Professional investor
How did we become a major investor in some of the world’s most innovative companies while remaining an Edinburgh-based private partnership?
Our company takes its name from its two founders. Colonel Augustus Baillie was a lawyer who had served in the Boer War and was 47 years old when he established the business. T J Carlyle Gifford, another lawyer, was 20 years younger but had already built a reputation for brilliance and determination.
In the winter of 1908, the two men spotted an opportunity to invest in the rubber industry and created an investment trust.
The US economy enjoyed robust growth between 1922 and 1929. Increased use of electricity and rising consumer demand for automobiles and radio entertainment played a role.
Scottish Mortgage was a beneficiary, outperforming the broader British market by a wide margin.
The US sell-off began on 24 October 1929 and brought the decade’s stock market boom to an abrupt halt.
The depression that followed impacted the companies and public bodies the trusts had invested in. Even so, Scottish Mortgage investors came off relatively lightly as the Trust had amassed considerable reserves.
Augustus Baillie died on 8 January 1939. Just over half a year later, Germany invaded Poland, triggering the start of the Second World War.
Many of the firm’s staff served in uniform. Carlyle Gifford, now in his late 50s, received papers of his own from the Bank of England. The Governor requested that he advise HM Treasury on how to build a war chest by requisitioning gold, dollars and dollar-based investments in exchange for government bonds.
The devaluation of sterling in September 1949 – £1 fell from $4.03 to $2.80 – made it much easier to obtain US currency to make portfolio investments. That meant the trusts could reinvest in American assets following the liquidations required by the war.
As a result, shareholders benefited from tremendous returns over the following decade and a half. However, the firm was storing up problems for its future.
The 1965 Finance Act dealt a blow to the investment trust industry. It replaced profits tax with corporation tax, a side-effect of which was to depress the dividends paid on American assets.
The legislation also introduced capital gains tax. One side-effect was that it encouraged clients to sell shares in trusts and hold stakes in companies directly instead. That led trusts to trade at a discount.
Baillie Gifford’s dependence on a handful of investment trusts came into focus when the British Rail Pension Fund announced a bid to acquire Edinburgh & Dundee’s share capital in August 1977.
The Trust’s Board initially resisted the approach but finally agreed in the Spring of 1978 after receiving better terms.
Three decisions boosted the UK finance industry in the 80s:
Together they sparked a bull market that ran from 1982 until 2000. The strong performance of our UK team over the period contributed to the turnaround in Baillie Gifford’s fortunes.
The outstanding story of the 90s was the development of our overseas business. This included joint ventures with Japan’s Toyo Trust and Banking Company and the Guardian Life Insurance Company of America.
We also took on some big-name North American public and corporate pension funds, including those belonging to the states of New York and Wisconsin, Puerto Rico Teachers, Goodyear Tire and United Airlines. These opportunities led us to open a US office in New Jersey, which later moved to Manhattan.
This period marked a significant shift in strategy. During the 1990s, the broader industry had shifted towards a more benchmark-based approach to measuring performance. But some of our partners felt this had:
All of which acted against long-term client returns.
The insight spurred them to develop concentrated, low-turnover portfolios of ‘superior quality’ businesses, which they managed without regard for deviating from an index or other benchmark.
The rise of smartphones, cloud computing and electric vehicles, alongside advances in biotechnology and growing awareness of climate change, continue to create rich investment opportunities.
Our increased focus on exceptional companies, often founder-led, drew us to many of the fastest-growing companies of recent times.
In addition, we increasingly sought out and partnered with distinguished thinkers from academia and elsewhere to inform our worldview, guiding us to think about long-term opportunities before they became common knowledge.
It takes time to achieve transformational change. So we invest in companies for years, even decades.
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Being Edinburgh-based gives us stability and perspective, but we are truly global in our investment approach.