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- Baillie Gifford is a leading investment firm managing over $465 billion in assets.
- At an exclusive event, four of its star stock-pickers shared their outlook on key themes, including the metaverse.
- They also highlight the rationale for some of their highest-conviction ideas.
Asset manager Baillie Gifford has become renowned for being ahead of the curve.
In the space of ten years, the more than a 100-year-old Scottish firm went from being a little-known boutique investment house to an industry juggernaut, with assets under management surging over 380% to reach $465 billion under management today.
This rate of growth parallels that of the returns seen from many of the company’s early bets, such as those on Amazon, Facebook, Alibaba, Tesla and Netflix .
Baillie Gifford’s flagship fund, the Scottish Mortgage Investment Trust, returned 1,166% investors over 10 years, while the lesser known Monks Investment Trust returned 348%.
The company attributes its outperformance to its strategy of seeking out stocks that have the potential to double over five years and triple over 10. This strategy even applies to the firm’s Keystone Positive Change Investment Trust, which aims to equally balance two objectives of providing attractive returns and contribute to a more sustainable world.
“Purpose complements profits,” said Kate Fox, co-manager of the Keystone Positive Change fund. “When it comes to returns, what we’re looking to identify are companies that have got potential to double over a five year time horizon. So we’re still growth investors.”
Over a one-year period Fox’s fund has returned 43% to investors, but the managers tend to focus more on the long-term.
“Our careers are measured in 2, 3, 4 decades,” said Ben Durrant, co-portfolio manager of the firm’s Pacific fund. “And that’s the right kind of timeframe for looking at how these companies evolve.”
At an exclusive media event, four of Baillie Gifford’s star stock-pickers shared the key trends they are watching and the thesis behind some of their highest-conviction picks.
Collectively, the portfolio managers have returned 356% to investors over a five-year period, with portfolios ranging from being concentrated on regions and specific countries, such as Asia and Japan, to global portfolios focused on specific themes, such as positive change and long-term global growth.
The common element across each portfolio is the focus on the growth of investments and key to identifying those big winners is spotting disruption and emerging trends.
One of the hottest trends right now is the metaverse, a virtual environment that aims to parallel the real world through computer generation and virtual reality. The term was catapulted into the mainstream when Facebook announced in October it would rebrand to Meta and invest in the space.
Despite the surge of interest in the metaverse, Spencer Adair, who oversees the $4.6 billion Monks fund, which features Facebook, remains cautious.
“I keep coming back to why this is better for customers?” Adair said. “Why will people like spending their time here in this online area? Why is that better than anything else that they can do? No one’s really given a good answer to that yet. So until someone does, then it’s still an interesting concept, but not one we are active in.”
Even if Adair’s questions get answered, he’s not convinced the Big Tech leaders of today will be the winners in the metaverse.
“My starting point is I’m pleased that some of the existing companies are trying to think it through,” Adair said. “I have my doubts that the leaders of tomorrow will come from that. It’s hard to innovate … changing the company’s name is a sign that Mark Zuckerberg is trying extremely hard to actually innovate faster. But let’s see.”
Adair is not completely dismissing the metaverse, he just notes it’s in its very early stages and many new companies will emerge.
This cautious view is shared by Durrant when it comes to the rise of play-to-earn blockchain games in Asia where some individuals have been playing games like Axie Infinity and earning more than the minimum wage.
“We’ve looked at it a reasonable amount,” Durrant said. “The best performing mid-cap company in Korea is a play-to-earn company and we’re still puzzled by the long-term economics there in terms of the fundamental value of what people are producing within these games.”
Right now, the value is coming from bringing more people into playing the game, Durrant said. The challenge is identifying what the utility is for that asset in five years’ time, he added.
‘Hopefully there’s a value for the broader population if they can actually at least get a short term benefit from that,” Durrant said. “But long term, I think the jury’s still very out.”
Instead, Durrant’s focus is on markets like Indonesia and India, where he seeing more exciting growth opportunities. We lay out the portfolio managers top high-conviction stock ideas that highlight the major trends they are watching.
1. Sea Limited
Thesis: SEA Limited is a company operating in Southeast Asia that specializes in entertainment, e-commerce and financial services currently with a $145 billion market capitalization.
“We’re reasonably comfortable that this could be Southeast Asia’s first trillion dollar company in five to 10 years,” Durrant said.
There’s a significant pace of growth with a multi-billion dollar revenue line that is growing over 100% year-over-year, Durrant said. He highlights the market is continually failing to recognize this opportunity, with many sell-side analysts forecasting growth between 2% and 20%.
This misunderstanding creates opportunities for long-term stock pickers in the region.
Narratives from investors can be binary, driven by local investors who often don’t have the context for the investments and foreign investors that can get very enthusiastic and flighty when things turn, Durrant said.
Thesis: TSMC, the world’s largest contract chipmaker, is seen as a duration company within Durrant’s portfolio.
“We just think it can grow at 15% a year from now until as far forward as you care to imagine where others will do it for a few years, and then multiple on it,” Durrant said. “Whereas you really believe that these businesses can grow for far longer.”
Thesis: In March of 2020, Durrant and his team used the market sell-off to gain exposure to a lot of Indian growth businesses that were completely mispriced for a short period of time.
Durrant believes there will be an emergence of a 10- to 15-year capital investment cycle in India.
Gaining further exposure to the market, they recently added PB Fintech, the parent company of PolicyBazaar, an insurer that caters to middle-class Indians. Durrant believes PolicyBazaar’s approach is much more cost-efficient, as it takes the service online and also makes it easier for people to understand their policies.
“That’s a classic Baillie Gifford investment,” Durrant said. “This is a business that listed as a $5 billion to $6 billion [company], with $100 million of revenue. But you can see on a principle, long-term basis that that business is arguably half the price that it should be if it does work out. And so that’s what we found quite attractive there”
4. Estee Lauder
Thesis: One quarter of Adair’s portfolio is focused on unloved companies that are facing short-term headwinds with negative headlines, but have long-term structural growth opportunities.
In March 2020, he noticed an opportunity to invest in make-up brand Estee Lauder, which got beaten up in the market sell-off because half its revenues either came from duty-free stores at airports or brick-and-mortar shops.
Make-up isn’t somehow going to go out of favor even if we’re all stuck at home, Adair said.
“We thought they could have a chance of actually pivoting their business model towards more direct to their consumers,” Adair said. “And what’s brilliant is that they know a lot more about you.”
As the company moves further online, they have, not only a better understanding of their own customers, but they can also cut out the middle man by shipping directly, he added.
5. Rio Tinto
Thesis: Rio Tinto, which mines and processes mineral resources, sits in Adair’s portfolio because concerns around climate change and the shift to renewable energy sources have made it underloved.
“In a world where we’re having to build physical defenses against climate change, a lot of those loose materials will be required in the future,” Adair said. “Some of them produce a lot of carbon and we’re trying to work with Rio to lower that. But that’s what we’ve assessed. I think we’ll still be dependent on copper 5, 10, 20 years into the future.”
Thesis: Softbank’s been a holding in Brett’s portfolio for some time, but he still remains bullish.
“It’s just a simple fact that Softbank trades about half the size of the sum of its parts,” said Brett, describing how Softbank’s portfolio contains some really interesting technology investments.
Softbank chairman Masayoshi Son invests predominantly in early-stages companies, many of which may not work out. Nonetheless, Softbank is still the second-largest contributor to Brett’s fund’s performance over a five-year period and over the long-term.
“Mr. Son has managed to become, depending on the day of the week, the richest, or the second richest person in Japan,” Brett said. “And I personally think he very much knows what he’s doing over a very long investment career, so that’s why it continues to be a big position in the portfolio.”
Sometimes companies in Japan struggle with the presentational aspects of good growth stories, Brett said. But this also gives him and the team an advantage as stock-pickers, as they’ve had to adapt to a slightly different approach to thinking about investing.
Thesis: Adair likes to find stocks for his portfolio that have the potential to double over five years or treble over 10 years.
So, it it might seem odd to hold a legacy firm like Microsoft.
But Adair still sees a lot of opportunity coming from the company’s shift to offering subscriptions for their products. It had an early lead in the use of technology in the home, with its Xbox gaming system and Smart TVs. And most recently, they’re at the forefront of developments in cloud-based technology.
“It’s the cloud element, which really drives the growth for us over a five-year period. That’s where scale really matters, where trust really matters,” Adair said.
Microsoft has already built many of these relationships with large corporations and governments.
“The heritage of Microsoft bizarrely is part of their advantage,” Adair said.
Thesis: During the pandemic, budget airline RyanAir signed long-term supply contracts at a massive discounts to list prices, Adair said.
“They were brave during the lockdown,” Adair said.
He’s now grappling with the question of what commercial air travel will look like in the next 10 to 20 years. He feels comfortable that flying will have a nice recovery within the next decade. He thinks “flight shaming” will become a more prominent trend, but mainly among business travelers, as companies work to cutting their carbon output.
This is an area to which RyanAir, which caters predominantly to individuals, has less exposure.
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