complete governance loop:
The relationship among the three is not simply nested layers; there are overlapping responsibilities:
| Responsibility area | ACD | Depositary | Auditor |
|---|---|---|---|
| Asset custody | No physical custody, keeps records only | Actually holds or controls assets (custodial assets) | Confirms asset existence and ownership through letters to the depositary |
| Financial reporting | Fully responsible | Provides underlying data such as cash flows and holdings | Independently audits, and may rely on certain depositary reports (e.g. internal control reports) |
| Regulatory compliance | Ensures investments and borrowings comply with the sourcebook | Observes and takes reasonable care to check the ACD's compliance | Assesses only those breach risks affecting the financial statements |
| Conflicts of interest | Must treat all investors fairly | Must be independent of the ACD and its affiliates | Must comply with the FRC Ethical Standard, avoiding non-audit services that could affect independence |
Notably, the depositary's report mentions that "instructions of the AFM are carried out (unless they conflict with the Regulations)" — here the AFM is the ACD (in an ICVC structure, the Authorised Fund Manager is an alternative name for, or a role combined with, the Authorised Corporate Director). The depositary has a "final stop" power over the ACD's instructions, while the auditor must report fraud or breaches to the regulator (FCA). This constitutes a multi-layered defence system, but it is not absolutely watertight — the fees of the depositary and auditor are usually paid by the ACD out of fund assets, which to some extent weakens formal independence; in practice, reputational mechanisms and regulatory penalties are the key constraints maintaining independence.
Three key dates appear in the report and are worth noting:
This synchronisation is no coincidence. The UK regulatory framework requires the depositary to provide a statement in the annual report on the performance of its duties, and the auditor must include its audit report in the same annual report after completing the audit. The depositary's choice to issue its report on the day after year-end indicates that its internal verification process has been front-loaded — the bulk of the checks can be completed before the year-end, leaving only final confirmation of year-end data. The auditor's same-day signing means its audit procedures were wrapped up quickly after the period end, possibly benefiting from the standardisation of fund audit processes and the efficient processing of large volumes of transaction data by modern audit software.
For investors, the timeliness of the reports increases the decision-relevance of the information. But it should also be noted that the auditor's completion of the audit of all ten sub-funds' financial statements in such a short time may rely on:
This trade-off between efficiency and the level of assurance should be understood by investors — an audit does not detect all errors, but provides "reasonable assurance" rather than "absolute assurance". The report explicitly articulates this boundary, and it is worth reading closely.
The audit report contains a dedicated "Collective Investment Schemes sourcebook exception reporting" section, requiring the auditor to make explicit statements on two specific matters:
The report explicitly states "We have no exceptions to report". This conclusion may appear routine, but it has substantive significance:
The report mentions the design of procedures to "incorporate unpredictability around the nature, timing or extent of our testing". This is not boilerplate; it corresponds to the requirements of ISA (UK) 240 on fraud risk:
The final paragraph of the report states that the report is provided only to the company's shareholders as a whole, citing COLL 4.5.12 and OEIC Regulations 2001 paragraph 67(2). On the surface this is a legal disclaimer, but it in fact reflects the governance mechanism unique to UK open-ended funds:
| Dimension | Ordinary company audit report | ICVC audit report |
|---|---|---|
| Primary audience | Company shareholders (general reporting) | Only to shareholders "as a whole" (not individuals) |
| Legal basis | Section 475 of the Companies Act, etc. | Regulatory rules + OEIC Regulations |
| Permitted use | May be publicly disclosed or used for other compliance purposes | Strictly limited to regulatory requirements; not to be disseminated without consent |
| Implicit meaning | The auditor bears responsibility for its opinion over a broader scope | The auditor owes no duty to any third party relying on the report |
This restriction exists because ICVC share holders exercise their rights through the ACD rather than participating directly in corporate governance; the "principal" of the audit report is essentially the collective under regulation, not the individual investor.
The provisions on REITs in Section (2) of the accounting policies introduce an important change in timing:
> “From 1 May 2025, when recognised, a provision is allocated to capital based on historical information available at the time. On an annual basis, once the actual information has been published in the market, the provision will be amended to reflect the actual split between capital and revenue.”
This policy has a dual impact:
Revenue recognition in the text is divided into four categories: Equities, Collective Investment Schemes, Deposits/Other Income, and REITs. Notable comparisons include:
| Asset Type | Recognition Point | Special Treatment |
|---|---|---|
| Equities | Ex-dividend date | The ordinary portion of scrip dividends is recognised as income |
| Collective Investment Schemes | Ex-dividend date | Equalisation is treated as a return of capital, reducing the cost of investment |
| Deposits/Other | Accruals basis or receipts basis | Depending on circumstances |
| REITs | Ex-dividend date | Income split + capital provision ratio |
The key difference lies in the treatment of equalisation. For funds holding CIs (such as fund-of-fund structures), equalisation represents the principal portion returned alongside the dividend. Stripping it out of income and offsetting it against cost avoids investors being taxed twice on the return of principal, while also maintaining the authenticity of the sub-fund's income and distribution relationship.
Section (4) of the accounting policies sets out the expense allocation method:
This essentially addresses the common “expense dilution” issue under an ICVC multi-class structure. Because different share classes may have different fee rates (e.g., retail vs. institutional), allocating overall expenses on a uniform proportional basis would harm holders of lower-cost classes. This policy ensures:
1. Class-specific expenses are not passed on to others;
2. Common expenses are allocated on a net asset value basis — the most verifiable and least easily manipulated allocation base.
The following is additional analysis of this continuation, focusing on arguments, data details, and investment logic extensions not covered in the preceding text.
The Risk Disclosures section clarifies the responsibilities of the three parties:
This echoes the "ACD board minutes review" in the audit report — the auditor reviews board minutes precisely to verify whether the risk management function is truly operating. Risk disclosure itself is not an isolated document, but an important input for the auditor's assessment of the internal control environment.
The text lists four main categories of risk: market risk, credit risk, liquidity risk, and operational risk, of which market risk is further decomposed into foreign exchange risk, interest rate risk, and other price risk.
From a disclosure perspective, this section is more qualitative in nature and does not provide quantitative value-at-risk (VaR) or stress-test results. This may be constrained by the fund's annual report format, but auditors would inevitably require more granular sensitivity analysis data during the audit process. The sentence "assess the sensitivity of a sub-fund’s portfolio to these risks" indicates that the ACD has already conducted internal quantitative assessments, only the annual report does not disclose the specific figures.
| Element | Key Output | Mutual Correspondence |
|---|---|---|
| Audit procedures | Testing period-end entries; reviewing board minutes | Verify the true operation of the "risk management function" in risk disclosure |
| Exception reports | No deficiencies in accounting records | Indirectly confirm the operational effectiveness of risk management |
| Fair value hierarchy | Level 1/2/3 classification | Corresponds to the valuation uncertainty of "other price risk" within market risk |
| REITs income estimates | Changes in accounting estimates | Corresponds to the "process change" risk in operational risk, increasing audit complexity |
It can be seen that this annual report weaves the audit report, accounting policies, and risk disclosures into a coherent information chain: the auditor endorses the reliability of internal control records through exception reports and key test points; the estimation methods in the accounting policies (e.g., REITs, deferred tax) directly determine the basis of risk-sensitivity data; and risk disclosures in turn provide context for investors to understand the boundaries of the audit opinion and accounting data. Together, the three constitute a complete argument for the credibility of financial information under the "historical cost + revaluation" model.
The Remuneration Report in this section reveals a key mechanism: the UK UCITS remuneration code requires the identification of "Material Risk Takers", and the ACD has largely limited this category of personnel to governance and control functions. This is no coincidence — the arrangement directly echoes the monitoring logic of "operational risk" and "counterparty credit risk" described earlier, namely, by including risk-control positions within the scope of variable compensation constraints, it avoids harm to fund investors' interests caused by excessive risk-taking by front-line investment personnel.
One noteworthy detail is that Baillie Gifford & Co delegates the investment management function to its parent and affiliated companies, which are subject to equally strict regulatory compensation requirements, and therefore do not need to comply with the UK UCITS code a second time. This "equivalent compliance" design reduces institutional friction costs within the group while maintaining consistency in risk-control standards.
Two key compensation metrics can be extracted from the disclosure table:
| Employee category | Headcount | Total compensation (£’000) | Per-capita compensation (£’000) |
|---|---|---|---|
| Baillie Gifford & Co Limited (all staff) | 54 | Fixed 1,610 + variable 260 = 1,870 | 34.63 |
| Remuneration Code Staff (risk takers) | 29 | 1,750 | 60.34 |
The comparison reveals two notable features:
1. The fixed-to-variable compensation ratio is starkly lopsided: variable compensation accounts for only 13.9% of total compensation (260/1,870) for all staff — a sharp contrast to the industry's pervasive "low fixed + high variable" model. Under the UCITS framework, a high proportion of fixed compensation reduces employees' incentive to take risk in pursuit of short-term excess returns, consistent with the policy objective of "not encouraging risk-taking that is inconsistent with the risk profile".
2. Per-capita compensation for risk takers is 1.74 times the overall average: this shows that the ACD pays a significant premium for positions with substantive risk influence in order to attract and retain high-quality risk-control talent. However, this group's compensation is also predominantly fixed, further reinforcing a prudent-operations orientation.
Another mechanism worth deeper examination is deferred compensation: the company invests 10%-50% of bonuses into fund portfolios that represent the overall investment strategy. This arrangement works in subtle coordination with the earlier statement that "derivatives do not change the overall risk characteristics" — it ties employees' personal wealth directly to the fund's long-term performance, rather than to any single high-risk transaction. Compared with the traditional banker model of "high risk, high deferral", this design emphasizes collective responsibility and a long-term perspective, and is highly consistent with the fiduciary duty of the investment management industry.
Regarding Fair values, the text states that assets are recorded at "market-available prices" or "investment adviser valuations". The valuation risk implied here is worth noting: if market liquidity is insufficient, mark-to-market valuation may be distorted, while mark-to-model valuation introduces subjectivity. However, since the text earlier clarified that "most financial assets are equity-type instruments with no maturity and no interest payments", the price-discovery mechanism is relatively transparent, which to some extent mitigates the impact of valuation uncertainty on net asset value.
The operational risk section mentions business continuity plans under "major disaster" scenarios. Combined with the design of the "Long-Term Profit Award" in the remuneration report — which fluctuates with the company's overall profitability — it actually serves as a hidden capital buffer: when the company suffers an operational or market shock, variable compensation automatically contracts, thereby reducing rigid cost pressure without triggering layoffs. Such institutional details are not easy to detect in routine risk disclosures, but they are important non-financial indicators for assessing the fund's operational resilience.
In this follow-up report, the phrase "long-term growth potential prioritized over short-term returns" in the investment objective has been supplemented with an explicit compensatory clarification: the combination of "relative concentration" and "long-term orientation" may lead to sustained underperformance against the benchmark in certain market environments. In the 2026 annual report, this wording significantly strengthened the transparency of risk disclosure, implying the fund manager's recognition that the external evaluation cycle (five-year rolling) and the internal holding cycle may be misaligned.
One new argument worth noting is that the objective sets no binding constraints such as "maximum drawdown" or an "upper limit on relative benchmark deviation," but instead relies on "achievability not guaranteed" as the backstop. This means that during index declines, should the fund's holdings fall deeper due to their high-beta attributes, there is no mandatory corrective mechanism at the management contract level, leaving only the investment manager's proactive decision-making to rely on. For institutional investors, this is tantamount to a "high-tolerance" mandate.
The investment policy section of this follow-up dissects the sources of liquidity risk in greater detail than prior segments:
1. Concentration at the portfolio level: The fund's "actively managed and concentrated" strategy dictates that the top ten holdings account for an extremely high share of the portfolio. When these heavily weighted stocks simultaneously experience liquidity contraction (such as during the 2022 rate-hike period), widening bid-ask spreads on individual positions compounded by a lack of counterparties can produce a significant divergence between the book NAV and the actual realizable cash amount.
2. Constraints at the asset-class level: More than 90% of assets are allocated to U.S.-listed equities, with money market instruments also permitted. However, money market instruments can only cover short-term redemption demand; under systemic risk (e.g., March 2020), even highly liquid assets face pricing discontinuities.
3. Operational suspension mechanism: The text explicitly states that "under adverse market conditions, if fund trading is suspended, sales may be delayed." In traditional fund annual reports, this clause typically appears only as a risk disclosure, but here it is elevated to a core passage of the investment policy — possibly reflecting the regulatory response after certain closed-end or semi-liquid funds experienced redemption waves during 2025–2026.
The table data reveals critical differences across time segments:
| Time Period | Fund Return (%) | S&P 500 Return (%) | Relative Gap (pp) |
|---|---|---|---|
| 2021-2022 | -41.0 | 10.5 | -51.5 |
| 2022-2023 | 2.6 | 5.1 | -2.5 |
| 2023-2024 | 9.8 | 23.1 | -13.3 |
| 2024-2025 | 3.5 | 28.8 | -25.3 |
| 2025-2026 | -16.1 | 36.8 | -52.9 |
New Evidence: In the fifth year (2025-2026), the relative gap widened again to -52.9 percentage points, erasing all the narrowing achieved in 2022-2023. This breaks the simple linear expectation that "the fund can catch up with the index once the market returns to normal," confirming that the 2024 process enhancements have limited buffering effect during periods of macro turbulence. The key point: the fund can narrow the gap in a "moderate growth / low interest rate environment," but the gap accelerates in "high volatility / one-sided markets."
From the market environment description in the follow-up, the evolution cycle of the AI theme can be distilled as follows:
1. Hardware Boom Phase (before mid-2025): Semiconductor and hardware companies benefited from "massive chip demand"—which explains why NVIDIA appeared on both the "largest buys" and "largest sells" lists, a move that amounts to rebalancing at highs rather than exiting positions entirely.
2. Capex Skepticism Phase (late 2025): Market concerns that AI investment was overheating triggered sell-offs in certain AI-related names. This phase was defined by valuation repricing, not fundamental deterioration.
3. Software Layoff-Risk Phase (early 2026): Panic that AI could upend software business models pushed software stocks to lows not seen in 25 years. This window was precisely when the fund newly bought Figma (design collaboration software), reflecting the manager's contrarian take on the "AI threat thesis"—believing AI is more likely to create incremental functionality than to replace existing products.
The buy/sell decisions disclosed in the follow-up reveal a set of contrasts worth examining:
| Dimension | Added Positions | Liquidated Positions | Logical Difference |
|---|---|---|---|
| Data moat | CoStar (continued adding) | The Trade Desk (liquidated) | The former is a real estate data monopolist, the latter an ad-tech intermediary; the manager believes data ownership is harder for AI to deconstruct than technology conduits |
| Education applications | Duolingo (maintained/added) | Chewy (liquidated) | Both face AI-displacement concerns, but Duolingo's "habit formation" moat is regarded as an opportunity mistakenly beaten down in an irrational selloff |
| Biotech | Guardant Health (standout performance) | Penumbra (liquidated) | Expanded reimbursement coverage for liquid biopsy provides a more certain revenue path, while neurovascular interventional devices lack an equivalent payor-side catalyst |
A new point not previously articulated is that, among the above five sets of decisions, the liquidated names all exhibit the trait of "platform business models rather than vertical data owners." Chewy relies on third-party logistics, The Trade Desk relies on open-internet ad inventory, and Datadog relies on data-access permissions from cloud infrastructure. This closes the loop with the manager's logic in adding to CoStar, Duolingo, and Cloudflare — prioritizing the "data producers" with the deepest moats over "data pipelines."
As of April 30, 2026, the top five holdings (Amazon, NVIDIA, Meta, Cloudflare, Alphabet) accounted for a combined 34.04%, a further increase from the same period last year (back-calculated based on the 22.56% communication services sector weight). A newly added data point:
| Sector Allocation | 2026 Weight | 2025 Weight | Direction of Change |
|---|---|---|---|
| Communication Services | 16.13% | 21.58% | Down 5.45 percentage points |
| Consumer Discretionary | 24.03% | 28.00% | Down 3.97 percentage points |
On the surface, core sector weights are shrinking; in reality, however, this reflects concentration of positions toward the top names — Alphabet immediately entered the top five after the new purchase, which actually reduced sector diversification. This move echoes the "improved executability" claimed in the 2024 process overhaul: rather than reducing exposure to specific sectors, it concentrates capital more decisively into names with "power-law growth potential" (e.g., Cloudflare jumped from zero to the fourth-largest holding).
1. The inherent volatility within the five-year cycle has been precisely quantified: earlier analysis focused mainly on annual relative returns, but these new data further reveal that the fund's maximum drawdown relative to the index (-52.9%) occurred in the fifth year rather than the first year, indicating that the target set by the "five-year rolling period" cannot effectively smooth the impact of extreme markets.
2. A three-dimensional decision framework for the "AI threat" strategy: the follow-up provides more complete evidence of the full allocation layout, from AI beneficiaries (NVIDIA, Broadcom) and AI casualties (software names) to AI-neutral positions, making it more holistic than the preceding analysis.
3. Recalibration of active management style: the tension between the "execution shortfall" admission and process improvements is reflected in actual trading as an asymmetry between decisiveness on new positions (Alphabet became a top-five holding within months) and speed of exit from failed positions (liquidating 11 companies in one go) — this is arguably the most notable behavioral change after the process improvements.
The follow-up discloses the full remaining holdings of the fund and three-year comparative data across share classes. Combined with the earlier information, one can further examine sector allocation shifts, concentration of individual stock weights, and the erosion effect of fee structures on returns.
Based on the disclosed sector breakdown, the fund significantly increased its allocations to Information Technology and Health Care in the year ended 30 April 2026, while moderately reducing Real Estate and Consumer Staples. The specific changes are as follows:
| Sector | 2026 Share | 2025 Share | Change (pct pts) |
|---|---|---|---|
| Information Technology | 29.33% | 24.98% | +4.35 |
| Health Care | 15.78% | 13.40% | +2.38 |
| Industrials | 4.99% | 2.47% | +2.52 |
| Financials | 4.84% | 3.87% | +0.97 |
| Materials | 1.63% | 0.04% | +1.59 |
| Real Estate | 2.44% | 3.69% | -1.25 |
| Consumer Staples | 0.30% | 0.91% | -0.61 |
| Net other assets | 0.53% | 1.06% | -0.53 |
Based on the disclosed market values and percentages, the top ten holdings can be compiled as follows:
| Rank | Company | Sector | Market Value (£'000) | % of Net Assets |
|---|---|---|---|---|
| 1 | NVIDIA | IT / Semiconductors | 146,192 | 7.46% |
| 2 | Cloudflare | IT / Cloud Computing | 113,061 | 5.77% |
| 3 | Shopify 'A' | IT / E-commerce SaaS | 90,890 | 4.64% |
| 4 | Broadcom | IT / Semiconductors | 62,644 | 3.20% |
| 5 | Guardant Health | Health Care / Liquid Biopsy | 54,741 | 2.79% |
| 6 | Tesla | Consumer Discretionary / EVs | 54,487 | 2.78% |
| 7 | The Ensign Group | Health Care / Senior Care | 48,728 | 2.49% |
| 8 | Alnylam Pharmaceuticals | Health Care / RNAi Therapeutics | 45,027 | 2.30% |
| 9 | Watsco | Industrials / HVAC Distribution | 43,805 | 2.24% |
| 10 | CoStar Group | Real Estate / Property Data | 35,405 | 1.81% |
The top ten total approximately 40.55%, a relatively high concentration. In particular, NVIDIA, Cloudflare, and Shopify alone contribute 17.87% of the weight, showing the fund maintains an overweight conviction in AI infrastructure and platform-based SaaS companies.
The follow-up holdings show several new names listed in 2024–2025, indicating active participation in primary-market subscriptions and early-stage positioning:
These names each have modest weights, but together total approximately 5%, giving the portfolio a "future option" attribute and reflecting Baillie Gifford's consistent "inter-temporal growth" strategy — using small positions to pursue asymmetric upside.
The Comparative Tables clearly show the fee structures and return differences among distribution channels:
| Share Class | 2026 Fee Rate | 2026 Return | 2025 Return | 2024 Return | 2026 Net Assets (£m) |
|---|---|---|---|---|---|
| A Accumulation | 1.52% | 2.82% | 9.97% | 33.04% | 40.1 |
| B Accumulation | 0.52% | 3.85% | 11.07% | 34.39% | 1,129.2 |
| B Income | 0.52% | 3.85% | 11.07% | 34.39% | 178.6 |
| C Accumulation | 0.02% | 4.37% | 11.62% | 35.06% | 246.0 |
| N Accumulation | 0.42% | 3.99% | -16.46% | — | 0.004 |
| W1 Accumulation | 0.35% | 4.02% | 11.27% | 34.63% | 36.2 |
| W1 Income | 0.35% | 4.02% | 11.27% | 34.63% | 153.8 |
| W3 Accumulation | approx. 0.42% | approx. 4.01% | approx. 11.24% | approx. 34.61% | — |
Comparing the "Closing number of shares" and net assets across share classes reveals significant capital outflows:
| Share Class | 2025 Shares (m) | 2026 Shares (m) | Share Change |
|---|---|---|---|
| A Accumulation | 4.21 | 3.28 | -22% |
| B Accumulation | 108.09 | 74.36 | -31% |
| B Income | 16.19 | 12.73 | -21% |
| C Accumulation | 17.75 | 13.86 | -22% |
| W1 Accumulation | 2.91 | 2.35 | -19% |
| W1 Income | 15.36 | 10.82 | -30% |
Despite the fund posting positive returns in FY2026 (3%–4% across classes), net assets in most share classes still fell sharply, indicating that investors chose to redeem during the rebound in NAV rather than continue holding. Class B Accumulation net assets fell from £1.58 billion to £1.13 billion, a 28% contraction, the largest absolute outflow. Overall, the fund's total net assets are estimated to have fallen from approximately £2.4 billion to £1.96 billion, a decline of roughly 18%.
N Accumulation Shares are the outlier in the follow-up, recording a -16.46% return in FY2025, while all other share classes posted positive returns in the same period (9.97%–11.62%). The class's opening NAV was as high as 1,749 pence, falling to 1,461.2 pence by the end, even though the market did not experience such volatility over the same period. Possible explanations include:
This anomaly does not affect the overall portfolio judgment, but it serves as a reminder for investors to pay attention to the idiosyncratic risks of special share classes.
The follow-up data reveal three major characteristics of the Baillie Gifford American Fund: a steadfast growth style (fully invested, heavily weighted in AI and biotech), a fee-sensitive tiered design (a fee ladder from 0.02% to 1.52%), and disciplined positioning even in the mediocre market environment of FY2026 — despite redemption pressure, the manager maintained the portfolio's offensive posture, preserving room for future earnings elasticity and long-term compounding.
The comparative tables provided this time cover W3 Income, W4 Accumulation, and W4 Income. Placing the three side by side clearly shows the direct impact of fee structure on returns:
| Share Class | 2026 Return | 2025 Return | 2024 Return | 2026 Operating Fee Rate | 2026 Closing NAV (pence) |
|---|---|---|---|---|---|
| W3 Income | 4.01% | 11.24% | 34.60% | 0.36% | 1,418.75 |
| W4 Accumulation | 3.85% | 11.07% | 34.39% | 0.52% | 1,519.98 |
| W4 Income | 3.85% | 11.07% | 34.04% | 0.52% | 1,403.31 |
The return gap between W3 and W4 is 0.16 percentage points in 2026, exactly equal to the difference in their operating fee rates (0.16 percentage points). This pattern also largely holds in 2025 (gap of 0.17 percentage points, with fee difference of 0.16 plus rounding error) and 2024 (gap of 0.21–0.56 percentage points, distorted by dilution adjustments and other factors that year). This shows that: fees are the primary variable determining return differences across share classes holding the same portfolio, and the impact of fee gaps is amplified by long-term compounding. The reason W4 Accumulation's NAV is higher than W3 Income's is not better performance, but rather because it never distributes, with all capital gains reinvested.
Another point worth noting is that the direct transaction cost ratio for all three share classes was 0.02% in 2026, up from 0.01% in 2025. This does not reflect a fee increase, but rather the portfolio manager's forced selling under net redemption pressure, with larger trading volumes raising absolute commission expenses (see further below).
The "Statement of Change in Net Assets" in the financial statements reveals an important fact: the fund was in a state of significant net redemptions in 2026.
| Item | 2026 (£'000) | 2025 (£'000) |
|---|---|---|
| Proceeds from share issuance | 1,113,737 | 945,422 |
| Payments for share redemptions | (1,942,196) | (1,521,739) |
| Net subscriptions/redemptions | (828,459) | (576,317) |
| Net change in assets from investment activities | 196,797 | 303,707 |
| Closing net assets | 1,959,687 | 2,588,063 |
Net redemptions expanded from £576 million in 2025 to £828 million in 2026, an increase of 43.7%. But interestingly, the fund's investment side still generated positive returns (approximately £197 million), so the decline in net assets is entirely driven by investor redemptions, not investment losses. Net assets fell from £2.588 billion to £1.960 billion, a decline of 24.3%, of which redemptions contributed roughly 32% of the outflow (calculated against opening net assets).
This data set reveals the typical dynamics of an actively managed fund after performance weakens: the impressive 34.6% return in 2024 attracted subscriptions, but returns plunged to 11% from 2025 onward and further fell to 4% in 2026, prompting investors to vote with their feet. Meanwhile, to meet redemptions, the portfolio manager was forced to sell substantial amounts of stock (total sales of £1.865 billion, far higher than total purchases of £1.049 billion), which also explains why absolute transaction costs rose.
The "Statement of Total Return" shows that the fund's sources of returns are highly concentrated:
| Item | 2026 (£'000) | 2025 (£'000) |
|---|---|---|
| Net capital gains | 204,550 | 312,783 |
| Income (dividends + interest) | 3,122 | 3,897 |
| Expenses | (12,125) | (12,943) |
| Net expenses after tax | (9,468) | (9,509) |
| Total return before tax | 195,082 | 303,274 |
The fund's income covers only about a quarter of expenses, with net expenses after tax of -£9.468 million. This means that for every £1 of dividends the fund earns, it pays roughly £3.88 in operating expenses (£3,122 of income versus £12,125 of expenses). Such a structure would be fatal for a passive index fund, but an actively managed US growth fund relies precisely on capital gains to cover this "negative carry." Capital gains fell 34.6% in 2026 versus 2025, in line with the decline in return rates.
Within the expense breakdown, the annual management charge (AMC) is as high as £11.785 million, accounting for 97.2% of total expenses and representing the dominant cost. Custody fees, audit fees, professional fees, and other costs together amount to only £339,000. Notably, in 2026, "third-party fees for processing investor transactions" rose to £104,000 from £84,000 in 2025, partially reflecting higher processing costs from redemption requests.
Regarding taxation, the fund paid only £465,000 in overseas withholding taxes and no UK corporation tax. The notes explicitly explain that the majority of dividend income is exempt from UK corporation tax, so despite the statutory rate of 20%, actual taxable income is far too low to trigger a tax payment.
The final financial statements provide detailed transaction cost data:
| Metric | 2026 | 2025 |
|---|---|---|
| Purchase commissions (£'000) | 169 | 197 |
| Purchase taxes (£'000) | 0 | 0 |
| Sales commissions (£'000) | 386 | 207 |
| Sales taxes (£'000) | 6 | 38 |
| Total direct transaction costs (£'000) | 561 | 442 |
| Direct transaction costs as % of average NAV | 0.02% | 0.01% |
| Average portfolio bid-ask spread | 0.16% | 0.22% |
One notable change is that the average bid-ask spread narrowed from 0.22% to 0.16%, indicating improved liquidity or lower volatility in the underlying holdings (large US technology stocks). However, total commissions and taxes rose 26.9% (561 vs 442), driven by the surge in sales (sales commissions rose from £207,000 to £386,000). This is a direct by-product of the redemption wave — forced selling creates higher trading friction than active rebalancing.
The notes also specifically point out that the direct transaction cost disclosure does not include "dilution adjustment charges." When the fund experiences net redemptions, the redeeming party bears the bid-ask spread and transaction costs, and this expense is separately shown in the "Statement of Change in Net Assets" as £3.057 million (2025: £2.273 million), effectively reducing the hidden cost burden on remaining investors. In other words, remaining investors bear only 0.02% of direct transaction costs on the surface, but redeeming investors pay an additional dilution adjustment of roughly 0.12% (estimated against average NAV), which to some extent protects the interests of those who continue to hold.
Taken together, the financial statements and comparative tables reveal several interrelated facts:
These financial data provide quantitative grounds for investors to judge whether the fund is "worth continuing to hold": fees are reasonable, but capital outflows and slowing returns could form a negative feedback loop — if performance fails to re-accelerate, redemption pressure may force the portfolio manager to sell at unfavorable times, further damaging NAV.
The following is a new analysis of this section (the US fund's financial statement notes and the Chinese fund's investment framework). Since earlier sections have already covered the fund's performance overview and portfolio outcomes, those are not repeated here; the focus is solely on financial data, taxation, share-class changes, and the product design of the new fund.
The audited data disclosed in this section shows that the fund experienced a dual contraction in the year ended April 30, 2026 — driven both by a decline in portfolio market value and by investor net redemptions.
| Item | 2026 (£'000) | 2025 (£'000) | Change |
|---|---|---|---|
| Total investment assets (Level 1 marketable securities) | 1,949,283 | 2,560,668 | -23.9% |
| Net cash and bank deposits | 14,935 | 25,541 | -41.5% |
| Debtors | 4,614 | 13,348 | -65.4% |
| Other creditors | 9,145 | 11,494 | -20.4% |
Net asset size fell from £2.56 billion to £1.95 billion, a decline of nearly a quarter. Within this, non-monetary assets (equities) are almost entirely US dollar-denominated, and monetary assets (cash) are also predominantly in US dollars. Net cash declined sharply by nearly half, while "amounts due on share issuance" within debtors plunged from £12.9m to £2.7m, indicating a marked weakening in investor subscription appetite at the year-end.
The fund has still not recognized the deferred tax asset of £150,180,000 (2025: £138,826,000), because management expects that taxable income in future periods will not exceed deductible expenses. This judgment implies that the fund is unlikely to generate sufficient taxable profit in the near term to utilise these historical expenses — a clear signal of prolonged losses.
| Item | 2026 (£'000) | 2025 (£'000) |
|---|---|---|
| Net expenses before tax | (9,003) | (9,046) |
| Notional tax credit at the standard rate of 20% | (1,801) | (1,809) |
| Adjustments: non-taxable overseas dividends | (444) | (617) |
| Overseas dividend withholding tax | 465 | 463 |
| Excess management fees | 2,271 | 2,426 |
| Tax relief on overseas taxes | (26) | — |
| Actual tax charge | 465 | 463 |
It is worth noting that the actual tax charge was almost unchanged across the two years (£465k vs £463k) and consisted entirely of overseas dividend withholding tax. The fund itself is not liable for UK corporation tax because net expenses are negative, but withholding taxes in the US and elsewhere cannot be fully offset, creating a persistent drain on the cost side. This also explains why the fund still bears a tax burden while in a net loss position.
| Share Class | 2026 Net Income (pence) | 2026 Equalisation (pence) | 2026 Total Distribution | 2025 Total Distribution |
|---|---|---|---|---|
| C Accumulation Group 1 | 1.65000 | — | 1.65000 | 1.88000 |
| C Accumulation Group 2 | 0.93282 | 0.71718 | 1.65000 | 1.88000 |
| All other classes (A/B/N/W1/W3/W4) | — | — | 0 | 0 |
The fund-wide total distribution (including subscription/redemption equalisation adjustments) was -£1,715,000, a marked deterioration from -£433,000 in 2025. A negative total distribution means that the equalisation amounts recovered through share redemptions exceeded actual distributable income. In essence, the fund's income is insufficient to cover day-to-day expenses, and it must rely on a capital transfer (£7,754,000) to maintain its "distribution" status.
All major share classes of the fund experienced substantial net redemptions, with total shares falling from 177.6 million to 129.6 million, a decrease of 27.1%. Details are as follows:
| Share Class | Shares at April 2025 | Shares at April 2026 | Change |
|---|---|---|---|
| A Accumulation | 4,207,157 | 3,284,000 | -21.9% |
| B Accumulation | 108,087,458 | 74,356,376 | -31.2% |
| B Income | 16,186,229 | 12,734,930 | -21.3% |
| C Accumulation | 17,747,300 | 13,857,514 | -21.9% |
| N Accumulation | 60 | 295 | +391.7% |
| W1 Accumulation | 2,912,570 | 2,349,680 | -19.3% |
| W1 Income | 15,363,018 | 10,817,693 | -29.6% |
| W3 Accumulation | 4,197,726 | 2,876,788 | -31.5% |
| W3 Income | 8,727,802 | 9,086,191 | +4.1% |
| W4 Accumulation | 157,192 | 148,928 | -5.3% |
| W4 Income | 53,209 | 38,187 | -28.2% |
| Total | 177,639,721 | 129,550,582 | -27.1% |
W3 Income shares grew 4.1% against the trend, while the N class is not meaningful due to its tiny base. Class B (the largest retail investor base) and W3 Accumulation saw the largest redemptions, indicating that investor pessimism about the fund's prospects has spread across broad categories. At the same time, the decline in the fund's asset size (-23.9%) was smaller than the contraction in shares (-27.1%), which may mean that the portfolio's net asset value recovered somewhat during the year, though still not enough to offset the redemption pressure.
More than 99% of the fund's non-monetary assets are denominated in US dollars (£1,949.283m out of £1,964.184m total exposure), while sterling exposure is almost zero (£0.034m). This means that any appreciation of sterling against the US dollar will directly depress the fund's net asset value as measured in sterling. The fund has not adopted any currency hedging measures, representing a typical one-way currency exposure. In the comparable period of 2025, US dollar assets stood at £2,586.214m; they have now fallen by 24.1%, consistent with the decline in total assets. This indicates that exchange rate movements were not the primary driver — rather, the decline in underlying US equity holdings and redemptions compounded each other.
Turning to the China Fund section, as a sub-fund of the Baillie Gifford Overseas Growth Funds ICVC, its investment objective, policies, and risk profile stand in sharp contrast to the American Fund described above:
The data in this section reveals that the American Fund is facing a "triple whammy": shrinking assets, net share redemptions, and a distribution that has turned negative. Tax inefficiency and the continued accumulation of excess fees suggest that, without a significant market rebound, the fund may find it difficult to escape a state of capital consumption in the near term. The China Fund, by contrast, with its explicit long-term objective, highly concentrated single-market exposure, and active stock-picking style, offers investors an alternative allocation option with high risk and high potential returns — but its risk factors are more complex, particularly against a backdrop of heightened geopolitical uncertainty.
The complete holdings data disclosed in this continuation reveals that the portfolio is undergoing a rebalancing more profound than previously recognized by the market. Comparing with the percentage weights for the same period last year (prior-period figures in parentheses), the underlying logic of capital flows is clearly visible:
| Industry | Current Weight | Prior Weight | Change |
|---|---|---|---|
| Communication Services | 13.52% | 14.15% | -0.63 pct |
| Consumer Discretionary | 26.16% | 37.27% | -11.11 pct |
| Consumer Staples | 3.91% | 7.22% | -3.31 pct |
| Energy | 3.96% | 1.25% | +2.71 pct |
| Financials | 9.85% | 7.14% | +2.71 pct |
| Industrials | 14.84% | 12.78% | +2.06 pct |
| Information Technology | 13.23% | 9.61% | +3.62 pct |
| Health Care | 2.01% | 3.38% | -1.37 pct |
The consumer sectors (discretionary + staples) fell from 44.49% to 30.07% in aggregate, a reduction of more than 14 percentage points in a single year — the largest one-industry repositioning since the portfolio's inception. The trimmed positions (Meituan, Pop Mart, Trip.com, H World) were not deteriorating fundamentally; rather, they were densely distributed in areas where valuations had fully reflected growth. Meanwhile, information technology, industrials, and energy rose in aggregate from 23.64% to 32.03%, forming the new pillars of the portfolio. This suggests that the investment manager's decision was not "bearish on consumer," but rather a repricing of certainty across more than 2,800 A-shares and Hong Kong stocks — replacing some high-valuation consumer growth stocks with low-valuation cash-flow assets (China Mobile, China Construction Bank, Anhui Conch) and direct beneficiaries of industrial policy (AI, semiconductors, energy storage).
The transaction list in this report illustrates the methodological change better than any prose. The pattern worth noting is structural substitution within the same industry:
This is the most insightful point in the portfolio construction: for the same AI theme, the investment manager chose computing infrastructure (Zhongji Innolight) and new application-layer species (Minimax), rather than the "AI transformation" story of traditional SaaS. The latter faces the risk of direct competition from large-model vendors, while the former has a clearer business model.
The parallel analysis of two positive contributors (Zijin Mining, CATL) and two drags (DPC Dash, Pop Mart) reveals the structure of the current portfolio's return sources:
The extreme divergence between the one-year return (+23.7%) and the five-year annualized return (-6.0%) exists at the index level as well (+19.6% vs -2.3%), but the source of the gap deserves deeper decomposition:
| Metric | Fund (Class B) | MSCI China All Shares | Excess |
|---|---|---|---|
| 1 year | +23.7% | +19.6% | +4.1 pct |
| 5-year annualized | -6.0% | -2.3% | -3.7 pct |
The excess losses of the first four years (2021-2024) were almost entirely concentrated in the macro headwind period of 2021-2023. Regulatory crackdowns, pandemic lockdowns, and the property crisis were piled on simultaneously, and the fund's holdings were predominantly private enterprises and consumer-oriented growth stocks — precisely the group hit hardest. Over the same period, state-owned enterprises and high-dividend strategies outperformed, as domestic capital sought "defensive equity" amid uncertainty.
However, this history precisely demonstrates the cyclical nature of the strategy: when policy clearly shifted at the end of 2024 toward "supporting innovation, consumption, and private enterprises," the portfolio's elasticity was far greater than the index's — the one-year excess return of 4.1 percentage points was precisely compensation for the patient holding of the preceding three years. The key question is not whether the past five years underperformed, but whether China will experience systemic policy shocks similar to those of 2021-2023 over the next five years. If the answer is no (and the current policy direction appears to have fully reversed), then the industrial directions the portfolio currently allocates to (AI, new energy, high-end manufacturing, globalized consumer brands) will most likely continue to contribute excess returns.
Based on the industry allocation changes and trading behavior in this report, the portfolio's trajectory over the coming quarters can be inferred:
1. The consumer sector weight may stabilize in the 28-32% range, but internally the "strong get stronger" logic will continue — retaining core holdings such as Tencent, Alibaba, and Moutai while continuing to clear second-tier consumer brands
2. Information technology may rise above 15%, with AI computing (Zhongji Innolight, Luxshare), chip design (Montage), and intelligent driving (Horizon Robotics) as the main accumulation directions
3. The defensive increases in energy and financials have reached a phase-high (13.8% combined), leaving limited room for further accumulation unless the market experiences a systemic pullback
4. Health care may stabilize and recover — Innovent, as the portfolio's sole innovative drug name, could see an increased allocation if its pipeline progresses smoothly
The most noteworthy signal in this report is the investment manager's answer to the core question of "whether to maintain a growth-stock style in China": growth is not abandoned, but it is equipped with the dual insurance of valuation and industrial trends. This "disciplined offense" is precisely the portfolio management philosophy most needed in the coming phase of market divergence.
The holdings detail disclosed this time reveals a significant industry-level rebalancing in the portfolio. The Materials sector weight rose sharply from 3.60% in the prior fiscal year to 10.13%, becoming the portfolio's most representative cyclical allocation; Real Estate fell directly to zero from 1.55% in the prior year, showing the fund manager's complete exit from the property sector. Utilities also increased from 1.12% to 2.08%, with defensive assets modestly strengthened.
| Industry | 2026 Weight | 2025 Weight | Change |
|---|---|---|---|
| Materials | 10.13% | 3.60% | +6.53pp |
| Real Estate | 0.00% | 1.55% | -1.55pp |
| Utilities | 2.08% | 1.12% | +0.96pp |
Within Materials, Zijin Mining Group Co Ltd 'H' has a market value of £6.13 million, representing 2.84% of net assets, making it the largest single materials stock in the portfolio; the fund also holds Anhui Conch at 1.23%, Wanhua Chemical at 1.26%, Sinocera at 1.67%, as well as lithium resource stocks such as Ganfeng Lithium and Tianqi Lithium. This layout clearly points to a bet on an upswing in the global commodities cycle and structural supply-side opportunities in China, particularly in non-ferrous metals and new chemical materials. Notably, Zijin is also held separately under the name Zijin Gold International at 0.80%; on a combined basis, the Zijin group's position totals approximately 3.64%, making it one of the highest-weighted entities in the portfolio.
The complete clearing of Real Estate stands in sharp contrast to the 1.55% position in the 2024/25 annual report. With liquidity risks in the property industry not fully cleared and the sales recovery still weak, this move reflects the portfolio's avoidance of credit risk and fundamental deterioration. Combined with the increased positions in China Yangtze Power and ENN Energy within Utilities, it can be concluded that the portfolio executed a "sell real estate, buy materials + utilities" switch in fiscal 2026, balancing cyclical offense with defense.
The Comparative Tables show the performance of the A, B, and C share classes under different fee rates and distribution structures. In fiscal 2026, all share classes recorded positive returns of 22%-24%, decisively reversing the losses of roughly -12% to -13% in fiscal 2024. Class C shares (lowest fee, 0.06%) performed best:
| Share Class | 2026 Return | 2025 Return | 2024 Return | Fee Rate |
|---|---|---|---|---|
| A Accumulation | 22.16% | 11.64% | -13.22% | 1.53% |
| B Accumulation | 23.08% | 12.49% | -12.57% | 0.78% |
| B Income | 23.08% | 12.48% | -12.56% | 0.78% |
| C Accumulation | 23.97% | 13.30% | -11.93% | 0.06% |
| C Income | 23.96% | 13.30% | -11.92% | 0.06% |
From the table above, it is clear that Class C's cumulative excess return widened steadily over the three years — in 2026, for example, Class C outperformed Class A by approximately 181 basis points, almost entirely attributable to the fee differential. The gap between Class B and Class A is approximately 92 basis points, also consistent with the 0.75pp fee difference. This again confirms the compounding impact of low-cost share classes on net returns over long holding periods.
The high/low price ranges for each share class also reflect that, after the significant drawdown in fiscal 2024, the price center of gravity rose notably in fiscal years 2025-2026. Taking B Accumulation as an example, the high price rose from 551.2p to 632.7p and the low price from 370.2p to 474.8p, indicating no deep drawdown during the year.
Despite realizing £47.057 million in capital gains and £2.677 million in net income in fiscal 2026, the fund still faced substantial net redemptions: £13.505 million issued, £64.657 million redeemed, for a net outflow of £51.152 million. This figure widened further from the prior year's net outflow of £25.758 million, nearly doubling. As a result, net assets at the year-end fell from £21.813 million to £21.615 million — without the redemptions, net assets would have increased to approximately £26.726 million.
| Item | 2026 £'000 | 2025 £'000 |
|---|---|---|
| Issuance | 13,505 | 38,244 |
| Redemptions | (64,657) | (64,002) |
| Net outflow | (51,152) | (25,758) |
| Investment return | 47,055 | 22,073 |
| Change in net assets | (1,984) | (1,673) |
Investors choosing to redeem after a strong fund rally is typical profit-taking behavior; it may also reflect institutional clients reallocating under a fee-versus-performance tradeoff. Notably, redemptions far exceeded issuance, leaving the fund in a state of overall contraction. This places some pressure on the liquidity management of holdings, but it also correspondingly reduces the fee income associated with assets under management.
The Notes section discloses buy and sell transaction costs. In fiscal 2026, the buy-side commission rate was 0.08% and taxes 0.08%, totaling approximately 0.16%; the sell-side commission rate was 0.04% (based on sale proceeds) and taxes 0.09%. Total transaction costs were £100,000 on buys and £139,000 on sells, both higher than the prior year's £70,000 and £99,000, respectively — possibly reflecting more trading in China's A-share market (where stamp duty is higher).
| Cost Type | 2026 (Buy) | 2025 (Buy) |
|---|---|---|
| Commission rate | 0.08% | 0.05% |
| Tax rate | 0.08% | 0.07% |
| Total cost £'000 | 100 | 70 |
The rise in trading costs explains why "direct transaction costs" in the performance attribution increased from 0.07% to 0.10% (see the Comparative Tables footnotes). It is also consistent with higher portfolio turnover — in fiscal 2026, total purchases were £65.158 million and total sales £112.883 million, with sales far exceeding purchases, reflecting that the fund was rotating industries while reducing positions.
Total assets at the year-end were £21.815 million, of which investments at market value were £21.548 million, accounting for 98.77%, with the remainder in cash and small receivables. Bank overdrafts were £964,000 and net cash approximately £1.524 million, providing ample liquidity. Other creditors increased from £279,000 to £848,000, possibly related to higher payables such as redemption settlements.
Overall, fiscal 2026 was a year of "strong performance growth, shrinking size." The overweight in Materials and the clearing of Real Estate represent the sources of alpha, while heavy redemptions limited the growth of total net assets. The question going forward is whether this trend will continue — if performance continues to improve, redemption momentum may weaken and the fund could enter a steady state.
Total portfolio transaction costs in 2026 were £239k, up 41.4% from £169k in the prior year, driven primarily by commissions nearly doubling (£93k vs £52k). Taxes grew 24.8% in tandem (£146k vs £117k). However, the average dealing spread narrowed from 0.09% to 0.08%, indicating some improvement in market liquidity or the execution environment, but the increase in trading frequency or scale offset this positive factor.
| Item | 2026 (£'000) | 2025 (£'000) | Change |
|---|---|---|---|
| Commissions | 93 | 52 | +78.8% |
| Taxes | 146 | 117 | +24.8% |
| Total direct transaction costs | 239 | 169 | +41.4% |
| Average spread | 0.08% | 0.09% | -0.01pct |
View: Transaction costs as a percentage of NAV rose from 0.07% to 0.10%. Although the absolute figure is not large, given the fund's growth-stock focus, high turnover may erode long-term compounding. The narrowing spread is favorable for large-scale traders, but the higher commissions suggest changes in trading arrangements or market structure.
Overseas dividends grew 14.3% (£4,889k vs £4,279k), representing the only substantive source of income; bank interest, by contrast, fell from £45k to £21k, a decline of 53%. Total income rose only 13.6% year over year. The decline in interest income is related to the global rate environment, but it also indicates a low level of cash management by the fund — with average cash balances of approximately £2m this year, annualized interest income is around 1%.
The AMC increased from £1,566k to £1,735k (+10.8%), broadly in line with changes in the fund's asset size. Points worth noting:
Total expenses were £1,859k vs £1,670k (+11.3%), below the income growth rate, so the expense ratio improved somewhat.
There was no corporation tax this year; overseas withholding tax was £374k (+8.7%). The core data point is that excess management fees accumulated from £18,815k to £20,653k, an increase of 9.8%, equivalent to approximately 9.6% of the fund's net assets. Management believes it is unlikely that these fees will be absorbed by taxable income in the future and therefore has not recognized a deferred tax asset. This is effectively an admission that the fund is in a long-term "tax loss" state, which for investors means future distributions cannot be offset by domestic tax credits and must rely on claiming relief against overseas withholding taxes.
Total distributions rose from £2,312k to £2,679k (+15.9%), with per-share distributions as follows:
Distribution growth far exceeded income growth (13.6%), because the reduction in shares weakened the dilution effect on per-share earnings, while retained earnings carried forward also increased. Group 2 shares include equalisation, indicating that new subscriptions during the year also participated in part of the income distribution.
Cash and bank balances fell from £2,368k to £1,524k (-35.6%), mainly because the sterling account overdraft swelled from £82k to £964k (+1075%). Although the total overdraft is not large, it indicates funding pressure at the year-end, possibly arising from mismatches in subscription/redemption timing or investment payment arrangements. Within other payables, "purchases awaiting settlement" of £26k and "amounts payable on redemptions" of £671k both show increased short-term liabilities, with year-end cash concentration capacity tightening.
Class B Accumulation shares fell from 41.80m to 33.50m, a net decrease of 8.29m (-19.8%); B Income shares decreased by 0.65m (-15.2%). Class A, however, edged up 1.2%, and Class C was unchanged.
| Share Class | Beginning | End | Change Rate |
|---|---|---|---|
| A Acc | 138,654 | 140,314 | +1.2% |
| B Acc | 41,798,374 | 33,499,518 | -19.9% |
| B Inc | 4,276,805 | 3,625,925 | -15.2% |
Structured redemptions suggest institutional investors may have taken profits after heavy positions, while retail investors (Classes A/C) remained on the sidelines. If Class B redemptions persist, asset size will contract further, intensifying the pressure of spreading fixed expenses.
All assets are valued using Level 1 (publicly quoted prices), with no Level 2/3 assets — extremely high transparency. In currency exposure, the Hong Kong dollar accounts for 62.4% (£134.3m), the renminbi 31.4% (£67.8m), with the US dollar and Taiwan dollar together around 6%. The renminbi is an important non-freely-convertible currency, yet the fund does not separately disclose hedging arrangements, meaning exchange rate fluctuations have a significant impact on net assets.
The ACD and its related parties hold 0.00% of the fund's shares, meaning there is insufficient interest alignment, though this is consistent with common practice for open-ended funds. ACD fees and custody fees are fully disclosed, and the year-end payable of £129k is within normal range.
This sub-fund aims to outperform the MSCI Pacific Index (in GBP), investing at least 90% in companies listed, registered, or with principal operations in Australia, Hong Kong, Japan, New Zealand, and Singapore. The style continues the active management approach of "long-term growth potential over short-term returns" and explicitly states that it "may underperform the benchmark for extended periods", with risk warnings more candid than those of Chinese fund reports. At present, only the objective and policy are listed; financial data have not yet been disclosed. Future attention should focus on its holding concentration and performance comparison.
Pairing the 10 data points from the bar chart by annual fund/benchmark pairs yields a complete five-year, year-by-year performance breakdown, revealing an underperformance gap far more striking than the summary figure of "five-year annualized -2.0% vs 8.5%":
| Period | Fund Return | Benchmark Return (MSCI Pacific) | Relative Gap |
|---|---|---|---|
| 30/04/2021 – 30/04/2022 | -17.0% | -0.9% | -16.1pp |
| 30/04/2022 – 30/04/2023 | -1.4% | -0.9% | -0.5pp |
| 30/04/2023 – 30/04/2024 | +1.0% | +2.4% | -1.4pp |
| 30/04/2024 – 30/04/2025 | +3.2% | +13.5% | -10.3pp |
| 30/04/2025 – 30/04/2026 | +9.7% | +27.0% | -17.3pp |
Three key observations:
1. The fund did not beat the benchmark in any single year over the five-year period, and the underperformance margin widened in a fluctuating pattern—the cumulative underperformance over the most recent two years was 27.6pp, exceeding the total of the prior three years combined.
2. The -17.0% in 2021-2022 was the decisive blow. In that year, the benchmark fell only 0.9%, yet the fund suffered a near-collapse-level drawdown. Based on an initial investment of 100 yuan, after five years the fund's NAV would be only about 90 yuan (actual annualized -2.0%), while the benchmark would have grown to about 150 yuan (annualized 8.5%), leaving a terminal gap of as much as 60%. The cruelty of compounding is fully exposed here.
3. Notably, the fund recorded an absolute positive return of +9.7% in 2025-2026, but this came against a backdrop of a 27% surge in the benchmark. Management noted in the report that "SMC and Keyence and other automation-related stocks strengthened toward period-end and improved performance", implying that the fund was weaker for most of the period, and the late-year rebound only narrowed part of the gap.
The report repeatedly emphasizes that the "rally was unusually narrow", which in fact reveals the structural source of the fund's underperformance—the explosive growth in AI capital expenditure is reshaping valuation logic in the Asia-Pacific market, and the fund has been caught on both the "positive" and "negative" sides of this narrative:
This is a rare two-sided failed bet: it neither held sufficient exposure to the strongest AI hardware beneficiaries nor avoided the camp of victims in the AI disruption narrative. The market's pricing of AI is extremely optimistic on the hardware side and extremely pessimistic on the software side, while the fund's portfolio structure happens to straddle both ends—and its exposure on each side is insufficiently precise.
The deeper question is: Does the fund's absence from Advantest and Kioxia stem from a systematic blind spot in its investment framework? Advantest is a leader in semiconductor test equipment, and Kioxia is a NAND flash maker—both have typical cyclical growth characteristics, whereas Baillie Gifford has historically preferred "long-term compounding growth" companies, and its coverage of strongly cyclical semiconductor names may be relatively limited. This explains why the fund could only "partially participate" in the AI hardware upcycle.
The most noteworthy signal comes from the structure of the new holdings. The report summarizes this as "extended our growth investing into a broader set of industries", but a closer look at the quality of the targets suggests this is more like an overt style drift:
| New Area | Representative Companies | Traditional Growth Characteristics | Actual Exposure Characteristics |
|---|---|---|---|
| Japanese regional banks | Kyoto Financial Group, Chiba Bank | Low | Beneficiary of rising rates, value-stock attributes |
| Insurance | Tokio Marine | Low | Defensive, dividend attributes |
| Defense | Kawasaki Heavy Industries | Medium | Geopolitical catalyst, order cycle |
| Energy | Santos | Low | Commodity price cycle |
| Semiconductor materials | Shin-Etsu Chemical | Medium | Cycle + AI penetration dual drivers |
| Electronic components | Taiyo Yuden | Medium | Industry cycle bottoming and recovering |
Among these, the purchases of Japanese banks, insurance, and energy sit in clear tension with Baillie Gifford's signature "long-term growth" label. A reasonable interpretation is that, amid five consecutive years of growth-style headwinds (rising rates, weak yen, value preference), fund manager Cho-Yu Koo chose a tactical extension into traditional value/cyclical areas to reduce the portfolio's pure-growth exposure. But this also plants a new question—does the fund have the ability to consistently pick stocks in these industries? The sell list includes MS&AD Insurance (an insurance stock previously bought), indicating that the attempt in this direction has not been entirely smooth.
Another detail: the purchase of Kawasaki Heavy Industries (defense) carries a strong thematic-investment flavor against the backdrop of rising Asia-Pacific geopolitical risk, which sits in tension with Baillie Gifford's consistent bottom-up stock-selection logic.
Among the top ten holdings, Baillie Gifford Japanese Smaller Companies Fund C Acc ranks first with a 5.61% weight, but it appears in both the "largest purchases" and "largest sales" lists (purchases of £831k and sales of £831k, with exactly equal amounts). This is most likely not an actual trade but an internal share conversion or rebalancing operation (for example, transferring from other share classes into the C Acc class), yet it also reflects the fund's structural arrangement of indirectly allocating to Japanese small caps through an affiliated fund.
Several points are worth examining regarding this cross-holding:
1. Double fee structure: Investors hold this fund, which in turn holds another Baillie Gifford fund that charges management fees. Although fund companies typically waive fees on affiliated funds to avoid double charging, this arrangement is not explicitly disclosed in the report.
2. Transparency issue: The aforementioned cross-held fund is flagged in "Principal Holdings" via a footnote reading "please refer to note 11", but in the "Material Portfolio Changes" table it is directly listed as a trading target with amounts precise to thousands of pounds, indicating that at least some capital flow has occurred, not merely a book holding.
3. Boundary of investment capability: Entrusting 5.61% of assets to a same-family Japanese small-cap fund is tantamount to admitting that in certain Japanese small-cap areas, the parent fund's direct stock-picking capability is inferior to that of the sub-fund. Given that Japan accounts for 68.06% of the entire portfolio, this arrangement is effectively a structural complement to the portfolio's internal circle of competence.
| Region | 30/04/2026 Weight | Prior Weight | Change |
|---|---|---|---|
| Australia | 14.61% | 13.31% | +1.30pp |
| Hong Kong | 7.58% | 8.55% | -0.97pp |
| Japan | 68.06% | 67.68% | +0.38pp |
Australia saw the largest increase, consistent with the report's description of relative strength in resources/energy. BHP (3.79%), Washington H Soul Pattinson (3.48%), and Worley (1.65%) are all companies in the resources/energy chain. But what is intriguing is that the report also notes that in Australia "technology and software shares fell sharply"—yet the fund's Australian holdings are mainly software/platform names such as Carsales (1.43%) and REA Group (0.95%). This implies that the increase in Australia came more from the passive weight rise of resource stocks (due to price appreciation) than from active buying of technology stocks.
The reduction in Hong Kong came against the backdrop of "IPO activity revived", which seems untimely—especially as Hong Kong Exchanges & Clearing appeared on the largest-sales list (£1,050k), trimming a name directly benefiting from the IPO recovery. Combined with the sale of Tencent (£913k), the fund's stance toward the Hong Kong market is clearly cautious, likely reflecting concerns over regulatory risk for Chinese concept stocks and the sustainability of valuation recovery.
In the report's risk warnings section, there is a higher-order piece of information often overlooked by investors: the Risk and Reward Indicator explicitly states that it "does not take into account" active management risk. This means that the official risk classification (one of the bands from 1 to 7) is based solely on historical volatility and cannot capture the most central risk of this type of active fund—the risk of manager misjudgment.
The real-life annotation to this statement is this very report: if measured by historical volatility, the fund might fall into the 4-5 category ("typically higher rewards, higher risk"), but the fact that it underperformed the benchmark by more than 10pp in each of the past five years shows that the real risk lies not in market beta but in the persistent failure of stock-selection alpha. Five consecutive years of style headwinds can be seen as a "macro-level active management risk"—when an investment style is persistently mismatched with the market's dominant narrative, even correct stock selection cannot prevent sustained damage to relative returns at the portfolio level.
The inclusion of "military conflict" in the risk warnings is particularly real in the Asia-Pacific context. The appearance of this phrase in the 2026 report, combined with the fund's new defense holding (Kawasaki Heavy Industries), suggests that geopolitics is shifting from a tail risk to one of the considerations in portfolio construction.
The report concludes that "we remain confident that our approach will deliver meaningful value", but looking at the medium-term data, this confidence faces several unanswered questions:
1. Of the 10.5pp annualized gap between the five-year annualized -2.0% and the benchmark's +8.5%, how much can be attributed to external style headwinds (rates, exchange rates, value preference) and how much is actual deterioration in stock-picking ability? The report does not provide an attribution breakdown.
2. In future scenarios of rate cuts or a reversal in Japan's monetary-policy normalization, can the newly purchased banks, insurance, energy, and defense names still generate excess returns?
3. How long will it take for the market to reprice the continued holdings in "AI-disruption worries" such as Recruit, Xero, and REA Group?
The portfolio status as of April 2026 shows that the fund is using broader industry coverage to hedge against persistent growth-style headwinds, but the trust deficit accumulated over the past five years will not be automatically repaired by one year of 9.7% absolute return. The key observation windows ahead are whether the new "broad growth" holdings can prove their profitability when expectations for the rate environment shift, and whether the automation/robotics-chain holdings can sustain their period-end strength—if both fail simultaneously, the manager will find it very difficult to continue explaining a fifth underperforming year with "long-termism".
The holding details disclosed in this section confirm the fund's "Japan-focused" positioning. As of 30 April 2026, Japanese assets accounted for 90.25% of the portfolio (calculated as total holdings of 98.75% minus New Zealand's 1.37% and Singapore's 7.13%), up further from 89.19% in fiscal 2025. This change did not stem from adding Japanese equities, but from the relative contraction of Singapore (down from 7.95% to 7.13%) and New Zealand (down from 1.61% to 1.37%), reflecting passive weight changes in both regions against the backdrop of a shrinking fund NAV.
| Region | 2026 Weight | 2025 Weight | Change |
|---|---|---|---|
| Japan | 90.25%* | 89.19%* | +1.06pp |
| Singapore | 7.13% | 7.95% | -0.82pp |
| New Zealand | 1.37% | 1.61% | -0.24pp |
| Other | 1.25% (net other assets) | 0.90% | +0.35pp |
*Note: The Japan weight is a derived figure (total holdings of 98.75% minus the disclosed regions); in practice it may include other unlisted markets, but based on the fund's name and the holdings list, it can be regarded as the main component.
Looking at individual names, United Overseas Bank (Singapore) is the largest holding with a 4.99% weight, followed by SoftBank Group (3.90%), Tokyo Electron (3.85%), Sony (3.53%), and Fast Retailing (3.36%). This order differs from the intuitive "core Japan holdings" picture; UOB, a regional banking giant, receives the highest weight, which may reflect the manager's active overweight allocation to Southeast Asian financials rather than a simple country-weight allocation.
A notable detail in the holdings is the fund's stake in Baillie Gifford Japanese Smaller Companies Fund Class C Acc (5.61% of net assets), a cross-holding of a sub-fund under the same group. This sub-fund invests specifically in Japanese small-cap growth stocks, indicating that the manager uses a two-tier structure to diversify stock-picking capability across smaller-cap targets, while also giving the fund greater actual exposure to small- and mid-cap names. For example, direct holdings such as Money Forward (0.94%), MonotaRO (0.62%), and Sugi Holdings (0.89%) are all growth companies with relatively small market capitalizations; after adding the sub-fund, the small-cap style weight is far greater than the book figures suggest.
The comparison table shows the complete performance path of four share classes over three fiscal years. Taking fiscal 2026 as an example, the "Return after charges" varies dramatically across share classes:
| Share Class | Ongoing Charges | FY2026 Return | FY2025 Return | Three-Year Cumulative Return* |
|---|---|---|---|---|
| A Accumulation | 1.50% | 9.11% | 0.49% | 8.76% |
| B Accumulation | 0.65% | 10.04% | 1.35% | 11.53% |
| B Income | 0.65% | 10.04% | 1.35% | 11.53% |
| C Accumulation | 0.10% | 10.64% | 1.90% | 13.17% |
*Three-year cumulative figures are extrapolated via CPR (not precise compounding, merely indicative of the trend).
The fee differences produce a significant divergence in returns over long-term compounding: Class C (institutional grade, 0.10% fee) has a three-year cumulative return of about 13.2%, while Class A (retail grade, 1.50% fee) has only about 8.8%, a gap of 4.4 percentage points. For every 1 percentage point reduction in the fee rate, the annualized return difference is about 1 percentage point, which becomes increasingly critical in a low-rate, low-return environment.
The fund's net assets fell from £59.791 million at the end of fiscal 2025 to £50.333 million, a decline of approximately 15.8%. The financial statements reveal the core reason: net investor redemptions reached £14.908 million (issuance of £1,589k, redemptions of £16,497k), with redemptions far exceeding new subscriptions. Although the fiscal year delivered investment returns of £4.862 million, this was insufficient to offset the capital outflows. This phenomenon of "improved performance but continued shrinkage in size" is common among small- and mid-cap funds—institutional investors typically choose to cash out after a performance rebound rather than add capital.
Notably, distribution patterns also show structural changes: total distributions in 2026 were £663k, down 14.2% from £773k last year, but retained accumulated distributions fell from £665k to £576k, a decline of 13.4%, in line with the fund's shrinking size. However, the per-share distribution for the B Income share class changed only slightly (from 6.31 pence to 7.03, in fact an increase), while the per-share distribution for the A Accumulation share class rose from 1.64 to 2.24 pence, mainly due to a change in the net asset base rather than operational improvement.
The "Statement of Total Return" reveals key information about the quality of the fund's earnings:
The combination of surging capital gains and declining income shows that this fiscal year's returns relied almost entirely on unrealized/realized gains from rising share prices, rather than fundamental dividend growth. This earnings structure is not unusual in the 2025-26 global technology rally, but it also means the fund lacks a dividend buffer if the market turns.
At period-end, the portfolio market value was £49.704 million, representing 97.8% of total assets of £50,828k, with cash and bank deposits of only £339k (0.67%) and a bank overdraft of £28k, leaving net cash almost zero. This near-fully-invested allocation reflects the manager's firmly bullish stance, but it also meant that during the redemption wave the fund was forced to sell holdings to meet redemption demand—from the start of the period to period-end, investment market value fell by £9.551 million, well short of net redemptions of £14.908 million (the difference being offset by capital gains), suggesting that the selling itself may have partially hedged market value fluctuations.
The holdings include Baillie Gifford Japanese Smaller Companies Fund C Acc, ranking as the second-largest holding at 5.61% of net assets. Because this sub-fund and the parent fund are both under Baillie Gifford, this cross-investment creates double fees: when the fund holds sub-fund shares, investors must bear both the parent fund's operating charges (0.10%-1.50% depending on share class) and the sub-fund's fees. Although the report does not break out the sub-fund's fee rate, similar Japanese small-cap funds typically charge a 0.5%-0.8% management fee. After layering, the actual total cost could exceed 0.7% for Class C, 1.3% for Class B, and 2.0% for Class A. This is not reflected in the "Operating charges" and constitutes a hidden cost. When investors evaluate cost-effectiveness, this additional cost of the cross-holding should be taken into account.
Compared with the 2025 holdings, this report does not disclose a complete list of buys and sells, but the direction of rebalancing can be inferred from changes in holding market values and weights. For example, Kyoto Financial Group appears as a new name with a 1.64% weight, while a traditional holding such as Chiba Bank has a 1.69% weight, suggesting that the manager may be making a subtle tilt within the financial sector from regional banks toward regional financial holding groups. Taiyo Yuden and Murata are held simultaneously, with a combined weight of 3.29%, indicating sustained conviction in the passive-components industry chain. Combined with Japan's still nearly 90% exposure, these subtle changes suggest that the fund is intensifying its bet on Japanese manufacturing and financial services at the index level, rather than rotating into defensive industries.
This period's financial statements disclose a more granular breakdown of transaction costs. In 2026, total equity purchases were £14.772M, down 10.3% from £16.469M in 2025, consistent with the overall contraction in fund size. Notably, the fund's buy-side transaction costs were only £7,000 (commissions £7,000, taxes £0), a cost ratio of just 0.05%, and no UK stamp duty was incurred—confirming that the portfolio is highly concentrated in non-UK markets (which typically have no UK stamp duty obligation, such as Hong Kong, Japan, and Australia).
The fund's buy-side costs were lower because in 2026 the purchase amount of funds was zero (£414,000 in 2025), whereas purchases of fund units typically involve higher distribution fees or bid-ask spreads. In fact, units of UK-listed investment trusts and OEICs are usually quoted by market makers, and the spread cost is far higher than equity commissions.
Sell-side transaction costs also remained low:
| Item | 2026 | 2025 | Change |
|---|---|---|---|
| Total equity sales (excluding fees) | £28.428M | £45.127M | -37.0% |
| Commissions | £10K | £13K | -23.1% |
| Taxes | £3K | £7K | -57.1% |
| Sell-side cost ratio (commissions) | 0.04% | 0.03% | +1bp |
In 2026, total sales were significantly larger than total purchases (sales of £29.246M vs purchases of £14.779M), a direct reflection of net redemptions. Under the redemption wave, the fund was forced to sell assets, but transaction cost ratios did not deteriorate significantly, reflecting ample liquidity in the portfolio's underlying securities, especially in Japan and Australia. However, this one-way selling pressure, combined with realized capital gains of £4,861k, indicates that the fund was realizing profits while managing redemptions.
| Metric | 2026 | 2025 |
|---|---|---|
| Direct transaction costs as % of average NAV | 0.04% | 0.04% |
| Average portfolio dealing spread | 0.06% | 0.06% |
| Commissions as % of NAV | 0.03% | 0.03% |
| Taxes as % of NAV | 0.01% | 0.01% |
Although the direct cost ratio remained unchanged, the report explicitly notes that spreads fall outside the scope of direct cost disclosure. The nominal spreads of single-priced funds are not included in the average spread, meaning assets held by the fund indirectly through the Baillie Gifford Japanese Smaller Companies Fund may involve hidden transaction costs that are not reflected. In 2026, the fund held the Baillie Gifford Japanese Smaller Companies Fund (see note 11); the bid-ask spread of that fund is adjusted by the manager (Baillie Gifford) within its rules, and this portion of the cost effectively constitutes an indirect friction cost for investors, though it is not quantified on the books.
Total income for fiscal 2026 was £1.081M, down 15.5% year over year (2025: £1.279M). Breaking this down:
| Income Source | 2026 | 2025 | Change |
|---|---|---|---|
| UK dividends | £39K | £42K | -7.1% |
| Overseas dividends | £1,037K | £1,221K | -15.1% |
| Bank interest | £5K | £16K | -68.8% |
Overseas dividends accounted for 95.9% of total income, making them the absolute core income source. The drivers behind the 15.1% decline in overseas dividends include: ① the decline in holdings due to the shrinking fund size; ② the translation impact of yen depreciation against sterling on Japanese dividends (yen exposure fell from £37.277M to £31.435M, a decline of 15.7%); and ③ higher-yielding value names that may have been sold between November 2025 and April 2026 (total sales of £28.428M).
Bank interest fell sharply from £16K to £5K, a decline of 68.8%, reflecting the persistently low cash balance (year-end cash and bank deposits of only £311K, roughly 0.6% of total assets) — the fund has allocated nearly all investable capital to equities rather than holding cash, consistent with the style of a global growth fund. It is worth noting, however, that the UK base rate remained above 4% in 2026, and the opportunity cost of forgoing cash returns was voluntarily accepted, which in turn underscores management's confidence in equity market returns.
Total fees were £359K, down 19.5% year-on-year (£446K→£359K), but the change in fee rates reveals a structural contradiction:
| Fee Item | 2026 | 2025 | Change | Fee Rate Change (% of Average NAV) |
|---|---|---|---|---|
| AMC fees | £316K | £403K | -21.6% | 0.56%→0.53% |
| Custody + bank fees | £10K | £13K | -23.1% | 0.02%→0.02% |
| Audit fees | £8K | £8K | 0.0% | 0.014%→0.014% |
| Professional fees | £9K | £7K | +28.6% | 0.012%→0.016% |
| Investor processing fees | £16K | £15K | +6.7% | 0.027%→0.028% |
Although AMC fees declined in sterling terms, the decline (-21.6%) was smaller than the decline in average NAV (average NAV of approximately £56.5M in 2026 vs approximately £77M in 2025, a decline of approximately 26.6%), leading to an effective fee rate increase of approximately 3bp. This indicates that AMC's minimum fee mechanism or tiered management fee schedule has begun to disadvantage smaller funds—once fund size falls below a certain threshold, fixed operating costs (audit, compliance, custody) cannot be compressed proportionally, forming a vicious cycle of rising fee rates.
Audit fees remained unchanged at £8K for two consecutive years, professional fees rose 28.6%, and investor instruction processing fees rose 6.7%. The price stickiness of these expenses places additional pressure on the company as the fund shrinks: the £30K in "other fees" accounted for 8.4% of total fund fees, up 1.7 percentage points from 6.7% in 2025. For every £1 of fees investors pay, a larger proportion flows to administrative processes unrelated to investment management.
The fund is subject to a 20% corporate tax rate, but its corporate tax liability is zero. The key mechanism is: UK dividends and qualifying overseas dividends are exempt, while deductible expenses (mainly AMC of £316K) far exceed taxable income. The 2026 tax reconciliation shows:
| Reconciliation Item | 2026 | 2025 |
|---|---|---|
| Notional tax at 20% of net income | £145K | £167K |
| Non-taxable UK dividends deduction | (£8K) | (£8K) |
| Non-taxable overseas dividends deduction | (£207K) | (£245K) |
| Overseas dividend withholding tax | £58K | £61K |
| Excess management expenses adjustment | £70K | £86K |
| Actual tax charge | £58K | £61K |
The fund pays no UK corporate tax at all; all taxes are overseas withholding taxes. This reflects the tax pass-through advantage of a UK OEIC as a cross-border investment vehicle: investors pay tax only at their own level, and the fund level incurs no tax shield erosion. However, caution is warranted: excess management expenses have reached £7.517M, up 4.9% from the prior year (£7.165M). This implies that if substantial interest income or special taxable income were to arise in a future year, these historical losses could be used to offset corporate tax. Yet, since the fund's net income is almost entirely derived from tax-exempt dividends, the practical value of this tax shield will most likely never be realized; it is merely a book-level comfort.
Overseas withholding tax of £58K represents 5.6% of overseas dividends of £1,037K (5.0% in 2025). The ratio has risen modestly, possibly related to shifts in the portfolio's country allocation — Japan's dividend withholding tax rate for UK investors is typically 15%, while Australia is 15%, Hong Kong is 0%, and Singapore is 0%. Given that the relative weighting of Japanese exposure rose in 2026 (yen-denominated assets account for approximately 63% of total assets), the average 5.6% withholding tax rate implies a portfolio tilt toward high-withholding-tax markets.
Total distributions amounted to £663K, down 14.2% year-on-year (£773K→£663K), yet the per-share distribution for Class B accumulation shares rose against the trend by 13.1% (7.33p→8.29p). The root of this contradiction lies in the adjustment mechanism for subscriptions and redemptions.
| Distribution adjustment item | 2026 | 2025 |
|---|---|---|
| Undistributed income at period end | £601K | £693K |
| Income deducted upon redemption | £71K | £110K |
| Income returned upon subscription | (£9K) | (£30K) |
| Net distributable income | £663K | £773K |
In 2026, redemptions far exceeded subscriptions (net redemptions of Class B shares of -2,118,866 shares). At redemption, a proportionate share of undistributed income (£71K) was taken out of the fund's assets, which in turn raised the per-share income distribution for remaining shareholders — this is the effect of the "equalisation" mechanism. For the fund as a whole, however, the scale of distributions is contracting, and this is not the result of improved operations.
The Distribution Table shows:
The equalisation amount for Group 2 shares (Class B accumulation 3.27846p, representing 39.5% of total distributions) indicates that a fairly high proportion of investors subscribed midway or partially redeemed during the reporting period, requiring income to be apportioned across multiple holding periods. The unusual expansion of this proportion (2025 data not disclosed, so no comparison is possible) may reflect frequent investor flows.
| 流动资产项目 | 2026 | 2025 | 变动 |
|---|---|---|---|
| 待收申购款 | £0 | £9K | -100% |
| 待收卖出款 | £513K | £442K | +16.1% |
| 应计股息 | £270K | £335K | -19.4% |
| 其他应收 | £2K | £3K | -33.3% |
应计股息下降 19.4% 说明期末时点接近股息支付周期的尾声，或投资组合的除息日分布发生变化。而待收卖出款上涨 16.1% 至 £513K，与年末前的大额卖出（£28.428M）相匹配，其中一部分交易的交割延至下个会计期间。
现金及银行存款总额 £311K（含£28K 透支），仅占总资产的 0.6%。这低于一般基金 1-2% 的现金缓冲水平。虽然在牛市中满仓运作有利于回报，但在波动加大的市场环境中，如此低的现金储备使基金缺乏应对赎回的缓冲——当赎回压力上升时，基金可能被迫在市场不利时机卖出持仓，进一步加剧资本损失。
| 流动负债项目 | 2026 | 2025 |
|---|---|---|
| 待付赎回款 | £159K | £130K |
| 待付购股款 | £248K | £377K |
| 应付 ACD | £23K | £27K |
| 应付托管人 | £3K | £3K |
| 其他应计 | £9K | £9K |
待付赎回款 £159K 比 2025 年增加 22.3%，尽管基金规模整体缩水 16%，赎回款占比更大，进一步确认了赎回压力持续到期末。同时，待付购股款从 £377K 降至 £248K（-34%），买卖结构完全失衡。
| 维度 | 2026 | 2025 |
|---|---|---|
| 买入日本小型公司基金 | £0 | £414K |
| 卖出日本小型公司基金 | £831K | £1,946K |
| 从该基金获得的股息 | £39K | £42K |
2026 年度未新增买入日本小型公司基金，并清仓了 £831K 的持仓。这一动态值得玩味：一方面，Baillie Gifford 旗下日本小型公司策略与其 Developed Asia Pacific 基金在持仓重叠度上较高（两者都重仓日本的成长型中小盘股），双重收费在过往受到投资者质疑；另一方面，清仓行为可被解读为简化投资结构、移除关联交易的主动治理举措。
不过，也应指出：这笔交易发生于2025年5月至2026年4月期间，具体时点未披露，无法判断是否属于“在赎回压力下的被迫出售”还是“基于投资判断的自愿调整”。
ACD 及关联方持有基金份额仅占 NAV 的 0.02%（2025 年为 0.01%）。这一比例低于行业惯例——许多主动管理基金的管理人会持有 1% 以上的份额以示利益绑定。0.02% 的持股意味着管理人对该基金的经济利益敞口极小，投资者可能需要重新审视管理人持续投入资源的意愿。
| Share Class | Opening Shares | Issuance | Redemption | Conversion | Closing Shares | Net Change Rate |
|---|---|---|---|---|---|---|
| A Accumulation | 169,440 | 6,387 | (53,354) | (109) | 122,364 | -27.8% |
| B Accumulation | 9,027,889 | 187,257 | (2,306,123) | (438) | 6,908,585 | -23.5% |
| B Income | 449,531 | 49,010 | (145,550) | 626 | 353,617 | -21.3% |
| C Accumulation | 500 | 500 | (500) | - | 500 | 0.0% |
| C Income | 1,000 | 1,000 | (1,000) | - | 1,000 | 0.0% |
B Accumulation saw net redemptions of 2,118,866 shares (23.5%), and B Income saw net redemptions of 96,540 shares (21.5%); together, these two classes accounted for more than 98% of the fund's total net redemptions. The redemption-to-issuance ratio stands at roughly 11:1, meaning that for every £1 of inflows, £11 flowed out. This one-way flow typically stems from institutional investors' asset allocation rebalancing or client attrition following underperformance.
Notably, Class A had the highest redemption rate (27.8%)—Class A is generally aimed at retail investors, who are more sensitive to fund performance and belatedly exited in large numbers.
| Valuation Tier | 2026 | Share | 2025 | Share |
|---|---|---|---|---|
| Level 1 (Active market quotes) | £46.881M | 94.3% | £56.061M | 94.6% |
| Level 2 (Observable market data) | £2.823M | 5.7% | £3.194M | 5.4% |
| Level 3 (Unobservable data) | £0 | - | £0 | - |
| Total | £49.704M | 100% | £59.255M | 100% |
The Level 2 assets of £2.823M typically correspond to holdings of open-ended fund units (such as the Baillie Gifford Japanese Smaller Companies Fund). Although these funds can be redeemed at NAV, the redemption conditions (e.g., notice periods, dilution adjustment fees) make their liquidity actually weaker than directly holding equities. The 5.7% Level 2 share is higher than the industry average of 3–4%. Against a backdrop of increasing redemption pressure, this portion of assets could become a bottleneck for monetization.
But a more positive interpretation is that while the Level 2 asset share rose from 5.4% to 5.7%, the absolute value fell by 11.6%, reflecting that the fund maintained stable NAV valuations during the process of selling Japanese smaller-company funds, without any forced liquidation at a discount.
| Currency | 2026 Non-Currency Exposure | 2025 Non-Currency Exposure | Share (2026) |
|---|---|---|---|
| JPY | £31.435M | £37.277M | 63.3% |
| AUD | £8.041M | £8.920M | 16.2% |
| HKD | £3.816M | £5.111M | 7.7% |
| SGD | £2.933M | £3.368M | 5.9% |
| USD | £0.655M | £1.384M | 1.3% |
| GBP | £2.823M | £3.194M | 5.7% |
JPY exposure accounts for 63.3% of net assets, higher than the 62.9% in 2025 (calculated on a non-currency exposure basis), meaning the fund is essentially a politically correct version of a Japan equity fund. If the JPY/GBP exchange rate appreciates roughly 10% (hypothetically) in fiscal 2026, currency moves alone could contribute approximately £3.1M in capital gains—which explains why a considerable portion of the £4.861M net capital gains may stem from currency factors rather than active stock selection.
Notably: the table shows all foreign-currency exposures are non-monetary (equity), with no FX forwards or option hedges. The fund's management costs also do not disclose FX transaction costs. This means investors are fully exposed to two-way currency volatility. For a fund named "Developed Asia Pacific," investors expect diversification across multiple developed Asian markets, but actual drawdown risk is highly concentrated in a single currency—the yen. This may be an aspect of product design that warrants reconsideration.
1. Cost discipline remains intact: The transaction cost ratio remains at 0.04% and the spread at 0.06%, with no deterioration despite the shrinking scale.
2. High tax efficiency: At the fund level, the actual tax burden is limited to foreign withholding tax, with an effective tax rate of 5.6% and no drag from UK corporation tax.
3. Related-party cleanup: The liquidation of the Japanese small-cap company fund removed layered related-party fees and improved the transparency of the investment structure.
4. No anomalies in the valuation hierarchy: There are no Level 3 assets, avoiding valuation manipulation risk.
1. Rising fee trend (wage stickiness + shrinking scale): Economies of scale are weakening, and fixed costs cannot be compressed.
2. Cash buffer too low: A 0.6% cash ratio is effectively running unprotected in a redemption wave.
3. Liquidity mismatch risk: The share of Level 2 assets has risen, making disposal prices uncertain in stressed markets.
4. Lack of currency hedging: The 63% yen exposure may generate sharp volatility as US-Japan monetary policy divergence widens.
The fund's financial statements reveal a passive victim in a net redemption spiral: weak investment performance drives outflows, the shrinking fund scale pushes up the fee ratio, and that in turn undermines future performance competitiveness. From an asset allocation perspective, however, the Japan + Australia + Singapore combination offers low correlation to the S&P 500 and UK equities, and the yen exposure can serve as a natural hedge for US dollar/sterling assets. The key question is whether investors should pay a 0.56% AMC to buy an index combination they could replicate cheaply themselves (for example MSCI Japan + MSCI Australia + MSCI Singapore). The answer depends on the manager's active alpha — and in these financial statements, sufficient evidence that such alpha exists has not yet been seen.
The five-year data disclosed this time provide key evidence for understanding the active management risk of the Baillie Gifford Emerging Markets Growth Fund. The fund returned 60.3% over the latest year versus 45.0% for the index, a single-year excess return of 15.3 percentage points (B Accumulation Shares, FE data, 10am dealing prices). However, over five years the annualised return was 5.8% for the fund versus 6.9% for the index, a cumulative gap of roughly 7.3 percentage points ((1.058)^5-1 = 32.5% vs (1.069)^5-1 = 39.8%).
Working backwards, the fund underperformed the index by approximately 22.6 percentage points cumulatively over the first four years, equivalent to a sustained headwind of roughly 6.2 percentage points per annum. This corroborates the phrase "prolonged periods of underperformance" in the report — the fund manager explicitly flags this risk in the Investment Objective, yet the 5.8% annualised result still shows that even a sharp rally in the final year cannot fully repair the relative loss of the previous four years.
| Period | Fund Annualised Return | Index Annualised Return | Excess Return |
|---|---|---|---|
| 2025/04–2026/04 | 60.3% | 45.0% | +15.3% |
| 2022/04–2026/04 (5yr p.a.) | 5.8% | 6.9% | -1.1% |
| Implied cumulative first 4 years | — | — | ≈ -22.6% |
This performance arc precisely confirms the "bottom-up" characteristic emphasised in the report: performance is highly dependent on bursts from a few years and a few holdings, rather than stable, continuous alpha generation. For investors with a five-year evaluation horizon, the fund has demonstrated an ability to recover, but the timing and magnitude of that recovery are unpredictable.
The Principal Holdings show that the top five positions total approximately 38.5%, of which Samsung Electronics (9.89%), SK Hynix (9.79%) and TSMC (9.32%) together account for 29.0%. Adding Mediatek (4.99%) and Accton Technology (2.05%), the portfolio's AI/semiconductor supply chain exposure exceeds 36%.
This is not unusual among EM funds, but what deserves attention is not the ratio itself but the report's narrative structure: the Contributors column is almost entirely built around the AI supply chain (Samsung, SK Hynix, HBM), while the Detractors are concentrated in consumer internet (MercadoLibre, Sea Limited). This means the fund's actual risk-factor exposure deviates from the label of "diversified emerging markets growth" — in essence, it is a portfolio of AI capex cycle beta layered with individual stock alpha.
The Baillie Gifford team acknowledges in Notable Transactions that it was "taking profits from selected holdings where share prices had been particularly strong, including some AI hardware related companies", but judging from Material Portfolio Changes, the sales of TSMC (£31.1m) and Samsung Electronics (£24.4m) were far larger than the new additions of Montage Technology (£6.9m) and Accton Technology (£6.3m). In other words, within the AI chain the fund carried out a "trim the giants, add the second tier" rebalancing rather than a systematic reduction in risk.
The geographical and industry distribution of the newly purchased names reveals a clear investment thread: financially healthy non-technology companies are being brought into the portfolio to hedge the volatility of technology holdings. Capitec (South African retail banking), InterGlobe Aviation (Indian aviation), Vista Energy (Argentine unconventional oil and gas) and Sanhua Intelligent Controls (Chinese thermal management) represent four different types of domestic-demand-driven growth, and none is among the top ten index weights.
Notably, the largest single purchase was Emaar Properties (£11.6m) — a UAE real estate developer that did not appear in the interim report. Placing Emaar alongside Vista Energy (Argentina's Vaca Muerta shale) suggests that, under the theme of "local structural growth", the team has begun to include assets linked to the global rate cycle, energy transition and local credit cycles. This cross-regional, cross-industry diversification is an active correction to the portfolio's excessive tilt toward the East Asian technology chain.
| Purchased Name | Amount (£'000) | Region/Theme |
|---|---|---|
| Emaar Properties | 11,589 | Middle East/Real estate |
| Mediatek | 9,500 | Taiwan/Semiconductors |
| CATL 'A' | 8,563 | China/Batteries |
| Axia Energia | 7,410 | Brazil/Energy |
| Montage Technology | 6,912 | China/Semiconductors |
The report rates the fund at 6 on a seven-level scale in the Risk and Reward Profile, but at the same time emphasises in the Investment Policy that "In adverse market conditions it may be difficult to sell investments held by the Fund in a timely manner and their value may fall significantly". Combined with the report's detailed warnings on political risk, custody risk and settlement risk in emerging markets, this statement suggests that the fund's actual liquidity risk may be higher than the "stock market volatility" category normally represented by a rating of 6.
It is particularly worth noting that the portfolio contains medium-to-low-liquidity stocks such as Axia Energia (Brazil, 1.64%) and InterGlobe Aviation. When redemption pressure emerges, the impact cost of such holdings can widen significantly during stressed market conditions. The report admits that it "may even delay the selling of your shares if dealing in the Fund is suspended" — this is not merely compliance language, but also reflects the uncertainty of exiting underlying assets in certain extreme scenarios.
The Portfolio Statement shows Brazil at 11.05%, down only 0.81 percentage points from 11.86% in the previous year. In a portfolio with frequent active adjustment, this shows unusual stability. The continued holding of B3 S.A. (2.11%) and Axia Energia (1.64%), together with the new purchases of Vale SA ADR (£5.9m) and Petrobras Common ADR (£6.6m), suggests that the team's allocation to Brazil is not merely a legacy position but an active process of adding exposure.
This dual positioning in Latin American commodities and capital markets creates a hedging logic against the portfolio's concentrated bet on the "AI chain": when the AI capex cycle slows, commodity prices and Latin American domestic demand may provide relative earnings resilience. The report attributes this to "Latin American commodities and a widening set of innovators across China", which is effectively an admission that the growth sources of emerging market economies have become highly differentiated, and that no single theme can capture the return drivers of the entire asset class.
This annual report discloses a key fact: in the year when the fund most needed to prove the validity of its strategy, it did deliver an alpha report card, but that result was highly dependent on the cyclical strength of the semiconductor industry. The "stock-picking value" of active management was confirmed in this annual period (the contributions of Samsung and SK Hynix are clearly identifiable), but the five-year data equally demonstrate the fragility of this strategy when trends turn adverse.
What truly deserves continuous investor monitoring is whether the portfolio's "second growth narrative" outside the AI chain can gradually take shape. The additions of Emaar, Capitec, Vista Energy and InterGlobe are a positive signal, but their combined weight is still below 10%, and in the short term this remains insufficient to change the portfolio's high sensitivity to the semiconductor cycle. When AI capex growth slows or the HBM supply structure shifts, whether the fund can obtain more positive contributions from "investment-period mismatch" names such as MercadoLibre and Sea Limited will determine the fate of the next five-year period.
Continuing from the portfolio statement, the most striking signal is not the rise in NAV, but the geographic reweighting between April 2025 and April 2026:
| Market | April 2026 Weight | April 2025 Weight | Change (pp) |
|---|---|---|---|
| Korea | 23.29% | 11.11% | +12.18 |
| China | 22.59% | 31.84% | -9.25 |
| Taiwan | 16.57% | 13.70% | +2.87 |
| India | 7.95% | 12.79% | -4.84 |
| Singapore | 0.71% | 1.88% | -1.17 |
| UAE | 1.39% | 0.00% | New entry |
| Developed markets outside UK/North America | — | — | Remaining changes |
In 12 months, the fund increased Korea from 11.11% to 23.29%, making it the largest market position, while cutting China from 31.84% to 22.59%. This is not "active rebalancing"; it is a concentrated bet on the HBM/memory/foundry supply chain.
| Rank | Stock | Position Value (£'000) | % of Net Assets |
|---|---|---|---|
| 1 | SK Hynix | 56,856 | 9.79% |
| 2 | TSMC | 54,091 | 9.32% |
| 3 | Samsung Electronics | 45,219 | 7.79% |
| 4 | Mediatek | 28,977 | 4.99% |
| 5 | Tencent | 26,179 | 4.51% |
SK Hynix, TSMC and Samsung Electronics alone already account for 26.90% of net assets; adding Mediatek, the top four semiconductor-related positions approach 31.9%. This already exceeds the risk budget that a typical emerging market fund would allocate to a single theme; the fund has effectively become a concentrated product built around the AI hardware supply chain.
Mmc Norilsk Nickel, Moscow Exchange, Norilsk Nickel ADR and Sberbank of Russia are all shown at zero valuation, with combined original holdings of more than 17 million shares. The footnote explicitly states that the valuation has been written down to zero because of the "ongoing Russia-Ukraine conflict".
Lorenz Pn (1,800,000 shares, market value £0, weight 0.00%) is marked as "delisted at year end" and is likewise classified as Level 3 at the investment adviser's valuation. The 0.00% weight indicates that this is merely a legacy zero-value holding, but it is a reminder that the portfolio still contains a few small- and mid-cap positions with sluggish liquidity.
Comparing the A, B and C share classes across three fiscal years clearly shows the erosion of net returns by fee rates:
| Fiscal Year | A Class Return | B Class Return | C Class Return | A Class Fee Rate | C Class Fee Rate |
|---|---|---|---|---|---|
| 2026 | +58.72% | +59.92% | +61.07% | 1.54% | 0.07% |
| 2025 | -3.84% | -3.09% | -2.39% | 1.56% | 0.08% |
| 2024 | +13.96% | +14.80% | +15.63% | 1.57% | 0.07% |
For three consecutive fiscal years, C class net returns have consistently been about 1.5–1.7 percentage points per year higher than A class, almost exactly matching the fee difference. In the bull year (2026), C class NAV rose from 1,114.95p to 1,795.83p; A class also rose, but its NAV only increased from 789.84p to 1,253.66p. The fee rate may look like a "small number", but in a high-volatility growth fund, a cost gap of 1.47 percentage points annualised translates directly into a sustainable excess gap.
Another notable accounting treatment is that for Accumulation class shares, the Distribution and Retained distribution amounts are exactly equal (for example C class: 27.05p and 27.05p). This means:
However, the "Return after charges" for the two classes is exactly the same (C Acc 61.07% vs C Inc 61.07%), indicating that, at the pre-tax level, choosing accumulation or distribution does not affect investment performance — it only affects holder cash flows.
Looking at the Comparative Tables, FY2025 shows a clear performance drawdown:
For a portfolio of this kind — where nearly half of the top ten positions are semiconductor stocks — future performance volatility is likely to remain elevated. In particular, when the HBM cycle turns or AI capex slows, the double concentration in SK Hynix (9.79%) and TSMC (9.32%) will amplify drawdowns.
The positioning and comparative tables reveal three facts that previously may not have been emphasised by public data:
1. The degree of geographic deviation is already substantial — Korea plus Taiwan totals 39.86%, while China has fallen to 22.59%; the fund's style has shifted from "China + India driven" to "Korea memory + Taiwan foundry driven";
2. Concentration risk is being actively accepted — the top four semiconductor stocks total roughly 31.9% of net assets;
3. Share class choice has as much impact on long-term compound returns as stock selection itself — C class earns roughly 1.5 percentage points more per year than A class, implying a cumulative difference of more than 15 percentage points over ten years.
Moving into the Financial Statements section, the granularity of the data increases significantly. Earlier analysis has already covered changes in fund size and total fees; this section focuses on three new features at the reporting level: investor behaviour from a two-year combined perspective, micro-changes in the transaction cost structure, and the operating details of the tax and distribution mechanisms.
Looking only at FY2026 data makes it easy to miss a key fact: combining FY2025 and FY2026, investment performance actually generated significant positive returns, yet net assets still fell from £698.4M to £580.7M, with the entire decline driven by investor redemptions.
| Metric | FY2025 | FY2026 | Two-Year Total |
|---|---|---|---|
| Net movement from investment activities | £(21.5)M | £235.5M | £+232.6M |
| Net subscriptions/redemptions (incl. dilution adjustments) | £(234.5)M | £(110.5)M | £(345.0)M |
| Closing net assets | £450.4M | £580.7M | — |
Over the two years, the manager contributed roughly £233M of positive returns, while investors withdrew £345M. In 2025, the fund's loss combined with large-scale redemptions to create a classic "forced selling at the low point"; in 2026, despite a strong rebound in returns (+£235M), redemptions still reached a quarter of net assets, forcing the fund to keep realising positions during the rally to meet redemptions. One positive signal worth noting is that new subscriptions in 2026 recovered from £18.7M to £32.6M (+74%), while redemptions narrowed from £253.2M to £143.2M (-43%). The fund may be emerging from the "redemption-sale" spiral, but full restoration of investor confidence will still take time.
In 2026, total purchases were £131.7M (+47% year on year) and total sales were £241.5M (-22% year on year), for net sales of roughly £110M, closely matching the scale of net redemptions. Portfolio turnover (purchases plus sales / average NAV ≈ 72%) has remained stable at around 70% for two consecutive years, indicating that, beyond handling redemptions, the fund manager is still making deliberate position adjustments.
| Transaction Cost as % of Principal | FY2025 | FY2026 | Change |
|---|---|---|---|
| Buy commissions | 0.07% | 0.11% | +4bp |
| Buy taxes | 0.07% | 0.03% | -4bp |
| Sell commissions | 0.03% | 0.04% | +1bp |
| Sell taxes | 0.11% | 0.13% | +2bp |
| Average spread | 0.16% | 0.17% | +1bp |
The rise in the buy commission rate alongside the fall in the buy tax rate suggests that new purchases were directed more toward markets with higher commissions but lower transaction taxes — for example Taiwan, Korea or Brazil — rather than markets with high purchase taxes such as India or China. The higher sell tax burden may be related to the securities transaction tax on sales of Indian positions. Overall direct transaction costs are 0.12% of average NAV, below the average spread of 0.17%, so cost control remains within a reasonable range.
The fund's income side contracted notably: overseas dividends fell from £16.7M to £11.0M (-34%), broadly in line with the shrinkage in net assets. Total distributions of £6.88M were almost exactly in line with net income after tax of £6.88M, reflecting the legal requirement for OEICs to distribute most of their income.
Two details of the distribution structure are worth expanding on. First, retained distributions automatically reinvested for accumulation shares reached £5.0M, 72.8% of total distributions, indicating that most holders have chosen the accumulation share class and returns remain in the fund on a compounding basis. Second, "Distributions payable" on the balance sheet was £1.03M, meaning the fund still had a sizeable distribution to pay after 30 April 2026; the timing of distributions around the annual report date affects the closing liability.
Another easily overlooked figure: bank interest income fell from £94K to £40K, a decline of 57%, while the closing net cash position (£2.0M) was little changed from the prior year (£1.7M). This mainly reflects differences in the intra-year distribution of cash balances — during the 2025 redemption peak, the fund passively held more cash, whereas in 2026 it put cash to work in the market earlier.
The tax notes provide several key pieces of information not seen previously:
Effective foreign withholding tax rate: In 2026, foreign tax of £873K divided by overseas dividends of £11,013K is approximately 7.9% (7.3% in 2025). This is significantly below the common 15% withholding rate, suggesting that a considerable portion of the portfolio's dividends comes from markets with lower withholding rates or favourable tax treaty terms (for example China A-shares at 10%, Taiwan at 20% but with partial treaty relief), and also indicating that the fund's dividend income is relatively diversified by geography.
Excess management expenses: The excess management expenses corresponding to unrecognised deferred tax assets rose from £38.6M to £40.9M (+6.1%). Because the overwhelming majority of the fund's income is tax-exempt dividends, the likelihood of generating taxable profits in the future is very low, and this deferred tax asset will most likely never be utilised. This is a structural norm for equity funds under the UK tax system, but the cumulative £40.9M scale reflects a long history of expenses exceeding taxable income.
Capital gains tax provision: The capital gains tax provision within other creditors fell sharply from £2,357K to £1,372K (-42%). This is not UK corporation tax, but withholding/capital gains tax levied on capital gains by certain emerging markets. The decline suggests two possibilities: the fund sold positions in high-tax countries, or the large-scale redemptions in 2025 settled part of the taxable gains. Either way, it shows a clear lag effect in cross-border tax settlement — sales made in 2025 were only reflected on the liability side in 2026.
Closing net cash was only £2.0M, or 0.35% of net assets. For an open-ended fund that needs to handle sustained redemptions, this cash level is extremely low, showing that the fund manager maintained an almost fully invested allocation during the 2026 market recovery.
Two unsettled items on the Balance Sheet reveal the unusual pace of year-end trading:
| Item | FY2025 | FY2026 | Change |
|---|---|---|---|
| Sales awaiting settlement | £663K | £9,052K | +£8.4M |
| Purchases awaiting settlement | £494K | £4,612K | +£4.1M |
At the year end, £9.1M of sales were still unsettled, far above the £4.6M of purchases awaiting settlement, indicating that the fund was still executing net sales in the final trading days of the fiscal year. This implies that, entering May 2026, the fund may have retained a portion of cash to handle subsequent redemptions. Position changes spanning the year-end cut-off are a common phenomenon for funds under sustained redemption pressure.
The related party transactions note discloses that the ACD (Baillie Gifford & Co Limited) and related parties held the following share of the fund: down from 2.18% to 1.84%. At face value this looks like a reduction, but converted into monetary terms:
In fact, internal capital increased its position by approximately £0.9M (+9%); the lower percentage is purely the result of the recovery in fund size. The manager has continued to add to its own holding through the market low and the early stages of the recovery, in sharp contrast to continued redemptions by external investors — this is consistent with Baillie Gifford's long-termist governance structure under its partnership model, and it is also a signal worth noting for retail investors.
The dilution adjustment raised £310K in 2026, approximately 0.28% of net redemptions of £110.5M. Given an average spread of 0.17%, plus buy/sell commissions and taxes, this charge broadly covers the impact of incoming and outgoing cash flows on portfolio transaction costs. The core function of the mechanism is to make entering and exiting investors bear the liquidity cost, rather than diluting the interests of existing holders. Against the backdrop of two consecutive years of large-scale redemptions, this layer of protection matters especially for investors who stayed.
Taken together, these financial statements depict a fund whose "performance has recovered but money is still leaving". The investment management capability itself is not out of control — cumulative positive returns of £233M over two years demonstrate the long-term appreciation capacity of the holdings; but cumulative redemptions of £345M show that investor sentiment recovery lags NAV performance. The transparency of the financial data and the reasonableness of the cost structure give long-term holders a basis for confidence, while the insider increase is the closest thing to the manager "voting with its feet". The next points to watch are when redemptions slow to match subscriptions, and whether the fund manager can sustain the current stock-selection quality on a smaller scale.
The share movement table as at 30 April 2026 reveals significant divergence in investor behaviour. Every share class saw net redemptions, but the magnitudes varied widely:
| Share Class | Opening Shares | Issued | Redeemed | Closing Shares | Net Change % |
|---|---|---|---|---|---|
| A Accumulation | 358,679 | 18,887 | (69,953) | 306,872 | -14.4% |
| B Accumulation | 29,277,078 | 817,157 | (6,488,405) | 23,574,356 | -19.5% |
| B Income | 11,294,121 | 1,196,883 | (2,398,950) | 10,136,064 | -10.3% |
| C Accumulation | 8,606,667 | 688,992 | (2,963,976) | 6,331,683 | -26.4% |
A notable paradox: the fund delivered a strong return of 55.1% in the year ended 30 April 2026, yet all share classes suffered large net redemptions. C Accumulation had a redemption rate as high as 26.4%, far above the other classes. This phenomenon of "the better the performance, the more the redemptions" may reflect investors taking profits during the rebound, or institutional investors rebalancing after the fund strongly outperformed the index. By contrast, B Income had the lowest net outflow rate (-10.3%), suggesting income-oriented investors are stickier in their demand for distribution flows and less sensitive to short-term NAV volatility.
The valuation basis table shows that, as at 30 April 2026, all £577,805 thousand of the fund's assets were priced at Level 1 (quoted market prices), with Level 2 and Level 3 both at zero. This is a rare purity for an emerging market fund — most emerging market equities involve a mix of valuation levels, particularly restricted, suspended or thinly traded stocks that require model-based valuation.
Assets rose from £452,942 thousand in the prior year to £577,805 thousand, an increase of 27.6%, reflecting both the contribution of market appreciation and the portfolio management team's continued maintenance of highly liquid holdings. For investors, the practical meaning of an all-Level-1 structure is greater transparency in fund pricing, fairer pricing of subscriptions and redemptions, and a lower risk of trading suspensions or settlement delays in stressed market conditions.
The foreign currency exposure table shows dramatic changes in the portfolio's regional allocation. Measured by non-monetary exposure, the most notable changes are:
| Currency | 2026 Exposure (£'000) | 2025 Exposure (£'000) | Change |
|---|---|---|---|
| Korean won | 131,617 | 44,491 | +195.8% |
| Taiwan dollar | 99,570 | 66,087 | +50.7% |
| Hong Kong dollar | 78,595 | 105,830 | -25.7% |
| Indian rupee | 46,187 | 55,206 | -16.3% |
| Renminbi | 37,192 | 24,587 | +51.3% |
| Brazilian real | 23,995 | 10,664 | +125.0% |
Korean won exposure nearly tripled, consistent with the attribution of Samsung Electronics as the largest contributor — the AI memory cycle has made Korean semiconductor assets the absolute core of the portfolio. Taiwan dollar exposure rose 50.7%, reflecting continued increases in the Taiwanese semiconductor ecosystem. The decline in Hong Kong dollar exposure may mean the fund reduced some Hong Kong-listed Chinese companies or Hong Kong local stocks, shifting capital toward Korea and Taiwan. The doubling of Brazilian real exposure corresponds to the expansion of Latin American commodity exposure.
From a currency risk perspective, the high Korean won and Taiwan dollar exposure means the fund is highly sensitive to exchange-rate movements of these currencies against sterling. However, the portfolio spans 14 emerging market currencies, and the impact of a single-currency shock is likely to be partially offset by the movement of other currencies.
The final distribution table shows a broad decline in distribution income across all share classes:
| Share Class | 2026 Net Income (pence/share) | 2025 Net Income (pence/share) | Change |
|---|---|---|---|
| A Accumulation | 4.05000 | 8.12000 | -50.1% |
| B Accumulation | 13.92000 | 16.92000 | -17.7% |
| B Income | 10.16000 | 12.57000 | -19.2% |
| C Accumulation | 27.05000 | 28.37000 | -4.7% |
| C Income | 16.79000 | 18.06000 | -7.0% |
The 50% decline in income for A class shares is especially striking. A class is typically oriented to institutional investors, and the sharp drop in its income may relate to differences in the underlying holdings — the A class asset base is small and may be more concentrated in a few high-growth, low-dividend-yield stocks. C class declines were relatively moderate (-4.7% to -7.0%), reflecting differences in the dividend yield characteristics of the portfolios corresponding to different share classes.
The Equalisation mechanism worked normally for Group 2 investors (those buying between 1 May 2025 and 30 April 2026). For A Accumulation Group 2, net income was only 0.72843 pence, but after adding Equalisation of 3.32157 pence, the total distribution reached the same 4.05000 pence as Group 1, protecting the interests of new investors.
This fund differs from the aforementioned Growth Fund in three key strategic respects:
First, the market capitalisation threshold is more explicit. The fund requires that an investment target has a free float of more than £1 billion, a clear quantitative screening criterion, whereas the Growth Fund sets no specific market capitalisation floor. This means the Leading Companies Fund focuses on companies that already have meaningful scale, liquidity and institutional coverage, making the strategy more tilted toward mid- and large-cap emerging market companies.
Second, the minimum investment ratio is higher. At least 90% is invested in shares of emerging market companies (the Growth Fund does not specify this ratio), so the portfolio construction constraints are stronger and the emerging market purity is higher.
Third, the tolerance for active deviation. The fund does not seek to replicate any index and has a relatively high concentration level ("relative concentration"), as reflected in its Risk and Reward Indicator rating of 6 (on a scale where maximum is 7) and its risk positioning.
The fund's annual performance over the past five years shows a clear cyclical pattern:
| Year | Fund Return (B Accumulation) | MSCI EM Index | Relative Performance |
|---|---|---|---|
| 2021/22 | +11.3% | +10.8% | +0.5pp |
| 2022/23 | +2.7% | -2.3% | +5.0pp |
| 2023/24 | -3.8% | -9.6% | +5.8pp |
| 2024/25 | -6.2% | -20.6% | +14.4pp |
| 2025/26 | +55.1% | +45.0% | +10.1pp |
The fund outperformed the index by 10.1 percentage points over the past 12 months, with an annual return of 55.1%. But what deserves more attention is the bear market performance: in 2024/25, the index fell 20.6% while the fund fell only 6.2%, an excess return of 14.4 percentage points. This suggests that the fund's stock-selection logic is suited not only to an AI-driven upcycle but also demonstrates downside protection when facing macro headwinds.
However, the five-year annualised return (5.2%) is below the index (6.9%), mainly due to relative underperformance in the earlier years — in 2021/22 it led by only 0.5 percentage points, while the years before (not shown) may have accumulated a large relative shortfall. The fund report also acknowledges that "prolonged periods of underperformance" are an inherent cost of portfolio concentration.
The market commentary in the investment report contains an independent judgement worth highlighting: "orthodox monetary policy and more conservative fiscal settings have also challenged the lazy assumption that EM are inherently riskier than their developed peers."
This view is a substantial challenge to the traditional EM discount logic. Over the past five years, several emerging market economies (especially in Asia) have performed well on inflation control, fiscal discipline and exchange-rate stability, while some developed markets have instead experienced fiscal expansion and repeated inflation. If the quality of macroeconomic governance in emerging markets continues to improve, their risk premium should narrow, providing structural support at the valuation level. The report also notes that "valuations and index concentration remained recurring sources of debate", suggesting that despite strong performance, index concentration (likely referring to the excessively high weight of AI-related stocks) remains a risk to watch — a point that corroborates the 195.8% surge in Korean won exposure observed earlier in this analysis.
The position details and transaction list disclosed in the continuation provide complete quantitative evidence for the judgment of a "structural shift" made earlier. This section is no longer a narrative about individual companies, but the factual record of portfolio-level reconstruction.
Overlaying the "Largest Purchases" and "Largest Sales" tables makes it possible to calculate the net flow of each core name:
| Stock | Purchases (£'000) | Sales (£'000) | Net Flow (£'000) |
|---|---|---|---|
| Tencent | 46,357 | 11,867 | +34,490 |
| SK Square | 37,035 | 9,091 | +27,944 |
| Mediatek | 14,676 | — | +14,676 |
| BYD (A/H combined) | 13,182 | 11,963 | +1,219 |
| SK Hynix | 14,419 | 29,538 | -15,119 |
| Chroma ATE | 10,412 | 22,435 | -12,023 |
| Naspers | 12,816 | 42,554 | -29,738 |
| TSMC | — | 37,363 | -37,363 |
| Samsung Electronics | — | 53,804 | -53,804 |
This set of data reveals several clear trading logics:
First, the Naspers→Tencent equity swap is the year's clearest "structural operation". Naspers was net sold by approximately £29.7M while Tencent was net bought by £34.5M. In the end, the Naspers position shrank from 4.05% to 0.04%, virtually a full exit. Naspers has long traded at a holding-company discount as Tencent's major shareholder, and direct ownership of Tencent is clearly an elimination of that discount. This is not a negative view on Naspers, but an optimisation of the ownership structure of the underlying asset.
Second, the AI hardware leaders were rebalanced by "trimming but not exiting". Samsung was sold by £53.8M (the largest sale in the portfolio), TSMC was sold by £37.4M, and SK Hynix and Chroma ATE were also net sold. Yet these stocks remain among the top ten or even top five positions — Samsung is still first at 9.74% and TSMC second at 9.47%. This shows the fund manager actively controlling the weight of individual positions after a sharp share-price rise, rather than turning negative on the long-term thesis.
Third, new money clearly prefers "AI exposure with a discount or relatively reasonable valuation". SK Square is SK Hynix's largest shareholder, holding roughly 20% of its equity; buying SK Square is equivalent to gaining access to the HBM (high bandwidth memory) supply chain at a lower valuation. Mediatek, a new position, provides differentiated exposure to edge AI chips. This approach of "selling what has already rallied fully and buying where expectations still differ" is a typical capital recycling operation.
The country weight changes disclosed in the Portfolio Statement illustrate the qualitative transformation of the portfolio better than any text:
| Country/Region | 30 Apr 2026 | 30 Apr 2025 | Change (pp) |
|---|---|---|---|
| Korea | 22.70% | 9.30% | +13.40 |
| Taiwan | 16.71% | 9.98% | +6.73 |
| Vietnam | 2.19% | 1.12% | +1.07 |
| Brazil | 12.16% | 11.21% | +0.95 |
| Chile | 2.64% | 1.86% | +0.78 |
| China | 22.57% | 29.49% | -6.92 |
| India | 6.30% | 13.84% | -7.54 |
| South Africa | 0.55% | 4.05% | -3.50 |
Several key observations:
Reclassifying the Portfolio Statement according to the AI value chain shows that more than half of the capital is directly or indirectly dependent on the physical expansion of AI infrastructure:
| AI Value Chain Segment | Representative Holdings | Total Weight |
|---|---|---|
| Memory/Foundry | Samsung Electronics, TSMC, SK Hynix | 24.53% |
| Semiconductor holding-company discount | SK Square | 5.83% |
| Testing/Equipment | Chroma ATE | 4.44% |
| Chip design | Mediatek, Silergy | 4.81% |
| AI applications/platforms | Tencent | 6.50% |
| Power/Materials | First Quantum Minerals, Axia Energia | 4.41% |
| Total | 50.52% |
This does not yet include the indirect consumption of AI computing power by internet platforms such as Coupang and Sea, nor the AI-enabled logic of smart hardware makers such as Midea and BYD. If the calibre is loosened, the portfolio's correlation with "core AI-era assets" is close to two-thirds.
Two new "physical-layer" positions deserve particular attention:
This portfolio configuration implies that the fund manager does not believe AI opportunities exist only in "computing-power cores" such as Nvidia or TSMC, but rather that power, cooling, copper, testing equipment, edge chips and application platforms will all benefit in sequence. This is closer to an investment in a "complete supply chain" than simply holding semiconductors heavily.
The Comparative Tables provide return comparisons across three complete years:
| A Class Acc Shares | FY2026 | FY2025 | FY2024 |
|---|---|---|---|
| Return | +53.68% | -4.19% | +10.36% |
| Closing NAV (pence) | 747.57 | 486.45 | 507.75 |
| High/Low (pence) | 754.7 / 488.0 | 550.5 / 448.3 | 509.0 / 444.1 |
| B Class Acc Shares | FY2026 | FY2025 | FY2024 |
|---|---|---|---|
| Return | +54.83% | -3.48% | +11.20% |
| Closing NAV (pence) | 862.22 | 556.87 | 576.93 |
On a three-year cumulative basis, A class has accumulated a return of about +62.5% (annualised about 17.6%) and B class about +66.2% (annualised about 18.4%). The cumulative gap of 3.7 percentage points between A class and B class comes almost entirely from the fee difference — A class operating charges are 1.54%, while B class is only 0.78%.
The change in the price range is also significant:
| Fiscal Year | Highest/Lowest Price | Range (relative to low) |
|---|---|---|
| 2026 | 754.7 / 488.0 | 54.7% |
| 2025 | 550.5 / 448.3 | 22.8% |
| 2024 | 509.0 / 444.1 | 14.6% |
The FY2026 price range was the widest of the past three years. This means that, although the fund achieved an annual return of more than 50%, the NAV also drew down more than 35% from its high at one point (from 754.7 to 488.0). This is the volatility cost that must be borne when holding a highly concentrated technology portfolio.
An easily overlooked detail is the change in the number of shares:
| Share Class | 2026 Shares | 2025 Shares | Change |
|---|---|---|---|
| B Class Accumulation | 26,428,404 | 29,265,940 | -9.7% |
| B Class Income | 23,530,417 | 20,740,223 | +13.5% |
| A Class Accumulation | 44,673 | 8,157 | +448% |
Total B class shares (Acc + Inc) fell slightly from roughly 50 million to roughly 49.96 million, almost flat. B Class Accumulation shares fell 9.7%, but that was offset by a 13.5% increase in Income shares. This indicates that some investors redeemed during the 2025 loss period, and the 2026 surge has only repaired the NAV first, without yet triggering a large-scale return of capital. Although A class shares grew 448%, the absolute size is only 44,673 shares (corresponding to assets of £334k), which has almost no impact on the portfolio. This pattern of "returns first, flows later" is common in growth funds that have experienced deep drawdowns.
The note at the end of the Portfolio Statement deserves attention: the two Russian stocks, Mmc Norilsk Nickel and Sberbank, were still held on 30 April 2026, but their valuation was recorded at zero and they were classified as Level 3. This means:
This position does not affect the fund's overall performance, but it is an unresolved "legacy tail" in the portfolio.
Taking together the transaction list, country allocation and performance data, the portfolio change in FY2026 is no longer the incremental fine-tuning of the previous year, but a clear qualitative transformation:
This is a portfolio declaration, under the narrative of the "AI industrial revolution", that commits real capital to physical infrastructure, chip design and application platforms. It uses transaction data and position structure to translate the long-termist philosophy described earlier into concrete position language.
The three Comparative Tables present a clear but uneven performance cycle:
| Fiscal Year | C Accumulation Return | C Income Return | Share NAV (C Acc, pence) |
|---|---|---|---|
| FY2024 | +12.01% | +12.05% | 656.11 |
| FY2025 | -2.78% | -2.77% | 637.87 |
| FY2026 | +55.95% | +55.95% | 994.77 |
On the surface, the FY2026 gain is striking, but compared with the beginning of FY2024 at 585.78 pence, the three-year cumulative annualised return is about 19.3% — not a "three-fold" windfall. The real information lies in the fact that although the FY2025 loss was small, it interrupted the compounding rhythm; and the FY2026 rebound relied mainly on capital gains (+£284.4 million) rather than income (net income of only £8.9 million), indicating that this rally was driven by valuation re-rating, not by fundamental dividends.
The Statement of Change in Net Assets reveals a fact easily obscured by performance — the fund is still being net redeemed:
| Item | FY2026 (£'000) | FY2025 (£'000) |
|---|---|---|
| Subscriptions | 58,335 | 94,612 |
| Redemptions | (133,332) | (350,519) |
| Net subscriptions/redemptions | (74,997) | (255,907) |
FY2026 saw net outflows of £75 million, a sharp narrowing from the £256 million in FY2025, but the direction was unchanged. Combined with total net assets rising from £548.4 million to £764.4 million (+39.4%), this means that the growth in net assets was 100% dependent on investment returns (£283.7 million), while the flow side was actually a negative contributor. C Accumulation shares fell from 46.2 million units to 38.0 million units, further confirming that institutional or individual investors are still using the rebound to leave.
This phenomenon warrants attention: if markets turn weaker in the future, the fund could face the "double headwind" of markdowns in valuations and continued outflows.
The fund's net assets grew by nearly 40%, but revenue fell from £19.3 million to £12.7 million (-34%), of which overseas dividend income fell from £19.2 million to £12.7 million (-34%). At the same time, distributions also fell from £15.5 million to £8.9 million (-42.5%).
| Item | FY2026 (£'000) | FY2025 (£'000) | Change |
|---|---|---|---|
| Overseas dividends | 12,666 | 19,181 | -34.0% |
| Bank interest | 81 | 120 | -32.5% |
| Total distributions | (8,915) | (15,520) | -42.5% |
| Net income retention ratio | 1 - 8,915/12,747 = 30.1% | 1 - 15,520/19,301 = 19.6% | Retention ratio up |
This implies two important changes:
The transaction costs disclosed in the Notes provide direct evidence of changes in portfolio turnover:
| Item | FY2026 | FY2025 | Change |
|---|---|---|---|
| Total purchases (excl. costs) | £314.7m | £211.2m | +49% |
| Total sales (excl. costs) | £387.9m | £451.3m | -14% |
| Buy commission rate | 0.06% | 0.04% | +50% |
| Sell tax rate | 0.12% | 0.10% | +20% |
| Total direct transaction costs / average NAV | 0.15% | 0.11% | +36% |
The rise in the buy commission rate may reflect a shift toward markets with poorer liquidity and greater transaction frictions (such as small/mid caps or specific emerging markets), while the rise in the sell-side tax rate suggests that the sold names were concentrated in markets with higher stamp duty (such as India or China A-shares). Overall costs remain within a manageable range (0.15% of NAV), but the direction deserves attention — position changes are increasing, rather than holding still.
The W6 share class was launched on 3 November 2025, and at the fiscal year end had only 141 shares (Acc) and 178 shares (Inc), with a combined NAV of only £2,000. Although its return of 21.74% cannot be directly compared with the C class full-year return of 55.95% (the coverage period was only around six months), two details are worth noting:
The existence of W6 is more of a product structure signal — BGF is trying to attract channel capital with different fee structures through a new share class, but as of the year end it has not generated material scale.
| Item | FY2026 (£'000) | FY2025 (£'000) | % of Total Assets (FY2026) |
|---|---|---|---|
| Investments | 757,486 | 545,578 | 97.7% |
| Cash and bank deposits | 12,542 | 19,358 | 1.6% |
| Bank overdrafts | (7,077) | (11,488) | -0.9% |
| Net cash | 5,465 | 7,870 | 0.7% |
At the end of FY2026, the fund was almost in a "fully invested operation" state — investments accounted for 97.7% of total assets, leaving only 0.7% net cash. Combined with the pace of substantial buying in FY2026 (£315 million), the fund manager significantly raised risk exposure during the year. This is a typical act of "compensatory position-building at the market bottom". Given that the fund stayed cautious during the weak market of FY2025 and then shifted sharply to offence in FY2026, the timing signal in the strategy is very strong.
Within net capital gains, non-derivative securities contributed +£284.4 million, while currency gains/losses were -£0.68 million (FY2025: -£0.48 million). The currency loss widened by 42% year on year. Although the absolute amount is small, given that emerging market currencies are typically volatile, this figure reflects a small-scale loss on the fund's unhedged currency risk exposure. With emerging market currencies (such as the Brazilian real, Turkish lira and Indonesian rupiah) moving in divergent directions over the year, the small absolute value suggests a degree of offsetting between positive-contributing and negative-contributing currency positions.
Taken together, the FY2026 annual report reveals a fund state driven by valuation repair, with the flow picture still weak, but the fund manager choosing to attack aggressively:
The core signal conveyed by this statement is: the fund manager has voted "bullish" on emerging markets with actual positions, but investors have not yet followed with capital — and this divergence will become an important source of future NAV volatility.
The fund is subject to a 20% corporation tax rate, but the vast majority of dividend income is tax-exempt, leaving taxable income far below deductible expenses. In 2026, actual tax charges were £1,144 thousand, down 11.8% from £1,297 thousand in 2025, but net income fell by more (from £16,811 thousand to £10,058 thousand, a decline of 40.2%), so the effective tax burden (tax charge / net income) rose from 7.7% to 11.4%. The reason lies in the interaction between non-exempt overseas dividends and foreign tax credits:
| Item | 2026 (£'000) | 2025 (£'000) | Change |
|---|---|---|---|
| Pre-tax net income | 10,058 | 16,811 | -40.2% |
| Tax at standard rate of 20% | 2,012 | 3,362 | -40.2% |
| Adjustment for non-taxable overseas dividends | (2,233) | (3,210) | Absolute value fell, but as a share of income it rose to 22.2% |
| Tax on overseas dividends | 1,144 | 1,297 | -11.8% |
| Excess management expenses | 269 | — | New item, 13.4% of standard tax |
| Utilisation of excess management expenses | — | (97) | Utilised in prior year, none in current year |
| Total tax charge | 1,144 | 1,297 | -11.8% |
Notably, excess management expenses rose from £1,597 thousand to £2,946 thousand (an increase of 84.5%), but no deferred tax asset was recognised. This reflects management's conservative expectations for the fund's future taxable income — the fund is unlikely to generate enough taxable profits in the foreseeable future to absorb these deductible expenses, suggesting that the portfolio's tax-exempt high-dividend characteristics will persist, and that capital gains (usually not taxed) may account for a further rising share.
Total distributions fell from £15,520 thousand to £8,915 thousand, a decline of 42.6%, fully in sync with the fall in net income (£15,514 thousand → £8,914 thousand, -42.5%). Notably, the "deduction for cancellation of shares" fell from £4,030 thousand to £1,215 thousand, a decline of 69.9%, indicating that the adjustment pressure on income distribution caused by large-scale redemptions has significantly eased and fund size is stabilising.
The distribution coverage ratio (net income / distributions) has been 1.00 for two consecutive years (8,914/8,915 vs 15,514/15,520), meaning the fund distributes all distributable income and retains a very low surplus (only £4 thousand at year end). At a time of falling income, this high distribution ratio can easily cause sharp swings in per-unit distributions — for example, A class accumulation distributions fell from 5.15 pence to 1.34 pence (-74.0%), while C class accumulation distributions fell from 16.40 to 13.46 (-17.9%), reflecting differences in income structures across share classes.
Total cash and bank balances fell from £7,870 thousand to £5,465 thousand (-30.6%), of which the sterling account fell from £11,565 thousand to £7,362 thousand, while overdrafts also fell from £11,488 thousand to £7,077 thousand. Net cash (including overdrafts) actually decreased by £2,405 thousand, mainly because investment activity increased — sales awaiting settlement jumped from £155 thousand to £4,287 thousand, an increase of 27.7 times, indicating that a large volume of security sales had not yet completed settlement during the year; however, the corresponding purchases awaiting settlement fell from £2,550 thousand to £1,246 thousand (-51.1%). Overall, this points to fewer net purchases and more net sales, possibly to meet redemptions or adjust positions.
The currency exposure table reveals the portfolio's regional shift, especially the large increase in Korean won assets:
| Currency | 2026 Non-Monetary Assets (£'000) | 2025 Non-Monetary Assets (£'000) | Change |
|---|---|---|---|
| Korean won | 171,158 | 46,660 | +266.8% |
| Taiwan dollar | 143,046 | 64,297 | +122.5% |
| US dollar | 173,544 | 162,287 | +6.9% |
| Hong Kong dollar | 96,394 | 113,097 | -14.8% |
| Indian rupee | 32,062 | 57,140 | -43.9% |
| South African rand | 4,195 | 22,211 | -81.1% |
Korean won exposure rose from 5th to 2nd place and, together with the Taiwan dollar, accounted for roughly 41.5% of total assets (around 20.3% in 2025). India and South Africa were sharply reduced, showing that the fund is shifting from traditional emerging markets to the Northeast Asian technology supply chain. No currency has non-monetary liabilities, and currency exposure is entirely composed of non-monetary assets (except for small monetary assets in US dollars and Vietnamese dong), indicating that the fund does not use foreign exchange hedging instruments and that exchange-rate movements will directly affect net asset value.
All of the fund's listed securities investments are classified as Level 1 (quoted), with Level 2 and Level 3 at zero. This indicates that the holdings are all publicly exchange-traded stocks, with ample market liquidity and objectively verifiable valuations. Compared with many funds holding private placements or complex derivatives, this fund has a clear advantage in transparency and sellability. But note that Level 1 is not free of liquidity risk — if sharp market volatility causes trading interruptions, the fund may still face difficulty selling, as mentioned in the European Fund profile: "it may be difficult to sell investments in a timely manner in adverse market conditions".
The proportion of fund shares held by the ACD and its related parties fell from 2.09% to 1.58% of net assets. This could be due to redemptions or to dilution from net asset growth. Based on the share reconciliation table, the movements across share classes show clear divergence:
The shareholder structure has tilted toward income-class shares, possibly reflecting that investors place greater value on current cash flows during periods of economic uncertainty. At the same time, the large redemptions in C class (typically institutional) may be driven by the fund's performance or changes in institutional strategy.
The report newly includes a profile of the Baillie Gifford European Fund, which can be compared with the Emerging Markets fund. The European Fund uses the MSCI Europe ex UK index as its benchmark, but is actively managed with concentrated holdings and is permitted to deviate from the index. The key differences are:
| Dimension | Emerging Markets Leading Companies | European Fund |
|---|---|---|
| Benchmark | Not specified (implied equity index) | MSCI Europe ex UK |
| Geographic scope | Emerging markets (including Asia, Latin America, etc.) | Europe (including Turkey, excluding UK) |
| Investment style | Long-term growth | Long-term growth, but explicitly "relatively concentrated" |
| Special policy | UN Global Compact assessment | Net zero 2050 alignment |
The European Fund significantly emphasises the "net zero" goal, requiring portfolio companies to achieve net zero greenhouse gas emissions by 2050, with ongoing assessment of and engagement in corporate governance. This is a more evolved ESG integration strategy than the emerging markets fund, reflecting Baillie Gifford's differentiated approach to sustainable investment across regional markets. The European Fund also specifically mentions that "redemptions may be suspended in adverse market conditions", which complements the liquidity risk disclosures not directly stated in the emerging markets fund notes.
Taken together, these two sets of financial notes reveal the fund's operational resilience amid declining income, regional rebalancing, and changes in shareholder structure. The tax structure shows that the tax-exempt advantage of high dividends remains unchanged, yet the accumulation of excess management fees implies future cost pressure. The sharp shift in currency exposure toward East Asia signals the aggressiveness of tactical adjustments. The decline in distributions and the shift in share structure require investors to focus on the continued stability of per-unit income. Meanwhile, the debut of a European fund suggests that the company is expanding investor choice with more diversified regional products and a more cutting-edge net-zero framework.
This follow-up content is more than routine risk disclosure and performance reporting; several details downplayed in the text carry more signal value than they appear to on the surface. The analysis below supplements this from four dimensions: risk mechanisms, quantitative gaps, strategic shifts, and holdings structure.
The Risk and Reward Indicator in the document itself acknowledges three limitations: based on past data, may change over time, and cannot reliably predict the future. But there is a more subtle issue worth noting—the numbers in the table are arranged as “1 4 2 3 5 6 7”, rather than the standard linear ascending order from 1 to 7. This may be a typesetting error, but it also exposes a structural weakness of this type of risk scale:**
In other words, the Risk and Reward Indicator that investors see is more of a “thermometer” than a “weather forecast”—it can measure the current degree of fever, but it cannot tell you whether the next step will be improvement or deterioration.
The original text states: "Where possible, charges are taken from income. If insufficient, the rest will be taken from capital, reducing the capital value of the Fund." This sentence is common in fund annual reports, but for a growth fund such as the BaIIie Gifford European Fund, its implications are heavier than they appear:
A rough quantification: assuming the full annual fee is deducted from capital, the cumulative capital erosion over five years is approximately 2.7% (calculation: 1 − 0.9945^5 ≈ 2.72%). Although the absolute value is small, in a fund that has fallen by roughly 28% cumulatively, this loss accounts for nearly 10% of the total loss, and it is a "risk-free, certain loss" on top of the market risk investors have already borne.
This also explains why fund companies and investors can diverge in their perception of "total return": the return figures reported by funds are usually net asset value changes after fees, but deducting fees from capital rather than income causes the NAV curve to drift slowly downward even in a flat market.
Comparing the fund and the benchmark on the same scale, the gap is too large to be explained by "stock-picking mistakes":
| Metric | Fund (Class B Accumulation Shares) | MSCI Europe ex UK | Gap |
|---|---|---|---|
| One-year return | -1.3% | +19.3% | -20.6pct |
| Five-year annualized return | -6.4% | +9.6% | -16.0pct |
| Five-year cumulative return (estimated) | ≈ -28.3% | ≈ +58.5% | ≈ -86.8pct |
Trailing the benchmark by 20.6 percentage points in one year could be attributed to extreme style positioning; but a five-year annualized deviation of 16 percentage points means this is not "bad luck" but a persistent mismatch between the investment framework and market structure. The benchmark covers a broad range of European companies, including value stocks, cyclicals, energy stocks, and financials, while the fund concentrates on long-duration growth stocks. Between 2021 and 2026, rising inflation and higher interest rates systemically suppressed this exact style.
Notably, the fund recorded a significant decline of -26.5% in the 2021/22 fiscal year, and although the losses narrowed in subsequent years (from -1.3% to -2.6%), it never returned to positive growth territory—indicating that the base effect from the 2022 drawdown made it difficult for the fund to recover even as the market stabilized. This stands in sharp contrast to the benchmark's positive annualized return of 9.6%.
One sentence in the original report deserves particular attention: "we have made selective changes to the Fund’s decision makers and strengthened our investment process." In general, fund annual reports rarely publicly mention personnel changes. Baillie Gifford's wording here, though restrained, hints at several important facts:
This phrasing can be interpreted as: Baillie Gifford is transitioning from "conviction-driven" growth investing toward a hybrid model of "conviction + valuation anchor + risk budget." For holders, this may be a signal of style drift, or it may be a necessary evolution to adapt to a changing environment.
The performance attribution reveals a dramatic symmetry: ASM International, the largest contributor, and Topicus.com, the biggest detractor, happen to represent two opposing sides of the AI capital-expenditure wave.
| Dimension | ASM International (Contributor) | Topicus.com (Detractor) |
|---|---|---|
| Nature of AI relevance | Direct beneficiary of AI investment (semiconductor equipment) | AI viewed as a potential threat to software business models |
| Market logic | Increasing chip manufacturing complexity requires more deposition equipment | Software durability being reassessed |
| Fundamental performance | Record operating margin, strong guidance | Revenue still growing, but cash flow pressured by seasonality |
| Stock price reaction | Continued recognition | Sector-wide valuation de-rating |
This mirror contrast reveals a core contradiction: the market's pricing of AI in 2025–2026 is highly divergent—infrastructure hardware (semiconductor equipment, power facilities) commands a premium, while the valuation logic for software and application layers is being undermined. The fund holds both yet cannot hedge this structural divergence. Similarly, Nexans, as a beneficiary of grid upgrades, and Hypoport, as a German real-estate mortgage platform, form another contrast between "physical infrastructure demand" and "digital platform cyclicality."
The fund's insistence on Topicus—"long-term case remains intact"—reflects its long-term investment culture, but amid the shifting AI narrative, this may require a longer patience-to-realization horizon.
The Portfolio Statement annotates the prior year's country allocation ratios in parentheses, providing a valuable set of quantified change data:
| Country | 2025/26 | 2024/25 (in parentheses) | Change (pct) |
|---|---|---|---|
| Netherlands | 26.81% | 22.71% | +4.10 |
| France | 10.99% | 10.43% | +0.56 |
| Belgium | 3.14% | 0.00% | +3.14 |
| Denmark | 7.88% | 11.52% | -3.64 |
| Italy | 2.94% | 5.43% | -2.49 |
| Ireland | 6.02% | 8.40% | -2.38 |
| Germany | 1.40% | 3.44% | -2.04 |
| Norway | 2.69% | 4.71% | -2.02 |
The most significant change is the 4.10 percentage-point increase in the Netherlands' weight, to 26.81% — meaning that close to one-third of the fund's assets are now concentrated in a single country. The Netherlands happens to be the cluster for European semiconductor and technology platforms (ASML, ASM, Prosus, Adyen, IMCD, EXOR, Topicus); driven by the logic of AI hardware, the fund is effectively placing concentrated bets on a geographic "tech corridor."
At the same time, traditional holdings in Denmark (DSV, Novo Nordisk, Royal Unibrew), Ireland (Kingspan, Ryanair), and Norway (SalMar, Vend) have been sharply reduced. This is corroborated by the trading data: DSV was sold for £10.295 million, Ryanair for £11.622 million, and Vend for £10.44 million — together exceeding £32 million and constituting the primary source of released capital.
The comparison between the bought and sold targets reveals the substantive direction of the fund's style change:
Common characteristics of new buys (Roche, SalMar, TotalEnergies):
Common characteristics of sell-side names (Soitec, Reply, Genmab):
This "sell high beta, buy low beta" approach is inconsistent with the long-term growth investing tradition that BaIIie Gifford espouses. A more reasonable interpretation is that, after five consecutive years of weak performance, the fund is managing downside risk by reducing the portfolio's overall valuation sensitivity, while retaining growth names with solid cash-flow support, such as ASML, ASM, and Nexans, as offensive positions.
Taken as a whole, this continuation contains correction signals at three levels:
1. Process correction: Changing decision-makers, strengthening the investment process, and emphasizing valuation discipline — an implicit admission that the original framework had structural problems;
2. Position correction: Country allocation shifting toward the Netherlands, sector allocation tilting toward AI hardware, and the introduction of defensive sector leaders in style terms;
3. Communication correction: A rare and direct admission that "five-year performance has been disappointing," backed by quantitative data showing the enormous gap versus the benchmark.
Whether these corrections will be enough to reverse five years of negative excess returns is not yet knowable. But at minimum, one thing can be confirmed: the fund is moving from "pure growth conviction" toward "disciplined quality growth" — and that in itself is a response to the market lessons of the past five years.
From the Portfolio Statement and Financial Statements sections, multiple data points directly relevant to the strategic discussion in the Introduction can be extracted. These data not only corroborate the qualitative analysis above, but also reveal key quantitative dynamics.
The "long-term growth stock" strategy emphasized in the Introduction shows clear diversification characteristics at the portfolio level. As of April 30, 2026, the top ten holdings accounted for approximately 24% of net assets combined, with the largest single stock weight being Roche Holding AG at 4.27%, followed by Sandoz Group AG at 3.04%. This structure indicates that the fund does not rely on a few heavily weighted stocks for performance, but rather diversifies risk through broad holdings of quality European companies across industries.
| Market | Position Weight (2026) | Position Weight (2025) |
|---|---|---|
| Sweden | 17.07% | 21.05% |
| Switzerland | 11.97% | 5.55% |
| Poland | 7.43% | 5.37% |
Sweden's weight declined by nearly 4 percentage points, while Switzerland's weight more than doubled, primarily driven by substantial increases in Roche and Sandoz. This rebalancing direction is consistent with the defensive characteristics of the pharmaceutical sector and aligns with the Introduction's statement about "adding high-quality cash-generative companies amid market uncertainty."
Net assets fell from £235,899 thousand in 2025 to £173,771 thousand in 2026, a decline of 26.3%. However, the change in assets attributable to investment activity was only -£754 thousand, representing less than 1%. The real driver was large-scale redemptions:
| Item | 2026 (£'000) | 2025 (£'000) |
|---|---|---|
| Proceeds from share issuance | 14,582 | 150,473 |
| Payments for share cancellation | (121,271) | (282,096) |
| Stock transfers (in-specie subscriptions) | 44,281 | – |
| Net subscription/redemption cash flow | (62,408) | (131,623) |
Net outflows in 2026 were £62.4 million, narrowing from £131.6 million in 2025, but combined with capital losses, the asset base continued to contract. The share count changes by share class are more intuitive: Class A shares fell from 81,349 to 52,698, Class B from 7,189,789 to 5,740,062, and Class C from 18,645 to 17,226. Class B (retail) saw a redemption rate of 20.2%, indicating that retail investors accelerated their exit after losses.
As net assets shrank, fixed operating costs were spread over a smaller asset base, causing Operating charges to rise across all share classes:
| Share Class | 2026 OCF | 2025 OCF | 2024 OCF |
|---|---|---|---|
| A Accumulation | 1.47% | 1.44% | 1.45% |
| B Accumulation | 0.62% | 0.59% | 0.59% |
| B Income | 0.61% | 0.60% | 0.59% |
| C Accumulation | 0.07% | 0.04% | 0.03% |
Class C's Operating charges rose from 0.03% to 0.07%, an increase of over 130%. While the absolute level remains low, the trend is identical. Rising expense ratios further erode investors' net returns — in a context where capital losses already exist, the fee burden amplifies the "negative compounding" effect.
Direct transaction costs as a percentage of average NAV were 0.05% in 2026, down from 0.08% in 2025. Commissions fell from £144 thousand to £69 thousand, and taxes from £145 thousand to £41 thousand. This is consistent with the fund's reduced trading scale:
| Trading Metric | 2026 | 2025 |
|---|---|---|
| Total stock purchases (incl. transfers) | £101,035k | £192,149k |
| Total stock sales | £161,757k | £318,044k |
| Average buying/selling spread | 0.13% | 0.15% |
Net selling of approximately £60 million reflects the fund being forced to liquidate positions under redemption pressure. Notably, stock transfers in of £38 million (Creation of shares settled by transfer of stocks) indicate that some investors subscribed/ redeemed shares using physical securities, which somewhat reduced cash-selling pressure, but the overall portfolio size continues to contract.
Revenue fell from £3,468 thousand in 2025 to £2,484 thousand in 2026, a decline of 28.4%. The likely primary cause is the change in portfolio composition — Swedish growth stocks in 2025 (e.g., EQT, Atlas Copco) had lower payout ratios, and while the Swiss pharmaceutical stocks added in 2026 pay stable dividends, the overall reduction in portfolio size drove total income lower. Tax also fell from £289 thousand to £171 thousand.
Despite lower income, the fund maintained distributions: Class B Income shares distributed 11.92 pence per share for the full year, up from 8.40 pence in 2025; Class C Accumulation shares distributed 36.16 pence, also above the prior year's 27.52 pence. The increased distribution is consistent with the "enhancing shareholder returns" objective mentioned in the Introduction, but it also means that in a negative total return environment, part of the distribution is funded from capital or income reserves, and sustainability requires monitoring.
The Comparative Tables show that all share classes delivered negative returns in FY2026 and FY2025, while FY2024 was positive. Taking Class B Accumulation as an example:
| Metric | 2026 | 2025 | 2024 |
|---|---|---|---|
| NAV change per share | -31.53p | -25.16p | +78.40p |
| Return (after charges) | -1.15% | -0.91% | +2.92% |
| High/Low price | 3,032 / 2,474 | 2,972 / 2,362 | 2,920 / 2,189 |
Notably, capital losses in 2026 were only £751 thousand, far below the £9,409 thousand in 2025. The capital erosion narrowed substantially, but declining income and distribution pressure kept total returns negative. This suggests the fund may have transitioned from the "valuation de-rating" phase of the early market downturn to a "weak earnings repair" phase, but the rising expense ratio caused by AUM shrinkage has become a new drag.
The financial statement notes reveal a complex interplay between asset base shrinkage, cost efficiency improvement, and distribution resilience, providing concrete evidence for understanding the fund's management strategy and market environment.
Using year-end net assets as an approximation, the fund's total expense ratio fell from 0.87% in 2025 to 0.70% in 2026, a decline of approximately 19.5%. The Annual management charge fell 42.5%, far exceeding the 26.4% decline in net assets, indicating a tiered fee structure adjustment or proactive rate reduction by the ACD. This partly mitigated the negative impact of redemptions, but it should be noted that a lower expense ratio does not itself create returns — it merely reduces the cost drag.
| Metric | 2026 | 2025 | YoY Change |
|---|---|---|---|
| Year-end net assets (£'000) | 171,202 | 232,618 | -26.4% |
| Total expenses (£'000) | 1,198 | 2,024 | -40.8% |
| Total expense ratio (expenses/year-end NAV) | 0.70% | 0.87% | -19.5% |
| Dividend income (£'000) | 2,472 | 3,342 | -26.0% |
| Net income (pre-tax) (£'000) | 1,286 | 1,444 | -10.9% |
| Class B Accumulation distribution per share (pence) | 15.51 | 10.91 | +42.2% |
It is worth noting that dividend income fell in tandem with net assets — calculation reveals that the dividend yield per unit of net assets remained stable at approximately 1.44% (2026: 2,472/171,202 ≈ 1.44%; 2025: 3,342/232,618 ≈ 1.44%). Therefore, the sharp rise in per-share distributions was not due to improved portfolio earning power, but rather to the denominator shrinking from share redemptions. Class B Income shares declined 53%, far exceeding the overall AUM decline, indicating that low-tax or income-preferring investors are exiting, leaving remaining shares to enjoy the stable dividends more concentratedly. Total distributions of £1.118 million even exceeded after-tax net income of £1.115 million, with the gap covered by capital transfers. This "excess distribution" is unsustainable — if income continues to decline, the fund may be forced to cut distributions or further deplete capital.
The fund disclosed excess management expenses of £52,447,000, equivalent to 30.6% of year-end net assets. Since UK funds can deduct management expenses when calculating corporation tax on overseas dividends, but the fund's income is primarily tax-exempt dividends, a large portion of expenses cannot be utilized in the current period. Management has chosen not to recognize a deferred tax asset because future taxable income is expected to be insufficient. This means the implicit tax shield may be permanently wasted. The actual tax burden mainly comes from overseas withholding tax (£171 thousand) plus prior-year recoveries/losses (£12 thousand); despite a £12 thousand overseas tax recovery, the net tax cost was still £171 thousand. Based on net income of £1,286 thousand, the effective overseas tax rate is approximately 13.3% (171/1,286). For UK investors, this portion of tax can typically be partially credited, but at the fund level it remains a cash flow drain.
The currency exposure table shows that nearly all of the fund's assets are denominated in foreign currencies, with sterling at only £2,402 thousand in cash (1.4% of total assets). Euro exposure is the largest (83,195 thousand), followed by Swedish krona (25,880 thousand), Swiss franc (20,806 thousand), Danish krone (13,685 thousand), and Polish zloty (12,907 thousand). There is no evidence of any derivatives hedging. This structure means the fund's sterling-denominated NAV is almost fully exposed to currency fluctuations between European currencies and sterling. If sterling strengthens in 2026, non-sterling assets will be directly impaired on translation, and vice versa. In the current environment of divergent central bank policies globally, this exposure may be more decisive than stock market volatility. Investors who focus only on European corporate fundamentals while ignoring currency movements may misjudge actual returns.
The share reconciliation table shows net redemptions across all classes, with Class B Income particularly hard hit, falling from 1,754 thousand shares to 818 thousand (-53.4%), and Class A also down 35%. Large-scale redemptions of this magnitude typically occur during underperformance or market panic. ACD and related party holdings were 0.00%, indicating management did not buy shares as a confidence signal. Despite the decline in total assets, cash as a percentage of total assets remained low at 1.4%, suggesting the manager did not passively hoard cash under redemption pressure, but maintained a high equity allocation and stayed true to investment conviction. This behavior may increase short-term volatility but benefits remaining investors over the long term.
The valuation hierarchy is entirely concentrated in Level 1 (active market quotes), with no Level 2/3 assets, indicating high portfolio liquidity and the absence of hard-to-value assets. This enhances the credibility of the financial reporting and also means the fund can liquidate quickly in extreme circumstances, though it equally raises the risk of correlated selling.
The subsequently introduced Baillie Gifford Global Discovery Fund continues the same management philosophy: aiming to outperform the benchmark over the long term while accepting sharp short-term volatility. The cost control, tax sensitivity, and currency exposure management evident in the financial data will serve as a reference framework for assessing that fund's operational efficiency. The Global Discovery Fund's investment universe includes China, and its additional political and liquidity risk warnings indicate management's awareness of the execution costs unique to emerging markets. Future financial statements will reveal how these risks translate into actual numbers.
Overall, the European Fund's annual report data paints a picture of "shrinking but orderly": the contraction in scale did not cause fee escalation, distribution policy maintained stability, but excessive unused tax shields and unhedged currency exposure remain potential weak points. These factors will carry greater weight in the next five years of returns, especially against the backdrop of ongoing global repricing of interest rates and exchange rates.
Building on the earlier analysis of the fund's overview and investment objectives, the subsequent content disclosed this time further reveals the fund's risk characteristics, actual performance, and investment decision logic. The following expands across five dimensions: the limitations of risk indicators, long-term performance gaps, responses to market conditions, individual stock contributions, and operational strategy, with necessary data comparisons added.
The fund's Risk and Reward Indicator is positioned at a higher risk level (due to primary investment in company equities), but the disclosure text explicitly acknowledges that this indicator is based on historical data and does not cover the following material risks:
This indicator is essentially a one-dimensional price volatility ranking that ignores the portfolio's high technology concentration, liquidity discounts, and the erosion of NAV by "charges deducted from capital" (detailed below). Investors relying solely on this indicator will severely underestimate downside risk in extreme scenarios.
The disclosed performance data is the most critical objective fact for evaluating this fund. Although the fund emphasizes that "past performance does not indicate future results," the severity of long-term negative returns must be confronted:
| Performance Metric (as of 30 April 2026) | Fund Class B Shares | S&P Global Small Cap Index | Gap |
|---|---|---|---|
| Past one-year return | +28.4% | +33.0% | -4.6 ppts |
| Past five-year annualized return | -13.9% p.a. | +6.9% p.a. | -20.8 ppts p.a. |
| Five-year cumulative return (estimated) | ≈ -52% | ≈ +40% | approx. -92% |
The report characterizes the past twelve months as "extremely volatile" and identifies two key themes:
1. AI shifted from tailwind to headwind: Early compute infrastructure drove sentiment across the entire chain, but the subsequent emergence of agentic systems and low-cost models forced the market to reassess software company stickiness and digital moats. The fund's carefully selected AI infrastructure names (e.g., ASPEED) delivered strong returns, but its software holdings (e.g., ZoomInfo, Zillow) were inevitably impacted.
2. Geopolitics reshaping pricing power: The US "Liberation Day" tariffs intensified supply-chain security narratives, sharply elevating the strategic value of defense autonomy and rare earths. The fund's heavily weighted MP Materials thus received direct investment from the US Department of Defense and a long-term Apple contract. These "policy-catalyzed" gains are not inherently driven by endogenous growth, and carry extreme risk if policy direction shifts.
Notably, the report admits the fund's long-term performance has been "particularly disappointing" and attributes this to two factors: first, the 2022 investment environment was extremely unfavorable to its style; second, execution shortcomings existed. The decision-making structure and portfolio construction framework improvements introduced in January 2025 have not yet shown evidence of reversing the long-term trend — in 2026, with both AI mania and geopolitical conflict, the fund still underperformed the small-cap benchmark, indicating that the efficacy of process improvements awaits the test of time.
| Company | Catalytic Event | Key Logic |
|---|---|---|
| Aehr Test Systems | Wafer-level burn-in testing technology expanded to AI processors, with evaluation orders from leading global manufacturers | Capturing a niche segment of AI infrastructure, avoiding crowded chip design competition; FY25 H2 revenue guidance of $60-80M |
| ASPEED Technology | New position; hyperscale data center GPU cluster buildout driving demand for server management controllers (BMC) | Leadership position in BMC chips, high switching costs, embedded in virtually every mainstream AI server |
| MP Materials | US Department of Defense took a 15% equity stake, committing to purchase high-performance rare earth magnets at floor prices well above spot; multi-year supply agreement with Apple | Transitioning from miner to vertically integrated strategic magnet supplier; a quintessential geopolitical dividend play |
| Company | Fundamental Performance | Reason for Share Price Decline | Fund's Stance |
|---|---|---|---|
| MercadoLibre | 2025 revenue +39% YoY, Mercado Pago monthly active users reached 83 million, e-commerce share gains | Aggressive investment in logistics/credit/technology raised margin concerns, compounded by LatAm currency volatility and broad de-rating of high-valuation growth stocks | Recognized as a deliberate strategic choice; believes long-term earnings power is undervalued and retains the position |
| Axon Enterprise | Revenue >30% YoY, software and recurring revenue accelerating, net retention rate >100% | Panic over high-multiple software valuations, tariff cost pressures, M&A integration concerns | Added on weakness, maintaining "highest conviction long-term holding" |
| Zillow Group | (Commentary not detailed) | Likely affected by interest rates and weak housing market | No specific action disclosed |
All three detractor stocks fit the pattern of improving fundamentals but compressed valuations, revealing that the fund faces a systematic headwind in an environment of higher neutral interest rates. Despite management's claim of "strong fundamentals," the five-year cumulative loss demonstrates that: even if one selects excellently growing companies, excessive purchase prices and shifts in macro discount rates can still destroy long-term returns.
The report proactively discloses three key trading moves reflecting the fund's attempt to correct its previously excessive drawdowns:
However, it must be noted that the report does not provide the overall impact of these trades on portfolio risk characteristics — for example, whether concentration remains too high, cash levels, or changes in sector deviation. For a fund with a five-year annualized loss of nearly 14%, management only offers a vague description of "process improvements" without quantitative changes in risk metrics (such as turnover, PE range, or number of holdings), making it difficult for investors to assess execution effectiveness.
The risk disclosures and performance review in this section are generally candid, with the admission of execution problems being particularly rare. But the data provides no new evidence that mitigates the long-term underperformance. Investors should at minimum focus on three unresolved questions:
1. Against the backdrop of "hardware hot, software cold" in AI, can the fund institutionalize ASPEED/Aehr-style gains rather than relying on a few stock bets?
2. Did the January 2025 process improvements genuinely change portfolio structure and stop-loss mechanisms? — Given that 2026 still underperformed the benchmark, no decisive results are yet visible.
3. The rule of deducting fees from capital amplifies the compounding of losses; for a fund with sustained negative returns, is this design fair to investors?
Future tracking should focus on whether, over two or more consecutive full years, the fund can narrow its annualized gap to the benchmark in a normal market environment and demonstrate a repeatable stock-selection logic. Until then, any single-year rebound should be viewed as short-term volatility rather than evidence of reversal.
The list of new positions may appear scattered across 21 companies in different fields, but in reality it revolves around two highly synergistic themes: first, the infrastructure niche segments emerging as the AI industry chain shifts from "training" to "inference"; second, the Western world's urgent need for supply chain autonomy under geopolitical pressure. The former encompasses ASPEED Technology (BMC for AI servers), IREN (renewable energy data centers), Rubrik (cloud-native data security), BESI and Shibaura Mechatronics (semiconductor packaging and manufacturing equipment), and PDF Solutions (semiconductor yield optimization software) — this group essentially covers the entire chain of AI compute from chip design, manufacturing, and packaging to data center operations; the latter includes Kratos Defense & Security (unmanned systems), Exail Technologies (defense navigation), IperionX (low-carbon titanium supply chain), and Silex Systems (laser uranium enrichment technology) — each addressing Western pain points in defense, energy, and critical minerals autonomy.
Two additional sub-themes deserve attention: healthcare innovation moving toward "platform tools" and "payment model transformation." Guardant Health (liquid biopsy), Stoke Therapeutics (RNA drugs), Revolution Medicines (RAS inhibitors), and Shanghai United Imaging (imaging equipment) represent four distinct biopharma paths — diagnostics tools, gene therapy, targeted therapy, and equipment localization — while Universal Technical Institute and Upstart Holdings, whose business models resemble UnitedHealth's approach, share a common underlying logic: using data-driven assessment models to transform traditionally inefficient credit and education systems. Finally, the three positions in Circle Internet Group (USDC stablecoin), EHang (autonomous aerial vehicles), and Metaplanet (Bitcoin treasury company) reflect the fund's intention to position early for "emerging asset classes after regulatory boundaries loosen."
Zillow's decline is the most instructive case of this earnings season. The market simultaneously fears AI search replacing real estate portals' traffic and high rates suppressing the mortgage market — both concerns are logically valid, but the fund rebutted excessive market pessimism with three data points: full-year profitability on a GAAP basis (FY2025), Rentals segment revenue growing 45% YoY, and management's target of approximately $1 billion in annual Rentals revenue. If the Rentals segment alone can reach $1 billion in revenue, even at a 3x price-to-sales estimate, that business alone would correspond to roughly $3 billion in market cap, while the group's current market cap is far above that — meaning the market is effectively assigning near-zero or even negative value to Zillow's core transacting business. Zillow's Proprietary Data (home valuation models, buyer intent signals) and vertically integrated ecosystem (from buying to renting to lending) constitute a classic "data flywheel" moat, creating a significant perception gap versus the market's simplistic analogy of Zillow as a "listing site" that AI search engines will displace. The fund's willingness to hold a 2.39% weight (eighth-largest position) and write a lengthy defense indicates this is a calculated contrarian bet, not simply "buying more as it falls."
The 25 companies exited stand in sharp contrast to the new positions. Exact Sciences (sold for £16.42 million, the largest sale of the year) and Schrodinger reflect the fund's judgment that 'competition in the molecular diagnostics and computational chemistry tracks has deteriorated'; CyberArk (£11.69 million sold) and Confluent are typical of valuations/growth no longer attractive in a higher-rate environment; the exits from platform companies such as Sweetgreen, Upwork, and EverQuote show the fund has limited patience for 'platforms dependent on advertising spend or freelancer ecosystems'; and the exits from semiconductor names like Ambarella, Veeco, and SkyWater likely served to make room for purer AI hardware beneficiaries such as BESI and Shibaura. Notably, the fund also cleared out quality names like Xero and MarketAxess whose growth has entered the mid-to-low range, with a net amount of only approximately £4 million — underscoring the discipline of "either high growth or not held at all."
The country distribution of the portfolio clearly shows the manager's vote on global supply chain restructuring:
| Country/Region | April 2025 Weight | April 2026 Weight | Change (pct) |
|---|---|---|---|
| Australia | 1.22% | 3.66% | +2.44 |
| Taiwan | 1.63% | 4.79% | +3.16 |
| France | 0.12% | 1.64% | +1.52 |
| Netherlands | 0.00% | 1.61% | +1.61 |
| UK | 12.02% | 7.18% | -4.84 |
| US | 59.05% | 56.92% | -2.13 |
| Switzerland | 0.74% | 0.00% | -0.74 |
| Israel | 5.77% | 3.44% | -2.33 |
Australia's weight tripled from 1.22% to 3.66%, primarily driven by three new positions — IREN (renewable data centers), Silex (uranium enrichment), and IperionX (titanium metal) — a dual bet on 'energy-intensive AI compute + critical minerals autonomy,' and notably all three countries (Australia, US, France) are members of the nuclear/laser enrichment technology alliance, with Silex's addition carrying clear geotechnology synergy implications. Taiwan rose from 1.63% to 4.79%, with ASPEED going from zero to 3.75% as the largest new position, reflecting the fund's preference for 'niche monopolists' in the AI server supply chain — ASPEED holds over 70% global market share in BMC chips, a positioning advantage largely insulated from direct US export controls on China.
From the comparison of largest purchases and largest sales, the buy side is relatively diversified (largest single purchase, Upstart, was only £8.39 million; top ten purchases totaled approximately £61.7 million), while the sell side is concentrated in two healthcare names: Exact Sciences (£16.42 million) and Alnylam (£14.03 million). Alnylam was both the largest sale and remains the largest holding at 5.18% — indicating the sale was profit-taking rather than a deteriorating thesis. Meanwhile, the buy side featured Upstart, Axon, and MercadoLibre, all existing portfolio companies where the fund added on weakness (Axon purchases of £7.45 million, zero sales), reflecting a contrarian accumulation strategy in quality companies. Overall turnover (largest buys + largest sells of approximately £218 million versus portfolio net assets of £337 million) is roughly 65%, moderate-to-high for a global growth fund, but net buys and net sells are nearly balanced, indicating the portfolio's overall gross exposure remained stable, with the core being structural adjustment rather than positioning size changes in response to market conditions.
The comparison table reveals significant return divergence across share classes under the same investment strategy:
| Metric | Class A (2026) | Class B (2026) | Difference |
|---|---|---|---|
| Opening NAV (pence) | 883.15 | 1,051.92 | — |
| Closing NAV (pence) | 1,151.59 | 1,381.99 | — |
| Return | +30.40% | +31.38% | +0.98 pct |
| Ongoing charges | 1.54% | 0.78% | -0.76 pct |
| Closing assets (£'000) | 1,456 | 304,147 | — |
Class B, with a fee rate 76 basis points lower than Class A, has already opened a significant gap in three-year cumulative returns (Class B three-year cumulative of -7.80% followed by +31.38% ≈ 2026 NAV at 102.1% of the 2024 peak, versus Class A recovering to only 99.8% over the same period). In long-term compounding, a 0.76% fee difference can produce roughly a 16% difference in terminal value over 20 years (assuming 5% annualized growth), with direct implications for investors choosing share classes. Meanwhile, Class A assets are only £1.46 million versus Class B's £304 million — the fund itself is in a contraction cycle (Class B shares fell from 40.9 million to 22.01 million), but NAV per share is growing, suggesting this is more an active share buyback or institutional redemption than deteriorating investment capability.
The top ten holdings account for 32.54%, with Alnylam (5.18%), Twist Bioscience (3.84%), ASPEED (3.75%), and Axon (3.64%) forming the portfolio's four pillars, precisely spanning four high-prosperity tracks: biopharma (RNA interference), synthetic biology, AI server chips, and public safety hardware. Zillow (2.39%) as the eighth-largest position, alongside MercadoLibre (2.59%) and Astera Labs (2.59%), shows the fund retains a meaningful "contrarian value growth" allocation outside its core growth names. From the holdings detail, the portfolio also harbors a set of "option-type" positions each representing only 0.5%-0.9% of NAV, including QuantumScape (solid-state batteries), Rocket Lab (space launch), and Circle (stablecoins) — if any one of these pays off, it could produce a return path similar to Axon's 5x over the past three years. This reveals the fund's other side: beyond the 30% in high-conviction core assets, approximately 20% of the portfolio is in high-volatility, high-odds seed investments, and the new 2026 positions in IREN, EHang, and Metaplanet are continuations of this category.
The portfolio now includes Shanghai United Imaging Health - stock connect (联影医疗), marking the fund's first holding of a mainland China medical device company via the Stock Connect channel, with a position value of £3.49 million (1.04% weight). Combined with the fund's simultaneous holdings in Zai Lab (再鼎医药) and Horizon Robotics, it is clear the manager's China allocation logic has shifted from 'internet platforms' to 'high-end manufacturing + innovative drugs.' United Imaging has achieved domestic substitution against GPS (GE, Philips, Siemens) in large imaging equipment such as CT, MR, and PET-CT, with overseas revenue growing over 50% for two consecutive years — an interesting parallel to the fund's investment in IperionX (US titanium supply chain): supply chain restructuring in global manufacturing is happening not only in the West, but also in China's import substitution. The fund's China allocation edged down only slightly from 6.55% to 5.91%, far milder than the reductions in the UK (-4.84 pct) and Israel (-2.33 pct), indicating China remains a growth market the fund cannot abandon, with the investment vehicle shifting from ADRs/HK stocks to targets more aligned with industrial trends.
Based on the fund annual report data provided in this continuation, the following supplements new analytical evidence from four dimensions — performance, fund flows, trading costs, and income/taxation — with emphasis on the structural changes behind the data.
After two consecutive years of negative returns in 2024 and 2025, all share classes generally recorded after-fee positive returns exceeding 31% in FY2026. Taking Class B Accumulation as an example:
| Metric | 2026 | 2025 | 2024 |
|---|---|---|---|
| Opening NAV (pence) | 907.72 | 984.53 | 1,192.55* |
| Closing NAV (pence) | 1,192.55 | 907.72 | 984.53 |
| After-fee return | 31.38% | (7.80)% | (15.72)% |
*Note: The 2024 figure corresponds to the FY2025 disclosure basis; the actual sequence is 2024→2025→2026.
Class C Accumulation delivered an after-fee return of 32.37%, nearly 1 percentage point higher than Class B. This difference primarily stems from the significant gap in ongoing charges:
| Share Class | 2026 Ongoing Charges | 2025 Ongoing Charges | 2024 Ongoing Charges |
|---|---|---|---|
| Class B Accumulation | 0.78% | 0.81% | 0.80% (adjusted 0.79%) |
| Class C Accumulation | 0.03% | 0.06% | 0.04% |
Class C's ongoing charge rate is roughly 1/26 of Class B's, despite identical direct investment costs (0.04%) for both. The cumulative effect of this fee differential becomes material to final returns under long-term compounding. Notably, Class C Income has only 50 shares (corresponding to net assets of £1,000), a symbolic presence indicating this class is not a primary fundraising channel for the fund.
"Return before operating charges" for each class has already deducted direct transaction costs, but the table notes indicate that direct transaction costs do not include dilution adjustment fees. In 2026, the impact of direct transaction costs on NAV was approximately 0.49-0.63 pence per share (varying by class), roughly 20-30% of ongoing charges. While small, this cost is amplified by dilution adjustments during large subscriptions/redemptions.
| Item | 2026 (£'000) | 2025 (£'000) |
|---|---|---|
| Issuance amount | 18,711 | 17,007 |
| Redemption amount | (116,481) | (182,383) |
| Net flow | (97,770) | (165,376) |
Although net redemptions in 2026 declined approximately 41% from the prior year, they still reached £97.77 million, representing 29.5% of opening net assets (£331.9 million). Such large-scale redemptions combined with the concurrent market rally mean the fund was forced to reduce positions at low levels to meet liquidity needs, potentially harming the portfolio's long-term compounding ability.
Year-end net assets were £336.8 million, up only 1.5%. This growth came entirely from investment activity (+£102.4 million), offset by net redemptions (-£97.8 million). Investment assets rose from £325.2 million to £330.9 million, an increase of only 1.8% — far below the 31% return — indicating that a large portion of capital gains has already been cashed out via redemptions.
| Item | 2026 (£'000) | 2025 (£'000) |
|---|---|---|
| Total purchases (incl. costs) | 137,237 | 98,206 |
| Total sales (net) | 235,757 | 270,998 |
| Net selling | 98,520 | 172,792 |
The net selling scale broadly matches net redemptions, indicating portfolio adjustments were primarily to satisfy redemptions rather than active rebalancing. Notably, purchases in 2026 grew 39.7% YoY while sales fell 13%, suggesting the manager maintained a certain turnover rate while beginning to reposition.
| Cost Type | 2026 Amount (£'000) | % of Average NAV | 2025 Amount (£'000) | % of Average NAV |
|---|---|---|---|---|
| Commissions | 113 | 0.03% | 135 | 0.03% |
| Taxes | 44 | 0.01% | 46 | 0.01% |
| Total | 157 | 0.04% | 181 | 0.04% |
The average buying/selling spread remained unchanged at 0.36%. With annual turnover (purchases plus sales divided by average NAV, approximately 110%), direct transaction costs were contained at 4 basis points, reflecting good trade execution efficiency. However, this does not include dilution adjustment fees, whose actual burden in a net-redemption environment may be higher.
| Income Source | 2026 (£'000) | 2025 (£'000) | Change |
|---|---|---|---|
| UK dividends | - | 178 | -100% |
| Overseas dividends | 645 | 315 | +104.8% |
| Bank interest | 44 | 99 | -55.6% |
| Total income | 689 | 592 | +16.4% |
UK dividend income fell to zero while overseas dividends doubled, reflecting a major shift in geographic allocation — likely a substantial reduction in UK holdings alongside increased US and other overseas exposure. This is consistent with the fund's "global discovery" theme, but also means income sources are more dependent on overseas withholding taxes, raising the effective tax burden.
The fund did not recognize £65.89 million of excess management expenses as a deferred tax asset, citing the unlikelihood of generating sufficient taxable income in the future. This reveals a structural contradiction: most of the fund's returns come from capital gains rather than dividend income, and capital gains may not be subject to corporation tax at the fund level (depending on UK tax law). Consequently, despite substantial operating expenses, the tax shield cannot be utilized, resulting in an extremely low effective tax rate — actual overseas tax paid in 2026 was only £50 thousand, with pre-tax net expenses of -£2.14 million, implying an effective tax rate of approximately 2.3%.
Total 2026 distributions were £226 thousand (prior year £506 thousand), including redemption withholdings of -£304 thousand and issuance increases of £77 thousand. Retained distributions on accumulation shares were only £1 thousand, indicating most distributions were paid on income shares. Given the fund's extremely small income base, the distribution rate is at a very low level.
Net capital gains included foreign exchange gains of £39 thousand, versus -£234 thousand in the prior year. With the fund holding substantial non-sterling assets, currency fluctuations' impact on NAV cannot be ignored. From the high/low price ranges:
| Class | 2026 High (pence) | 2026 Low (pence) | Amplitude |
|---|---|---|---|
| Class C Accumulation | 1,780 | 1,258 | 31.9% |
| Class B Accumulation | 1,285 | 912.7 | 34.0% |
Intra-year NAV volatility exceeded 30%; even with strong full-year returns, the drawdown magnitude during the period highlights the risk characteristics of high-volatility growth investing.
Cash and bank deposits were £8.9 million (prior year £10.97 million), with bank overdrafts of £1.8 million (prior year £2.34 million), leaving net cash of approximately £7.1 million, or 2.1% of net assets. In a sustained net-redemption environment, the fund maintains approximately a 2% cash buffer for daily redemption needs, though this also means a small amount of capital did not participate in the market rally.
The above analysis is based on the data in this continuation, complementing the investment strategy, market background, and other content discussed earlier, providing quantitative evidence for a complete understanding of the fund's FY2026 performance.
Unlike the previous fund (Global Discovery Fund) with its globally diversified multi-market allocation, Baillie Gifford Japanese Fund strictly confines its investment universe to the Japanese market and requires at least 90% of assets to be invested in Japanese company equities. Its definition of "Japanese companies" spans multiple dimensions including listing venue, place of incorporation, and primary business location, retaining similar flexibility, but geographic concentration is significantly higher. The fund uses TOPIX (in sterling terms) as its benchmark, targeting outperformance over rolling five-year periods rather than absolute returns or specific index replication. This single-market, active stock-selection strategy means fund performance is highly dependent on Japan's domestic economic cycle, the yen exchange rate, and Japanese corporate profitability, with risk and return sources fundamentally different from globally allocated funds.
The fund's risk disclosures explicitly identify several categories of potential loss factors:
These risk disclosures place greater emphasis on "single-market fragility" than those of the previously discussed fund, reflecting the amplification of risk exposure through investment concentration.
The Past Performance chart and data table show returns for B Accumulation Shares as of April 30, 2026:
| Metric | Baillie Gifford Japanese Fund B Accumulation Shares | TOPIX |
|---|---|---|
| One-year return (%) | 15.4 | 28.0 |
| Five-year annualized return (% p.a.) | 1.2 | 9.5 |
On a single-year basis, the fund achieved a double-digit absolute return (15.4%), but significantly lagged TOPIX's 28.0%, a gap of 12.6 percentage points. Extending to five years, the fund's annualized return was just 1.2% versus 9.5% for the benchmark — an even more substantial cumulative gap. The annual interval returns shown in the chart (e.g., -12.1%, -10%, -4.7%) further confirm that the fund experienced pronounced drawdowns in several prior years, with long-term NAV growth heavily dependent on rebounds in individual years. This contrasts with TOPIX's relatively steady long-term ascent, highlighting the vulnerability of the active stock-selection strategy during style shifts in the Japanese market.
The investment report's description of the past year provides crucial context: after escaping the previous regime dominated by large-cap value, cyclicals, a weak yen, and post-pandemic recovery, the Japanese equity market did not experience broad-based gains, but instead rotated toward a small group of companies driven by the AI and AI-related capital expenditure cycle. This means market gains were concentrated in a few stocks directly benefiting from the AI theme, while the fund's holdings likely lacked such companies, preventing returns from keeping pace during the index rally.
However, the report also conveys positive signals:
This statement effectively acknowledges that the fund's underperformance over the past year stems from style mismatch, while simultaneously expressing conviction in the improving earnings quality of its holdings — a typical "weak performance + optimistic outlook" financial report narrative. Investors should be wary: whether this optimism materializes depends on whether market breadth genuinely expands, rather than relying solely on the manager's subjective expectations.
The fund explicitly discloses an annual management fee of 0.60% for Class B shares, which is on the low side among actively managed Japanese equity funds. Fees are first deducted from income, with any shortfall deducted from capital, the latter directly reducing NAV. While the low fee benefits long-term holding costs, in a situation where the five-year annualized return is only 1.2%, even a 0.60% fee represents a meaningful erosion of actual net returns — if pre-fee returns are only slightly above this level, the fee's share becomes even more significant. When assessing its long-term appeal, investors should weigh the low fee against high volatility and benchmark underperformance.
The report clearly states that the "narrow nature of the rally" in the index was the direct cause of underperformance this period. But examining the beneficiaries more closely — Kioxia, Advantest, Fujikura, Furukawa Electric, Sumitomo Electric, Taiyo Yuden, NGK, Sumitomo Metal Mining, JX Advanced Metals — one finds they are not "value stocks" in the traditional sense, but rather direct beneficiaries of the AI infrastructure and electrification cycle. This rally driven by the "hardware AI chain" stands in extreme divergence from the fund's heavily weighted "software/platform/consumer growth" names.
Among the top ten holdings, only SoftBank (8.27%) and Murata (2.58%) are genuinely highly correlated with AI hardware; the rest — SBI, Sumitomo Mitsui Trust, Rakuten, CyberAgent, GMO Internet — do not belong to this cycle's core market theme. Therefore, even though SoftBank's contribution was important enough for the fund to outperform its benchmark, it could not offset the systematic underperformance of other holdings.
Comparing the largest purchases and sales, this period's rebalancing signals are extremely clear — capital is migrating from "pure software/old economy" toward "automation/robotics/gaming IP":
| Purpose | Representative Names | Logic |
|---|---|---|
| New positions | Yaskawa, Harmonic Drive | Factory automation and robot core components, benefiting from China's capex recovery and the long-term "physical AI" narrative |
| New positions | Sega Sammy | Monetizing global IP library, low valuation + gaming industry cyclical rotation |
| New positions | Money Forward | Enterprise SaaS unfairly sold off on AI fears, but cloud accounting has strong essential-demand characteristics |
| Additions | Unicharm, Shimano | Consumer defensive names unfairly punished; brand moats intact |
| Exits/trims | Mixi, Digital Garage, Broadleaf, Rohm, NEG, Tokyo Tatemono | Loss of fundamental conviction or valuations no longer attractive |
Notably, the purchase list includes Unicharm — precisely the type of "quality growth" name the report says was suppressed. This indicates the manager has not made a complete pivot to cyclicals, but is positioning for "wrongly punished quality names" within the growth universe.
The largest sale was SoftBank Group (£92,227 thousand), with only £12,271 thousand bought back in the same period — a net sale of approximately £80 million. SoftBank was both the largest holding and the largest relative contributor during the period, making the sale look contradictory. In fact, there are three reasonable explanations:
1. Weight control: SoftBank represented 8.27% of total assets; single-name risk was too high, and partial profit-taking reduced portfolio volatility.
2. Capital reallocation: Sale proceeds flowed into SBI Shinsei (banking), Yaskawa, Shimano, etc., diversifying the single "AI stack" exposure.
3. Active valuation choice: SoftBank has been fully revalued in the AI wave, while robotics/automation names may offer more attractive PEG ratios.
This "sell strength, buy weakness" operation demonstrates the fund's discipline of not following the herd and targeting long-term absolute returns.
The report specifically mentions "decline in valuation of software-related stocks amid AI concerns." The market is indiscriminately selling software assets, fearing AI will disrupt traditional application layers — but this is not the reality. Money Forward, as a cloud accounting SaaS, derives its core value from accumulated business process data and customer stickiness; AI will actually enhance its product efficiency. freee, BASE, Colopl, and others are similarly suppressed by the "AI threat" narrative. Their current low valuations precisely offer a buying window for long-term capital.
The weakness in Kao and Unicharm is attributed to "Asian consumer demand weakness and downtrading." But this judgment needs to be unpacked along two dimensions:
The report's statement that "the market will soon reward increasingly-clear evidence of improved execution" implies management is responding through cost optimization, product innovation, or channel adjustments, and the share price has not yet priced this in.
The fund admits its five-year returns have been "disappointing," attributing them to "rising interest rates, the weak yen, and a sustained preference for value stocks." These three factors are intertwined:
But now, the Bank of Japan has entered a normalization path; if the yen turns from weak to strong, it would directly benefit domestic-demand growth stocks and the sterling returns of overseas investors. Meanwhile, global AI hype is spreading from hardware to "efficiency tools," making a software re-rating far from impossible. The five years of extreme headwind may be nearing its end.
Comparing the 2025 and 2026 portfolios, the notable changes are:
| Industry Sector | Weight (2026) | Weight (2025) | Change |
|---|---|---|---|
| Electrical/Precision equipment | 19.72% | 14.67% | +5.05pct |
| Machinery | 9.62% | 5.71% | +3.91pct |
| Information & communications | 14.05% | 15.46% | -1.41pct |
| Services/Internet | 10.87% | 14.39% | -3.52pct |
| Retail | 1.61% | 2.38% | -0.77pct |
| Real estate | 2.03% | 3.04% | -1.01pct |
| Rubber products | 2.01% | 2.86% | -0.85pct |
This data confirms the fund is strategically reducing "pure software/consumer platform" weight and shifting toward "automation hardware + fintech." But this is not an outright pivot to cyclicals — it is more like a redefinition of the "AI value chain": from software to hardware, from consumer internet to industrial robotics. Although short-term volatility remains possible, the portfolio's long-term growth attributes have not disappeared — only the vehicle has changed.
The timing of the Yaskawa and Harmonic Drive purchases is worth examining. The report mentions that "automation and robotics names also helped Fund performance later in the period," indicating these positions had already risen after purchase. However, their valuations remain below global peers (such as Fanuc and SMC), and they are in the early stages of recovering from the bottom of the order cycle. Combined with China's equipment-update policies and mass-production expectations for humanoid robots, this sector has dual "cyclical + growth" characteristics, providing the fund with a different beta from pure software names and a partial hedge during AI hardware chain pullbacks.
Overall, this report reveals the manager's struggle and adjustment in an extreme market environment: on one hand, holding firm to long-term growth convictions with large positions in SoftBank, Rakuten, and others; on the other hand, attempting to capture the next phase's structural opportunities through new purchases in robotics/automation, SaaS, and gaming IP. The risk of this "fence-sitting" strategy is that if the AI hardware chain corrects, the new positions cannot escape unscathed; while if software/consumer growth continues to fall out of favor, the fund will keep underperforming. But over the long term, the current portfolio configuration is evolving toward a "more balanced growth distribution" rather than betting on a single narrative. This is precisely the resilience expected of a fund manager under adversity.
In the Comparative Tables section, the data reveals deeper divergence within the product line, with details sufficient to supplement earlier judgments on overall fund performance.
The return differences across classes on the same underlying assets are almost entirely determined by Operating charges.
| Share Class | FY2026 Operating Charges | FY2026 Return (ACC) | 2024-2026 Cumulative NAV Growth* |
|---|---|---|---|
| C Accumulation | 0.03% | 16.97% | +20.4% |
| W1 Accumulation | 0.49% | 16.44% | +16.4% |
| W6 Accumulation | 0.49% | 16.43% | +16.4% |
| W3 Accumulation | 0.61% | 16.30% | +16.3% |
| A Accumulation | 0.63% | 16.27% | +15.8% |
| B Accumulation | 0.63% | 16.27% | +15.8% |
*Calculated from NAV changes between April 30, 2024 and April 30, 2026 (excluding dividend reinvestment)
Class C, with its mere 0.03% ongoing charge, outperformed Class A by approximately 4.6 percentage points cumulatively over three years — almost exactly replicating the compounding effect of the fee differential. Meanwhile, Class W3's fee rose from 0.55% in FY2025 to 0.61% in FY2026, and its return correspondingly degraded to parity with the higher-fee A/B classes, confirming the immediate erosion of performance from fee changes.
Almost all classes experienced declines in both assets and share counts in FY2026, but W6 Income was the only significant grower:
| Share Class | End-2025 Assets (£'000) | End-2026 Assets (£'000) | Change |
|---|---|---|---|
| A Accumulation | 689,637 | 359,027 | -48.0% |
| B Income | 108,810 | 105,131 | -3.4% |
| C Accumulation | 241,177 | 238,954 | -0.9% |
| W1 Accumulation | 34,037 | 32,039 | -5.9% |
| W6 Income | 99,771 | 129,416 | +29.7% |
| W3 Income | 53,465 | 35,876 | -32.9% |
W6 Income's share count rose from 6.33 million to 7.14 million, indicating genuine net subscriptions rather than asset appreciation. This may suggest that in the current phase of investor risk-appetite repair, income shares are more attractive than accumulation shares, as the narrative of improving Japanese corporate shareholder returns begins to materialize. But overall, the fund's total assets shrank from approximately £9 billion to £6 billion, with redemption pressure still significant.
W3's Operating charges rose over three years from 0.47% → 0.55% → 0.61%, while its assets collapsed from £490 million to £36 million over the same period. The likely cause is that fixed operating costs (audit, custody, administration) cannot shrink in line with assets, causing per-unit costs to fail to spread. This highlights: scale reduction not only sacrifices absolute returns, but also raises the fee burden on remaining holders, creating a negative feedback loop.
In FY2026, the high/low prices for most classes fell outside the corresponding NAV fluctuation ranges. For example, Class A Accumulation's high was 2,362p while its closing NAV was 2,237.85p, indicating the fund traded at approximately a 5.5% premium; its low of 1,910p corresponded to approximately a -14.6% discount. The timing of these extreme prices aligns with the year's yen movement and Japanese equity volatility phases. More notably, the premium/discount gap between Class C and Class B was not significant, indicating the market has not priced in a liquidity premium for institutional share classes.
Direct transaction costs were constant at 0.02% for all share classes, unchanged for three years. Given the expanded trading volumes in the Japanese market in FY2026 (implying higher turnover costs), this stability suggests either an actual decline in portfolio turnover or that execution optimization (such as more efficient electronic matching) offset market impact. This provides positive evidence for active cost management, and also means the only controllable component of total fees is operating charges.
C Income had only 100 shares at year-end, with assets of £2,000 — clearly the minimum size for maintaining the product line. Its existence may serve institutional client validation or internal testing, but it also reveals a product design issue: if the class needs to be closed in the future, its minimal value would generate unnecessary administrative costs. Rather than maintaining this "zombie share class," it would be preferable to merge it into C Accumulation or terminate it outright.
These data break through the monolithic lens of "annual fund performance," presenting the real investor experience differences across channels, fee tiers, and share structures — especially how the compounding effect of fees can create significant return gaps within just three years, and how asset shrinkage further punishes remaining investors through higher fee rates, posing concerns for the product's sustainability.
From the Statement of Total Return, the fund's total return rebounded significantly this year, with the core driver being realized/unrealized capital gains:
| Item | 2026 (£'000) | 2025 (£'000) | Change |
|---|---|---|---|
| Net capital gains | 157,466 | 18,837 | +736% |
| Investment income (dividends + interest) | 21,629 | 25,769 | -16.1% |
| Net income after tax | 14,354 | 16,843 | -14.8% |
| Distributions | (14,354) | (16,843) | -14.8% |
| Total return | 171,820 | 35,680 | +381% |
The ratio of capital gains to income reached 11:1 (approximately 1.1:1 in 2025), indicating this year's performance was driven by price movements rather than fundamental income. Dividend income fell to £21.6 million, a decline exceeding the asset base contraction (approximately 8%), suggesting some high-dividend holdings were reduced or cut their payouts. But this is also consistent with the fund's long-term growth style — not deliberately pursuing current income.
Net assets fell from £1.142 billion to £1.047 billion (-8.3%), primarily affected by shareholder redemptions:
| Item | 2026 (£'000) | 2025 (£'000) | Change |
|---|---|---|---|
| Subscription proceeds | 49,599 | 45,468 | +9.1% |
| Redemption payments | (311,369) | (492,360) | -36.8% |
| Net redemptions | (261,770) | (446,892) | -41.4% |
| Retained distributions (accumulation classes) | 9,122 | 10,550 | -13.5% |
Despite still seeing net outflows of £262 million, redemptions fell by nearly half from the prior year, reflecting easing investor sentiment. The balance sheet shows: investment assets fell to £1.041 billion (-7.4%), broadly matching the decline in net assets; net cash and bank deposits were only £3.587 million (2025: £4.145 million), with liquidity remaining low and the fund nearly fully invested.
The low-cost structure is a key competitive advantage for the fund, especially in a high-turnover year, with commissions and market impact tightly controlled. Transaction costs do not include the dilution adjustment, which is reported separately.
The fund continues to owe no UK corporation tax because dividend income is largely tax-exempt, and cumulative excess management expenses reached £151.2 million (2025: £146.1 million), not recognized as a deferred tax asset. Overseas dividend withholding tax was £2.162 million (2025: £2.575 million), an effective rate of approximately 10% of dividend income — below the "theoretical" standard corporate rate of 20% — consistent with Japan's dividend withholding rates (typically around 15%) and the fund's management structure.
| Item | 2026 (£'000) | 2025 (£'000) | Change |
|---|---|---|---|
| Payables for redemptions | 2,759 | 1,189 | +132% |
| Payables for unsettled purchases | 3,191 | 728 | +338% |
| Other payables | Cumulative increase | — | — |
The surge in redemption payables reflects a large number of redemption orders still in transit at year-end; the sharp increase in unsettled purchase payables indicates concentrated position-building before year-end, corroborating the growth in trading activity.
The ACD (Baillie Gifford & Co Limited) and related parties held 0.00% of the fund's shares (nil in both years), ensuring no conflicts of interest. Management fees paid to the ACD were £4.846 million (2025: £6.064 million), down 20.1% YoY, consistent with the decline in average assets; the effective fee rate remained around 0.5% (broadly consistent with the OCF of 0.63% disclosed in the "Introduction," with the difference attributable to other expenses).
1. Performance elasticity: This year's return dominated by capital gains shows, on one hand, that the fund's holdings (especially Japanese growth stocks) saw significant valuation recovery in 2025/26; on the other hand, investors should be wary of market volatility's impact on NAV.
2. Redemption trend: Although net outflows narrowed, two consecutive years of large-scale redemptions (cumulative over £700 million) have reduced the fund's size from a £1.559 billion peak to £1.047 billion, potentially affecting operational efficiency and future investment flexibility.
3. Income quality: Declining dividend income alongside rising capital gains suggests this fund is better suited for capital-appreciation-oriented allocations rather than income-oriented ones.
4. Cost discipline: In rebalancing activity, transaction costs of only 0.02% of NAV fully embody an investment philosophy centered on long-term holding, avoiding the drag of frequent trading.
> Note: This analysis is based on the annual financial report. The specific distribution tables, securities investment details, and subsequent notes are not covered in this section and will be linked to the next part.
From the share movement table, as of April 30, 2026, all major share classes experienced net redemptions or net declines after conversions. Calculating net change rates reveals that outflow pressure is universal, not confined to any single class.
| Share Class | Opening Shares | Closing Shares | Net Change (shares) | Net Change Rate |
|---|---|---|---|---|
| A Accumulation | 244,837 | 187,374 | (57,463) | -23.5% |
| B Accumulation | 22,263,570 | 16,043,370 | (6,220,200) | -27.9% |
| B Income | 6,902,268 | 5,800,995 | (1,101,273) | -16.0% |
| C Accumulation | 10,758,557 | 9,112,697 | (1,645,860) | -15.3% |
| W1 Accumulation | 1,748,462 | 1,413,514 | (334,948) | -19.2% |
| W1 Income | 6,816,559 | 4,983,404 | (1,833,155) | -26.9% |
| W3 Accumulation | 2,171,006 | 1,661,852 | (509,154) | -23.5% |
| W3 Income | 3,392,669 | 1,980,270 | (1,412,399) | -41.6% |
| W6 Accumulation | 1,148,402 | 658,906 | (489,496) | -42.6% |
| W6 Income | 6,330,809 | 7,142,844 | +812,035 | +12.8% |
Key observations:
| Level | 2026 (£'000) | 2025 (£'000) |
|---|---|---|
| Level 1: Quoted prices | 1,040,870 | 1,124,551 |
| Level 2: Observable market data | - | - |
| Level 3: Unobservable data | - | - |
| Total | 1,040,870 | 1,124,551 |
100% of the fund's assets are Level 1 (public market quotes), with no Level 2 or Level 3 assets whatsoever. This reflects two things:
1. Extremely low valuation risk: There are no assets reliant on models or unobservable inputs; liquidity is strong, and NAV can be confirmed in real time against market prices.
2. Fully transparent portfolio: All holdings are Japanese listed equities (or similar liquid instruments), with no private equity, unlisted securities, or complex derivatives.
Notably, total assets fell from £1.125 billion in 2025 to £1.041 billion (approximately -7.4%), but net redemption rates ranged from 15% to 40%, meaning the asset decline was significantly smaller than the share redemption rate. This indicates that NAV performance (total return) during the period was positive, partially offsetting the scale contraction from redemptions.
| Currency | 2026 Net Monetary Exposure (£'000) | 2026 Non-Monetary Exposure (£'000) | 2026 Total Exposure (£'000) | 2025 Total Exposure (£'000) |
|---|---|---|---|---|
| Japanese yen | 3,618 | 1,040,870 | 1,044,488 | 1,128,687 |
| UK sterling | (31) | - | (31) | 9 |
From the table, the fund's total net exposure is almost entirely yen-denominated, with yen assets representing approximately:
\[
\frac{1,044,488}{1,044,488 - 31} \approx 100.0\%
\]
Sterling exposure was only -£31 thousand, representing settlement payables/receivables. This means:
The final distribution table shows that distributions for the year ended April 30, 2026 generally increased versus 2025. Below is the per-share distribution comparison for Group 1 (full-year holders):
| Share Class | 2026 (pence) | 2025 (pence) | YoY Change |
|---|---|---|---|
| A Accumulation | 5.62000 | 5.10000 | +10.2% |
| B Accumulation | 25.18000 | 22.54000 | +11.7% |
| B Income | 20.62000 | 18.68000 | +10.4% |
| C Accumulation | 44.46000 | 39.54000 | +12.4% |
| C Income | 31.46000 | 28.45000 | +10.6% |
| W1 Accumulation | 28.52000 | 25.71000 | +10.9% |
| W1 Income | 23.22000 | 21.22000 | +9.4% |
| W3 Accumulation | 25.90000 | 24.19000 | +7.1% |
| W3 Income | 21.03000 | 19.91000 | +5.6% |
| W6 Accumulation | 28.29000 | 25.34000 | +11.6% |
| W6 Income | 23.05000 | 20.92000 | +10.2% |
All classes achieved positive distribution growth, averaging approximately 10%. This is consistent with the improvement in the fund's total return (though still behind the benchmark). Possible sources of distribution growth include:
The Group 2 equalisation data shows significant variation across classes. For example:
A high equalisation proportion indicates dispersed purchase timing for that class, and a significant gap between opening NAV and purchase prices. C Accumulation's equalisation accounted for 59.6% of the total, meaning Group 2 investors purchased at various points during the period, with average purchase costs significantly below (or above) the closing NAV. This type of data can be used to analyze investor behavior, but overall, the distribution policy is sound.
This continuation introduces another fund, Baillie Gifford Japanese Smaller Companies Fund, whose performance merits focused analysis.
| Metric | Fund (Class B Accumulation) | MSCI Japan Small Cap Index |
|---|---|---|
| 1-year return (to 30/04/2026) | +15.5% | +29.8% |
| 5-year annualized return | -7.9% | +8.2% |
The investment report attributes the poor performance to:
1. Rising rates and a weak yen: Higher Japanese rates have a greater impact on the discount factors of growth stocks, and the fund prefers domestic consumption and growth enterprises; yen depreciation raises import costs and suppresses domestic demand.
2. Market style favoring deep value: Corporate governance reforms are driving improved capital efficiency, directly benefiting low-valuation value stocks, while the fund, as a growth strategy, lacks corresponding exposure.
But the report also notes positive factors:
Notably, these positive factors only partially offset the negatives and did not change the overall underperformance. More seriously, five-year annualized negative returns mean that even a +15.5% one-year gain is far from sufficient to reverse the long-term damage. The fund's risk level is rated as the highest (shown as level 7 in the chart, the highest risk category), indicating high sensitivity to market volatility.
Additionally, the report notes "The indicator does not take into account the following relevant material risks," including custody risk, global catastrophes, and policy changes. On fees, the fund charges an annual management fee of 0.60% (Class B), but looking at five-year performance, fees are not the primary issue — stock selection and style exposure are.
This section reveals two core facts:
1. The original Japanese Fund is in a phase of scale contraction and slow return recovery. Redemptions continue but are narrowing, distribution income is rising, asset valuations are transparent, and yen exposure is fully exposed.
2. The newly introduced Japanese Smaller Companies Fund has historically deviated severely from its objectives, and its investment strategy remains under sustained pressure in the current macro and market environment. While AI-related names and M&A provide some bright spots, five-year negative returns are difficult to explain away with short-term narratives, and investors should remain highly vigilant about its long-term risks.
The two main detractors named in the report provide a highly instructive contrast:
| Detractor | Industry | Detraction Logic | Fund Strategy Problem Exposed |
|---|---|---|---|
| Cosmos Pharmaceutical | Drugstore retail | Weak yen raised procurement costs + consumption downgrades compressed gross margins | Defensive consumer is not a natural safety cushion; currency-sensitive retail suffers in depreciation cycles |
| Appier Group | Enterprise SaaS/AI | Valuation contraction as the market digested AI's long-term implications | High-growth AI stories lose valuation elasticity under dual pressure from rates and earnings validation |
One is "old economy," the other "new economy," yet both reflect the same core issue: the market's pricing standard for "growth quality" is rising. Cosmos's weakness lies in a business model lacking pricing power — unable to pass currency costs onto price-sensitive Japanese consumers; Appier's weakness is that its AI narrative requires sustained high-growth delivery, and once market focus shifts to earnings quality, valuations lose support. The shared lesson: in a stock-selection framework, mere industry labels (consumer/tech) matter far less than cash flow visibility and competitive moats.
The fund's 12 full exits demonstrate clear categorized disposal discipline:
1. M&A exits (Raksul, Technopro, Inforich): Acquirers paid premiums to realize value — passive exits;
2. Valuation realized (MatsukiyoCocokara, MonotaRO): Growth expectations fully priced in — proactive profit-locking;
3. Below expectations (Avex, Cellsource, Demae-Can): Fundamentals systematically diverged from the original investment thesis.
Among these, the stop-losses on Demae-Can (food delivery platform) and Avex (entertainment content) deserve special attention — both were pandemic-era "beneficiaries" that failed to rebuild growth momentum during post-pandemic consumption normalization. The fund chose to admit its mistakes after holding for three years rather than defending sunk costs, reflecting the new management's decisiveness in portfolio cleanup.
Notably, "valuation realized" sales do not equate to bearishness on Japanese consumption — after MatsukiyoCocokara, the fund retained holdings in Seria, Yonex, and other consumer names, indicating the adjustment was about individual stock risk-reward rather than sector direction.
Cross-referencing this year's sector allocation changes with the buy/sell lists reveals a systematic portfolio reconstruction:
| Sector | April 2025 Weight | April 2026 Weight | Direction | Key Actions |
|---|---|---|---|---|
| Information technology | 13.71% | 20.36% | Significant increase | New JEOL, Kohoku Kogyo; added Money Forward |
| Industrials | 26.08% | 28.59% | Steady increase | New DMG Mori; added Tsugami |
| Consumer staples | 7.66% | 3.44% | Significant decrease | Exited Cosmos; reduced defensive consumer exposure |
| Communication services | 10.78% | 8.88% | Decrease | Reduced Appier weight |
This round of sector rotation is not a simple "offense/defense" switch, but rather a deeper judgment on Japan's growth engines: the recovery in traditional domestic consumption is insufficient to support valuation premiums, while manufacturing automation (DMG Mori, Tsugami), precision instruments (JEOL, Harmonic Drive), and industrial digitalization with software capabilities (Soracom, Money Forward) represent more structurally growth-oriented directions.
The "growth driver" label distribution of newly purchased names supports this judgment: DMG Mori (capex cycle), Kasumigaseki Capital (real estate digitalization), Mani (medical device globalization), and eGuarantee (credit infrastructure) — corresponding respectively to automation, datafication, medical exports, and fintech, four growth themes rather than a single style bet.
The report explicitly notes that the fund used the revised market cap ceiling to buy multiple companies exceeding ¥15 billion in market value. This is glossed over in one sentence, but its strategic significance cannot be underestimated:
Given the new co-manager took office in May 2025, this adjustment was almost certainly an institutional supporting measure during the transition — it provides the necessary operational space for the new investment framework.
Class C (institutional/low-fee tier) recorded a 17.03% return in FY2026, outperforming Class A (15.29%) by 1.74 percentage points. Digging into the data:
| Share Class | Ongoing Charges | FY2026 Return | Three-Year Cumulative NAV Growth | Share Count Change (YoY) |
|---|---|---|---|---|
| Class A (retail) | 1.55% | +15.29% | +16.78% | -48.3% |
| Class B (adviser tier) | 0.65% | +16.33% | +18.90% | -27.3% |
| Class C (institutional tier) | 0.05% | +17.03% | +20.34% | -18.0% |
This set of data reveals two key signals:
1. The impact of fees on long-term compounding: The three-year cumulative return gap between Class C and Class A is 3.56 percentage points, almost entirely explained by the 1.5 percentage point annual fee differential. Low fees are not merely a cost advantage; they are a source of long-term alpha.
2. Investor redemptions show "inverse stratification": Class A's share count halved (-48.3%) while Class C fell only 18%. This shows that during manager transitions and performance volatility, retail investors are more likely to leave while institutional investors show greater stickiness. This also explains why total net assets fell from approximately £130 million to £116 million — the fund continued to face scale contraction pressure even during a performance recovery.
The top ten holdings together account for approximately 34.2% and exhibit three characteristics:
This structure indicates that the fund's definition of "Japanese smaller companies" is tilting toward technology-intensive manufacturers and digital service providers, while compressing traditional consumer names to historical lows.
The core incremental value of the data in this section lies in revealing the complete logic chain of the portfolio reconstruction in the first year after the manager transition: from exit mechanisms (triple liquidation discipline) to entry mechanisms (market cap ceiling revision + multi-growth-driver themes), to sector rebalancing (significant increase in IT, significant reduction in consumer staples), and finally through share class data revealing the subtle interaction between investor behavior and fee structure. This series of actions is not a simple style switch, but a systematic upgrade of the Japanese small-mid cap investment framework — placing greater emphasis on global competitiveness, digital penetration, and technological moats, while reducing sole reliance on domestic consumption dynamics.
Beyond performance, the details of the financial statements further confirm the fund's state of "shrinking scale but improving cost efficiency." The following expands from four dimensions — fund flows, fee structure, tax treatment, and transaction costs — adding observations not previously covered.
Despite a 17.03% return in 2026, the fund's net assets fell from £130.3 million at the start of the period to £116.0 million at the end, a decline of 11.1%. The core reason: net redemptions of £33.17 million, representing 25.5% of opening net assets, far exceeding capital gains (£17.73 million) over the same period. Compared to 2025's net redemptions of £66.61 million, cumulative redemptions over two years approach £100 million, reflecting investors' persistently weak confidence in the Japanese small-cap strategy after the 2024 losses.
| Fund Flow Item | 2026 (£'000) | 2025 (£'000) |
|---|---|---|
| Share issuance proceeds | 1,553 | 4,348 |
| Share redemption payments | (34,727) | (70,961) |
| Net redemptions | (33,174) | (66,613) |
Notably, subscriptions in 2026 fell 64% YoY while redemptions fell 51%. This indicates that after the performance rebound, new capital did not return while existing capital continued to exit — sentiment recovery has been slow. The unchanged share count (100 shares) may represent a "per 100 shares" accounting basis, but the actual share count can be inferred to have shrunk substantially from the NAV changes.
Annual management fees fell from £616 thousand to £448 thousand, a decline of 27.3%, better than expected relative to the average asset base contraction (approximately 18%), showing some elasticity in cost control. Operating charges fell from 0.06% to 0.05%, and direct transaction costs remained at the extremely low level of 0.02%. However, the ACD noted in the notes: as of April 30, 2024, they consider the indicative ongoing charges figure for Class A Shares to be 1.53%. This figure is far higher than the operating charges shown in the report, likely encompassing portfolio transaction costs, dilution adjustments, and other hidden fees. Investors reading the financial statements should avoid focusing only on the superficially low expense ratio while ignoring total holding costs.
| Fee Metric | 2026 | 2025 | YoY Change |
|---|---|---|---|
| Management fee (£'000) | 448 | 616 | -27.3% |
| Operating charges | 0.05% | 0.06% | -0.01pct |
| Direct transaction costs | 0.02% | 0.02% | Flat |
| Average portfolio dealing spread | 0.14% | 0.15% | Narrowed |
No corporation tax was incurred this year, mainly because dividend income is untaxed and deductible expenses far exceed taxable income. Overseas withholding tax fell from £266 thousand to £197 thousand, in line with lower dividend income. But the key issue is that excess management expenses have accumulated to £32.66 million (2025: £32.16 million). This amount represents 28.2% of closing net assets, meaning even if the fund generates taxable profits in the future, it would take substantial time to absorb these unrecognizable losses. Since the fund does not expect to generate taxable income exceeding deductible expenses in the foreseeable future, this asset has never been recognized on the balance sheet. This is effectively a potential erosion of shareholder equity that investors often overlook.
Total stock sales in 2026 were £49.64 million, far exceeding purchases of £19.20 million, with net selling of approximately £30.44 million directly related to redemption pressure. Despite the high trading volume, transaction costs remained extremely low (commissions of 0.05% of principal on buys / 0.03% on sells), and the average spread narrowed from 0.15% to 0.14%, indicating the Japanese small-cap market maintained good liquidity even under selling pressure. Closing investment assets were £115.0 million, representing 99.2% of net assets, showing the fund was nearly fully invested; net cash and bank deposits were only £1.1 million (after overdrafts). High gross exposure amplified gains in the rebound, but also means there is no buffer if the market reverses.
Dividend income fell from £2.66 million to £1.97 million, a 26% decline exceeding the asset base contraction, suggesting the portfolio's proportion of high-dividend names may have decreased or companies cut dividends. Bank interest income fell from £1 thousand to zero. Total distributions fell from £1.73 million to £1.28 million, but notably, retained distributions on accumulation shares were £1.03 million, representing 80.6% of total distributions, indicating most investors chose automatic reinvestment rather than cash dividends — which to some extent slowed the pace of scale shrinkage.
| Income Source | 2026 (£'000) | 2025 (£'000) | Change |
|---|---|---|---|
| Overseas dividends | 1,974 | 2,662 | -25.8% |
| Bank interest | - | 1 | -100% |
| Net capital gains/losses | 17,727 | 989 | +1,692% |
One observation: the ratio of net capital gains/losses to net distributions surged from 0.57x in 2025 to 13.9x in 2026. The fund has essentially transitioned from "income type" to "growth type," consistent with the macro backdrop of improving earnings and released price elasticity in Japanese small companies.
The following is an entirely new supplementary analysis of Baillie Gifford Pacific Fund from the continuation, focusing on comparison with the previously discussed Japanese Small Cap fund, performance data decomposition, and the implicit contradictions in the holding strategy.
Unlike the Japanese small-cap fund's single-country focus and size constraints, the Pacific Fund extends its geographic scope to the entire Asia (ex-Japan) and Australasia region, with no restrictions on company size or industry. Its benchmark is the MSCI AC Asia ex Japan Index, also measuring excess returns on a rolling five-year basis. This "broader geography + broader selection universe" design means the fund's risk sources are more diversified: it must contend with policy shocks in individual countries (such as China) while also bearing the sensitivity of the entire regional market to global trade and technology cycles.
One notable detail: the policy explicitly permits indirect investment through collective investment schemes and retains monetary market instruments. This gives the manager flexibility in position management, but may also introduce an additional layer of fees and counterparty risk. By contrast, the Japanese small-cap fund places greater emphasis on the purity of direct equity holdings.
The risk and reward indicator table places the fund at level 4 ("typically medium"), but the investment report discloses a five-year annual return sequence of extreme volatility — single-year returns can swing between -12.7% and +70.1%. This amplitude clearly diverges from the intuitive sense of "medium risk." In particular, the past year's 70.1% return versus the benchmark's 46.5% represents excess return concentrated in the semiconductor cycle and AI boom — a classic "event-driven rally." Once AI capex slows, the fund may face mean-reversion pressure.
| Metric | Pacific Fund B Acc | MSCI AC Asia ex Japan |
|---|---|---|
| 1-year return | 70.1% | 46.5% |
| 5-year (annualized) | 7.0% | 6.4% |
On a five-year annualized basis, the fund outperformed the benchmark by only 0.6 percentage points, yet led by 23.6 percentage points in a single year. This indicates the fund's long-term excess return is highly dependent on the recent one-year explosion; the preceding four years likely faced sustained pressure (the chart shows negative periods). This "concentrated holdings + high volatility" feature is precisely the realistic footnote to the active warning in the investment objective about "long-term underperformance risk."
The report describes the backdrop as "Asian markets recorded very strong positive returns despite trade tensions and geopolitical conflicts." This was driven by two structural engines: first, the surge in global AI infrastructure investment lifting semiconductor hardware producers in Korea and Taiwan; second, China's valuation recovery driven by policy stimulus and indigenous innovation (such as new energy and robotics).
But two cautions are needed: first, semiconductors are a highly cyclical industry, and current price increases stem from memory shortages — a short-term supply-demand imbalance; second, the China market's rally may be driven by sentiment and policy, with the persistence of corporate earnings improvement yet to be verified. Combined, these imply the "quality" of the fund's performance must be re-examined at the individual stock level.
Samsung went from a core detractor last period to the top contributor this period, driven by:
This case fully demonstrates the explosive power of active stock selection at industry inflection points, but also implies the risk of over-reliance on a single company's earnings elasticity.
TSMC already exceeds 15% of the index weight, but regulatory rules cap any single stock holding at 10%, forcing the fund to remain significantly underweight despite its bullish view on TSMC. This is the typical friction cost of active management under diversification rules — index investors get full weight exposure instead. To compensate, the fund increased holdings in other semiconductor ecosystem suppliers (equipment, consumables, back-end packaging, etc.), attempting to "indirectly capture" industry prosperity, but these substitute names' earnings transmission chains may be less direct than TSMC's.
SK Square's core asset is its equity stake in Korean memory leader SK Hynix. By holding this holding company, the fund effectively gains indirect exposure to the HBM supercycle at a discount, while also benefiting from the large-scale buyback launched in April 2025 that enhances per-share value. This structural strategy is more elastic than holding SK Hynix directly, but also introduces governance risk at the holding company level and NAV discount volatility.
The report explicitly states that India's macro outlook remains attractive, but company valuations are "demanding relative to growth prospects," hence maintaining an underweight. This reflects the fund's adherence to bottom-up valuation discipline, refusing to chase short-term momentum. However, if the Indian market continues to raise its valuation center through structural reforms, the underweight could become a relative drag in coming years. This is another "opportunity cost" that active strategies must bear.
| Dimension | Pacific Fund | Japanese Smaller Companies Fund |
|---|---|---|
| Benchmark | MSCI AC Asia ex Japan | Japanese small-cap related index (e.g., MSCI Japan Small Cap) |
| Geographic concentration | Multiple Asian countries, single-country weight capped | Single country |
| Primary risk sources | China policy risk, semiconductor cycle, FX | Japanese domestic demand, FX, small-cap liquidity |
| Current core drivers | AI, semiconductor supply cycle | Japanese structural reform (governance improvement) |
| Currency exposure | Yen plus KRW, TWD, CNY, INR, etc. | Primarily yen |
Both funds share Baillie Gifford's active growth style, but the Pacific Fund faces a more complex currency mix and geopolitical variables, while the Japanese small-cap fund can conduct deeper research within a single country. The two may complement each other in a portfolio, but purely on this year's results, the Pacific Fund clearly benefited from a broader technology cycle resonance.
1. Performance sustainability: A one-year 70.1% return is built on a combination of semiconductor shortages and AI bubble expectations; if inventory replenishment ends or large customer orders disappoint, the pullback could be equally violent;
2. The cost of passive constraints: The forced underweight in TSMC prevents the fund from fully sharing in the best company's growth, forcing detours through other suppliers, which raises tracking error;
3. Geopolitical and valuation mismatches: Directional stances on China (overweight) and India (underweight) must withstand testing through both policy cycles and liquidity cycles.
Overall, beneath the investment report's optimism, one should retain a clear-eyed awareness of cycle reversals and structural constraints.
Following the Introduction, the fund's annual report discloses complete portfolio changes and performance data, revealing that the strategy adjustment is far more dramatic than the main text suggests. The following supplements new evidence from three dimensions: structure, allocation, and trading behavior.
| Metric | FY2026 | FY2025 | FY2024 |
|---|---|---|---|
| Class A return | +67.12% | -8.49% | +13.50% |
| Class B return | +68.54% | -7.71% | +14.48% |
| Class A closing NAV (pence) | 1,584.39 | 948.05 | 1,035.98 |
| Class B closing NAV (pence) | 1,926.86 | 1,143.24 | 1,238.69 |
| Class A direct transaction costs/share | 2.36 | 1.03 | 1.01 |
This reversal was driven almost entirely by semiconductors and AI hardware. Korea and Taiwan weights rose from approximately 25% to 43.4% within one year, becoming the absolute performance engine. Notably, direct transaction costs rose 129% YoY, reflecting substantial rebalancing during extreme volatility rather than simple holding.
| Region | 2026 Weight | 2025 Weight | Change |
|---|---|---|---|
| China | 35.16% | 39.73% | -4.57pct |
| Korea | 25.10% | 10.78% | +14.32pct |
| Taiwan | 18.30% | 13.80% | +4.50pct |
| India | 5.74% | 16.31% | -10.57pct |
| Hong Kong | 4.55% | 0.93% | +3.62pct |
| Vietnam | 3.90% | 9.56% | -5.66pct |
| Singapore | 1.59% | 4.44% | -2.85pct |
The surge in Hong Kong weight was driven by new positions including ASM Pacific (semiconductor packaging equipment), Futu (fintech), Lightelligence (photonic computing chips), Wasion (smart meters), and Zijin Gold International — spanning AI infrastructure, finance, and gold, showing the fund seeking "tech + real assets" intersections via the Hong Kong market alongside its Northeast Asia tech theme.
The significant reductions in India and Vietnam are not due to fundamental deterioration, but look more like an active "valuation shift": when Korea/Taiwan memory and foundry names receive earnings upgrades in the AI capex cycle, the fund prefers to allocate to higher-earnings-visibility markets. Notably, although India's weight fell to 5.74%, it remains the largest emerging market position outside Northeast Asia, with new positions in Meesho and MakeMyTrip preserving long-term options on Indian local consumption and travel internet.
Among the top ten holdings, semiconductor-related names account for approximately 36% of total fund assets (calculated as Samsung Group 11.52% + TSMC 9.30% + SK Square 8.47% + Mediatek 3.90% + SK Hynix 3.02%). Adding ASM Pacific, Accton, Chroma, Montage Technology, and others, the share approaches 45%. This is a highly concentrated allocation along a single technology chain.
The Largest Purchases and Largest Sales reveal exquisite internal rotation:
| Direction | Name | Amount (£'000) |
|---|---|---|
| Largest purchase #1 | SK Square | 112,522 |
| Largest purchase #2 | CNOOC | 105,654 |
| Largest purchase #3 | SK Hynix | 96,448 |
| Largest sale #1 | TSMC | 121,726 |
| Largest sale #2 | SK Square | 115,740 |
| Largest sale #3 | Samsung Electronics | 108,829 |
SK Square appears in both the largest purchases and largest sales, indicating the fund traded around positions or adjusted strategy. SK Square is an intermediate holding company of the SK Group, holding approximately 20% of SK Hynix plus other semiconductor and ICT assets. By holding both SK Hynix and SK Square directly, the fund achieves dual exposure to memory: enjoying SK Hynix's own earnings elasticity while also obtaining the valuation leverage from SK Square's stake in SK Hynix. In contrast, TSMC, despite being the largest sale, remains the second-largest holding at 9.30%, indicating the fund is only partially realizing profits, not bearish on foundry.
Another interesting detail: selling Samsung Electronics common stock worth £108.8 million while buying Samsung Electronics common stock worth £75.3 million, and also selling Samsung Electronics preferred stock worth £49.68 million. These "sell common, buy preferred" or reverse maneuvers may aim to adjust capital gains, dividend tax structures, or arbitrage common/preferred price differentials. Either way, the Samsung group's overall weight remains as high as 11.52%, making it the largest cluster in the portfolio.
New positions in MMG, Zijin Mining, Chifeng Gold, Silvercorp, PT Vale, and other metals/mining names, combined with energy transition names like CNOOC, CATL, and Sungrow, clearly increase the portfolio's exposure to real assets and global reflation. This change complements the semiconductor theme: semiconductors capture AI compute demand, while mining and energy capture the materials and energy consumption of AI infrastructure construction. MMG's copper, Zijin's gold/copper, Chifeng's gold, PT Vale's nickel (battery materials), and Silvercorp's silver (used in photovoltaics) are essentially upstream resources for "electrification + intelligence." This "tech + resources" dual-wheel structure may be an intentional hedge the fund introduced amid high concentration risk.
Net other assets moved from -0.54% to +1.99%, meaning the fund holds approximately £74.4 million in net cash or equivalents, about 2% of total assets. This provides a small buffer against potential drawdowns and also suggests the manager is not using unlimited leverage for a one-way bullish bet — retaining some defensiveness in an extremely crowded semiconductor trade.
Additionally, the portfolio still contains dead positions like Eden Biologics, suspended for a long time with value written to zero, and Embassy Developments with suspended valuations, indicating some historical legacy issues remain alongside active management. But overall, the FY2026 portfolio changes represent a clear, decisive strategic reallocation: sharply toward Northeast Asia AI hardware and resources, while sharply reducing South Asia and Southeast Asia exposure. This combination of simultaneously rising concentration and turnover is quite rare among Asia-Pacific growth funds, and ensures future performance will be highly sensitive to the semiconductor cycle.
Among the multiple share classes disclosed in this section, Class C and Class W3 have extremely small asset sizes, in sharp contrast to Class A/B:
| Share Class | Closing NAV (£'000) | Closing Shares | Operating Charges | 2026 Return |
|---|---|---|---|---|
| A Income | 191,655 | 13,215,062 | 0.70% | 68.55% |
| B Income | 3,545,041 | 183,980,254 | 0.70% | 68.55% |
| C Accumulation | 2 | 100 | 0.05% | 69.64% |
| C Income | 15 | 1,000 | 0.05% | 69.65% |
| W3 Accumulation | 1 | 60 | 0.70% | 9.76%* |
| W3 Income | 1 | 75 | 0.70% | 9.76%* |
*W3 Shares were only issued on March 16, 2026, i.e., approximately six weeks prior.
Despite Class C's far lower fee rate than A/B (0.05% vs. 0.70%), its actual asset scale is almost negligible — C Acc has only 100 shares and C Income only 1,000 shares, typical "shell share classes" or legacy institutional categories. The W3 classes total just 135 shares on both sides combined, more like channel seed capital. This indicates the fund's primary assets remain concentrated in retail A/B classes, and the new classes have not yet contributed meaningful scale.
The FY2026 performance gap between Class C and A/B is approximately 1.1 percentage points, higher than the fee differential (0.65 percentage points):
| Comparison | B Income | C Income | Difference |
|---|---|---|---|
| 2026 Return after charges | 68.55% | 69.65% | +1.10 pp |
| Operating charges | 0.70% | 0.05% | −0.65 pp |
| 2025 Return | −7.70% | −7.10% | +0.60 pp |
| 2024 Return | 14.49% | 15.25% | +0.76 pp |
Class C's excess return is persistent and widening year over year. Beyond the compounding effect of fee differences, it may also be because Class C's cash flow structure differs — the large retail subscription/redemption flows in A/B classes create some NAV dilution or management friction costs, while Class C has almost no cash flow interference. This suggests: under the same underlying portfolio, the long-term compounding advantage of low-fee shares can be very significant.
The fund's asset growth did not bring proportional income growth; instead, income declined significantly:
| Item | 2026 (£'000) | 2025 (£'000) | Change |
|---|---|---|---|
| Revenue | 39,579 | 55,333 | −28.5% |
| Expenses | 19,646 | 21,505 | −8.6% |
| Net revenue after taxation | 16,303 | 28,464 | −42.7% |
| Average NAV (approximate) | 3,082,835 | 2,822,204 | +9.2% |
| Revenue / Average NAV | 1.28% | 1.96% | −0.68 pp |
The revenue yield fell from 1.96% to 1.28%, indicating the fund's dividend and interest yield thinned considerably in FY2026. Combined with large capital gains, this is a typical "low dividend, high capital appreciation" year, and may also reflect the portfolio migrating toward lower-dividend growth names.
Notably, while average assets rose approximately 9%, Expenses actually fell 8.6%. Possible explanations include: a slight fee rate reduction (0.71%→0.70%), adjustments to certain performance-related fees, and changes in fee attribution across share classes. But the direction of declining absolute expenses contradicting asset growth warrants investors looking further into the Fund charges notes for potential reversals of fee accruals or one-off factors.
Investment portfolio trading volume expanded significantly in FY2026, with turnover rising from approximately 73% to 111%:
| Metric | 2026 | 2025 |
|---|---|---|
| Gross purchases (£'000) | 1,603,650 | 762,937 |
| Gross sales (£'000) | 1,830,017 | 1,298,087 |
| Portfolio turnover (approx.) | 111% | 73% |
| Direct transaction costs / avg NAV | 0.19% | 0.10% |
| Average portfolio dealing spread | 0.15% | 0.16% |
The rise in transaction costs came from increased trading volume rather than deteriorating per-transaction costs. Breaking down the composition reveals an interesting detail — a highly asymmetric tax structure between purchase and sale sides:
| Transaction Cost Component | Purchases (£'000) | % of Principal | Sales (£'000) | % of Principal |
|---|---|---|---|---|
| Commissions | 1,352 | 0.08% | 1,043 | 0.06% |
| Taxes | 472 | 0.03% | 2,392 | 0.13% |
Taxes on the sale side were more than 5x those on the purchase side, reflecting the high transaction taxes levied by Asia-Pacific markets (such as India's STT and Hong Kong's stamp duty) on stock sales. In high-turnover years, this hidden tax burden noticeably amplifies the drag on fund performance.
The dilution adjustment is also worth attention: 2026 net redemptions were £147 million, far below 2025's £572 million, but dilution adjustment income fell only from £2.84 million to £2.49 million, a decline far smaller than the redemption reduction. Translated, the dilution charge per unit of net redemption rose from 0.50% last year to 1.69%. This indicates that in a less liquid market environment, redemptions impose higher impact costs on remaining shareholders, and the fund used the dilution adjustment to protect the interests of existing investors.
As of April 30, 2026, the fund's investment assets represented 98.0% of total assets (vs. 100.5% last year), essentially maintaining full investment. But the cash position changed notably:
| Item | 2026 (£'000) | 2025 (£'000) |
|---|---|---|
| Cash and bank balances | 80,308 | 36,856 |
| Bank overdrafts | (14,513) | (23,495) |
| Net cash | 65,795 | 13,361 |
| Net cash / NAV | 1.76% | 0.55% |
| Debtors | 27,047 | 6,990 |
The net cash ratio rose from 0.55% to 1.76%, while Debtors jumped from £6.99 million to £27.05 million (+287%), indicating significant unsettled redemptions or sales proceeds pending at year-end (possibly redemption payables or receivables from sold securities). This explains why the fund held substantial cash while maintaining a bank overdraft — a normal mismatch within settlement cycles, though the net cash position is nevertheless positive.
The Statement of Total Return shows FY2026 net revenue after taxation of £16.303 million, while distributions were £16.309 million — a distribution rate of approximately 100.04%, meaning the fund distributed all income and drew approximately £6 thousand from capital or prior retentions to maintain distributions. For a fund whose primary objective is capital appreciation, this "excess distribution" is trivial in scale, but it reflects the UK fund convention of distributing all distributable income.
Meanwhile, retained distributions on accumulation shares reached £15.142 million, indicating the vast majority of investors hold accumulation shares and automatically reinvest dividends. This aligns with the fund's "long-term growth" positioning.
This section paints a picture of a fund "growing amid net redemptions": although investors net redeemed approximately £147 million in FY2026, the fund's assets still jumped from £2.43 billion to £3.74 billion thanks to the 68.55% (Class B) strong return. Trading activity rose significantly, as did transaction costs and tax burdens; weakness on the income side mirrored abundance on the capital side. For holders, two things merit close attention: first, whether the performance gap between the low-fee Class C and A/B classes will continue to widen; second, whether the transaction taxes from high turnover (especially sales-side taxes) will erode performance when markets turn weak.
Income declined across the board this year, with declines significantly exceeding those on the expense side, sharply reducing the fund's distributable earnings:
| Item | 2026 (£'000) | 2025 (£'000) | YoY Change |
|---|---|---|---|
| Overseas dividends | 39,189 | 54,604 | -28.2% |
| Bank interest | 390 | 729 | -46.5% |
| Total income | 39,579 | 55,333 | -28.5% |
| Total expenses | 19,646 | 21,505 | -8.7% |
| Net income (after tax) | 16,303 | 28,464 | -42.7% |
The fund's income is highly dependent on overseas dividends, and the decline in dividend income exceeded 20%. Combined with bank interest nearly halving, the cash return capacity of underlying holdings has weakened significantly. Meanwhile, although expenses also contracted, rigid costs amplified the attenuation in net income. Ultimately, total distributions fell from £28.4M to £16.3M, a direct blow to investors relying on income share classes (such as B Income) for cash flow.
The unrecognized deferred tax asset corresponding to excess management expenses increased from £107.96M to £127.22M, up 17.8%. Although shareholders currently bear no corporation tax due to tax-exempt dividends, this portion of excess expenses cannot be realized as future tax deductions — because the fund does not expect to generate sufficient taxable income. This effectively means the fund's continuously accumulating "tax losses" lack prospects for utilization, which may reduce the fund's capital allocation efficiency over the long term — especially if the fund generates non-exempt income (such as interest or capital gains taxes) in the future, it could still be partially utilized, but management's current judgment is that this is unlikely to materialize.
Cash balances rose from £36.9M to £80.3M (+117.8%). Bank overdrafts declined from £23.5M to £14.5M, but the fund still maintains an overdraft position. This "cash + overdraft" combination allows flexible adjustment of net exposure when liquidity is ample, but also hints that the manager may be waiting for market opportunities or holding significant unsettled trades. Notably, uncollected sales proceeds rose from £6.1M to £15.1M, while payables for unsettled purchases rose from £6.1M to £11.9M, showing intensive rebalancing around the period end. Net cash jumped from £13.4M to £65.8M, with cash representing approximately 1.8% of total assets — relatively high — which may partly explain why the fund maintained smooth operations despite falling dividends.
Level 3 (unobservable input valuation) assets expanded from £44K to £13.23M, a more than three-hundred-fold increase. While the absolute share remains small (approximately 0.36%), this change deserves attention. It indicates the fund newly invested in assets lacking active market quotes — possibly private equity, unlisted growth companies, or liquidity-restricted securities. Valuations of such assets rely on management assumptions and models, carrying subjectivity; if market conditions deteriorate, fair values could face sharp downward revisions. At the same time, the increase in Level 3 assets is consistent with the fund's "Pacific growth" theme extending into earlier-stage, non-public market investments.
The currency exposure changes clearly reveal the fund's regional allocation shift:
| Currency | 2026 Total Exposure (£'000) | 2025 Total Exposure (£'000) | Change |
|---|---|---|---|
| Korean won | 938,590 | 238,119 | +294.2% |
| New Taiwan dollar | 735,548 | 364,415 | +101.8% |
| Chinese yuan | 420,884 | 151,089 | +178.5% |
| Indian rupee | 163,163 | 347,637 | -53.1% |
| Vietnamese dong | 128,399 | 205,839 | -37.6% |
| US dollar | 504,159 | 382,203 | +31.9% |
Korean won exposure nearly tripled, surpassing the Hong Kong dollar to become the largest currency risk source. This is very likely the result of the fund increasing its Korea technology and industrial positions. Indian and Vietnamese assets were significantly reduced, suggesting the manager's assessment of local market valuations or growth prospects diverged. The Korean won's volatility against sterling has historically been high, and the concentration of currency exposure will amplify the fund's sterling-denominated NAV volatility.
Per-share distributions for Class B declined across the board: B Accumulation fell from 11.16p to 8.23p, B Income from 8.52p to 6.23p, declines of 26.3% and 26.9% respectively. Class C also fell approximately 5%-7%. Class A made no distribution at all in 2026, with both Group 1 and Group 2 at zero. Class A's share count is tiny (fewer than 300 thousand shares at the start), and its net income may be insufficient to support distributions due to a different management fee structure. Class W3 is a new class with no comparable prior period, but its distribution is far lower than other classes, suggesting it targets specific channels or fee arrangements.
The capital gains tax provision on the balance sheet fell sharply from £14.0M to £2.9M. This item typically corresponds to deferred tax liabilities on unrealized capital gains (in certain jurisdictions). Its decline may reflect two possibilities: first, the fund realized large gains before year-end, converting deferred tax liabilities into current tax (though no corresponding tax payment appears in the income statement); second, the portfolio experienced unrealized losses, significantly reducing future capital gains tax obligations. Combined with the rapid growth in Korean won and New Taiwan dollar exposure, the fund may have trimmed some long-term loss-making assets at high levels, causing the capital gains tax provision to fall.
The General Information section clarifies the triggers for dilution adjustment: large net subscriptions or redemptions, exceeding specific thresholds, and other circumstances the ACD deems necessary. The current policy requires dilution adjustments on all share issuances or cancellations, meaning investors actually bear the bid-ask spread and transaction costs on subscription/redemption rather than having existing shareholders "implicitly subsidize" them. This practice ensures NAV is not eroded by fund flows. But with multiple consecutive years of net redemptions (Class B shares substantially reduced), the dilution adjustment effectively makes exiters bear all liquidity costs while protecting remaining investors' interests.
The ACD and related parties held 0.00% of the fund's shares (also 0.00% in 2025). This is not unusual, but the persistent zero indicates the manager has not invested its own capital in the fund to signal confidence. Against the backdrop of divergent performance and net share outflows, some institutional investors may interpret this as a weak signal of insufficient interest alignment.
The previous section covered the basic principles of dilution adjustment, but this section reveals an operational detail often overlooked: the ACD sets daily net inflow/outflow thresholds; once daily net flows exceed the threshold, the dilution adjustment is scaled up. This creates a structural contradiction:
This "daily aggregation, uniform pricing" mechanism essentially treats all traders on the day as one average impact portfolio rather than distinguishing trade by trade. For ordinary retail investors, individual trade sizes may be far below the market impact threshold, yet they may still indirectly bear higher bid-ask spreads due to institutional flows. The table below compares cost attribution under different scenarios:
| Scenario | Trade Size | Daily Sub-Fund Net Flow | Threshold Triggered? | Actual Adjustment Cost Borne |
|---|---|---|---|---|
| Retail investor A | Small subscription | Net inflow exceeds threshold (due to large institutional subscription) | Yes | High adjustment, not caused by own action |
| Institutional investor B | Large subscription | Net inflow exceeds threshold (self-driven) | Yes | High adjustment, but own cost |
| Retail investor C | Small subscription | Net inflow below threshold | No | Low or zero adjustment |
| Redemption side analogous | Small redemption | Net outflow exceeds threshold | Yes | Higher adjustment (greater price reduction) |
This design helps protect long-term holders, but also means investors trading on the same day have convergent marginal costs even when their investment behaviors are completely different. On transparency, the document explicitly admits "it is impossible to predict when adjustments will be made," making cost prediction difficult for small investors, who in effect face uncertainty of "only knowing the cost after the fact."
This section makes clear: dilution adjustments proportionally affect the dealing prices of all share classes within the same sub-fund at equal percentages. This is an important fairness design — different share classes (such as Class A, C, N, W), despite different fee rates and different dealing price bases, receive the same adjustment percentage, avoiding artificial arbitrage opportunities from class differences.
The document also notes that "when the Company neither issues nor redeems shares on a given dealing day, the sub-fund's price will not include any dilution adjustment." This means adjustments are triggered only when actual net flows occur. Unlike many open-ended funds with "permanent swing pricing," this fund adopts conditional swing pricing, which only takes effect when net flows exceed the threshold, preserving zero impact on normal trading.
This section reveals an important detail in the "Stamp Duty Reserve Tax" portion: under normal circumstances, shareholder share redemptions do not trigger SDRT, but if redemptions are made as "non-pro rata in-specie distributions," SDRT may be triggered. This provision transfers the tax risk of in-specie redemptions directly to investors, with practical implications:
This section clarifies two key time boundaries:
This "grandfather existing, restrict new" pattern is common in share class consolidation processes, but it is worth noting: existing Class A holders who sell and then repurchase may lose their exemption and be barred from re-entry. This is not directly stated in this section, but combined with the "written agreement" requirement, it can be inferred that secondary purchases may no longer automatically qualify. Furthermore, all share classes have equal rights upon liquidation, indicating eligibility restrictions do not affect payment priority — only subscription channels.
This section details that the ACD is required to provide HMRC with information on shareholder identities, tax residencies, payments made, and disposal proceeds, which HMRC may forward to tax authorities in other jurisdictions. This is a direct manifestation of the automatic exchange of information (AEOI) framework at the fund level, particularly related to CRS (Common Reporting Standard) and FATCA. Operational details worth noting:
This section provides a clear tax explanation of the equalisation mechanism for Group 1/Group 2 shares:
This mechanism balances income distribution fairness between new and old investors, but may create a tax planning "trap": if an investor holds shares for a short period before the distribution and redeems, the equalisation payment received is tax-free as a return of capital, but the reduced cost basis may result in higher capital gains tax. Additionally, the document mentions that the ACD applies an "income equalisation-like" mechanism for conversions (such as between share classes) to ensure fair treatment between converters and other shareholders — meaning distribution timing differences at conversion can be smoothed, avoiding conversion being used to extract unreasonable benefits.
The final section emphasizes that the ACD and investment adviser, when facing potential conflicts of interest with other clients and other funds, must simultaneously consider "fiduciary duties to the company" and "responsibilities to other clients." This statement actually confirms the existence of dual obligations — conflict management is not about absolutely avoiding conflicts of interest, but requiring fair treatment and ensuring shareholder interests are not harmed by internal business elsewhere. Specific arrangements include:
The document also notes the Depositary may serve as depositary or trustee for other companies or funds, meaning the custodian itself also carries multiple duties, relying on internal mechanisms such as new business adoption and conflict-of-interest registers for management.
| Dimension | Small Retail Investor | Institutional Investor (Contractual Arrangement) |
|---|---|---|
| Share class selection | No agreement; may be unable to newly purchase Class A (requires grandfathered holding) | Can obtain Class A/C/N/W through agreements |
| Dilution adjustment impact | May passively bear adjustment costs from large flows | Own trades may trigger adjustment; costs controllable |
| Tax reporting obligations | Must submit self-certification and tax identification number | Must submit entity and controlling person information; higher compliance costs |
| In-specie redemption taxation | Must watch for SDRT on non-pro-rata distributions if choosing in-specie | More likely to choose in-specie redemptions; requires dedicated tax assessment |
| Equalisation mechanism | Affects tax treatment of first distribution | Affects cost basis management for large investments |
This section reveals a series of refined designs in fund governance: the threshold mechanism for dilution adjustments, the tiering of share class eligibility, the extension of tax reporting, the capital nature of equalisation, and the dual obligations of conflict management. Together, these provisions build a framework oriented toward protecting long-term shareholders while imposing differentiated costs and compliance requirements on different investors. If investors fail to fully understand these mechanisms before subscribing, they may face passively increased costs, misjudged tax treatments, or restricted share class access.
The FCA ESG sourcebook translates the TCFD recommendations into a dual-track requirement of entity reporting + product reporting. This document reveals an easily overlooked operational detail:
Class W's fee design is not a simple discount, but a piecewise linear pricing on asset size tiers, with significantly different tier intervals across funds. The table below summarizes all funds with tiered fees (including complete data from the footnotes):
| Fund | Threshold Trigger | Fee Tiers (full rate applied after threshold) | Minimum Effective Fee |
|---|---|---|---|
| Baillie Gifford American | £100m | 0.50% / 0.40% / 0.30% / 0.25% / 0.20% | 0.20% |
| Emerging Markets Leading Companies | £100m | 0.72% / 0.60% | 0.60% |
| Baillie Gifford Japanese | £100m | 0.60% / 0.50% / 0.40% / 0.35% / 0.30% | 0.30% |
| Baillie Gifford Pacific | £100m | 0.65% / 0.50% / 0.40% | 0.40% |
Key observations:
The currently disclosed Active Share data covers only three funds, yet an intuition-defying combination is already observable:
| Sub-fund | Active Share | Target Benchmark | Class A Fee |
|---|---|---|---|
| Baillie Gifford American | 76% | S&P 500 | 1.50% |
| Baillie Gifford China | 64% | MSCI China All Shares | 1.47% |
| Baillie Gifford Developed Asia Pacific | 78% | MSCI Pacific | 1.40% |
Assuming other undisclosed funds (such as Emerging Markets Growth) may have similar data, only these three rows currently appear in the table. Analysis shows:
This document shows "Baillie Gifford Overseas Growth Funds ICVC April 2026" twice, with page numbers jumping from 285 to 287, with disclaimers and fee tables in between. This layout indicates the document is an annual update version, not an initial offering. Investors should pay particular attention to:
In summary, this section is not a simple legal appendix, but a composite information set spanning index licensing, climate disclosure, fee pricing, and active management transparency. Investors should treat it as an important signal for understanding product design philosophy, not as boilerplate text to be ignored.
The `Portfolio Turnover Ratio` disclosed in the continuation provides key quantitative evidence for understanding the trading behavior of each sub-fund. The calculation methodology is explicitly defined as "the lesser of monthly purchases and sales divided by month-average market value, summed over 12 months," which is more robust than a common single-period turnover ratio and smooths seasonality and short-term fluctuations. According to the disclosed data:
| Sub-fund | Portfolio Turnover Ratio |
|---|---|
| Baillie Gifford Japanese Smaller Companies Fund | 15% |
| Baillie Gifford Japanese Fund | 18% |
| Baillie Gifford Emerging Markets Growth Fund | 25% |
| Baillie Gifford Developed Asia Pacific Fund | 27% |
| Baillie Gifford China Fund | 27% |
| Baillie Gifford European Fund | 29% |
| Baillie Gifford American Fund | 37% |
| Baillie Gifford Global Discovery Fund | 37% |
| Baillie Gifford Emerging Markets Leading Companies Fund | 44% |
| Baillie Gifford Pacific Fund | 46% |
Key observations:
1. Japanese funds have notably low turnover (15% / 18%), highly consistent with the Japanese equity market's long-term holding culture and Baillie Gifford's consistently low-turnover strategy. Lower turnover means reduced transaction and impact costs at equivalent returns, and also signals the managers' stronger long-term conviction in core holdings.
2. Asia-Pacific and emerging markets show active turnover (Pacific 46%, EM Leading Companies 44%), noticeably higher. Possible reasons include frequent changes in emerging market index constituents, rebalancing needs from currency fluctuations, or capturing valuation mismatches in high-volatility environments. Notably, although both target emerging markets, `Emerging Markets Growth Fund` has a turnover of only 25%, significantly lower than `EM Leading Companies`' 44%, demonstrating clear divergence in portfolio management style even within the same regional strategy — the former emphasizes holding long-term growth names, while the latter is more active in individual stock selection and position adjustments.
3. Global Discovery Fund has a 37% turnover yet its overlap with the S&P Global Small Cap index is as high as 99% (see earlier data), indicating its holdings highly overlap index constituents while still trading actively. This suggests the fund's primary return source may be selecting different weight allocations and timing within the index rather than entirely non-consensus positions outside the index.
The "The Group's Funds" list reveals multiple product lifecycle management actions, which often reflect the firm's strategic responses to market conditions and investor demand:
Both changes remove "Income" or add "Growth," showing Baillie Gifford is repositioning these funds' core style as growth-oriented rather than income-distributing. This may be to avoid misleading investors (as actual dividend yields may be low) or to align with institutional clients' preference for capital appreciation.
The list shows the firm's fund products are organized under four ICVC (Investment Company with Variable Capital) umbrella structures:
| ICVC | Representative Sub-funds |
|---|---|
| Bond Funds ICVC | 4 funds (including 2 suspended) |
| Overseas Growth Funds ICVC | 10 funds (the main subject of this report) |
| Investment Funds ICVC | 8 funds (including 2 suspended) |
| Investment Funds II ICVC | 5 funds (including 2 suspended, 1 renamed) |
| UK & Balanced Funds ICVC | Not fully listed, but Managed Fund and others visible |
This cluster-style architecture facilitates shared operational infrastructure while isolating risk across different legal entities. For investors, when selecting funds across series, attention should be paid to differences in management fees, dividend policies, and investment scopes.
The end of the continuation provides complete contact information: the Edinburgh-based client relations team, toll-free phone, website, email, and fax. From `© Baillie Gifford & Co 2009` and the regulator designation (Financial Conduct Authority), this marketing material is a historical version, but current channels remain valid. The statement that phone calls may be recorded, and the existence of a fax channel, reflect a service philosophy accommodating both traditional and digital modes.
> Although this section is appendix-like in nature, it provides more "transparent" information than investment performance: the turnover ratio directly reflects the manager's actual operating frequency, and the dynamic changes in the fund list reveal product strategy trade-offs. For due diligence professionals, these data points are more useful than NAV curves for assessing the fund team's style stability and risk management capabilities.
| Instrument | Direction | Author's One-Sentence Stance | Key Data |
|---|---|---|---|
| Baillie Gifford Japanese Smaller Companies Fund | Not specified | Investment policy eased: market-cap ceiling changed to a variable amount, turnover limit removed, flexibility enhanced | Policy effective 2025-08-05; held by Developed Asia Pacific Fund: 61,412 shares, valued at 2,823 thousand pounds |
| Baillie Gifford Developed Asia Pacific Fund | Not specified | The only cross-holder in the entire complex; holds a small-cap fund from the same family, with a relatively modest amount | Holds 61,412 shares of Japanese Smaller Companies, valued at 2,823 thousand pounds |
| Baillie Gifford Japanese Fund | Not specified | Removes the target return; introduces a new fee schedule for W-class shares | Fee schedule effective 2026-04-05; target return removal effective 2026-02-02 |
| Baillie Gifford Emerging Markets Leading Companies Fund | Not specified | Removes the target return; launches W6-class shares | New share class 2025-11-03; target return removal effective 2026-02-02 |
| Baillie Gifford Pacific Fund | Not specified | Removes the target return; launches W3-class shares | New share class 2026-03-16; target return removal effective 2026-02-02 |
| Baillie Gifford American Fund | Not specified | Removes the target return, no longer promises a specific return level | Effective 2026-02-02 |
| Baillie Gifford China Fund | Not specified | Removes the target return | Effective 2026-02-02 |
| Baillie Gifford Emerging Markets Growth Fund | Not specified | Removes the target return | Effective 2026-02-02 |
| Baillie Gifford European Fund | Not specified | Removes the target return | Effective 2026-02-02 |
| Baillie Gifford Global Discovery Fund | Not specified | Removes the target return | Effective 2026-02-02 |