Actual investors are focused, not frantic.

The trouble with the term ‘active management’ is that it confuses more than it clarifies.

‘Active’ naturally suggests ‘activity’. Share traders in red braces barking ‘buy this!’ or ‘sell that!’ down the phone no longer prevail, but active managers are still expected to act fast and often. Busyness is a badge of professional excellence, reflecting superior sources of company information, familiarity with market cycles and whiplash commercial reflexes.

But this is based on a misunderstanding of how an investment manager adds value for clients: not by trading stock markets but by seeking companies that can outperform their peers over the long term. Frantic day-to-day activity is distracting and unrewarding.

For equities, over five years and longer, there’s a strong correlation between growth in earnings per share and share price performance. From 1992 to 2022, using rolling five-year periods, there was a 69 per cent chance that a company in the top fifth of earnings growers would outperform the median stock. There was only a 19 per cent chance that a company in the bottom fifth of earnings growth would outperform.

Crucially, this relationship over the longer term is robust, regardless of companies’ starting valuations. In the three-to-five-year timeframe there is less correlation, and for periods of less than three years it’s statistically insignificant. In short: most investors don’t look five years ahead. If we can find more of the rare companies that will thrive over this longer period, we needn’t worry about share prices at all.

The other, deeper confusion around the ‘active’ word stems from it being the opposite of ‘passive’. That suggests the primary aim of an active portfolio is to be different from the index. On those terms Baillie Gifford is an ‘active investor’, and proudly so. But we think the definition is limited.

Invented as useful benchmarks and illustrations, stock indexes have proliferated over the decades, their complexity promoting a phoney sophistication. Computing power has accelerated the bewildering variety with which global stocks can be sliced and diced. It may just be a matter of time before it’s proved that companies whose names start with, say, the letter ‘T’ outperform others and the ‘Letter T Index’ is launched. Some smart marketer would find a plausible reason for it, and people would buy it.

In an increasingly short-term world, indexes are often based on investors’ crude extrapolations of present values into the future. They take no account of foreseeable disruption, for example from the impact of declining demand for fossil fuels on big oil companies.

Active investors can decide not to own – or own less of – a company but an index portfolio is not a sensible starting point. It makes even less sense to pay managers a premium just to be different.

Investment choices based on their degree of variation from an index are often more about business risk management than the real task of investment, leading to perverse outcomes. Managers who expect to be rated against an index may cover themselves by, for example, investing in a widely-held bank, even if they disdain the prospects for that sector.

Baillie Gifford doesn’t so much seek to differ from ‘the index’ as to ignore it. As Actual investors, our focus is on deploying capital into the growth companies we think likeliest to generate outsized investment returns. We therefore ask the questions that actually matter: ‘What are the long-term prospects for this company? What do I think it’s worth? How risky is it? How much should I invest?’ Focusing on these absolutes serves clients better than frequent buying and selling of stocks based on news flow.

Tomorrow’s rapid growth opportunities are best understood not through the lens of today’s index incumbents but through the nascent technologies and business models that could answer future needs and wants.

By linking with academics, entrepreneurs, thinkers and authors, by talking to companies about emerging competition, we stay alert to what’s changing to increase our chances of discovering the tiny number of companies that are worth holding for long periods. The academic research we sponsor may or may not lead directly to investments, but it opens us up to new thinking. Even obliquely, this helps us understand the long-term change on which Actual investing is based.

The information on this website is intended for institutional investors and accredited investors (as defined in the Securities and Futures Act, Chapter 289 of Singapore, as amended) and consultants in Singapore only. It is not intended for use by any other persons including members of the general public or investors from other jurisdictions.
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 the United Kingdom's Financial Services and Markets Act 2000 or any conduct of business rules which we are bound to comply with. 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 Singapore.
Baillie Gifford Overseas Limited is wholly owned by Baillie Gifford & Co. Baillie Gifford Overseas Limited provides investment management and advisory services to non-UK clients. Both are authorised and regulated by the Financial Conduct Authority.
Baillie Gifford Asia (Singapore) Private Limited is wholly owned by Baillie Gifford Overseas Limited and holds a Capital Markets Services Licence from the Monetary Authority of Singapore to conduct fund management activities for institutional investors and accredited investors in Singapore. Baillie Gifford Asia (Singapore) Private Limited can be contacted at Singapore Land Tower, Level 46, Unit 4616-17, 50 Raffles Place, Singapore 048624.
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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.