Capital at risk

Actual investors help shape the new world. Not shore up the old one.

  • You can often find the best growth opportunities among the disruptive businesses of tomorrow
  • It’s too easy for long-established companies to underinvest in innovation, allowing upstarts to change the market and render them obsolete
  • Actual investors look for risk-taking companies with the imagination to shape future markets

In 1997, the Harvard Business School management guru Clayton Christensen described the ‘innovator’s dilemma’. He explained why well-run companies that excel in satisfying their customers eventually get pushed aside by disruptive companies exploiting new technologies.

Even if they do everything right, Professor Christensen argued, big companies can find it hard to move with the times. Their day-to-day efforts are naturally focused on refining their businesses and responding to customer demand. Why should they spend time and resources experimenting with niche products and markets posing no visible threat?

New products make a new world

Meanwhile, earlier-stage companies are often much freer to pioneer new technologies and experiment with new business models. Undistracted, they can develop entirely new approaches to provide the products and services that will serve the needs of tomorrow’s customers. By testing these offerings in a small target market and by envisioning their wider appeal, the likes of Airbnb, Spotify, Amazon, and Skype made deep inroads into long-established, profitable industries as diverse as hospitality, music, book publishing and telecoms. The new world they created came about when dominant companies were slow to spot how new products could please consumers. By the time they did, the disruptors’ technology or competitive position were too far ahead.

The speed of disruption is accelerating as human ingenuity is boosted by computer processing power and improved artificial intelligence. An accelerated wave of change is hitting new areas of everyday life, from consumer products to public services such as healthcare and education. In this new world, seemingly unassailable companies become vulnerable.

Even long-established and seemingly impregnable strongholds can crumble if they underinvest in their own future in response to the insatiable short-termism of the stock market. The pressure on companies to maintain payouts to shareholders via dividends or buying back stock – sometimes even borrowing to do so – can be intense. Reinvesting current cash flow to generate far-distant revenues, even where there is plainly a good opportunity, all too often results in a share price fall. And those far-distant revenues aren’t always so far off: academic evidence shows that company management often forego projects that have payback periods of as little as three years.

Investing in the future

At Baillie Gifford, we actively seek out companies that can reinvest cash flows at high rates of expected return, so capturing the phenomenal power of compound growth. Increasingly, we provide primary capital to early-stage companies as they build their business, sometimes before they are even profitable.

Companies that pay today’s investors out of yesterday’s business are of little interest to Actual, long-term investors. However well-crafted or well-marketed their offering is, if they’re merely shoring up the old world, it’s hard to see them surviving into the long term, let alone outperforming over Baillie Gifford’s preferred long time-horizons.

In sectors as diverse as oil and gas, car manufacturing, retail and pharmaceuticals, some companies are simply not capable of adapting to the new world, so great is their reliance on legacy technologies and business models that are being superseded. For Actual investors, it’s the new, unencumbered players that are more likely to achieve long-term growth – and to change peoples’ behaviours in big ways and small.

Looking for the disruptors

Our job is to seek out the businesses shaping this new world. We find them more often among disruptive new entrants than among past champions attempting to reinvent themselves. There are exceptions: Netflix, for example, was a video hire business that killed its own business model by developing on-demand streaming, achieving extraordinary success. But the big businesses capable of reinvention are more likely to be those with disruption in their DNA. Perhaps the best-known example is Amazon. Not content with upending consumer behaviour, it saw an opportunity to become a leader in the adjacent area of cloud computing services. Amazon Web Services (AWS) is now its most profitable division.

Investing in new-world companies takes curiosity, knowledge, imagination and a long-term perspective. Actual investors build relationships and encourage the companies we invest in to take risks, invest in their future, and create businesses built to beat the competitors of tomorrow, not today.

Actual insights in your inbox

Offering you insights from our fund managers, on topics ranging from the changing face of growth to the energy transition.

Ways to invest

Products to fit your choice of investment style, asset type, type of fund and geographic region.

Actual insights in your inbox

Offering you insights from our fund managers, on topics ranging from the changing face of growth to the energy transition.

Ways to invest

Products to fit your choice of investment style, asset type, type of fund and geographic region.

Important information

Please remember that all investment strategies have the potential for profit and loss and your or your clients’ capital may be at risk.
 
The information on this Website is issued by Baillie Gifford Asia (Hong Kong) Limited 柏基亞洲(香港)有限公司 (the “Company”) which is licensed by the Securities and Futures Commission of Hong Kong (the “SFC”) under the Securities and Futures Ordinance (“SFO”) for Type 1 (Dealing in Securities) regulated activity with CE Number BGB803. It allows the Company to market and distribute the Baillie Gifford’s range of collective investment schemes to Professional Investors (as defined by the SFO) in Hong Kong.
 
The information contained in this website has been compiled with considerable care to ensure its accuracy at the date of publication. However, no representation or warranty, express or implied, is made to its accuracy or completeness. Nothing in this information or elsewhere in this website shall exclude, limit or restrict our duties and liabilities to you under the SFO or any conduct of business rules which we are bound to comply with. The information on this website has not been reviewed by the SFC. These Terms and any non-contractual obligations arising from or connected with them shall be governed by, and these Terms shall be construed in accordance with, the laws of Hong Kong.
 
This website is informative only and the information provided should not be considered as investment or other advice or a recommendation or offer to buy, sell or hold a particular investment. You can read details of our Legal and Important Information here. Please remember that all investment strategies have the potential for profit and loss and your or your clients’ capital may be at risk.
 
This website does not collect personal information. "Cookies" may be stored on your computer for easy navigation. A "cookie" does not allow us to identify you, but stores information about navigation through our website (such as pages already visited, time and date of visit) which we can remember during the user's next visit to our website in order to improve your browsing experience. If you have any enquiries in relation to our data protection policies and procedures, this Website or the information on it, please click here to contact Baillie Gifford.
 
Baillie Gifford Asia (Hong Kong) Limited 柏基亞洲(香港)有限公司 is incorporated in Hong Kong.  The Company’s principal place of business is Suites 2713-2715 Two International Finance Centre, 8 Finance Street, Central, Hong Kong . Baillie Gifford Asia (Hong Kong) Limited 柏基亞洲(香港)有限公司 is a wholly owned subsidiary of Baillie Gifford Overseas Limited, which is wholly owned by Baillie Gifford & Co. Baillie Gifford Overseas Limited and Baillie Gifford & Co are authorised and regulated in the UK by the Financial Conduct Authority.

Any stock examples, or images, used on this website are not intended to represent recommendations to buy or sell, neither is it implied that they will prove profitable in the future. It is not known whether they will feature in any future portfolio produced by us.