At Baillie Gifford, a 112-year-old investing partnership in Edinburgh, the short-term outlook doesn’t matter all that much – not even at times like the present, when the short term involves a global plague and the worst economic downturn in decades.
The important question is still what a prospective investment will look like in five to 10 years, says investment manager Lawrence Burns.
“Whether a company has a good or bad quarter really doesn’t matter to us,” he said in a phone interview. “We’re searching for outlier companies, ones that have the potential to multiply an investor’s money 10 to 15 times.”
Baillie Gifford has carved out a niche searching for those rare outperformers. It is one of the world’s leading growth investors, managing or advising on US$290-billion in assets for investors around the world.
Unusually for an investment manager, it stresses the importance of being positive. Pandemic or not, its investment process emphasizes the potential upside in a business – the best case as opposed to the base case.
Tough questions do get asked, Mr. Burns emphasizes, but especially in the early stages of researching investments, the firm wants to avoid snubbing out good ideas. It figures that one investment that goes up tenfold can offset many other investments that fall short.
“People tend to focus on avoiding loss,” he says. “What is just as important is recognizing businesses that are capable of tremendous growth.”
Its early investment in Tesla Inc. shows how that approach can pay off. Baillie Gifford first bought shares in the upstart automaker in 2013 and is now its largest outside shareholder, with a stake worth an estimated US$9-billion.
Thanks to Tesla and other prescient early bets, the firm’s growth-oriented strategy has bloomed in recent years. For instance, its Global Alpha Fund, with $2.6-billion in assets, achieved an average 14.6-per-cent annual return in the five years to the end of 2019, far outpacing the market.
Conventional wisdom is that investors should take refuge in conservative value stocks during slumps like the present one. However, the opposite approach has tended to work out better in recent downturns, Mr. Burns contends. Crisis periods have helped accelerate change by encouraging customers to try new approaches.
Many locked down households, for instance, are now experimenting with novel methods of getting food to their doors. Baillie Gifford has invested in several companies at the forefront of that industry.
Its holdings include Ocado Group PLC, a British supermarket that has been running a purely online grocery business for almost 20 years. Ocado, which is listed on the London Stock Exchange, has already signed international partnerships with Kroger Co. in the United States and the Sobeys chain in Canada. Mr. Burns thinks its expertise in warehouse robotics positions the British grocer to be a long-term winner.
Other food-related holdings include HelloFresh SE, the German company that has built the largest meal-kit operation in the world, as well as food delivery giants such as Germany’s Delivery Hero SE and China’s Meituan Dianping. All of them are market leaders with huge economies of scale. Meituan, for instance, delivers up to 30 million meals a day, Mr. Burns notes.
Many companies in Baillie Gifford’s portfolios enjoy similarly dominant positions. Tesla, for instance, is the undoubted pacesetter in electric vehicle technology, with a substantial lead over traditional auto companies.
Many key holdings also benefit from network effects, in which each new participant increases the value of the overall system to other members.
The network effect can manifest itself through several channels. One way is by providing companies with detailed data on users’ preferences, which then allows those networks to better predict what other users will like.
Consider Spotify Technology SA, the Stockholm-based music streaming service, which Baillie Gifford holds in many of its portfolios.
Mr. Burns acknowledges that Spotify is in a fiercely competitive market for online music, but praises the company’s market-leading accumulation of data on what users look at and when they like it. That, in turn, feeds into artificial intelligence software that has allowed Spotify to achieve unrivaled engagement rates among its listeners.
As Spotify demonstrates, Baillie Gifford is strongly global in its outlook. Its investments span the usual U.S. giants, such as Amazon.com Inc. and Alphabet Inc., but also Japan’s SoftBank Group Corp. and China’s Alibaba Group Holdings Ltd., as well as Canada’s Shopify Inc.
What unites these companies is room to grow. Shopify, for instance, is currently handling less than 1 per cent of U.S. retail sales through its e-commerce platform. Baillie Gifford figures it should be able to expand the gross value of those merchandise sales at a 30-per-cent-plus clip for years to come.
If that sounds rather hopeful, so be it. “We think it makes sense to understand the things that could go right, as well as wrong,” Mr. Burns says.
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