Baillie Gifford has made a name for itself for investing in high growth companies with potential to make huge returns but there are some holdings that might surprise investors.
The firm has been among the early backers of some of the world’s largest companies, including high-profile investments in the likes of Amazon and Tesla, which have both soared.
From tractors to paint, there are a number of industries the firm invests in that many may not consider to be of the same calibre, but where the Edinburgh-based asset manager is staking a claim to future spoils. Below Trustnet highlights some of the firm’s more surprising stock picks.
Ryanair
First up is US and Ireland-listed budget airline Ryanair. The travel industry is notoriously cyclical, with profits dependant on the number of passengers carried.
It took a nosedive in 2020 when the world placed into Covid lockdowns, but has started to take flight recently and Baillie Gifford believes the firm is among those that stand to benefit the most from an increase in pent-up demand from travel-hungry consumers.
More recently, higher interest rates and inflation have pushed costs up, but again Ryanair has not suffered, according to Chris Davies, co-manager of the Baillie Gifford Euro Growth Trust. In fact, it is exactly this environment that has helped the stock to rise.
“It takes crises sometimes to accelerate market share and Ryanair’s market share over this crisis has gone up really quickly because all the airlines have retrenched. They’ve had to be recapitalised, issue debt and equity and have got themselves into all sorts of trouble,” he said.
Part of this is its ability to keep costs low. At Ryanair the average fare is about €50, while the average cost per passenger at one of its largest competitors (easyJet) is about €79, the manager said.
This is partially because the firm fits the brief for many during a cost-of-living crisis, offering cheap travel options. Chris Davies, co-manager of the Baillie Gifford Euro Growth Trust, said: “If you look at the average cost per passenger for easyJet it is about €79. That’s the story with Ryanair.”
Additionally, in an effort to keep costs low, the airline has started offering flights “to the back end of nowhere”, but locating them as near-city airports, something that has had “strong demand”, according to the fund manager.
“We’ve held Ryanair as a firm for a very long time. It is a growth business because partly because no one can match it,” said Davies.
Mastercard
Another area far from synonymous with Baillie Gifford is financials, yet the firm is keen on credit card provider Mastercard. Ben Drury, investment specialist at the firm, said it “sits at the heart of the global payments system” and “is the infrastructure upon which other payment applications are built”.
Mastercard should benefit from the rise of online payments around the world and is known as one of the safest and most reliable operators in the space.
“Since [Baillie Gifford] Global Alpha’s purchase in 2011, Mastercard has performed with remarkable consistency, with rising profitability and returns. Capital expenditure is minimal and cash conversion is around 100%,” said Drury.
The investment case for the stock is that the shift away from cash continues and its network remains the infrastructure bedrock for the industry, but there are reasons for even more optimism, said Drury.
“Longer term, there are new payment flows such as business-to-business (B2B), where there is the opportunity for MasterCard to take a leading role in the build out of the next generation, real-time, payment infrastructure. This will unlock the far larger B2B opportunity and create a durable moat that will drive sustained growth over the decade and beyond,” he said.
Kubota and Nippon Paint
Tractors may not be a natural fit for the Baillie Gifford stable, but $17bn Japanese tractor maker Kubota is another the firm is keen on.
Investment specialist Thomas Patchett said: “The focus remains on its inventory levels and its US operation (ride-on mowers for residential use), but the bigger/longer-term opportunity (we believe) exists in the automation of Asian paddy fields – an area of expertise it has finessed through decades of servicing the Japanese farmers.
“A stake in Indian business Escorts provides the company with an attractive entry into what is the world’s largest tractor market. Now trading at a decade low price-to-book ratio, the upside from herein looks increasingly exciting.”
The other shocking Japanese name invested in is Nippon Paint, a $16bn mid-cap painting business, which Patchett described as a “surprisingly attractive industry” for the firm.
Technically listed as an industrials business, he noted that paint has more going for it than traditional industrials thanks to being capital light, while the brand power that exists in the industry gives businesses a quality characteristic.
“Through subsidiary Nipsea, it provides us with exciting exposure to China, where Nippon Paint it is the number one provider of consumer paint,” said Drury.
“Although this market – and those involved – have been impacted by the property market slowdown, there remain several exciting long-term structural tailwinds for growth (per capita usage is still a third that of developed markets; wall space in meters-squared is equivalent to the US, India and Japan combined).”