21 Apr 2023
Visiting Edinburgh in the spring has its benefits as it’s still relatively quiet on the tourist front but light in an evening, with the Princes Street gardens coming into bloom. The gardens were created in 1820 following the draining of the North Loch and to separate the Old Town seen in the distance from the new. It remains one of the most important urban parks in the heart of Edinburgh with over 37 acres and houses the National Gallery of Scotland which opened in 1859 - an elegant neo-classical building designed by William Henry Playfair. It is situated on The Mound, an artificial slope just off Princes Street. The park also features several famous statues, including that of Edinburgh poet and publisher Allan Ramsay dating back to 1862.
I had the opportunity to catch up with Gary Robinson, one of the co-managers of the Baillie Gifford American Fund. The fund performed very strongly in the Covid-19 period before suffering a setback in 2022 along with many other growth orientated mandates. The American team recognise that mistakes were made last year but looking forward, many of the holdings hardest hit have fallen to relatively insignificant positions within the fund. The fund’s prospects will depend on how its largest holdings perform and today, the top 10 names account for roughly 50% of the portfolio. The investment process continues to allow winners to run and looks to not add to losers, so over time the better performing names become the largest positions. They have recognised that in today’s world, capital will be harder to access by companies and there will need to be a greater emphasis on delivering profitability by businesses in this new environment.
While several companies in the technology and ecommerce space have needed to downsize their labour force, Baillie Gifford believe that companies can come out the other side stronger and more profitable. Companies held will need to have resilience as economic growth slows to fulfil the potential open to them in the future. Gary and the team still believe there are large structural growth trends in the global economy, but businesses need to be able to stay around to deliver on this. The expected post-pandemic growth rate for online, ecommerce, and digitisation has not occurred and there has been a retrenchment back to the original trend line of growth, but companies are still growing, albeit at their pre-pandemic trend. Some companies over invested during the pandemic including Amazon, Shopify, and Wayfair, but they are now restructuring their operations and going forward, leaner businesses will be able to respond more rapidly to changes in the marketplace.
Gary strongly believes the structural growth trends seen before the pandemic will continue in the post pandemic world. Ecommerce is a bit more mature but there is still scope for strong growth in cloud, digitalisation and the shift to electric vehicles. Many of the businesses held still have very strong long-term growth prospects such as the largest holding in the fund - The Trade Desk - leader in programmatic advertising but operating in a cyclical industry. It is providing data driven demand and the company continues to grow strongly with its operations in areas such as the connected TV market which is still in its infancy.
Last year Shopify chose to reinvest in its business to build out its own fulfilment centres to be able to compete with Amazon Prime and over time can significantly increase its take rate to the levels being charged by other competitors. The company is continuing to acquire merchants and has recently built out its position in the enterprise segment of the market (larger companies) with recent signings including Superdry and Mattel.
Moderna remains a large holding in the fund and is well known for its highly effective Covid-19 vaccine, but the mRNA biotech platform was invested in prior to the pandemic on the belief that its ability to leverage its technology platform across multiple different diseases would lead to a much higher success rate with new drugs than other biotech businesses. Gary Robinson is the team’s healthcare expert and has spent a lot of time in Boston visiting biotech startups and views this as a software business in healthcare.
Tesla remains a large holding in the fund. Last year its share price was depressed by fears of forced sales by founder Elon Musk to fund his purchase of Twitter, but it has rebounded strongly in 2023. Its auto industry margins are best in class at around 18-19% and the company continues to become more efficient with scale. The company is now positioned to deliver lower prices to consumers to gain market share.
The Amazon share price suffered last year with a general slowdown in the ecommerce space, but looking at AWS alone is now on a cheap rating and the cloud continue to gain market share. Nvidia in the semiconductor space will be a major beneficiary of generative AI which Gary believes will be at least as important as the iPhone on productivity and can re-shape industries, increasing productivity of knowledge workers. There is a question mark about where value will accrue in the AI chain and Nvidia as the provider of the ‘picks and shovels’, and a leader in the GPUs market, is well placed to capitalise on this secular growth theme. Its top end chips cost tens of thousands of US$ and there is a massive structural growth tailwind. Netflix remains a significant holding and while the company is more mature its scale means it can produce content more cost effectively than competitors, resulting in industry leading margins in the streaming space. There remains strong scope for the business to expand internationally.
The team have delivered strong results over the long-term by identifying US domiciled companies with the potential to become global leaders and looking at the top 10 holdings many of the names appear to have the potential to deliver on this. The fund can suffer high volatility over shorter time periods with its focus on finding stock market outliers but for investors looking for a portfolio with high potential over a 10 year+ period, offers opportunities for above average returns.
I headed to my next meeting across St. Andrew’s Square, which is now over 250 years old and the result of a design competition in 1766 by the City Fathers to build a New Town to deal with severe overcrowding and the squalid conditions inside the older part of the city. The winning design was based on a grid pattern, allowing for wide streets and large palatial town houses for the wealthy of the day. St. Andrew’s Square was one of the first areas to be built under the plan.
I caught up with Rob Harley who is part of the Stewart Investors Sustainability Team which, after a tricky period of performance in the first half of 2022 when quality growth stocks came under pressure from rising interest rates, has seen performance stabilise with the fund continuing to focus on high quality businesses which should prove resilient as and when economic growth slows. Exposure to consumer staples such as Beiersdorf and Finnish Telco Elisa, together with insurer Admiral have added resilience to the fund. The team have sold some names which, after holding up well in last year’s market turmoil, became very expensively valued on a relative basis, including Tomra and maker of restaurant ovens Rationale, with both businesses not really seeing a downturn in their operating performance, but rather a run up in valuations which was the driver of the sales.
A name which was a problem last year, Vitasoy, has now come good as the management have re-established themselves with the Chinese authorities, having been victim of a social media campaign against the company. Brazil listed Natura has been a problem holding but, with the sale of Aesop improving the balance sheet considerably and other parts of the franchise such as Avon and Body Shop now profitable, can hopefully turn the corner and the company still has a strong franchise in its home market.
Healthcare has been a detractor this year with some of the diagnostics companies seeing a de-rating and in the large cap space Roche has also struggled. The team still believe diagnostics will have structural tailwinds as they inform 70-80% of clinical outturns and innovation has accelerated. In the food and retail space supermarket Jeronimo Martins which operates primarily in Poland, although not listed there, has found the very high levels of inflation difficult to cope with, but will benefit if inflation falls back to around the 5% level. Current increases in the cost of living are seeing customers trading down and input costs rising.
Overall, the portfolio remains positioned for a more difficult global economy and on balance fund holdings have net cash rather than debt and are expected to have pricing power, even in periods of economic weakness. Within the emerging market content India remains a strong overweight.
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