While some US mega-cap stocks have captured investors’ attention thanks to strong performance in recent years, Baillie Gifford’s Gary Robinson believes there is a new class of companies which he thinks are the biggest companies of the future.
Robinson, manager of the £1bn Baillie Gifford US Growth Trust, the best-performing investment trust of 2020, said he prefers to focus on the few “exceptional growth companies” to generate strong long-term returns.
Citing a study carried out by Hendrik Bessembinder into the total wealth creation of the US market, Robinson explained that over the long term just a handful of companies make up the majority of returns. Indeed, just 0.45 per cent of companies are responsible for a quarter of wealth creation in the 31 three-year periods since July 1926.
He explained: “What investors should be doing, rather than trying to avoid losers is identifying companies who’ve got the potential to be in the 0.4 per cent, the real outliers.
“In other words, it’s these outliers that matter for market returns.”
Robinson admitted that an obvious criticism of this idea is to go passive and own the entire index, but he thinks that is unnecessary as there are three characteristics that can help identify these companies early on: addressing large market opportunities; an ability to build and sustain a strong competitive advantage; and, those with a “distinct culture” often run by founders “who have skin in the game, and […] an attachment to the company rather than the share price”.
Tech has been a significant theme for markets in 2020 – and a major one across Baillie Gifford portfolios – and Robinson believes that it’s still an area of opportunity for finding such “exceptional growth companies”.
“Now it’s tempting after we’ve had such a strong run for technology-led companies to question whether the best returns might be behind us,” the manager said. “But what’s interesting about this new class of companies that I’m going to talk about is that they’re only just getting started.
“And I think each of them has got the potential to go on and be one of the biggest companies in the world.”
As such, he highlighted three companies – Stripe, Shopify and Twilio – what he calls “scale as a service platforms”, software companies that deliver infrastructure services via the internet.
Stripe
The first company is Stripe, a privately-held, global payments platform and a top-10 holding for the Baillie Gifford US Growth Trust.
“It’s doing for online payments what Amazon Web Services [AWS] did for computing,” Robinson explained.
Stripe was founded by two Irish brothers to overcome the difficulty of accepting payments online.
“The payments world is messy,” Robinson said. “There’s complexity within and between regions.
“Each country has its own unique banks, credit cards, mobile wallets, cultural norms, regulators and regulations. It’s a really difficult landscape for any company to navigate, never mind a starter.
He continued: “Stripe helps customers deal with these complexities. Its software platform sits above the financial system and interacts with it on your behalf. It makes sending and receiving money as easy as transferring information.”
Shopify
The next company is Shopify, a Canadian e-commerce platform.
“Just like AWS and Stripe, Shopify is a platform that sits behind the scenes powering a big part of the digital economy. It processed $16bn worth of goods in 2019 and it looks like it’s going to do double that in 2020,” Robinson said.
Shopify was developed in 2000 by Tobias Lütke, who originally wanted to build an online snowboard shop but realised that the programme he had built from scratch was more valuable, Robinson said.
“I think the best way to think about Shopify as platform is like an operating system for retailers,” Robison said. “It provides retailers with all the tools they need to manage their businesses online.
“Merchants can use Shopify’s platform to build online shop, run digital marketing campaigns, accept payments, manage inventory and borrow money.
“What Shopify’s platform does in essence is help automate routine tasks, tasks which frees up time for entrepreneurs to focus on the product,” Robinson said.
“One great example of the power of Shopify is Kylie Jenner, who famously built her billion-dollar makeup line in Shopify with just seven full time employees,” he added.
Twilio
The final company is Twilio, a more recent addition to the Baillie Gifford US Growth Trust which Robinson added to the portfolio last year.
Twilio is a software platform that allows developers to integrate and manage its communications functionality, such as sending and receiving phone calls and texts through the company’s apps.
According to Robinson it allows companies to just pay for what they use, a “stark contrast [to] the old model”.
According to Robinson, all three stocks have market opportunities over $1trn in scale, a strong competitive advantage and are run by “visionary founders”, the trifecta of his key characteristics.
“The icing on the cake is that as well as being attractive investments, they’re also performing an important role for society, and making it easier for entrepreneurs to start and scale companies,” he concluded. "That’s going to level the playing field between the biggest companies and the smallest ones.”
According to Robinson, all three stocks have market opportunities over $1trn in scale, a strong competitive advantage and are run by “visionary founders”, the trifecta of his key characteristics.
“The icing on the cake is that as well as being attractive investments, they’re also performing an important role for society, and making it easier for entrepreneurs to start and scale companies,” he concluded. "That’s going to level the playing field between the biggest companies and the smallest ones.”
These three companies, along with AWS, account for almost one-fifth of the trust’s portfolio.
Since launch in 2018, the trust – which Robinson runs alongside Helen Xiong – has made a total return of 246.27 per cent, outperforming both the IT North American sector (57.95 per cent) and the IA Mixed Investment 40-85% Shares index (21.87 per cent).
Performance of fund vs sector & benchmark since launch
Source: FE fundinfo
The trust is trading at a 5.4 per cent premium to net asset value (NAV), is not geared and has ongoing charges of 0.75 per cent.