Baillie Gifford, the Edinburgh-based money manager, has built a stellar investment record for over 110 years by separating signal from noise. The firm invests in public and private companies with long-term growth potential, regardless of macroeconomic variables and short-term market movements. His long-term investment horizon and easy familiarity with new technologies made Tom Slater, director of US equities and portfolio manager of his long-term US equity and global growth funds, a natural choice to join. Barron recent Centennial Roundtable, whose members were in charge of imagining the next 100 years.
Consider the edited interview below as a continuation of that conversation, but with a focus on the companies offering the most exciting investment opportunities now. Slater is a joint manager, with Barron Roundtable member James Anderson of Baillie Gifford’s
Scottish Mortgage Investment Trust
(ticker: SMT.UK), with approximately £ 18 billion ($ 25 billion) under management, and co-manager of the $ 145 million
Baillie Gifford’s US Equity Growth
background (BGGSX). Both have five-star ratings from Morningstar. Scottish Mortgage shares were up 99% in the 12 months ended March 31; US Equity Growth’s total return was 73% for the year ended June 15, placing it in the top percentile of Morningstar’s high-growth category.
Barron: After a stellar 2020, growth stocks are facing challenges. You are worried
Tom Slater: We do not focus on short-term movements in stock prices. We focus on exciting companies with long-term opportunities. Our average holding period is five to ten years. Only in that type of time horizon do fundamentals drive the stock price.
Many people concentrate on trying to predict economic variables. They are inherently extremely difficult, if not impossible, to predict. At the same time, there are many predictable trends: in communications, computing, machine learning, energy generation and storage, gene sequencing, and synthetic biology. We focus on predictable trends and the opportunities they create.
At our Centennial Roundtable, you observed that some technologies in biology are on as good, if not better, trajectories than Moore’s Law. How can investors profit from this?
The cost curve for genetic sequencing has decreased much more dramatically than the cost of computing power under Moore’s Law. Now the cost reductions are spreading to adjacent areas. Gene sequencing is generating huge volumes of health data. The cost of processing and storing this data is falling rapidly, as is the cost of applying machine learning to the data. An add-on is our ability to start printing [copying] DNA or RNA.
[MRNA] it is printing RNA sequences. We are talking about programming biology, only instead of coding with ones and zeros, they are Gs, Ts, As and Cs [guanine, thymine, adenine, and cytosine—sequenced nucleobases that form the genome].
Moderna’s ability to produce a safe and effective messenger RNA-based vaccine should increase belief in the company’s ability to produce vaccines to address other huge and unmet needs, such as HIV / AIDS. Ginkgo Bioworks, another synthetic biology company, goes public through a merger with a SPAC [special purpose acquisition company]. It involves writing strings of DNA code that can be used in biological manufacturing processes.
Won’t Moderna’s success attract the competition?
When a technology undergoes a sea change, not just the evolution of an existing paradigm, it is often difficult for established companies to embrace that change. This technology is much more likely to empower new businesses and new business models. That has been the case in the automotive industry until now with the development of electric vehicles or EVs. Interestingly, pharmaceutical companies with large vaccine franchises have not created effective Covid-19 vaccines.
Speaking of electric vehicles, Baillie Gifford has cut its stake in
[TSLA] to less than 2% of the company’s shares from a peak of more than 7%. What caused this?
Tesla is still a huge turnout. In part, the sale reflects the strength of the share price and the operating success of the company in driving it forward. And, in part, it’s just thinking about the odds of upside from here.
What is the next Tesla, in electric vehicles and in general?
China is the world’s largest auto market, and I’d be surprised if Tesla didn’t have a domestic Chinese rival. We are investors in
[NIO], who has the opportunity to be that player.
What are the characteristics that make Tesla so interesting? More than 100 million cars are sold each year. It is a vast market. They have approached it in a unique way, with a founding CEO with a significant component of his own wealth tied to the company. Tesla has doggedly pursued a long-term view, not caring too much about what the stock market thinks. There have been 10 times during our ownership period that the stock dropped 30% or more.
Moderna has a technology platform with a broad enough application to be interesting.
[ILMN], which makes genomic sequencing machines, has a similar opportunity. Chinese companies like
[3690.Hong Kong] in local services, and
[PDD] In the grocery category, they are fascinating, in part due to the scale of their ambition. They are increasingly changing the entire supply chain in their industries. The delivery of prepared food to Western markets began as a take-away product. The scope is much greater in China. There is more of a culture of eating prepared food. Kitchens designed in apartment blocks in China are getting smaller and smaller, and those apartment blocks are being designed with the service infrastructure for efficient food delivery. As you build a reliable, fast-delivery infrastructure, there are adjacent categories.
ByteDance is also fascinating. Tik Tok [its social-media subsidiary] It has generated controversy in the US, but ByteDance is 95% about China and how quickly the company has scaled the domestic advertising market. In China, very large companies with founding leaders are taking advantage of the scale of the domestic market.
Would you rather invest in companies led by founding CEOs?
We want to invest in people-led companies that optimize long-term results. That’s more common in founders, although that doesn’t mean you can’t get it in professional CEOs.
Francis deSouza has been the CEO of Illumina since 2016. The company has a large revenue base; it is very profitable and is growing predictably. Last year, Illumina bid $ 8 billion for Grail, a pre-revenue developer of cancer blood tests, based on where it thinks this market will go in the next five to 10 years. The stock market didn’t like it, but this is exactly the kind of move that founders make.
Which private companies should investors watch out for?
Private companies like ByteDance and SpaceX are valued in the tens of billions of dollars. SpaceX is trying to reduce the cost of access to space by several orders of magnitude and is creating a new market: commercial access to space. We are also investors in Relativity Space, which uses 3D printing to build its rockets.
Recently, it reduced its stakes in
We have been shareholders of Amazon for 16 years. Prior to last year, reductions were made for the sake of diversification within a fund. But Amazon is still a huge stake for us. He still has great opportunities ahead. The grocery store is one; It is a huge category that is slowly moving online.
On the other hand, the retirement of Jeffrey Bezos from the CEO position is an important factor in our analysis of the company, along with the recent retirement of Jeff Wilke, who ran the consumer business. [Bezos will become executive chairman on July 5.] If you think Bezos’s vision and drive have been important in getting Amazon to this point, even a partial step back is reason to exercise more caution.
What other investments are you excited about?
[LMND] started out as a seller of renters insurance, which lends itself well to online distribution, specifically mobile device distribution. The company created a great consumer experience. Allows clients to nominate a charity to receive excess float in their insurance pool. That creates an incentive not to exaggerate a claim. Renters insurance is often the first insurance product someone buys. If the experience is great, they will consider buying the same brand of auto or pet or homeowners insurance. Lemonade is building a modern technology stack in an industry with big starters still running on mainframes.
We recently invested in
[RXRX]. The common theme, again, is to apply information technology much more efficiently than traditional companies have done.
[AFRM] also fits this theme. Loans at the point of sale have traditionally been a bad experience for consumers, with high interest rates and high penalties if you miss a payment. By using technology, Affirm has created a more consumer-friendly experience, which is driving greater adoption of the service. The model has a long runway.
When does the lack of benefits become an impediment to investment?
Whether a business is making a profit or not is almost tangential to the amount of value that is being created. Think of a software as a service company. Registering a new customer can cost a lot of money in the first year. But the revenue stream generated from that sale could last for decades. As an investor, I would like the company to register as many clients as possible, which means they are going to lose a lot of money in the beginning. But if they can hang on to those customers, the value creation could be huge.
Write to Lauren R. Rublin at [email protected]