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Baillie Gifford, the Edinburgh-based fund manager, has built a stellar investment record spanning more than 110 years by separating signal from noise. The company invests in public and private companies with long-term growth potential, independent of macroeconomic variables and short-term market movements. His long-term investment horizon and good knowledge of new technologies made Tom Slater, head of US equities and portfolio manager of his long-term US equity and global growth funds, a natural choice to join Barron recent centenary roundtable, whose members were tasked with imagining the next 100 years.
Think of the edited interview below as a continuation of that conversation, but with a focus on companies that currently offer the most exciting investment opportunities. Slater is co-manager, with Barron James Anderson Roundtable Member, 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 Equities US Growth
funds (BGGSX). Both carry five-star Morningstar ratings. Scottish Mortgage shares rose 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 an exceptional year 2020, growth stocks are facing challenges. Are you affected?
Tom Slater: We don’t focus on short-term stock price movements. We focus on interesting companies with long term opportunities. Our average holding period is five to ten years. It is only over this sort of time horizon that fundamentals determine the stock price.
A lot of people try 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 production and storage, gene sequencing, and synthetic biology. We focus on predictable trends and the opportunities they create.
During our centennial roundtable, you observed that certain technologies in the field of biology are on trajectories as good, if not better, than Moore’s Law. How can investors profit from this?
The cost curve for gene sequencing has fallen much more dramatically than the cost of computing power under Moore’s Law. Now the cost reductions extend to adjacent areas. Gene sequencing generates huge volumes of health data. The cost of processing and storing this data is rapidly decreasing, as is the cost of applying machine learning to data. Complement is our ability to start printing [copying] DNA or RNA.
Moderna
[MRNA] prints RNA sequences. We are talking about programming biology, only instead of coding with ones and zeros, it’s 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 vaccine based on messenger RNA is expected to increase the company’s belief in the company’s ability to produce vaccines to address other huge and unmet needs, such as the HIV / AIDS. Ginkgo Bioworks, another synthetic biology company, goes public through merger with SPAC [special purpose acquisition company]. He writes DNA code strings that can be used in organic manufacturing processes.
Won’t Moderna’s success attract competitors?
When a technology undergoes a radical change, and not just the evolution of an existing paradigm, it is often difficult for the incumbent companies to adopt this change. It is much more likely that this technology will enable new businesses and new business models. This has been the case until now in the automotive industry with the development of electric vehicles, or EVs. Interestingly, pharmaceutical companies with large vaccine franchises have failed to develop effective vaccines against Covid-19.
Speaking of electric vehicles, Baillie Gifford reduced his stake in
You’re here
[TSLA] to less than 2% of the shares of the company from a peak of more than 7%. What motivated this?
Tesla remains a big turnout. In part, the sale reflects the strength of the share price and the operational success of the company in this area. And part of it is just thinking about the odds upside from here.
What’s the next Tesla, in EV and more broadly?
China is the world’s largest auto market, and I’d be surprised if there wasn’t a Chinese challenger for Tesla. We are an investor in
NIO
[NIO], who has the opportunity to be that player.
What are the characteristics that make Tesla so interesting? There are over 100 million cars sold every year. It’s a huge market. They approached him in a unique way, with a founding CEO with a significant portion of his own wealth tied to the business. Tesla has stubbornly pursued a long-term view, not caring too much about what the stock market thinks. There were 10 occasions during our ownership period where the stock fell 30% or more.
Moderna has a platform technology with a broad enough application to be interesting.
Illumina
[ILMN], which manufactures genomic sequencing machines, has a similar opportunity. Chinese companies such as
Meituan
[3690.Hong Kong] in local services and
Pinduo
[PDD] in the grocery category, are fascinating, in part because of the scale of their ambition. They are increasingly changing the entire supply chain in their industries. The delivery of prepared foods to Western markets began as a take-out substitute. The reach is so much greater in China. There is more than one culture of eating prepared foods. The designed kitchens in apartment buildings in China are getting smaller and smaller, and these apartment buildings are designed with the service infrastructure for efficient food delivery. As you build a reliable rapid delivery infrastructure, there are adjacent categories.
ByteDance is also fascinating. TIC Tac [its social-media subsidiary] has sparked controversy in the United States, but ByteDance is 95% talking about China and how quickly the company has grown the domestic advertising market. In China, very large companies with founding managers are taking advantage of the size of the domestic market.
Prefer to invest in companies run by founding CEOs?
We want to invest in companies led by people who optimize long-term results. It’s more common with founders, although that doesn’t mean you can’t get it with professional CEOs.
Francis deSouza has been CEO of Illumina since 2016. The company has a significant revenue base; it is very profitable and grows predictably. Last year, Illumina made an $ 8 billion offer for Grail, a developer of pre-earning cancer blood tests, based on the direction of that market over the next five to ten years. The stock market didn’t like it, but it’s exactly the type of move the founders are making.
Which private companies should investors watch out for?
Private companies like ByteDance and SpaceX are valued at tens of billions of dollars. SpaceX attempts to reduce the cost of access to space by orders of magnitude, and creates a new market: commercial access to space. We’re also an investor in Relativity Space, which uses 3D printing to build its rockets.
Recently, you reduced your holdings by
Amazon.com
[AMZN]. Why?
We have been shareholders of Amazon for 16 years. Prior to last year, any reduction made was in the interest of diversification within a fund. But Amazon remains a big holding company for us. He still has great opportunities ahead of him. The grocery store is one of them; it’s a huge category that is slowly moving online.
On the flip side, the removal of Jeffrey Bezos from his CEO role is a big factor in our analysis of the company, as well as the recent retirement of Jeff Wilke, who ran the consumer business. [Bezos will become executive chairman on July 5.] If you think Bezos’ vision and drive has been important in getting Amazon to this point, even a partial pullback is reason for more caution.
What other investments are you passionate about?
Lemonade
[LMND] started out as a seller of renters insurance, which lends itself well to online distribution, especially mobile device distribution. The company has created a great customer experience. It allows clients to nominate a charity to receive the excess float in their insurance pool. This creates an incentive not to exaggerate a claim. Renter’s insurance is usually the first insurance product a person purchases. If the experience is great, they will consider purchasing the same brand of pet, car, or home insurance. Lemonade is building a modern tech stack in an industry with big historical players still running on mainframes.
We recently invested in
10X Genomics
[TXG] and
Pharmaceutical recursion
[RXRX]. The common theme, again, is to apply information technology much more effectively than incumbents have done.
Affirm holdings
[AFRM] also fits this theme. Point-of-sale lending has traditionally been a bad experience for consumers, with high interest rates and steep penalties if you miss a payment. By using technology, Affirm has created a more user-friendly experience for the consumer, resulting in greater adoption of the service. The model has a long runway.
When does the lack of profit become a brake on investment?
Whether or not a business is currently making a profit is almost tangential to the value created. Take a software as a service business. Signing up a new customer can cost a lot of money in the first year. But the revenue stream generated by this sale could last for decades. As an investor, I would like the company to sign as many clients as possible, which means they are going to lose a lot of money up front. But if they can hang on to those customers, the value creation could be massive.
Thanks, Tom.
Write to Lauren R. Rublin at lauren.rublin@dowjones.com
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