Active managers are focusing less on fundamental investment analysis and more on trying to outsmart one another to achieve immediate short-term gains, according to Baillie Gifford’s James Budden, who said the firm’s long-term approach can lead to better outcomes.
Budden, director of marketing and retail distribution at Baillie Gifford, said the fund management industry has lost sight of what investing should be, which led the firm to back its “actual” investment approach.
“We have become increasingly frustrated that we are lumped in with a whole range of active managers,” the marketing director said.
“We wished to create a new category, distinct from those whose views may be driven by short-term market sentiment and whose activity is more akin to trading than investing.”
He explained: “Actual investing is the process of allocating capital to actual companies and actual projects over the long term rather than the trading of existing assets over the short term.”
Actual investment is a long-term approach that ignores short-term volatility.
“We look to find great companies and hold their shares over time during which we expect that their fundamental attractions as businesses will be reflected in their share prices,” Budden (pictured) said.
“There will be ups and downs, and indeed often this provides opportunity to invest more in a company at a good price.”
Much of the industry is too focused on short-term returns, rather taking a risk to carry through actual investment projects that provide value to society while making profit for investors, according to the asset management firm.
Such “actual” investments are how sustainable profits are generated and wealth is created, Budden said.
These investment ideas come from companies that are trying to make a meaningful impact in certain defined areas, such as education, social inclusion, healthcare, or the environment.
Investing in actual companies and projects helps create wealth and benefits a range of stakeholders – investors, employees, suppliers, customers, and hopefully society in general, he said.
“It is how capitalism started and should work,” said Budden. “Simply trading assets only seeks to advantage those involved in the transaction.”
Actual investors aim “to own companies rather than rent them,” according to Budden.
Baillie Gifford’s long-term growth approach is well-known, with the firm aiming to invest over a 5-10 years period. Its funds are usually defined by a high active share and low turnover.
To illustrate how “actual” investing is embedded within its portfolios, Helen Xiong, co-manager of the Baillie Gifford US Growth Trust, highlighted three growth stocks that it is backing over the long term and making a difference in their respective field.
First up is Illumina “a world leader in gene-sequencing technology”, according to the manager.
“In 2002, the cost of sequencing a human genome was about $100m, which has now fallen to about $1,000,” she said. “This rapid reduction in cost has increased the adoption of genome sequencing across a vast array of areas: non-invasive pre-natal testing, rare disease diagnosis, oncology, population genomics, and consumer applications.”
Performance of stock since IPO
Source: Nasdaq
Xiong believes the tipping point for more widespread adoption is in sight, and said she has been impressed with management’s ability to transform Illumina from a niche hardware company for the gen-sequencing into a mass-market supplier.
Another example of an “actual” investment is medical product delivery company Zipline, which designs, builds, and operates small drone aircraft for delivery of medical products, with a focus on providing services in Africa.
“This is a great example of a software and data-oriented company using technology to radically change the business model of a longstanding and static industry – last-mile logistics,” said the Baillie Gifford US Growth Trust manager. “Its impact in low-income countries with poor infrastructure could be transformational.”
The manager said that even in developed markets, the firm could offer the benefits of revolutionising a costly and inefficient industry.
Finally, Xiong highlighted on-demand TV and movies service Netflix, one of the high-growth so-called FAANG stocks that have been among the best performers of recent years.
“Netflix has built a strong competitive position in streaming media at a time when the industry looks to be on the cusp of large disruption,” she said.
Led by founder and chief executive, Reed Hastings, Netflix has grown its business to around 150 million subscribers; and the fund manager said the company has impressed her team with its ability to successfully take its brand overseas from its US domestic base.
“We think the idea of a consumer having one central cable or satellite TV subscription will look outdated in 10 years' time,” she said, adding that Netflix has both the opportunity to grow its subscriber numbers substantially and raise prices over time as its own content becomes richer.
“We are impressed by the culture of this innovative company and think it could prove to be the global winner amidst the shifting contours of the large media market,” Xiong said.
Performance of trust vs sector & index since launch
Source: FE Analytics
The £319.3m Baillie Gifford US Growth Trust – co-managed by Xiong with colleague Gary Robinson –was launched in March last year during which time it has made a total return of 32.34 per cent against a 19.53 per cent gain for the average IT North America peer and a 26.80 per cent gain for the S&P 500 index, in sterling terms.
The trust currently trades at a 1.4 per cent discount to net asset value (NAV), is 2 per cent geared and has ongoing charges of 0.7 per cent.