Taking a long-term approach to investing is hardly a novel strategy. Just yesterday Blue Whale’s Stephen Yiu said that focusing on a company’s earnings prospects over a minimum period of three years gives you an edge over a market that focuses all its resources on what will happen over the next quarter, while last week Baillie Gifford’s Kirsty Gibson told investors not to waste their time looking at what a company does today.
However, Moritz Sitte of the Baillie Gifford European fund likes to hold companies that are willing to take a long-term focus to the extreme – including one that likes to plan for the next 50 years.
Sitte’s strategy involves identifying what he thinks are great businesses with the potential to deliver outsized returns. For example, although many investors turn their noses up at Europe, he pointed to research going back to 1988 which shows 73 continental companies with a market capitalisation of at least $750m in today’s money rose more than 10 times within a 10-year period.
Best-performing $750m+ European stocks since 1988
Source: Baillie Gifford
The manager begins his process by assessing four “gears” – growth, edge, returns and alignment.
“‘Growth’ is about identifying structural growth opportunities rather than cyclical or temporary ones,” he explained.
“I guess that is really not about looking at the next couple of quarters, but about looking at five or 10 years. Asking, where could this business end up, what are the opportunities, what problems does it solve for its customers?”
‘Edge’ refers to why a particular company will succeed over its competitors. Sitte said there are numerous tangible economic advantages that he spends a great deal of time researching, such as economies of scale, outspending competitors in terms of R&D (research & development) and the strength of distribution networks.
However, he added that what he has learned over the years is that you need to spend just as much time looking at intangible factors such as a company’s culture and how it actually operates.
“For example, if you look into our portfolio, you will find many businesses that are run in a very decentralised manner,” he explained.
“Now because a business is run in a decentralised way, it doesn’t necessarily mean it is run in a good way.
“But what we find is what makes companies with a very decentralised organisational system work is that they are often very entrepreneurial, because they give their employees, the divisional line managers, a lot of trust and responsibility and that tends to be quite motivating for people and brings out the best in them.”
Next is ‘returns’, which is not about near-term price-to-earnings ratios, for example, but about whether the manager can see the company doubling investors’ money in five years’ time.
Last up is ‘alignment’, which refers to the people that run the business and ensuring their interests are aligned with Sitte’s. The manager said that most of his top-10 stocks have “an inside owner”, meaning a foundation, founder or a family.
He pointed out this isn’t automatically a good thing, saying you have to dig deep to ensure these people are actually good at their job and it is not just nepotism in the case of family-run businesses, for example.
“But if you have an owner who is really committed to pass the business on to their family or the next generation, that tilts the odds in our favour,” he continued.
“It is not just about the alignment between the owners and the operators, it is also about alignment with customers, operators, suppliers and society at large.
“We spend more and more time on that, because I think if you want to have success in the long run, you can’t just rely on higher prices for your customers. That might work in the short term, but over the long term you want a business that aligns itself with the interests of others.”
Sitte does not have a view on sectors or regions, saying a great business is a great business whether it is based in France or Italy.
Baillie Gifford European currently has a bias to Swedish companies, but this is not driven by a macroeconomic view on the country’s growth prospects, for example. Instead, the manager attributed this to the preponderance of family-owned companies in Sweden – “and good family ownership in the sense that they treat minority shareholders very well, they don’t use it as their own piggy bank”.
“These are companies that are run by families that really want to pass down to the next generation,” he added.
“A good example would be [industrial equipment manufacturer] Atlas Copco. It tells its operating managers its time horizon is 50 years, for the next generation of the family, and we think that is fantastic.”
Data from FE Analytics shows Baillie Gifford European has made 289.75 per cent over the past decade compared with gains of 168.29 per cent from the IA Europe ex UK sector and 154.51 per cent from its MSCI Europe ex UK benchmark.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
It is £468m in size and has ongoing charges of 0.59 per cent.