International growth managers with a buy-and-hold philosophy

Burns: I joined Baillie Gifford in 2009. I was interested in investments because I was really very interested in the world. I studied geography at Cambridge; it’s a discipline that attempts to understand what’s going on with the world and how it’s changing. I saw investments through a similar lens, that is, as a way to view the world and how it is continually changing. I joined Baillie Gifford through its graduate rotational program for investment professionals, where I spent a year in our emerging markets team and then a year in our U.K. equities team before landing in the international growth team in 2012. Since then, I’ve focused my career on identifying transformative changes in the world. If something big happens, you know your clients can get materially rewarded when a change comes to fruition.

Coutts: I joined Baillie Gifford in 1999, also through its rotational program, also spending time in our emerging markets and U.K. equity teams. After that, I ran the European equity team for a few years before finally joining the international growth strategy in early 2008. About six years ago I took over as chair of the portfolio construction team, which is now my sole investment responsibility.

Coutts: Lawrence and I are part of our six-person core decision-making group. We have a research capability around that, and then we have several rotating analysts, like Lawrence and I were for our first few years. We also have a dedicated ESG (environmental, social, and governance) analyst.

Burns: The first thing that is important to know is that our six core decision-makers don’t need to get buy-in from anyone else if they’re keen on a particular company. That resolve is enough for us to take a holding. It will be a small holding at that point, as we as a team get to know that company, but we just need the conviction of one team member to make an initial purchase. The reason we do that is this: We’re looking for what could be the next big thing, for ideas that have the ability to exploit the asymmetry inherent in the equity market. Those ideas can be a bit controversial, or even vulnerable. They’re often not consensus-like ideas. Once we better understand and develop our conviction in a stock, then we determine our ultimate holding size. 

Coutts: We focus on high-growth companies and don’t overly aim to optimize for near-term valuations. We deliberately set ourselves up to back individual enthusiasm and liberally focus on opportunities with the potential for extremely high returns. Our bar is high in terms of the individual companies we look at. We also maintain patience and have a willingness to hold securities through cycles of price declines. We don’t blindly trust management, but we support them through difficult times when we think it makes sense to do so.

Burns: That’s right. Most of our successful holdings have been through periods where they’ve experienced drawdowns of between 40% and 60%. The reality is that progress rarely follows a straight line, but what we focus on is the long-term structural transformation a company can deliver. Take Argentinian online marketplace operator MercadoLibre, for example. The stock is currently our largest holding, and it operates in volatile macroeconomic environments. Since we’ve held the stock, it’s experienced six drawdowns of over 30%. When a company experiences that kind of a large dip, there’s always a narrative around why this time a company’s performance will go off the rails. Through that noise—be it a challenging macro climate, a weak currency environment, or an atypical growth market—we maintain focus on the few things that really matter and use those variables to determine our buy/hold strategy. 

Burns: From a philosophical perspective, we prioritize being good holders and owners of businesses over being the world’s best sellers of businesses. We’re willing to be patient so we can benefit during periods of transformational growth. We don’t want to sell a company like Tesla halfway through its journey because, mathematically, it becomes a lot more painful when you miss out on a continued upswing. We’re always trying to optimize that trade-off, but sometimes we’re going to end up selling a business a little bit later than we would ideally want to.

As valuation goes up, it can become harder to see when that point might be. Our performance has benefited from several companies that have experienced second acts, and we don’t always have that emergence priced in at the beginning. We’re seeing this now in the electric vehicle, autonomous driving, and artificial intelligence (AI) spaces in particular. AI is going to be huge and it’s going to have very complex impacts on civilization. It’s important that we remain open-minded, responsive, and adaptive as we consider where benefits may come through.  

Coutts: As growth investors, we actively seek disruptive companies, those that we expect will thrive in different market conditions. We believe there is an awful lot of change that has happened in the world and that will continue to happen. Those special companies that can adapt to new things, if we can find those, we can own them for 10 to 20 years. That can be incredibly valuable.

It’s very difficult to identify those disruptors at an early stage, and it’s easy to think a company is of a higher quality that it really is. To help us in our search, we maintain several relationships with external academic experts and research institutes. Those relationships help us get a broader understanding of an industry, a particular company’s position within that industry, and how a macro environment might affect future growth. Some of what we learn through these partnerships can help us get ahead of and put appropriate weight on certain factors behind new and growing technologies—AI for example, including where benefits might come through for investors.

Burns: The nature of growth itself is exciting, and transformative growth should be more diverse as we move forward. Some of the companies we invest in are having profound impacts on the world. mRNA is a broad technology platform that’s been applied in the treatment of COVID, but going forward, we could see it used to treat infectious diseases or create cancer vaccines. Moderna has a very large and diverse pipeline of potential uses for the technology. There’s also the transition away from fossil fuels, and the trillions of dollars that are being invested in technologies that can help move us away from hydrocarbons. 

Note: This interview was edited for length and clarity.

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