UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-10145
BAILLIE GIFFORD FUNDS
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(Exact name of registrant as specified in charter)
1 Greenside Row, Edinburgh, Scotland, UK, EH1 3AN
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(Address of principal executive offices) (Zip code)
Angus N G Macdonald
1 Greenside Row, Edinburgh, Scotland, UK, EH1 3AN
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(Name and address of agent for service)
Registrant's telephone number, including area code: 011-44-131-275-2000
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Date of fiscal year end: December 31
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Date of reporting period: January 1, 2007 to December 31, 2007
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The registrant, an open-end investment company registered pursuant to Section
8(b) of the Investment Company Act of 1940 (the "Act"), has not filed a
registration statement that has gone effective under the Securities Act of 1933
(the "1933 Act") because beneficial interests in the registrant are issued and
sold solely in private transactions that do not involve any public offering
within the meaning of Section 4(2) of the 1933 Act. Accordingly, this report is
not filed under Section 13(a) or Section 15(d) of the Securities Exchange Act of
1934.
ITEM 1. REPORTS TO STOCKHOLDERS.
The registrant's annual report transmitted to shareholders pursuant to Rule
30e-1 under the Investment Company Act of 1940 is as follows:
|-------------------------------------------------------------------------
|
| BAILLIE GIFFORD
| EMERGING MARKETS FUND
| Annual Report
| December 31, 2007
INDEX
BAILLIE GIFFORD EMERGING MARKETS FUND
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PAGE NUMBER
MANAGEMENT DISCUSSION 1
FUND EXPENSES 4
EMERGING MARKETS FUND
Industry Diversification Table 6
Portfolio of Investments 7
Statement of Assets and Liabilities 11
Statement of Operations 12
Statements of Changes in Net Assets 13
Financial Highlights
Selected Data for Class I 14
Selected Data for Class III 15
Notes to Financial Statements 16
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 24
SUPPLEMENTAL INFORMATION 25
MANAGEMENT DISCUSSION
BAILLIE GIFFORD EMERGING MARKETS FUND
1) MARKET CONDITIONS AND REVIEW OF PERFORMANCE DURING 2007
2007 was the fifth consecutive year of strong returns from Emerging Markets
Fund. For the year ended December 31, 2007, the Emerging Markets Fund returned
46.6%, outperforming its benchmark, the MCSI Emerging Markets Index, which rose
39.8% over the year. Within this good absolute performance, Brazil, India and
China performed particularly strongly, though Taiwan and Mexico were notable
underperformers, Mexico being hurt by its proximity to a slowing US economy.
During the year, stock selection in South Korea, Russia, Malaysia and China made
the most notable contribution to relative performance, and at the sector level,
stock selection in Energy and Materials was particularly strong. In South Korea,
the overweight positions in Samsung Corporation (trade, engineering and
construction company), Samsung Heavy Industries (oil tanker & container ship
manufacturer) and not holding Samsung Electronics (which manufactures products
such as LCD screens), were strong drivers of relative performance. In Russia,
not holding oil exploration and production company Lukoil, and the overweight
position in Vimpel Communications (mobile phone company) helped. In China, Gome
Electrical Appliances (China's leading electronics retailer) and China Shenhua
Energy (China's largest coal producer) both performed well, and in Malaysia, IOI
Corporation (palm oil and rubber manufacturer) and Sime Darby (diversified
conglomerate) also helped.
Stock selection in Taiwan and Hong Kong was less successful. In Taiwan, TSMC
(semiconductor manufacturer) and Hon Hai Precision (electronics manufacturer)
both underperformed as concerns persisted that a slowdown in developed economies
could hit technology spending, and in Hong Kong, Hutchison Telecommunications
underperformed.
2) REVIEW OF PERFORMANCE DURING THE FOURTH QUARTER OF 2007
During the fourth quarter of 2007, the Emerging Markets Fund returned 6.8%,
outperforming its benchmark by approximately 3.1%.
In terms of regional performance, the fourth quarter was more mixed, and in many
ways the reverse of the previous nine months, with the EMEA (Europe, the Middle
East, and Africa) region being the standout performer and both Latin America and
Asia lagging behind. The fund benefited from stock selection in South Korea,
Brazil and Russia. In South Korea, the overweight positions in Hyundai Fire &
Marine Insurance (non-life insurer) and Samsung Fire & Marine Insurance (also a
non-life insurer) helped relative performance, boosted by takeover speculation
within the country's financial sector. In Brazil, Petrobras benefited from
announcing the discovery of significant new potential reserves in the Tupi
field. In Russia, the overweight positions in Vimpel Communications, Evraz Group
(steel producer) and Rosneft (oil producer) helped. Also helpful was India's
Reliance Industries (petrochemicals company).
Page 1
MANAGEMENT DISCUSSION
BAILLIE GIFFORD EMERGING MARKETS FUND
Stock selection in Indonesia and South Africa offset some of the good stock
selection in other countries. In Indonesia, the Fund was hurt by not owning Bumi
Resources (coal company) and Bank Mandiri underperformed. In South Africa, the
overweight position in Naspers, the diversified media group, detracted from
relative performance.
At the sector level, stock selection in Materials, Energy and Financials was
strong, though some of the Technology stocks such as Hon Hai Precision and
Greatek Electronics (Taiwan) detracted.
3) INVESTMENT STRATEGIES USED TO MANAGE THE FUND
Baillie Gifford are growth managers with a bottom up approach to stock picking.
We look for companies with the ability to generate sustainable earnings growth.
In determining the potential of a company, we pay particular attention to
competitive advantage, management attitudes, financial strength, and the
industry background that a company operates in. We regularly meet the management
of the companies within our investment universe and constantly revisit the
investment case for companies within the portfolio to ensure that our
expectations are being met.
4) OUTLOOK
Over 2007, emerging markets have proven to be fairly resilient in the face of
the credit crunch and liquidity squeeze that affected many developed economies.
We believe that such resilience is merited given the relatively strong economic
fundamentals enjoyed by many of the leading emerging economies, and the fact
that intra-regional trade has become increasingly important over the last few
years.
Having said that, there remains some dependency on exports to the West, and
emerging markets can still be perceived as a "risky asset class" in times of
uncertainty, so it seems almost inevitable that volatility will increase in the
year ahead as the uncertainty regarding exposure to sub prime debt, and the
extent and length of a US slowdown, continues. In absolute terms, the dispersion
between winners and losers is likely to increase.
So, there will likely be difficulties in the year ahead, we may well see further
rebalancing, and a key question is whether (or to what extent) China's
remarkable growth will slow? Overall, we expect emerging markets to continue to
increase their contribution to global growth, but there may well be occasions
when share prices become detached from what we believe are, on the whole,
positive fundamentals.
Page 2
MANAGEMENT DISCUSSION
BAILLIE GIFFORD EMERGING MARKETS FUND
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LONG TERM FUND PERFORMANCE FOR PERIODS ENDED 12/31/07
(AVERAGE ANNUAL TOTAL RETURNS)
Since Inception
One Year (April 4, 2003)
------------------- -----------------------
The Emerging Markets Fund 46.6% 44.5%
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[GRAPHIC OMITTED]
Past performance is not a guarantee of future results. Returns for the Emerging
Markets Fund are before taxes and are net of all expenses, advisory fees and
commission charges and include the re-investment of the Fund's dividends and
distributions.
The MSCI Emerging Markets Index is a market capitalization Index designed to
measure equity performance in global emerging markets. The Index is unmanaged,
is not available for investment, and does not reflect sales charges, fees,
commissions, taxes or other expenses of investing. The Fund's holdings may
differ from the index.
Page 3
FUND EXPENSES (UNAUDITED)
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, which may include purchase premiums and redemption fees and (2) ongoing
costs, including management fees, shareholder service fees and other Fund
expenses. This example is intended to help you understand your ongoing costs (in
dollars) of investing in the Fund and to compare these costs with the ongoing
costs of investing in the other mutual funds.
The example is based on an investment of $1,000,000 (the minimum investment
requirement) invested at the beginning of the period and held for the entire
period from July 1, 2007 to December 31, 2007.
ACTUAL EXPENSES
The first line of the table provides information about actual account values and
actual expenses. You may use the information in this line, together with the
amount you invested, to estimate the expenses that you paid over the period.
Simply divide the account value by $1,000,000 (for example, an $8,600,000
account value divided by $1,000,000 = 8.6), then multiply the result by the
number in the first line under the heading entitled "Expenses Paid During the
Period" to estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table below provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed annual rate of return of 5% before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds by comparing this 5% hypothetical example
with the 5% hypothetical examples that appear in the shareholder reports of
other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as purchase
premiums and redemption fees. Therefore, the second line of the table is useful
in comparing ongoing costs only, and will not help you determine the relative
total costs of owning different funds. In addition, if these transactional costs
were included, your costs would have been higher.
Page 4
FUND EXPENSES (UNAUDITED) (CONTINUED)
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ANNUALIZED EXPENSES PAID
BEGINNING ENDING EXPENSE RATIO DURING
ACCOUNT ACCOUNT BASED ON PERIOD PERIOD
VALUE VALUE 7/01/07 TO 7/01/07 TO
7/01/07 12/31/07 12/31/07 12/31/07
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
BAILLIE GIFFORD EMERGING MARKETS FUND - CLASS I*
Actual $1,000,000.00 $994,353.10 1.37% $1,722.61
Hypothetical (5% return before expenses) $1,000,000.00 $1,018,295.52 1.37% $6,973.18
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
BAILLIE GIFFORD EMERGING MARKETS FUND - CLASS III
Actual $1,000,000.00 $1,236,664.09 0.86% $4,859.28
Hypothetical (5% return before expenses) $1,000,000.00 $1,020,860.36 0.86% $4,390.44
- ---------------------------------------------------------------------------------------------------------------------------
* Commencement of investment operations for Class I is November 15, 2007.
Expenses are calculated using the annualized expense ratio for the Fund, which
represents the ongoing expenses as a percentage of net assets for the six-months
ended 12/31/07. Expenses are calculated by multiplying the annualized expense
ratio by the average account value for the period; then multiplying the result
by the number of days in the most recent fiscal half-year; and then dividing
that result by the number of days in the calendar year. Expense ratios for the
most recent fiscal half-year may differ from expense ratios based on the
one-year data in the financial highlights.
A description of the Fund's proxy voting policies and procedures related to
portfolio securities is available without charge, upon request, by calling
Baillie Gifford Overseas Limited collect at 011-44-131-275-2000 or on the
Securities and Exchange Commission's website at http://www.sec.gov.
Information regarding how the Fund voted proxies relating to portfolio
securities during the most recent 12-month period ended June 30 is also
available upon request by calling Baillie Gifford Overseas Limited collect at
011-44-131-275-2000 or by accessing the Fund's Form N-PX on the Commission's
website at http://www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission (the "Commission") for the first and third quarters of
each fiscal year on Form N-Q. The Fund's Form N-Q is available on the
Commission's website at http://www.sec.gov. The Fund's Form N-Q may also be
viewed and copied at the Commission's Public Reference Room in Washington, DC;
information on the operation of the Public Reference Room may be obtained by
calling (800) SEC-0330.
Page 5
INDUSTRY DIVERSIFICATION TABLE
DECEMBER 31, 2007 (UNAUDITED) BAILLIE GIFFORD EMERGING MARKETS FUND
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% OF TOTAL
U.S. $ VALUE NET ASSETS
-------------- ------------
Banks 25,439,046 11.3%
Beverages, Food & Tobacco 1,468,939 0.7
Chemicals 11,316,001 5.0
Computers 3,515,984 1.6
Construction & Building Materials 9,157,615 4.1
Diversified Financial Services 14,293,971 6.4
Diversified Industrials 13,372,272 5.9
Electronic & Electrical Equipment 15,592,649 6.9
Engineering - General 1,967,972 0.9
Engineering & Machinery 837,455 0.4
Food Producers & Processors 3,585,045 1.6
Insurance 9,448,507 4.2
Media & Photography 1,716,154 0.8
Mining & Metals 28,776,568 12.8
Oil & Gas 37,324,063 16.6
Pharmaceuticals 3,682,182 1.6
Retailers-General 16,066,398 7.1
Telecommunication Services 20,876,094 9.3
Transportation 3,182,726 1.4
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Total Value of Investments 221,619,641 98.6%
Other assets less liabilities 3,179,588 1.4
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Net Assets $224,799,229 100.0%
============== =========
Page 6
The accompanying notes are an integral part of the financial statements.
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 2007 BAILLIE GIFFORD EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
COMPANY SHARES U.S. $ VALUE
- --------------------------------------------------------------------------------
COMMON STOCKS - 95.9%
BRAZIL - 8.9%
Companhia Vale do Rio Doce ADR 107,600 $ 3,515,292
JBS SA (a) 273,118 920,622
Lojas Renner SA 68,300 1,381,348
Petroleo Brasileiro SA ADR 111,300 12,826,212
Unibanco - Uniao de Bancos Brasileiros SA GDR 9,500 1,326,580
-----------
19,970,054
-----------
BOLIVIA - 0.5%
Apex Silver Mines Ltd. (a) 69,239 1,055,202
-----------
CHINA - 15.7%
Angang Steel Co. Ltd., Class H 689,960 1,889,174
C C Land Holdings Ltd. 706,000 1,028,569
China Insurance International Holdings Co., Ltd. (a) 393,000 1,078,590
China Mobile Ltd. 176,500 3,121,470
China National Building Material Co., Ltd., Class H 558,000 2,150,448
China Overseas Land & Investment Ltd. 1,166,000 2,410,537
China Power International Development Ltd. 3,161,000 1,483,733
China Shenhua Energy Co., Ltd., Class H 552,500 3,301,934
China Unicom Ltd. 1,318,000 3,025,650
CNOOC Ltd. 1,362,000 2,319,666
GOME Electrical Appliances Holdings Ltd. 1,091,000 2,770,385
Hutchison Telecommunications International Ltd. 1,925,000 2,893,400
Jiangsu Express Co., Ltd., Class H 844,000 920,050
Kingboard Chemical Holdings Ltd. 344,000 2,047,041
Li Ning Co., Ltd. 454,000 1,691,423
PetroChina Co., Ltd., Class H 1,206,000 2,149,870
SINA Corp. (a) 24,200 1,072,302
-----------
35,354,242
-----------
COLOMBIA - 0.8%
Bancolombia SA ADR 49,500 1,683,990
-----------
EGYPT - 0.0%
Orascom Construction Industries GDR 452 93,772
-----------
INDIA - 5.9%
ICICI Bank Ltd. 41,000 1,288,512
JSW Steel Ltd. 132,400 4,432,368
Reliance Industries Ltd. GDR 101,500 7,423,419
-----------
13,144,299
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Page 7
The accompanying notes are an integral part of the financial statements.
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2007 BAILLIE GIFFORD EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
COMPANY SHARES U.S. $ VALUE
- --------------------------------------------------------------------------------
INDONESIA - 3.6%
PT Bank Mandiri 5,477,000 $ 2,040,937
PT Bank Rakyat Indonesia 2,872,000 2,262,742
PT Indosat Tbk 2,486,000 2,289,476
PT Telekomunikasi Indonesia Tbk 1,484,500 1,604,224
-----------
8,197,379
-----------
IRELAND - 0.8%
Kenmare Resources Plc. (a) 1,584,161 1,687,086
-----------
LUXEMBOURG - 1.9%
Ternium SA ADR 103,900 4,167,429
-----------
MALAYSIA - 2.5%
IOI Corp. Berhad 1,136,935 2,664,423
Sime Darby Berhad (a) 844,864 3,040,182
-----------
5,704,605
-----------
MEXICO - 3.7%
America Movil SA de CV, Series L 277,608 852,081
America Movil SA de CV, Series L ADR 62,700 3,849,153
Grupo Financiero Banorte SA de CV, Class O 424,500 1,754,116
WalMart de Mexico SA de CV, Series V 560,780 1,955,020
-----------
8,410,370
-----------
RUSSIA - 11.3%
AO VimpelCom ADR 77,900 3,240,640
Cherepovets MK Severstal GDR (a) 101,200 2,297,240
Evraz Group SA GDR Reg S 33,000 2,557,500
Gazprom ADR 138,200 7,835,940
Mining and Metallurgical Co., Norilsk Nickel ADR 8,400 2,226,000
OAO Rosneft Oil Co. GDR 144A* 463,900 4,438,595
Pharmstandard, Class S GDR 144A* (a) 48,500 1,331,325
Sberbank GDR Reg S 600 330,716
X5 Retail Group NV GDR (a) 32,400 1,182,600
-----------
25,440,556
-----------
SOUTH AFRICA - 5.2%
ABSA Group Ltd. 85,200 1,383,775
FirstRand Ltd. 604,290 1,746,286
GEM Diamonds Ltd. (a) 88,000 1,699,176
Impala Platinum Holdings Ltd. 32,100 1,114,331
International Ferro Metals Ltd. (a) 565,224 1,350,162
Massmart Holdings Ltd. 91,756 966,651
Naspers Ltd., Class N 72,400 1,716,154
Nikanor Plc. (a) 132,500 1,651,103
-----------
11,627,638
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Page 8
The accompanying notes are an integral part of the financial statements.
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2007 BAILLIE GIFFORD EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
COMPANY SHARES U.S. $ VALUE
- --------------------------------------------------------------------------------
SOUTH KOREA - 17.3%
Cheil Industries, Inc. (a) 78,300 $ 4,374,862
Daegu Bank (a) 114,000 1,893,809
Daewoo Shipbuilding & Marine Engineering Co., Ltd. (a) 35,700 1,967,972
Hana Financial Group, Inc. 47,100 2,536,018
Hyundai Development Co. (a) 26,130 2,554,239
Hyundai Marine & Fire Insurance Co., Ltd. 98,300 2,677,902
Industrial Bank of Korea (a) 91,000 1,711,020
NHN Corp. (a) 5,300 1,280,199
ORION Corp. (a) 5,500 1,468,939
Samsung Corp. (a) 95,690 7,360,376
Samsung Fire & Marine Insurance Co., Ltd. 16,100 4,351,584
Samsung Heavy Industries Co., Ltd. (a) 19,500 837,455
Shinsegae Co., Ltd. (a) 4,650 3,606,538
Yuhan Corp. (a) 10,840 2,350,857
-----------
38,971,770
-----------
TAIWAN - 9.7%
China Life Insurance Co., Ltd. (a) 2,402,000 1,340,431
Evergreen Marine Corp. 1,731,000 1,579,725
Far Eastern Department Stores Ltd. 2,076,166 2,512,433
Far Eastern International Bank (a) 827,000 266,449
Greatek Electronics, Inc. 1,337,440 1,637,034
High Tech Computer Corp. 63,000 1,163,483
Hon Hai Precision Industry Co., Ltd. 830,015 5,169,281
Taiwan Fertilizer Co., Ltd. 752,000 1,845,541
Taiwan Semiconductor Manufacturing Co., Ltd. 2,496,518 4,772,206
Yang Ming Marine Transport 2,071,416 1,603,001
-----------
21,889,584
-----------
THAILAND - 0.5%
Bangkok Bank PCL NVDR 328,800 1,151,800
-----------
TURKEY - 1.8%
Turkiye Garanti Bankasi AS 314,513 2,817,135
Turkiye Is Bankasi, Class C 204,200 1,280,333
-----------
4,097,468
-----------
TURKMENISTAN - 1.5%
Dragon Oil Plc. (a) 477,196 3,289,051
-----------
UNITED KINGDOM - 3.9%
Imperial Energy Corp. Plc. (a) 117,700 3,631,552
International Personal Finance 490,500 1,869,786
Standard Chartered Plc. 89,600 3,288,918
-----------
8,790,256
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Page 9
The accompanying notes are an integral part of the financial statements.
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2007 BAILLIE GIFFORD EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
COMPANY SHARES U.S. $ VALUE
- --------------------------------------------------------------------------------
VIETNAM - 0.4%
Vietnam Resource Investments Holding Ltd. (a) 81,700 $ 833,177
------------
TOTAL COMMON STOCKS
(cost $131,483,281) 215,559,728
------------
PREFERRED STOCKS - 2.7%
BRAZIL -- 2.7%
Banco Bradesco SA 73,200 2,341,989
Itausa - Investimentos Itau SA 563,226 3,717,924
------------
TOTAL PREFERRED STOCKS
(cost $3,212,585) 6,059,913
------------
TOTAL INVESTMENTS - 98.6%
(cost $134,695,866) 221,619,641
Other assets less liabilities - 1.4% 3,179,588
------------
NET ASSETS - 100.0% $224,799,229
============
(a) Non-income producing security.
ADR - American Depositary Receipt.
GDR - Global Depositary Receipt.
NVDR - Non Voting Depositary Receipt.
PCL - Public Company Limited.
* Securities are exempt from registration under rule 144A of the Securities Act
of 1933, as amended. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. Prices are obtained
daily from the London International Stock Exchange, therefore, fair valuation is
typically not required.
Page 10
The accompanying notes are an integral part of the financial statements.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2007 BAILLIE GIFFORD EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $134,695,866) $221,619,641
Cash 3,773,209
Foreign cash, at value (cost $286,879) 288,040
Receivable for investments sold 752,350
Dividends and interest receivable 253,363
Other assets 14,651
------------
Total Assets 226,701,254
------------
LIABILITIES
Payable for investments purchased 1,193,088
Advisory fee payable 296,426
Servicing fee payable 62,283
Unrealized depreciation on forward foreign currency contracts 204
Accrued expenses and other liabilities 350,024
------------
Total Liabilities 1,902,025
------------
NET ASSETS $224,799,229
============
COMPOSITION OF NET ASSETS
Paid-in capital $122,376,628
Distributions in excess of net investment income (30,424)
Accumulated net realized gain on investments and
foreign currency transactions 15,527,967
Net unrealized appreciation in value of investments
and foreign currencies 86,925,058
------------
$224,799,229
============
NET ASSET VALUE, PER SHARE
CLASS I ($14,879,043 / 669,878 shares outstanding),
unlimited authorized, no par value $ 22.21
============
Maximum Purchase Price Per Share (Note E) $ 22.27
============
Minimum Redemption Price Per Share (Note E) $ 22.15
============
CLASS III ($209,920,186 / 9,470,504 shares outstanding),
unlimited authorized, no par value $ 22.17
============
Maximum Purchase Price Per Share (Note E) $ 22.23
============
Minimum Redemption Price Per Share (Note E) $ 22.11
============
Page 11
The accompanying notes are an integral part of the financial statements.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2007 BAILLIE GIFFORD EMERGING MARKETS FUND
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends (net of foreign withholding taxes of $414,643) $ 5,492,865
Interest 74,311
-----------
TOTAL INVESTMENT INCOME 5,567,176
-----------
EXPENSES
Advisory fee (Note B) 1,103,964
Shareholder servicing fees - Class III Shares (Note B) 194,418
Class II Shares (Note B) 57,691
Class I Shares (Note B) 5,458
Custody 267,464
Fund Accounting 145,459
Legal 109,617
Insurance 47,136
Professional fees 32,005
Trustees' fees 27,284
Transfer Agency 11,932
Miscellaneous 4,614
-----------
TOTAL EXPENSES 2,007,042
-----------
NET INVESTMENT INCOME 3,560,134
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY TRANSACTIONS
Net realized gain (loss) from:
Investments 72,710,979
Foreign currency transactions (183,176)
-----------
72,527,803
-----------
Net change in unrealized appreciation/depreciation on:
Investments 7,608,726
Translation of assets and liabilities in foreign currencies (5,554)
-----------
7,603,172
-----------
Net realized and unrealized gain on investments and
foreign currency transactions 80,130,975
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS $83,691,109
===========
Page 12
The accompanying notes are an integral part of the financial statements.
STATEMENTS OF CHANGES IN NET ASSETS BAILLIE GIFFORD EMERGING MARKETS FUND
- ------------------------------------------------------------------------------------------------------------------
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, 2007 DECEMBER 31, 2006
----------------- -----------------
INCREASE IN NET ASSETS FROM OPERATIONS
Net investment income $ 3,560,134 $ 1,973,025
Net realized gain from investments and foreign currency transactions 72,527,803 47,584,165
Net change in unrealized appreciation/depreciation on investments
and translation of assets and liabilities in foreign currencies 7,603,172 10,682,585
----------------- -----------------
Net increase in net assets from operations 83,691,109 60,239,775
----------------- -----------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income:
Class I (220,048) --
Class II -- (303,881)
Class III (3,448,058) (1,076,307)
Capital gains:
Class I (3,764,066) --
Class II -- (9,431,176)
Class III (60,168,046) (34,191,469)
----------------- -----------------
TOTAL DIVIDENDS AND DISTRIBUTIONS (67,600,218) (45,002,833)
----------------- -----------------
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
Net proceeds from shares subscribed:
Class I 14,962,500 --
Class III 42,176,923 --
Purchase premiums:
Class I 2,280 --
Class III 35,220 --
Redemption fees:
Class I 3,050 --
Class II 22,946 21,973
Class III 174,255 72,474
Dividends and distributions reinvested:
Class I 3,984,115 --
Class II -- 14,485,685
Class III 63,616,104 53,424,514
Cost of shares redeemed:
Class II (51,199,480) (7,518,797)
Class III (71,077,694) (30,259,904)
----------------- -----------------
INCREASE IN NET ASSETS FROM TRANSACTIONS IN SHARES OF
BENEFICIAL INTEREST 2,700,219 30,225,945
----------------- -----------------
TOTAL INCREASE IN NET ASSETS 18,791,110 45,462,887
NET ASSETS
Beginning of year 206,008,119 160,545,232
----------------- -----------------
End of year (distributions in excess of net investment income $ 224,799,229 $ 206,008,119
of $30,424 and $40,633, respectively) ================= =================
Page 13
The accompanying notes are an integral part of the financial statements.
FINANCIAL HIGHLIGHTS BAILLIE GIFFORD EMERGING MARKETS FUND
---------------------------------------------------------------------------
SELECTED DATA FOR CLASS I SHARES OUTSTANDING
THROUGHOUT EACH PERIOD:
FOR THE PERIOD
NOVEMBER 15, 2007(a)
THROUGH
DECEMBER 31, 2007
----------------------
Net asset value, beginning of period $30.53
----------------------
INCOME FROM INVESTMENT OPERATIONS
---------------------------------
Net investment loss(b) -0.04
Net realized and unrealized loss
on investments and foreign
currency transactions -0.16
----------------------
Net decrease in net asset
value from investment operations -0.20
----------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
-------------------------------------------
Dividends from net investment income -0.45
Taxable distributions in excess of net
investment income
and net realized gain on investments -7.68
----------------------
Total Dividends and Distributions -8.13
----------------------
PROCEEDS FROM PURCHASE PREMIUMS AND
-----------------------------------
REDEMPTION FEES 0.01
---------------
----------------------
Net asset value, end of period $22.21
======================
TOTAL RETURN
------------
Total investment return based on net
asset value(c) -0.56%
RATIOS/SUPPLEMENTAL DATA
------------------------
Net assets, end of period
(000's omitted) $14,879
Ratio of net expenses
to average net assets 1.37%*
Ratio of net investment loss
to average net assets -1.12%*
Portfolio turnover rate 61%
* Annualized.
(a) Commencement of investment operations.
(b) Calculated based upon average shares outstanding during the period.
(c) Total investment return is calculated assuming an initial investment made
at the net asset value at the beginning of the period, reinvestment of all
dividends and distributions, if any, at net asset value during the period,
and redemption on the last day of the period. Total return is not
annualized for periods less than one year.
Page 14
The accompanying notes are an integral part of the financial statements.
FINANCIAL HIGHLIGHTS
BAILLIE GIFFORD EMERGING MARKETS FUND
-------------------------------------------------------------------------------------------------------------------------------
SELECTED DATA FOR CLASS III SHARES OUTSTANDING THROUGHOUT EACH PERIOD:
FOR THE FOR THE FOR THE FOR THE FOR THE PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED APRIL 4, 2003(a)
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, THROUGH
2007 2006 2005 2004 DECEMBER 31, 2003
-------------- -------------- -------------- -------------- -------------------
Net asset value, beginning of period $21.42 $19.78 $16.61 $15.03 $10.00
-------------- -------------- -------------- -------------- -------------------
INCOME FROM INVESTMENT OPERATIONS
---------------------------------
Net investment income(b) 0.38 0.25 0.30 0.26 0.10
Net realized and unrealized gain
on investments and foreign
currency transactions 9.45 7.24 6.36 3.36 5.82
-------------- -------------- -------------- -------------- -------------------
Net increase in net asset value
from investment operations 9.83 7.49 6.66 3.62 5.92
-------------- -------------- -------------- -------------- -------------------
DIVIDENDS AND DISTRIBUTIONS
---------------------------
TO SHAREHOLDERS
---------------
Dividends from net investment income -0.50 -0.18 -0.34 -0.75 -0.10
Taxable distributions in excess of net
investment income and net realized gain
on investments -8.61 -5.68 -3.15 -1.29 -0.79
-------------- -------------- -------------- -------------- -------------------
Total Dividends and Distributions -9.11 -5.86 -3.49 -2.04 -0.89
-------------- -------------- -------------- -------------- -------------------
PROCEEDS FROM PURCHASE
----------------------
PREMIUMS AND REDEMPTION FEES 0.03 0.01 -- -- --
---------------------------- -------------- -------------- -------------- -------------- -------------------
Net asset value, end of period $22.17 $21.42 $19.78 $16.61 $15.03
============== ============== ============== ============== ===================
TOTAL RETURN
------------
Total investment return
based on net asset value(c) 46.59% 38.30% 40.47% 24.62% 59.22%
RATIOS/SUPPLEMENTAL DATA
------------------------
Net assets, end of period
(000's omitted) $209,920 $161,874 $127,251 $114,351 $81,204
Ratio of net expenses
to average net assets 0.87% 0.88% 0.96% 0.77% 1.11%*
Ratio of net investment income
to average net assets 1.48% 1.10% 1.61% 1.67% 1.06%*
Portfolio turnover rate 61% 50% 48% 80% 68%
* Annualized.
(a) Commencement of investment operations.
(b) Calculated based upon average shares outstanding during the period.
(c) Total investment return is calculated assuming an initial investment made
at the net asset value at the beginning of the period, reinvestment of all
dividends and distributions, if any, at net asset value during the period,
and redemption on the last day of the period. Total return is not
annualized for periods less than one year.
Page 15
The accompanying notes are an integral part of the financial statements.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2007
NOTE A -- ORGANIZATION AND ACCOUNTING POLICIES
The Baillie Gifford Emerging Markets Fund (the "Fund") is a series of Baillie
Gifford Funds (the "Trust"). The Trust is a diversified open-end management
investment company registered under the Investment Company Act of 1940, as
amended. The Trust is organized as a Massachusetts business trust under the laws
of Massachusetts pursuant to an Amended and Restated Agreement and Declaration
of Trust dated August 17, 2001. The Fund offers three classes of shares, Class
I, Class II and Class III shares (unlimited number of shares are authorized,
without par value). At December 31, 2007, only Class I and Class III shares were
issued and outstanding.
The financial statements of the Fund have been prepared in conformity with
accounting principles generally accepted in the United States of America.
Management is required to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities for the Fund and disclosure of
contingent assets and liabilities for the Fund at the date of the financial
statements and the reported amounts of increases and decreases in net assets
from operations for the Fund during the reporting period. Actual results could
differ from those estimates.
Investment income, expenses (other than those specific to the class of shares),
and realized and unrealized gains and losses on investments are allocated to the
separate classes of shares based upon their relative net asset value on the date
income is earned or expensed and realized and unrealized gains and losses are
incurred.
The following is a summary of significant accounting policies followed by the
Fund.
VALUATION OF INVESTMENTS
Equity securities listed on an established securities exchange are normally
valued at their last sale price on the exchange where primarily traded. Equity
securities listed on the NASDAQ National Market System are valued at the NASDAQ
Official Closing Price. Equity securities listed on an established securities
exchange or on the NASDAQ National Market System for which there is no reported
sale during the day, and in the case of over-the-counter securities not so
listed, are valued at the mean between the last available bid and asked price.
Other securities for which current market quotations are not readily available,
and all other assets, are taken at fair value as determined in good faith by
Baillie Gifford Overseas Limited (the "Manager"), pursuant to procedures
approved by the trustees of the Trust (the "Trustees"). The actual calculations
may be made by persons acting pursuant to the direction of the Trustees or by
pricing services.
Generally, trading in foreign securities markets is substantially completed each
day at various times prior to close of regular trading on the New York Stock
Exchange. Occasionally, events affecting the value of foreign fixed income
securities and of equity securities of non-U.S. issuers not traded on a U.S.
exchange may occur between the completion of substantial trading of such
securities for the day and the close of regular trading on the New York Stock
Exchange, which events may not be reflected in the computation of a Fund's net
asset value. If events materially affecting the value of the Fund's portfolio
securities occur during such period, then these securities will be valued at
their fair value as determined in good faith by the Manager, pursuant to
procedures approved by the Trustees.
Page 16
NOTES TO FINANCIALS (CONTINUED)
The Fund invests in obligations of foreign entities and securities denominated
in foreign currencies. Such investments involve risk not typically involved with
domestic investments. Such risks include fluctuations in foreign exchange rates,
inability to convert proceeds into U.S. dollars, application of foreign tax
laws, foreign investment restrictions, less publicly available information about
foreign financial instruments, less liquidity resulting from substantially less
trading volume, more volatile prices, and generally less government supervision
of foreign securities markets and issuers.
Repurchase agreements are carried at cost, which approximates market value (See
Note D).
FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. Foreign
currency amounts are translated into U.S. dollars at the applicable rate of
exchange to determine the value of investments, assets, and liabilities. For the
Fund, purchases and sales of securities, and income and expenses are translated
at the prevailing rate of exchange on the respective dates of such transactions.
The Fund does not isolate that portion of net realized and unrealized gains and
losses on investments resulting from changes in foreign exchange rates from the
impact arising from changes in market prices. Such fluctuations are included
with net realized and unrealized gain or loss from investments.
Net realized foreign exchange gains and losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions, and the differences between the amounts of
dividends, interest, and foreign withholding taxes recorded on the Fund's books
and the U.S. dollar equivalent of the amounts actually received or paid. Net
unrealized foreign exchange gains and losses arise from changes in the value of
assets and liabilities, other than investments in securities, resulting from
changes in the exchange rates.
FORWARD FOREIGN CURRENCY CONTRACTS
The Fund may enter into forward foreign currency contracts in connection with
planned purchases or sales of securities, or to hedge against changes in
currency exchange rates affecting the values of securities denominated in a
particular currency. A forward exchange currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. Fluctuations in the value of forward foreign currency exchange contracts
are recorded for book purposes as unrealized gains or losses on foreign currency
related transactions by the Fund. When forward contracts are closed, the Fund
records realized gains or losses equal to the differences between the values of
such forward contracts at the time each was opened and the value at the time
each was closed. Such amounts are recorded in net realized gain or loss on
foreign currency related transactions. At December 31, 2007, the Fund had the
following open forward currency contracts:
Page 17
NOTES TO FINANCIALS (CONTINUED)
Settlement Contracts In Exchange Unrealized
Date To Deliver For Loss
- ---------------------- ----------------------- ------------------ ------------
1/2/2008 GBP 18,711 USD 37,247 $ (38)
1/2/2008 HKD (291,596) USD (37,397) (112)
1/2/2008 HKD (745,290) USD (95,582) (54)
- ---------------------- ----------------------- ------------------ ------------
$ (204)
============
Currency Legend:
HKD - Hong Kong Dollar
GBP - British Pound
USD- United States Dollar
SECURITIES TRANSACTIONS AND INVESTMENT INCOME
The Fund's securities transactions are recorded on the trade date. Realized
gains or losses on sales of investments are determined on the basis of
identified cost. Dividend income is recorded on the ex-dividend date and
interest income is recorded on an accrual basis.
FEDERAL TAXES
The Trust intends to qualify to be taxed as a "regulated investment company"
under the provisions of the U.S. Internal Revenue Code of 1986, as amended, and
as such will not be subject to U.S. federal income tax on income (including any
net realized capital gains) which is distributed in accordance with the
provisions of the Code to the Fund's shareholders. Therefore, no U.S. federal
income tax provision is required.
Investment income received from investments in foreign currencies may be subject
to foreign withholding tax. Whenever possible, the Fund will attempt to operate
so as to qualify for reduced tax rates or tax exemptions in those countries with
which the United States has a tax treaty.
In June 2006, Financial Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement
109 ("FIN 48") was issued and is effective for fiscal years beginning after
December 15, 2006. FIN 48 prescribes a minimum threshold for financial statement
recognition of the benefit of a tax position taken or expected to be taken in a
tax return. As of December 31, 2007, management has evaluated the application of
FIN 48 to the Fund, and has determined that there is no material impact
resulting from the adoption of FIN 48 on the Fund's financial statements.
Page 18
NOTES TO FINANCIALS (CONTINUED)
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
The Fund intends to distribute each year, as dividends, substantially all net
investment income and net capital gains realized. All such dividends or
distributions are credited in the form of additional shares of the Fund at net
asset value on the ex-dividend date. Currently, the Fund's policy is to
distribute net investment income and net capital gains on an annual basis. Such
distributions are determined in conformity with U.S. federal income tax
regulations.
Currency losses incurred after October 31 ("post-October Currency losses")
within the taxable year are deemed to arise on the first business day of the
Fund's next taxable year. The Fund incurred and will defer post-October Currency
losses of $30,462 during 2007.
At December 31, 2007, the components of accumulated earnings on a tax basis were
as follows:
- -------------------------- --------------------- ------------------------ -------------------------- --------------------------
Net Unrealized
Undistributed Undistributed Net Appreciation on Total
Net Ordinary Income Realized Long-Term Investments and Foreign Accumulated
Fund Capital Gains Currencies Earnings
- -------------------------- --------------------- ------------------------ -------------------------- --------------------------
Emerging Markets $1,238,827 $14,751,450 $86,462,786 $102,453,063
- -------------------------- --------------------- ------------------------ -------------------------- --------------------------
The differences between the components of distributable earnings on a tax basis
and the amounts reflected in the Statements of Assets and Liabilities are
primarily due to the differing book/tax treatment of short-term capital gains
and wash sales.
For the year ended December 31, 2007, the following reclassifications have been
made on the Statement of Assets and Liabilities as a results of certain
differences in the computation of net investment income and net realized capital
gains under U.S. federal income tax rules and regulations versus accounting
principles generally accepted in the United States of America, such as the
treatment of foreign currency gains and losses and the redesignation of
dividends:
- ----------------------------------- --------------------- ---------------------
Accumulated Net
Realized Capital
Gains on
Distributions in Investments and
Fund Excess of Net Foreign Currencies
Investment Income
- ----------------------------------- --------------------- ---------------------
Emerging Markets $118,181 $(118,181)
- ----------------------------------- --------------------- ---------------------
For the years ended December 31, 2007 and December 31, 2006, the tax character
of the dividends paid, as reflected in the Statements of Changes in Net Assets,
were:
- ---------------------- --------------------------- -----------------------------
Fund Ordinary Income Long-Term Capital Gains
- ---------------------- --------------------------- -----------------------------
2007 2006 2007 2006
- ---------------------- ------------- ------------- -------------- --------------
Emerging Markets $14,062,287 $4,079,607 $53,537,931 $ 40,923,226
- ---------------------- ------------- ------------- -------------- --------------
Page 19
NOTES TO FINANCIALS (CONTINUED)
NOTE B -- INVESTMENT MANAGEMENT AND OTHER SERVICES
The Fund is advised and managed by the Manager. The Manager, an investment
adviser registered with the Securities and Exchange Commission, is a wholly
owned subsidiary of Baillie Gifford & Co.
Under an Investment Advisory Agreement between the Manager and the Trust on
behalf of the Fund, the Fund pays the Manager a quarterly management fee, in
arrears, at 0.50% annual rate of the respective Fund's average net assets
(calculated by taking the average of all determinations of net asset value made
at the end of each month). For the year ended December 31, 2007, the Fund
incurred $1,103,964 in management fees.
The Fund has adopted a Shareholder Servicing Plan providing that the Fund may
pay the Manager, or any other entity that acts from time to time as the
shareholder servicing agent with respect to a class of Fund shares, for services
rendered and expenses borne in connection with the provision of services
provided to Fund investors and/or the maintenance of shareholder accounts. For
these services, the Fund pays the Manager a fee at the annualized rate of 0.30%
and 0.10% of the Fund's average daily net assets attributable to Class I and
Class III shares, respectively. For the year ended December 31, 2007, the Fund
incurred $5,458 and $194,418 in shareholder servicing fees for Class I and Class
III shares, respectively.
NOTE C -- INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities (excluding short-term
securities) were $131,558,517 and $193,115,037, respectively.
The gross unrealized appreciation and (depreciation) on investments at December
31, 2007 were as follows:
Gross Unrealized Appreciation $90,207,096
Gross Unrealized (Depreciation) (3,283,321)
-----------
Net Unrealized Appreciation $86,923,775
-----------
The Fund's cost of investments and gross unrealized appreciation (depreciation)
at December 31, 2007 for U.S. federal income tax purposes, were as follows:
- ---------------- --------------- -------------- -------------- -----------------
Cost of Gross Gross Net Appreciation
Fund Investments Appreciation Depreciation (Depreciation)
- ---------------- ------------- ------------- ------------- -----------------
Emerging Markets $135,158,176 $91,299,142 $(4,837,677) $86,461,465
- ---------------- ------------- ------------- ------------- -----------------
Page 20
NOTES TO FINANCIALS (CONTINUED)
The Fund may be party to financial instruments with off-balance-sheet risk,
primarily forward contracts, in order to minimize the impact of adverse changes
in the relationship between the U.S. dollar and various foreign currencies.
These instruments involve market risk in excess of the amount recognized in the
Statement of Assets and Liabilities. Risks arise from the possible inability of
counter-parties to meet the terms of their contracts, future adverse movement in
currency values and contract positions that are not exact offsets. The contract
amount indicates the extent of the Fund's involvement in such currencies.
NOTE D -- REPURCHASE AGREEMENTS
A repurchase agreement is the purchase of a security at a specified price with
an agreement to sell the same or substantially the same security to the same
counterparty at a fixed or determinable price at a future date. Collateral
underlying repurchase agreements takes the form of either cash or fully
negotiable U.S. government securities. Repurchase agreements are fully
collateralized (including the interest earned thereon) and such collateral is
marked-to-market daily while the agreements remain in force. If the value of the
underlying securities falls below the value of the repurchase price plus accrued
interest, the Fund will require the seller to deposit additional collateral by
the next business day. If the request for additional collateral is not met, or
the seller defaults, the Fund maintains the right to sell the collateral and may
claim any resulting loss against the seller. Repurchase agreements by the Fund
of more than seven days duration (or investments in any other securities which
are deemed to be illiquid) are not permitted if more than 15% of the Fund's net
assets would be so invested. At December 31, 2007, the Fund did not have any
repurchase agreements outstanding.
NOTE E -- TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST
Emerging Markets Fund
Class I Shares Class III Shares
For the Period Ended For the Year Ended
December 31, 2007 December 31, 2007
---------------------------- -----------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
Shares sold 490,095 $ 14,962,500 1,669,552 $ 42,176,923
Redemption fees -- 3,050 -- 174,255
Purchase premium -- 2,280 -- 35,220
Shares issued in
reinvestment of
dividends and
distributions 179,783 3,984,115 2,816,124 63,616,104
Shares redeemed -- -- (2,570,901) (71,077,694)
------------ ------------ ------------ ------------
Net increase 669,878 $ 18,951,945 1,914,775 $ 34,924,808
============ ============ ============ ============
Page 21
NOTES TO FINANCIALS (CONTINUED)
Class III Shares
For the Year Ended
December 31, 2006
-----------------------------
Shares Amount
------------ ------------
Shares sold -- --
Redemption fees -- $ 72,474
Shares issued in
reinvestment of
dividends and
distributions 2,497,678 53,424,514
Shares redeemed (1,375,957) (30,259,904)
------------ ------------
Net increase 1,121,721 $ 23,237,084
============ ============
The Fund charges purchase premiums (25 basis points) in the case of cash
investments and redemption fees (25 basis points) in the case of cash
redemptions. All purchase premiums and redemption fees are paid to and retained
by the Fund and are intended to offset brokerage and transaction costs arising
in connection with purchases or redemptions. The purchase premium and redemption
fee may be waived or reduced by the Manager if the brokerage and transaction
costs in connection with the purchase or redemption are minimal or in other
circumstances in the Manager's discretion.
At December 31, 2007, Nebraska Investment Council, which is a Nebraska state
investment agency located at 941 "O" Street, Suite 500, Lincoln, Nebraska 68506,
owned 70.06% of the voting securities of the Fund, and the Fire and Police
Pension Association of Colorado located at 5290 DTC Parkway, Suite 100,
Greenwood Village, Colorado 80111-2721, owned 23.32% of the voting securities of
the Fund and the Guardian Life Assurance company of America located at 7 Hanover
Square, 20th Floor, New York, 10004, owned 6.62% of the voting securities of the
fund.
NOTE F -- NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS No. 157).
This standard establishes a single authoritative definition of fair value, sets
out a framework for measuring fair value and requires additional disclosures
about fair value measurements. SFAS No. 157 applies to fair value measurements
already required or permitted by existing standards. SFAS No. 157 is effective
for financial statements issued for fiscal years beginning after November 15,
2007 and interim periods within those fiscal years. The changes to current
generally accepted accounting principles from the application of SFAS No. 157
relate to the definition of fair value, the methods used to measure fair value,
and the expanded disclosures about fair value measurements. As of December 31,
2007, the Fund does not believe the adoption of SFAS No. 157 will impact the
amounts reported in the financial statements, however, additional disclosures
may be required about the inputs used to develop the measurements and the effect
of certain of the measurements reported on the statement of changes in net
assets for a fiscal period.
Page 22
NOTES TO FINANCIALS (CONTINUED)
NOTE G - COMMITMENTS AND CONTINGENCIES
The Fund indemnifies the Trust's officers and Trustees for certain liabilities
that might arise from their performance of their duties to the Fund.
Additionally, in the normal course of business, the Fund enters into contracts
that contain a variety of representations and warranties and which provide
general indemnifications. The Fund's maximum exposure under these arrangements
is unknown, as this would involve future claims that may be made against the
Fund that have not yet occurred. However, based on experience, the Fund expects
the risk of loss to be remote.
NOTE H - CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
On August 31, 2006, KPMG LLP was dismissed as the independent registered public
accounting firm for the Baillie Gifford Funds. KPMG LLP was previously engaged
as the independent registered public accounting firm to audit the Fund's
financial statements. KPMG LLP issued reports on the Fund's financial statements
as of December 31, 2005, 2004 and 2003. Such reports did not contain an adverse
opinion or a disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope or accounting principles. The decision to remove KPMG
LLP was approved by the Fund's Audit Committee and ratified by the Fund's Board
of Trustees. At no time during the two fiscal years immediately preceding the
dismissal of KPMG LLP or for the period January 1, 2006 through August 31, 2006,
were there any disagreements with KPMG LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope
procedure, which disagreements, if not resolved to the satisfaction of KPMG LLP,
would have caused it to make reference to the subject matter of the
disagreements in connection with its reports. At no time during the period
immediately preceding the dismissal of KPMG LLP through August 31, 2006, did any
of the events relating to management's representations, an expansion of the
scope of audit work or discovery of information impacting the fairness or
reliability of the Baillie Gifford Fund's financial statements enumerated in
paragraphs (1)(v)(A) through (D) of Item 304(a) of Regulation S-K occur. The
Funds engaged Briggs Bunting & Dougherty, LLP ("BBD") as its new independent
registered public accounting firm on August 31, 2006.
During the two fiscal years immediately preceding the dismissal of KPMG LLP and
through August 31, 2006, the date the Board of Trustees approved BBD as the
Fund's auditor, the Fund did not consult BBD regarding either (1) the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the Fund's financial statements, or (2) any matter that was either the subject
of a disagreement or a reportable event, as such terms are defined in Item 304
of Regulation S-K.
Page 23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES OF BAILLIE GIFFORD FUNDS
AND SHAREHOLDERS OF THE BAILLIE GIFFORD EMERGING MARKETS FUND
We have audited the accompanying statement of assets and liabilities of the
Baillie Gifford Emerging Markets Fund, a series of shares of beneficial interest
of Baillie Gifford Funds, including the portfolio of investments, as of December
31, 2007, and the related statement of operations for the year then ended and
the statements of changes in net assets and the financial highlights for each of
the years and the period in the two-year period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits. The financial
highlights for each of the years and the period in the period from April 4, 2003
(commencement of operations) through December 31, 2005 were audited by other
auditors whose report dated February 28, 2006 expressed an unqualified opinion
on such financial highlights.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 2007 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Baillie Gifford Emerging Markets Fund as of December 31, 2007, the results of
its operations for the year then ended and the changes in its net assets and its
financial highlights for each of the years and the period in the two-year period
then ended, in conformity with accounting principles generally accepted in the
United States of America.
BRIGGS, BUNTING & DOUGHERTY, LLP
PHILADELPHIA, PENNSYLVANIA
FEBRUARY 27, 2008
Page 24
SUPPLEMENTAL INFORMATION (UNAUDITED)
Qualified dividend income of as much as $4,983,926 was taxable to the Fund
through December 31, 2007. The Fund intends to designate the maximum amount of
dividends that qualify for the reduced tax rate pursuant to the Jobs and Growth
Tax Relief Reconciliation Act of 2003.
In January 2008, you will be advised on IRS Form 1099 DIV or substitute 1099 DIV
as to the U.S. federal tax status of distributions received by you in the
calendar year 2007.
The Fund designates $53,537,931 as a long-term capital gain dividend subject to
15% tax rate.
MANAGEMENT OF THE TRUST
The following tables set forth the Trustees and Officers of the Trust, their
principal occupations during the past five years, and certain other information.
- ------------------------------------------------------------------------------------------------------------------------------------
LENGTH OF NUMBER OF FUNDS IN
POSITION(S) HELD TIME FUND COMPLEX
NAME AND AGE(1) WITH TRUST SERVED(2) PRINCIPAL OCCUPATION DURING PAST 5 YEARS(3) OVERSEEN BY TRUSTEE
- --------------------- ------------------ ------------ -------------------------------------------------------- ---------------------
TRUSTEES
- --------------------- ------------------ ------------ -------------------------------------------------------- ---------------------
John G. Barrie, Jr. Trustee Since 2000 Retired. Formerly: Assistant Treasurer, Dominion
Age: 67 Resources, Inc. (electric and gas utility). 1
- --------------------- ------------------ ------------ -------------------------------------------------------- ---------------------
George W. Browning Trustee Since 2007 Retired. Formerly: Managing Director, Client Service,
Age: 65 Babson Capital Management, LLC (investment manager).
1
- ------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------------------
R. Robin Menzies(4) Trustee, Since 2000 Partner, Baillie Gifford & Co. (investment manager);
Age: 55 Chairman of the Director, Baillie Gifford Overseas Ltd. (investment
Board and adviser); Director and Chief Executive, Guardian 1
President Baillie Gifford Ltd. (investment adviser).
- ------------------------------------------------------------------------------------------------------------------------------------
OFFICERS (OTHER THAN OFFICERS WHO ARE ALSO TRUSTEES)
- ------------------------------------------------------------------------------------------------------------------------------------
Edward H. Hocknell Vice President Since 2000 Partner, Baillie Gifford & Co. (investment manager);
Age: 47 Director, Baillie Gifford Overseas Ltd. (investment N/A
adviser). Director, Guardian Baillie Gifford Ltd.
(investment adviser).
- --------------------- ------------------ ------------ -------------------------------------------------------- ---------------------
Alan Paterson Vice President Since 2000 Partner, Baillie Gifford & Co. (investment manager).
Age: 40 N/A
- --------------------- ------------------ ------------ -------------------------------------------------------- ---------------------
Dickson Jackson Vice President Since 2005 Head of Institutional Clients Accounting Department,
Age: 36 Baillie Gifford & Co. (investment manager); formerly, N/A
Treasurer of the Trust (2001 to 2005).
- --------------------- ------------------ ------------ -------------------------------------------------------- ---------------------
Nigel Cessford Treasurer Since 2005 Head of Overseas Institutional Clients Accounting
Age: 44 Department, Baillie Gifford & Co. (investment manager). N/A
- --------------------- ------------------ ------------ -------------------------------------------------------- ---------------------
Angus N.G. Macdonald Secretary Since 2000 Head of Legal for the Baillie Gifford Group
Age: 42 (investment manager). N/A
- --------------------- ------------------ ------------ -------------------------------------------------------- ---------------------
Graham Laybourn Chief Compliance Since 2005 Compliance Officer, Baillie Gifford Group (investment
Age: 41 Officer manager). N/A
- --------------------- ------------------ ------------ -------------------------------------------------------- ---------------------
Page 25
(1) The address of each Trustee and Officer of the Trust is c/o Baillie Gifford
Funds, Calton Square, 1 Greenside Row, Edinburgh, Scotland EH1 3AN.
(2) There is no stated term of office for the Trustees. The Chairman of the
Board, President, Secretary, and Treasurer of the Trust are elected
annually by the Trustees. Other officers may be elected or appointed by the
Trustees at any time.
(3) Previous positions during the past five years with Baillie Gifford & Co.,
Baillie Gifford Overseas Ltd. and Baillie Gifford Group are omitted if not
materially different from the positions listed.
(4) Mr. Menzies is an "interested person" (as defined in the 1940 Act) of the
Trust or the Manager due to his involvement with the Manager. Prior to
October 2006, Mr. Menzies served as an officer of portfolios in the
Guardian Funds fund complex.
Additional information regarding the Trustees is available upon request, without
charge, by calling Baillie Gifford Overseas Limited collect at
011-44-131-275-2000.
Page 26
ITEM 2. CODE OF ETHICS.
(a) As of December 31, 2007, the registrant has adopted a code of ethics
(the "Code of Ethics") that applies to its principal executive officer,
principal financial officer, principal accounting officer or controller,
or persons performing similar functions.
(b) Not applicable.
(c) During the period covered by the shareholder report presented in Item 1,
the registrant made certain updating and procedural changes relating to
the administration of its Code of Ethics. The revised Code of Ethics is
attached hereto as an exhibit.
(d) The registrant has not granted a waiver or an implicit waiver from a
provision of its Code of Ethics during the period.
(e) Not applicable.
(f) The registrant's Code of Ethics is attached hereto as an exhibit.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The registrant's Board of Trustees has determined that Mr. John G. Barrie, Jr.,
a member of the Board's Audit Oversight Committee, is an audit committee
financial expert. Mr. Barrie is "independent" for purposes of this Item 3 of
Form N-CSR. Mr. Barrie formerly served in various supervisory and managerial
positions in accounting and finance at Dominion Resources, Inc. and affiliates.
In these positions, Mr. Barrie was extensively involved in the preparation,
analysis and use of corporate financial statements. In the capacity of Assistant
Treasurer of Dominion Resources, Inc., Mr. Barrie had principal responsibility
for administering the investment of over $1 billion of retirement plan assets,
and was involved with internal and external auditors in establishing internal
controls and procedures relating to the administration and reporting of
retirement plan investments.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) - (d)
Fees for Services Rendered to the Registrant
- --------------------------------------------------------------------------------
FISCAL YEAR AUDIT FEES AUDIT-RELATED FEES TAX FEES ALL OTHER FEES
- --------------------------------------------------------------------------------
2006 $21,000 $0 $10,250 $0
- --------------------------------------------------------------------------------
2007 $22,000 $0 $ 4,000 $0
- --------------------------------------------------------------------------------
Audit fees include amounts for auditing and reporting on the financial
statements and the financial highlights included in the Fund's annual report to
the shareholders, issuance of the auditor's consent to be included in the
Amendment to the Registration Statement, issuance of the auditor's report on
internal controls for inclusion in form N-SAR and provision of comments on the
Fund's interim financial statements (as requested).
Tax fees include amounts for services rendered to the registrant for tax
compliance, tax planning and tax advice, including tax return preparation and
review of and participation in determining required income and capital gains
distributions.
There was (pound) 0 billed in 2007 by the registrant's accountants and (pound)
28,000 billed in 2006 by the registrant's former accountants (KPMG though August
31, 2006, BBD beginning September 01, 2006) for services rendered in connection
with reports on the internal control procedures of the investment management
operations of Baillie Gifford Overseas Limited ("BGO"), the registrant's
investment adviser, Baillie Gifford & Co. ("BG & Co."), the parent company of
BGO, and certain other affiliates. The engagements, which were between the
registrant's accountant and BG & Co., were approved pursuant to paragraph (c)
(7) (ii) of Rule 2-01 of Regulations S-X.
(e) (1) Engagements that are required to be pre-approved by the registrant's
Audit Oversight Committee may be pre-approved (i) at any regular or special
meeting of the Committee or (ii) by the Chairman of the Committee or any other
member of the Committee who is an independent trustee of the registrant if the
estimated dollar amount of the fee for the particular service does not exceed a
certain threshold.
(e) (2) Not applicable.
(f) Not applicable.
(g) The aggregate non-audit fees billed by the registrant's former accountant
and accountant (KPMG though August 31, 2006, BBD beginning September 01, 2006)
for services rendered to the registrant and rendered to the registrant's
investment adviser and any entity controlling, controlled by, or under common
control with the adviser that provides ongoing services to the registrant were
as follows:
2006: $599,598
2007: $0
The amounts included above for non-audit services rendered to the registrant's
investment adviser relate to its fiscal year ended March 31. Such amounts do not
include the fees billed by the registrant's accountants to BG & Co. for the
internal controls report described above. Such fees were (pound) 0 for 2007 and
(pound) 28,000 for 2006.
(h) In evaluating the independence of the registrant's accountant, the Audit
Oversight Committee of the registrant's Board of Trustees considered the
provision of non-audit services, which were not pre-approved pursuant to Rule
2-01(c)(7)(ii) of Regulation S-X, rendered to the registrant's investment
adviser and any entity controlling, controlled by or under common control with
the
investment adviser that provides ongoing services to the registrant and
determined that the provision of such services is compatible with maintaining
the principal accountant's independence.
ITEM 5: AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
The schedule is included as part of the report to shareholders filed under Item
1 of this form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The President and Treasurer of the registrant have concluded, based on their
evaluation of the effectiveness of the registrant's disclosure controls and
procedures (as defined in Rule 30a-3(c) under the Act) as of a date within 90
days of the filing date of this report on Form N-CSR, that to the best of their
knowledge the design and operation of such procedures provide reasonable
assurance that information required to be disclosed by the registrant in this
report on Form N-CSR is recorded, processed, summarized, and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms.
(b) There has been no change in the registrant's internal controls over
financial reporting (as defined in Rule 30a-3(d) under the Act) that occurred
during the registrant's second fiscal quarter of the second fiscal half-year
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
ITEM 12. EXHIBITS
(a)(1) Code of Ethics
(a)(2)(i) Certification of the Principal Executive Officer required by Rule
30a-2 under the Investment Company Act of 1940.
(a)(2)(ii) Certification of the Principal Financial Officer required by Rule
30a-2 under the Investment Company Act of 1940.
(a)(3) Not applicable.
(b) Not applicable.
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
(Registrant) BAILLIE GIFFORD FUNDS
-----------------------
By /s/ R Robin Menzies
--------------------------
R Robin Menzies, President
Date February 29, 2008
--------------------------
Pursuant to the requirements of the Investment Company Act of 1940, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By /s/ R Robin Menzies
--------------------------
R Robin Menzies, President
Date February 29, 2008
--------------------------
By /s/ Nigel Cessford
--------------------------
Nigel Cessford, Treasurer
Date February 29, 2008
--------------------------