There is a lot to be said for a barbell approach to investment. Rather than investing with a few index-hugging middle-of-the-road managers, invest in managers with high conviction but utterly different approaches. These can provide excess return, or alpha. And for beta, or market return, rather invest with a cheap index tracker than with a low-conviction benchmark hugger.
A fund such as Schroders Global Recovery is a suitable deep-value portfolio. And a good fund at the other end of the spectrum would be Baillie Gifford Long Term Global Growth Equity Fund. Investors in this fund must realise that many of the investments are quite early in their life cycle. Baillie Gifford is serious about the expression “long term”.
A partnership based in Edinburgh, Scotland, it has run the Scottish Mortgage Investment Trust since 1909. Its first unlisted investment was into Malaysian rubber plantations in anticipation of the upcoming and new demand for car tyres.
Baillie Gifford has no outside shareholders pushing for short-term returns and it has never bought another firm, yet it has grown to $250bn, making it substantially larger than SA’s Public Investment Corporation. It offers growth equities and little else, having a bit of an apology for a fixed-income unit.
Baillie Gifford is now substantially bigger than its Edinburgh rival Martin Currie, which manages a modest $10bn. It may still be smaller than the combined Standard Life Aberdeen asset manager, but Standard Life Aberdeen is dysfunctional and shrinking while Baillie Gifford is well managed and growing.
Baillie Gifford partner Scott Nisbet (who was presenting at the recent Allan Gray summit) says the fund doesn’t focus on mature dividend payers such as Unilever or Nestlé, so should not be confused with a common or garden quality/growth fund. Long Term Growth is the firm’s most concentrated portfolio, with 30 to 60 shares.
He says it believes there is merit in talking to the management, but not about quarterly projections. It prefers to talk about the business’s competitive advantage and its differentiated culture. It asks companies if customers like them. So, not surprisingly it doesn’t own any banks.
For the first 30 minutes of a discussion on a share nobody is allowed to criticise it, and if they do they have to leave the room
It has a high hurdle that the business must be able to at least double sales over five years, but it prefers to look 10 years ahead or more. It hopes that each investment can increase in value fivefold over 10 years —known as a five bagger.
Nisbet says growth investment requires an optimistic view of the world, and the Baillie Gifford style can be described as “sunshine investing”. For the first 30 minutes of a discussion on a share nobody is allowed to criticise it and if they do they have to leave the room. After the 30-minute embargo some contrary views are tolerated, but it would be a career-limiting move to be too cynical about any of the large holdings.
Nisbet says the firm avoids groupthink as its partners have a wide range of backgrounds — there are many more liberal arts graduates than there would be in an SA fund manager. It is not a closed clique of accountants and chartered financial analysts.
Of course, the weather isn’t always sunny. Nisbet says in 2008, when growth shares were hammered, the firm was 15% behind an already poor MSCI World benchmark.
Baillie Gifford owns 10% of electric car manufacturer Tesla, and it comprises about 5% of the Long Term Growth fund. Nisbet says there is only a 30% chance that Tesla will be at least a five bagger, but if it changes the industry, the returns could be much higher than that. It has already made substantial progress in seven years, growing from 5,000 cars to 400,000. And if it fails the fund will only lose its initial stake.
Tencent and Alibaba
The fund is inevitably skewed towards technology, the main exception being Kering, owner of fashion brands such as Gucci and Saint Laurent. There have been times in the cycle, however, when the largest shares have been commodity shares such as Petrobras, Vale and Gazprom.
The largest share is predictably Amazon, at 8.5% of the fund. It is classified as a retailer but it is technology that builds the platform. Next at 7.7% is Illumina, which specialises in genetic sequencing. Chinese internet giants Tencent and Alibaba (almost 15% of the fund) make up a larger proportion than Facebook and Alphabet (a combined 8%). Another of the shares of tomorrow is Nvidia, which makes gaming cards for video games.
Baillie Gifford invests in technology companies even before they list on public markets, including Ginkgo Bioworks in Boston and Bolt Threads in San Francisco.
Nisbet says growth investment does not have gurus of the renown of Benjamin Graham or Warren Buffett. The closest is Fidelity’s Peter Lynch. But Long Term Growth would have been the fund for him. Lynch was a strong believer in diversity, investing in a range of companies doing a good job.
In contrast, Baillie Gifford Long Term Growth, more than any other fund available on the SA market, focuses on chasing unicorns. Tesla still looks speculative, but imagine how bizarre it seemed when Elon Musk started it, when Baillie Gifford was one of its early backers.
Nisbet says that as Scots the partners are believers in a frugal approach. It is rolling out a private equity fund that will have a flat fee of 0.95%, compared with the standard industry practice of 2% plus 20% of profit.
Its Managed Fund is a very good one-stop investment. It is a lot more conservative than the Long Term Growth Fund, with 20% in fixed income and a very fair 0.45% annual fee.
Baillie Gifford has also registered its Worldwide Discovery Fund, which provides diversity as a mid- and small-cap fund.
• Cranston is a Financial Mail associate editor.
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