Baillie Gifford outlines investment strategy changes to address portfolio underperformance

In a recent meeting of the Lexington Police & Fire Pension Board, discussions centered around the performance and future strategies of their investment portfolio, particularly in light of ongoing market fluctuations and the impact of tariffs on various sectors. The atmosphere was charged with a mix of concern and cautious optimism as board members and investment managers reviewed the current state of their assets.

One of the key topics was the uncertainty surrounding tariffs and their implications for companies with extensive supply chains. An investment manager highlighted the adaptability of certain firms, using Techtronic, a power tool manufacturer, as a prime example. The company has successfully shifted its manufacturing from over 50% in China to less than 30% in the U.S. in response to tariff pressures. This nimbleness is what the board aims to capitalize on, focusing on companies that can adjust to changing market conditions rather than shying away from those affected by imports.

The board also examined the structure of their portfolio, which consists of 70 holdings categorized by growth potential. Approximately one-third of the portfolio is invested in "compounders," businesses expected to deliver consistent growth, while another third is in cyclical holdings. The remaining investments are split between rapidly growing companies and those that rely on acquisitions for growth. This diversified approach aims to mitigate risks and enhance returns over time.

Despite the strategic adjustments, the board acknowledged the underperformance of their investments in recent years. The investment managers expressed their commitment to turning this trend around, emphasizing the importance of learning from past mistakes. They noted that while some sectors, like internet platforms, are already showing signs of recovery, others, particularly in industrials, are still lagging. The managers are optimistic about the potential for growth in emerging markets, particularly as the global middle class expands.

As the meeting progressed, board members sought clarity on the timeline for a turnaround in performance. The investment managers were cautious in their responses, indicating that while they see promising signs, the recovery would likely be gradual and sector-specific. They reiterated their focus on quality growth businesses and the importance of adapting their strategies to the evolving market landscape.

In conclusion, the Lexington Police & Fire Pension Board is navigating a complex investment environment marked by uncertainty and change. With a commitment to adaptability and a diversified portfolio, they remain hopeful for a turnaround, even as they acknowledge the challenges ahead. The discussions reflect a broader narrative of resilience and strategic foresight in the face of economic fluctuations, underscoring the importance of informed decision-making in safeguarding the financial futures of those who serve the community.