International Growth: Exceptional growth companies and where to find them

As with any investment, your capital is at risk. Past performance is not a guide to future returns.

Katie Muir (KM): Right, we'll get started everyone. Good morning and welcome to this international growth strategy webinar. I'm Katie Muir and I'm an investment specialist for the strategy and I'm joined today by investment managers Tom Coutts and Robert Wilson. This webinar will run for about 45 minutes, and our plan is to discuss some of the topics that have been regularly coming up in our recent meetings and calls with you and other clients, and we're going to cover these under three broad sections.

First the investment landscape, then we'll get into some of the portfolio positioning, as well as where we're finding new opportunities in different regions. We've also received some questions in advance, so thank you for those. We want to make this conversation as useful as possible, so please enter any other questions you have in the Q&A box at the bottom of the screen as we go along, and we'll make sure we leave some time at the end to answer them.

First, maybe a quick reminder of our philosophy and process. Our own experience and academic research show that it's a small number of big winners that drive long-term equity returns. Our approach is, therefore, focused on identifying 50 or so of the most exceptional growth companies from the international universe, and patiently owning them in size to allow the asymmetry in stock market returns to work in your favour.

So Tom, Robert, thank you for joining today. It's nice to be hosting this against a backdrop of improving performance numbers over the past year or so, and certainly year to date, things are looking good as well. But there's still a lot of uncertainty out there, which also presents opportunities for us as long-term growth investors. And we'll get into some of that today. And so, Tom, maybe let's start with the investment backdrop - geopolitical tensions, tariffs, potential restructuring of global supply chains. There's a lot happening in the world. But as long-term bottom up stock pickers, how are we thinking about the impacts these things might have? Do they matter?

Tom Coutts (TC): Thanks, Katie. And thanks to everyone for joining us today. I think as you said in your introduction, ultimately it's always about the companies. So what are we trying to do? As you said, we're trying to find exceptional growth companies and hold them patiently. And it's really important to hold them with a bias to think optimistically about what could go right if they really work. And there is always stuff happening. So I started at Baillie Gifford in 1999, when some people will remember the millennium bug was the big thing that people were worried about, which turned out to be nothing really. And since then, we've had 9-11, wars in Iraq and Afghanistan, the TMT crash, the commodity super cycle, the financial crisis, the Eurozone crisis, Brexit, zero interest rates, a global pandemic, and on and on. So stuff happens, as you say.

And through that, companies emerge and develop, and some of them thrive and go on to almost unimaginable success. And really, our job, part of our job is trying to imagine that success, trying to ask, what if it really works? And we mustn't lose sight, I think, of the fact that the process of innovation and growth and excellence is still happening today and will keep happening in the future. But on the big picture, it does feel, I think, like some of the changes at the moment are more meaningful.

We talked, you and Robert and I and others on the portfolio construction group, a few weeks ago at our portfolio meeting, about whether the external situation today is like the Berlin Wall falling or the financial crisis. I mean, it's different, of course, from both of those, but it may be on that scale. Why is that? I think you are seeing a pretty fundamental reshaping of the global order, probably maybe an overdue one. You're seeing the United States push back against NAFTA, which has been in place since 1994. I think maybe even more fundamentally, this goes back to China's entry into the World Trade Organization in 2001. So you're seeing those things start to be unwound. The beliefs underpinning that really go back to Adam Smith, who's buried a quarter of a mile away from here, that in essence free trade is a positive sum game. And the problem is that it may be a positive sum game overall, but the costs and the benefits are shared unequally. And we're now in a world where I think there's a willingness to accept maybe less efficient global supply chains, more friction in trade, in order to try to bring jobs back to areas, parts of society that have been hurt most by globalization. That's the wager, that's the bet that people are taking. And there are lots of other aspects, part of it's an attempt to contain China, but part of it, I think, is this attempt to counter the unequal domestic outcomes of globalized trade in response to people who've been left behind over the last 30 years.

So yes, there's lots going on. We need to be careful, as you say, we aren't overexposed to areas where geopolitics could bite us or some of these shorter supply chains could cause problems. But alongside that, we still do have rapid technological progress. We still have large parts of the world where economic growth is going along quite nicely. And we still have companies facing big growth opportunities that are largely within their own hands. And that's what we're going to be focused on.

KM: Great. Thanks, Tom. To follow on from that, tariffs have obviously been very topical with clients in recent conversations. As much as it's not just China that tariffs are impacting, China comes up time and time again. Our direct exposure there is lower than it was five years ago. However, what we've seen more recently is market sentiment actually improving towards Chinese equities. And there's been a number of factors kind of driving that. Maybe, Robert, turning to you, you've visited China a number of times last year. How is the backdrop there, in your view, for our Chinese companies? And are we finding new opportunities there? 

Robert Wilson (RW): I think it is increasingly positive. There are still some of those long-term structural risks that are shared correlation that we do think about. But clearly, the recent news flow has been very positive for long term investors. It's not just the past couple of months. It's been going on for at least 12 months now, this increasing recognition of the role that the private sector has to play in Chinese growth, which is obviously a very important part of their political economy. And so some of the subsidy news and so on, going back a little further. This is a mounting picture of a change in the structure of the growth picture from here.

That's all positive, but obviously, as you well know for us, we come back to the bottom up. It's really about the individual companies and their ability to navigate the backdrop rather than our view about the backdrop per se. So, the conspicuous thing here is that China is home to some of the best companies in the world. Tencent, Pinduoduo, and BYD, obviously a position we've added to more recently. These companies we think are potentially generational companies and stand in the midst of very big opportunities both domestically and internationally. So those are things that we can definitely get excited about.

KM: All right, thanks. And maybe just to follow up on BYD there, tariffs are not new and are something that has been happening going back to Trump's previous term. And BYD right in the sweet spot for that. But that was known when we first invested. How have we been thinking about that as we think about the investment case for BYD?

RW: Yeah, it's a really interesting picture. There was a very notable piece of news flow recently in which President Trump indicated a desire for BYD to sell cars into the US so long as they made those cars in the United States, which is a subject that I raised with BYD whilst I was in China, to which they responded, ‘yeah, but Trump is only for four years’, which I think really demonstrates the long-termism there. And the desire to treat politics as noisy, not necessarily good signal for building a business on. And so they've done their own analysis and decided that Europe and other parts of the rest of the world would be a better opportunity for them from an export perspective. And with incredible results there. Also very notable that the EU have decided to impose the lowest tariffs of any external OEM on BYD because they've been found to have a good product that is not dependent on subsidy in order to be competitive, which clearly contributes to a lot of European goals around sustainable transition and so on. So BYD is a very interesting one from that perspective.

It feels like I'd be remiss not to comment on also their news about autonomy recently. They've announced that they will introduce autonomy - level two plus autonomy - into every or almost every product or model they're going to sell.  That includes cars sold at about nine thousand dollars so essentially this is the Tesla price for autonomy and you get the car for free. It is world-beating industrial process excellence that will be genuinely revolutionary from an EV adoption perspective. So, a lot of interesting news flow around BYD recently.

KM: Yeah, it's interesting. We talk a lot about China in terms of its cost advantage and driving cost deflation. And certainly, some of the headline news coming out of China more recently was, of course, the DeepSeek AI model released in late January. So interested to get your thoughts, your take on that and broader implications, I guess, for the portfolio.

RW: Yeah, super interesting. I will try and keep my comment concise because I have a lot to say about it. But I guess DeepSeek demonstrates one thing that we've known about China for a long time, which is they have excellent engineering and are very good at deflation. Now, I think that a lot of the reporting about these numbers, like $5.5 million for a training cost for the model, are not probably that accurate in terms of reflecting true training costs and represents a bit of a misreading on the markets part.

But I do think that it represents deflation. And I do think that is something that China has a seat at the table in AI engineering. And that will continue to be the case. I do think a lot of those developments will continue to be reinvested. I think there's a desire to read a lot of the AI spend as a sort of fixed budget that's aiming to achieve a set goal. I think that's true of some of the market, but a lot of the market is about figuring out what is now possible under this new engineering paradigm. In that context being more efficient enables more to be done at broader scale. So I found the market's attempt to interpret that news very quickly and decide what it meant kind of weird from the perspective of a long-term investor because I think it's quite difficult to know exactly what it will mean. It doesn't feel that thesis threatening in terms of understanding what kind of role China plays in the global economy and in AI specifically quite yet.

KM: Thanks, Robert. We'll maybe come back to it as we talk about some of our digital businesses. But on the topic of AI and more broadly, one of our core beliefs is that tech innovation will continue to drive change and disruption in sectors and industries around the world, in the global economy. This is a long-term growth megatrend. Lets maybe start with a question we received in advance around this. So the question is, ‘how do we identify disruptors with huge potential’? So it's more of a process one. Tom, do you want to take that one?

TC: Yeah, I'll have a go on that. I mean, just maybe before doing that, I would really underscore the points Robert was making about innovation from China. People talk about the scale of China as being one reason, but, we used to talk about - Tencent, Alibaba – back in the day as being genuinely innovative, differentiated companies. And I think that that bit’s been forgotten about recently. So BYD, DeepSeek, and in their own way, and the biotech stuff is really interesting. We should look to China for lots of innovation in the next few years.

I think on the question of looking for big winners, you talked about uncertainty in your introduction, and you have to accept uncertainty in this because by definition, you can't screen for future growth. The data points just don't exist. So you need to be looking for a few things. You need to look for a big addressable market. And again, back to the point about uncertainty, I think you have to accept that you can't be too precise about that. You can't quantify with too much precision. Sometimes it's fine to say it's big enough. It's a big enough market. So you look for scale. You look for a management team that is able to execute. And then you look to back them early at an appropriate size and hold on.

I think with management, you're looking for a combination of credibility and ambition. You almost want ambition right on the edge of credibility. So that's what you're looking for, a big market, a management team who you trust, who you think have got the vision and the ability to execute. And then it's about the position sizing and building the position up as evidence comes through. And the kind of line I have in my mind about this is one from Kleiner Perkins when they invested in Genentech back in the late 1970s, and Thomas Perkins there. ‘Describe Genentech, I concluded that the experiment might not work, but at least they know how to do the experiment.’ And I think there's something there about a willingness to accept the limitations of knowledge when you're looking out a long way at potentially very big winners. And I quite like that. So it is that you've got to be willing to accept the limits of your knowledge. When you're looking at five years, about possible real outlier success investments. So that's how I think about it. It is hard, it is uncertain, and that's part of the appeal, and that's, I think, part of what gives us our edge, frankly, in doing it.

KM: Great. Thanks, Tom. And let's get back to, some of those positions we've got in the portfolio. We've talked about digitalization and semiconductors before, can you maybe update on our bottom-up positioning there, as the companies that are providing the picks and shovels of that. And also where we've been finding new opportunities.

TC: Yeah, so staying, I guess, with digitalization, clients will have different allocations in terms of their willingness to invest in emerging markets. But for those who do allow us to, then TSMC is one of our biggest holdings. We were chatting around the desk earlier, Robert and I, about a meeting with them in a couple of months' time. ASML has been a longstanding holding. And these companies are still pretty early. So ASML had results a couple of weeks ago. 28 billion of euros of revenue. And they're talking about that 28 billion getting to maybe 60 billion by the end of the decade, with gross margins that could be 10 percentage points higher. So even a business like ASML that we've held for a long time is still potentially very, very early in the process of executing at scale.

And I think one of the lessons we've seen from the Mag7, let's say, is that if you can execute at scale, then the cash flows that come from that and the market cap that comes from that can be still incredible. So I've put TSMC and ASML kind of in that category, they're pretty established.

And then we've been broadening out beyond that on the back of some work that Robert in particular has done thinking about the semiconductor supply chain and I don’t want to steal Robert’s thunder, but one of the points he makes quite often is that international markets, markets outside the US, are critical in the semiconductor supply chain. And this is going to be, continue to be very important. And it's an industry, a series of market niches that lend itself to monopolistic or quasi-monopolistic characteristics. So that can lead to very good investment outcomes. And I put companies like Advantest and those sort of things in that category too.

KM: Great. Thanks, Tom.

RW: I would just build, sorry, I was just going to build on that, Katie, and just say, I think I was going to comment specifically that I thought the TSMC suggestions quite recently that. they see [AI] accelerator revenue growing 40 to 50 per cent until 2029, is pretty seismic in a way that I think is sort of taken as pretty run-of-the-mill guidance. But if you really do the compounding mathematics on that and read that across into the semiconductor supply chain, that is astronomically different from the kind of growth expectations that the market at large has for these companies. And to Tom's point, they exist uniquely in the international sphere to some extent. I think this is something that we should get particularly excited about from a picks and shovels perspective.

KM: Thanks, Robert. Maybe to build on that, let's move on to discuss how tech and innovation, and how companies are harnessing technology to drive changing consumer behaviour and demand. So we've got some exciting digital businesses across e-commerce, media, financial services in different regions around the world. Can you touch on some of those? I know we've been adding to a few [positions]. What the current thinking is in some of those large businesses.

RW: Yeah, I mean, I suppose some of the ones that would be maybe interesting to talk about would be businesses like Sea Limited, which has obviously been exhibiting some really profound strength in the market more recently. We've been a holder of Sea for quite some time now. It's been a very volatile journey. People get very excited about them because they're very enigmatic and they get very downbeat. And now we've seen a bit of moderation towards the middle ground, hopefully. But, 160 per cent year over year net income growth is a very profound number from a reasonably good base as well. So that speaks to the degree of strength that they're seeing across their fintech business, their gaming business, and their ecommerce business, it really feels like all cylinders are kind of going for Sea in particular. And really clean idiosyncratic exposure as well in the sense of it's in parts of the world that are not that easy to get exposure to Indonesia, Egypt, Brazil. So that's very promising from that perspective.

Similar things might be said about Meli [MercadoLibre], of course, in a larger position size. I think Shopify is another one that would call out. Again, exhibiting accelerating GMV growth, 24 per cent year over year, whilst also margins are now climbing as well. So, it's not having to spend to buy that growth, it's accelerating on its own steam as some of the tailwinds go away and free cash flow margins are 18 per cent. So again, lots of real positive evidence, and we've been building the position accordingly. And again, just connecting to the previous topic, all of these businesses, at least these examples, have real surfaces that have very high levels of engagement with consumers. And those surfaces are excellent opportunities for them to deploy AI and all of its means. Right now, that means machine learning in terms of advertising, recommendations, and that sort of stuff. There's very likely an opportunity for more gen AI and of these agentic type ideas to get embedded as we go. That should be a real area of product strength for these kind of companies as well.

KM: Yeah, certainly already seeing AI bots making suggestions and curating things better to engage consumers more on different platforms. So expect to see more of that. Maybe turning to Europe now, I know it's an area clients are often interested in hearing about the growth prospects for our European companies, given there's been a consistently weak macro backdrop there. And Tom, what are you hearing from our European businesses and where are we finding new opportunities there?

TC: Yeah, I sound like a broken record here, because, as you know, we don't really have a European exposure in a broad sense. We have a selection of businesses that happen to be based in Europe, but which are really global in their operation in this scope. But I do think there is something interesting starting to happen in Europe. I thought the Draghi report, Mario Draghi, the former ECB president from maybe six months ago, was right in its diagnosis and its prescription. We do need more innovation. We need Europe to stand on its own feet a bit more. We need to invest. We need to have growth-friendly policies.

But I'd say, despite that slightly moribund history, there are real pockets of innovation. I'd call out areas we've talked about, semiconductors already, but I think hard tech is pretty strong. I think fintech, it's quite interesting. We've got businesses like Adyen and Wise, and then there are companies like Revolut and Klarna, which will be likely to list at some point, which we talk to through our private colleagues. And then healthcare is the other one that I touched on, obviously, that you've got large established healthcare businesses around Basel in particular, but also smaller, more innovative companies like Argenex or Genmab or Zealand Pharma that we've taken holdings in. So there are pockets of innovation across Europe. And if you look in the right place, there's quite a lot going on.

And then the sort of more typical older-type businesses, longer duration maybe you'd call them, L'Oreal, Hermes, Atlas Copco, you know, high-quality consumer-facing businesses, industrial type companies, often with a long established family shareholding. Those sorts of companies are continuing to grind out the growth and to do very well. And in some cases, Hermes is a relatively recent purchase for us, a correction of a sin of omission. It was growing 18 per cent in its most recent results, a phenomenal rate of growth for a well-established business. Ferrari was double-digit as well. So there are plenty of growth opportunities in Europe. And I think the, you know, back to this big picture challenge that Europe's had, if it can get its act together, then I think we might see more innovative companies come through, but probably not for five years, maybe even 10 years before they're hitting the portfolio. But we're at the early stage maybe of that process starting. And in the meantime, there's still a great selection of global growth companies across the spectrum within the European market.

KM: Great. Thanks, Tom. And just to follow on from that, one of the things some clients have been asking us about, and we've been talking about, is broadening our research funnel and bringing a diverse range of different growth opportunities. Quite a few of them have been European [listed] businesses. I was thinking of DSV, Galderma, and then Brunello Cuccinelli more recently. Do you want to talk a little bit more about some of those new opportunities we've been finding?

TC: Yeah sure, so Galderma is, I mean one of the expressions I've used is trying to look for the next L'Oreal. In a way, Galderma is kind of the last L'Oreal because Galderma was partly owned by L'Oreal, as it was set up by it 40-odd years ago. It's a dermatology business, IPO'd last year. They sell injectables and fillers and things like that. It's a Botox competitor. We think Botox is probably not brilliantly managed as part of a much larger organization. So it's that classic thing of being a small focus player in a growth market. The market expansion is pretty obvious. The acceptability of the product has grown really quite substantially. And it's still pretty early in its delivery of that growth.

And then you've got a management team who we think are executing pretty well. And the economics of the business are strong. So back to my points earlier, big opportunity, ambitious management, executing well, and the potential to build a good business. It's already a pretty good business. That sort of ticks all the boxes. So we'd love to find more companies like that.

DSV, I don't know if Robert wants to talk about this one. He was quite keen on. I've been a fan for a long time from the sidelines. And he helpfully nudged us to get over that with a colleague. or Cuccinelli? You've actually met Mr Cuccinelli, I think, Robert, which I haven't done. Do you want to touch on either of those?

RW: Yeah, Cuccinelli, this is a very idiosyncratic founder. I guess to us, I suppose it looks a little bit like, in the same way as Galderma looks like something of an early days L'Oreal, I think obviously Cuccinelli bears a bit of a comparison with Hermes in terms of its price point and its positioning, or monogram positioning. So this is one that we've watched grow from a relatively young position and they've been very keen to engage with us as, you know, European investors with a similarly long timeframe, able to appreciate the merits of family ownership. So watch this continue to go through a lot of strength and been keen to add it to the portfolio as such.

KM: Great, thank you. We've had a few questions come in so I'll maybe move to address some of them. First one, is the excitement over BYD a contributing factor that's led to reductions and exit in some cases for Tesla?  So this is for portfolios where we've got the discretion to have US companies as well. I don't know who wants to take that one. Tom?

TC: I'll tee him up by saying I think your last BYD note was headlined by saying something like, this is what Tesla could be if it really executed.

RW: Yeah, I said, I think I said something like if, if, if Tesla did, I forgot exactly my pithy line now. In essence, I think the thesis is fair. Tesla is being out-executed by BYD. And I think that the distraction of the CEO of Tesla is obviously pretty conspicuous. It doesn't help with the concern over failure to execute in various ways, whereas on the other side, BYD is guns blazing in terms of execution. So I think it is fair to say the comparison looks a bit unflattering right now. And then market cap comparison is even more unflattering.

TC: That's the other thing I was going to add.

KM: Yeah, excellent. Thank you. And got quite a US theme of questions coming through at the moment. I mean, I guess it's an AI and tech innovation li-e one as well. But any thoughts on NVIDIA ahead of earnings released today? Again, it's held for clients where we have a US allocation, but obviously relevant to others in the semiconductor supply chain too.

TC: The short answer is we've got no view on earnings announcements today. It's obviously not our game. Robert can give you a fuller answer. He knows this one very well.

RW: Yeah, obviously nothing specific on the earnings, but in terms of where NVIDIA is at the minute, especially for those clients who do hold it currently, nothing really to damage the idea that the paradigm of NVIDIA's dominance is really pretty intractable, that it continues to deliver massive generational increases in product that make it essential to have for allocators of AI spend and that it is at the forefront of this paradigm and is currently the only business that is at scale realizing massive economic benefits as a consequence. Because it has such a point of leverage and positioning within the supply chain.

So that's one side of it. The other side of it is, of course, the asymmetry is more limited than it was in the past. I mean, when we first took a position in NVIDIA, it was much easier to make an absolutely monstrous growth case. I mean, I still think there are versions of that that exist, but probability-weighted, it's less than it was. And so as a result, we have trimmed the position from its peak position within the portfolio - for clients who own US stocks.

KM: Great. Maybe to change tack for a second, we've had a question on Europe, a follow-up, you know, we've seen in the news this week, the UK is increasing its defence budget for the first time in a long time. Have we been looking at any European defence businesses?

TC: Yes, I'll take that. Again, we're chatting around the desk about that earlier. We've done a bit of work on [this]. The most appealing company we've found is a Norwegian business that sells missiles, basically called Kongsberg Group. Like a lot of defence companies, it's part-owned by the state. The Norwegian state owns 50 per cent, or 51 per cent. We did a round of work on that last year. I think it's super interesting. I think the question is for us to revisit that. The reason for us to revisit that would be to say, okay, if European defence spending goes from two and a half to four, per cent of GDP, what does this look like?

And again, back to my sort of framework of thinking about things earlier, that's the addressable market opportunity, okay, so I think that that box is sort of ticked probably. The execution and management alignment point, it's never great owning a company, or investing in a company, that's part owned by the state, so we'd need to do more work around that. My understanding of the position there is that the Norwegian government are very supportive and recognize the need to remain quite hands-off. So I think it's less likely that you would suffer from that than you might in some countries' cases.

And then the, you know, is it a good business? Well, you're selling reasonably large pieces of kit. These things tend to be on 15-year product cycles or something. So it's not typically the sort of thing we look for. But having said that, actually missiles is a better business than many other defence industries. So it's as close as we got. We had a good think about it. And we, again, as I touched on earlier, we will, I think, actively revisit that. My final observation would be, I'm slightly wary of thematic investing. This is the big picture trend, and therefore we need to invest in this company on the back of it. Because I think if you do that without the backup of, again, a good management team, which helps you trust the ability to operate to execute operationally and a good underlying business, then you're left with a play on a trend. And when that trend falls away, you haven't got much. But I think Kongsberg is the closest we've got to that.

RW: I would just add that, I suppose insofar as we do respect the thematic idea, the notion of defence demand does feed into other cases as well. When we're talking about broader technology businesses, even ones that don't necessarily sell missiles, clearly those considerations are at work in some of the growth cases as well in terms of the demand for those companies and those pieces of technology. I think the real difficulty for the defence companies per se is often that more innovation does not result in more TAM. In a lot of cases, you know, they have a more limited incentive to try and drive value because it doesn't drive more demand for their product. Whereas with broader technology, you make it better, more of it will be used. And that's a dynamic that we often quite like to participate in.

KM: Great. Thanks, Robert. Moving on, we've had a question around risk management. I guess we've delivered quite a volatile experience for clients over the past five years. There's been some large drawdowns. What are some of the main enhancements we've been making to our process around risk management and following this?

TC: As clients know, we've done a lot of reflection on this in the last few years and we recognize the extreme volatility we've delivered. I think really comes down to two things which a lot of people have heard us talk about before. One is broadening the funnel to make sure we get a wider range of idiosyncratic exceptional growth companies into the portfolio. So both at the decision-making level, but also at the funnel for investment ideas level. So names like DSV or Galderma that we've touched on would be I think good examples of that, Novo Nordisk being in the same category. So we got a bit too narrow in the types of companies we own. We got a bit too concentrated. So it's an active attempt to push back on that. And I think that's working quite well.

And the second one is bringing more portfolio analytics tools closer to the decision-making process. So we've always had a risk team that analysed the portfolio and brought different perspectives to bear beyond the very bottom-up fundamental one we've had. But if those reviews only happen every six months and the analytic tools are kind of owned effectively by people who sit off the team, that isn't as good as if it's owned by us. And so we've brought those tools closer onto the team and we have a, every two weeks, a portfolio implementation meeting, myself and Lawrence and Robert, and you come along to those. We've done that for over a year and again that's moving from just a series of bottom-up decisions to let's think about how this builds into the portfolio as a whole and using some of those portfolio construction analytics tools to inform those meetings and those decisions. So those are the two main things I think we've done.

I guess the final point I'd make would just be to put those in a broader context. We know that the volatility and the outcomes have been extreme over the last couple of years. We, as you said at the start, are delighted that things have picked up, that performance has become much stronger. But we have always evolved over the 17 years I've been involved in the strategy. One of my favourite quotes from the former CEO of Atlas Copco is “There's always a better way”. You always need to be getting better. You always need to be challenging. And I think I'd put these risk tightenings, I guess, in the context of continued evolution over that period of moving to a central desk, changing things a bit after the financial crisis, concentrating the portfolio in the mid-2010s, taking holdings in US companies for those who allowed it, those sort of things. So there's always something going on. And this is the latest evolution. It's a slightly bigger one because the volatility was greater. But we make the change, so we move on and we look to the future. And I think that's where we are now.

KM: Great. Thank you, Tom. Maybe just to follow up on that, you touched in your year-end letter about turnover. It has picked up a bit in 2024 and I think that's been a reflection of where we've been finding some really exciting new growth ideas to add. Where might that settle? Is there more to come in terms of some of the names that have been leaving the portfolio as well?

TC: I think we're largely there. I think there's a bit more to come. It's more at the tail, which might be, you know, the name turnover might be a bit higher, but the percentage turnover will be much less. We've talked about a 10 to 20 per cent turnover sort of corridor for years. And for a long time, we were at the bottom end. And for a few years, we were below the bottom end of that. And we're now at the top end. I wouldn't expect it to be ticking along at 20 per cent annually for the next few years. I think it'll come down a bit from a slightly elevated level last year.

KM: Okay, great. Maybe time for one final one before we wrap things up. Sort of coming back to China, actually, any thoughts on the health of the Chinese consumer? You know, we obviously have our Chinese holdings that are domestically focused. You know, the domestic market is a big opportunity for BYD as well as outside of China, what is the outlook there for middle-class Chinese consumer demand, you know, because that has an implication for some of our non-Chinese holdings as well.

RW: I'm happy to take that one. I think the long-term prognosis, the long-term central expectation, is pretty positive in terms of continual development and GDP per capita raises through time. I think in the near term, it's important to be precise so that it's not that positive right now in terms of near-term indicators. There are positive indications in the Chinese market, economically speaking. Some signs of stabilization in the property market are obviously particularly symbolically important. It will be of note that many of our Chinese holdings domestically do cater to the whole market. They're not necessarily premium offers; PDD addresses the whole market, BYD addresses the whole market. That makes its demand more staple-like, to some extent, and less subject to discretionary pressures. But in the longer term, obviously, a certain amount central optimism. But it does really come back to the bottom-up cases that we're constructing for each of these companies and what the scenarios really look like in terms of how much upside could we expect.

KM: And maybe to follow on from that, Tom, how important is the Chinese consumer for some of our luxury goods businesses?

TC: Less important than it was. I think you've seen some of the classic European luxury companies report modest growth in China or still declines in some cases, and really quite rapid growth outside. And I think the best companies manage their exposure to individual markets. So again, if you look at a company like Ferrari, it's got some exposure to mainland China, but you try and balance. And again, the point of a proper luxury company controls the amount of supply that it gives out, both to maintain the quality, the prestige of the brand, but also to ensure you're not too exposed to any particular market.

I'd clearly put Hermes in that category and Ferrari in that category, and I think probably Cuccinelli in that category as well. And maybe the likes of Kering didn't do that well enough.

KM: Yeah. That's fair. But we've had one other question, which I'll try and squeeze in. There are a number of small positions in the portfolio at the moment. They are maybe incubator positions. Why not keep the portfolio concise and watch those incubators on a watch list?

TC: Yeah, we've had watchlists in the past, and this is going back probably 15 years, and our experience was if you like something enough to put it on the watch list, you should probably just buy it. And it was a sort of behavioural challenge more than anything. I distinguish between, the question is right, we do have quite a tail of holdings. There are some that are on their way out that are where we've taken a position, and it hasn't worked out. And in those cases, we're quite comfortable with it looking a bit messy, if I can put it that way. Having four or five names that are probably not long-term holdings, but we just haven't sold yet, that's fine. And the reason for that is if the sponsor, it hasn't yet given up on them, behaviourally, we think it's very damaging to force them to do that, let them get there in their own time. And the best way to do that is to find other things for them to put the money into, for us to put money into. So there's always a couple like that. Then there are a couple where we've taken a small holding and incubated a position as the question framed it. And we're we're watching and waiting to see when the right time to scale that up is. And Cuccinelli is maybe, it's probably a bit bigger than that, it's maybe in that category.

So there's a combination of reasons. But we don't run flat portfolios. So at the other end, I would say, the top dozen holdings typically are about half. We do want to back our winners. We do want to back the companies that can execute at scale. And we think there's a good chance of 3x, 5x over a good period of time. And that's really how we're thinking about it. So running a flat portfolio isn't something we do. Small positions make sense as long as we scale them up appropriately and then back them once they get large and once they're working.

KM: Excellent. Thanks, Tom and Robert. I think I'll close things up there. We hope this has been useful for everyone and has highlighted some of the diverse and world-leading growth companies held in the portfolio and also that are quite unique to the international equity universe. Finally, before we end things, I just wanted to highlight that we also record a short video update every few months that focuses more on performance, recent performance drivers and also portfolio activity. So if you're looking for more of a regular short update to keep up to speed with things, then please have a look at that. They're available on the website or you can reach out to your usual Baillie Gifford contact. But thanks again for joining us and for your questions. Thanks, Tom and Robert.

Annual past performance to 31 December each year (net%)

Annualised returns to 31 December 2024 (net%)

*MSCI EAFE Index prior to 30 September 2018.

Source: Revolution, MSCI. US dollars. Returns have been calculated by reducing the gross return by the highest annual management fee for the composite. 1 year figures are not annualised.

Past performance is not a guide to future returns.

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