The Baillie Gifford Managed Fund’s European Champions.

The value of an investment, and any income from it, can fall as well as rise and investors may not get back the amount invested.

While the stock market headlines over the past year or so have often been dominated by US companies, some European businesses excelled through the difficult circumstances presented by the Covid-19 pandemic, often under the radar of the mainstream financial press in the UK. With that in mind, Philip Scott, Managed Fund specialist, spoke to European equities specialist Thomas Hodges about the questions most often asked by investors about the Managed Fund’s European equity holdings. Thomas works closely with the Managed Fund’s European equities manager Stephen Paice, who is also the Head of European equities at Baillie Gifford.

1. Is it harder to find companies capable of generating exceptional returns in Europe (ex. UK) versus other regions?

Inspired by the work Professor Hendrik Bessembinder has published on the nature of investment returns, we calculated that over the past 30 years, the probability of identifying a European company which doubled in value over a five-year period is approximately 30 per cent. What will be surprising to many is that this is not that different to the probability among US companies at roughly 35 per cent. So, in answer to your question, historically, we have had about the same chance of finding a company which will generate exceptional returns in Europe as we would in the US.

It’s true that Europe just hasn’t been the hot bed of innovation in technology that the US has been since the 1950s or that the east coast of China has been in more recent years. The big winners among the internet and technology companies in those markets have grown at an exponential rate whereas Europe’s long-term winners, such as in branded consumer staples or the luxury sector, have tended to be steady compounders. This is beginning to change, though. In the last five or so years we have seen a number of digitally enabled companies come to market in Europe which have that rapid growth profile and which are held in the Managed Fund.

2. Europe is going through an exciting transformation, particularly in its technology eco-system. What’s your perspective on this?

This is a very exciting time to be investing in European equities, across the spectrum of sectors. Each success at the company or start-up level, contributes to a flywheel effect because it inspires budding entrepreneurs and draws capital to Europe. European start-ups are now better funded and supported than ever before, giving founders the tools they need to endure, so much so that the number of tech unicorns – technology company start-ups valued at $1bn or more – in Europe increased almost four times between 2014 and 2020. If you take a look at the start-up eco-system in Europe, it looks like this is just the beginning and over time we will see more of these companies turning public, transforming the opportunity set for investors and also the return potential for our clients. We are still in the early innings of a long-term transformation which means that there should be significant returns to be made by those with a long-term mindset.

Beyond this, though, there are changes happening aside from the rise of digital platforms which are relevant for growth investors. One long-term opportunity we are excited about is consolidation across multiple industries, allowing well-positioned companies to grow both organically and through acquisition. The Managed Fund’s second largest equity holding (as at end June 2021), IMCD, is a great example of this. IMCD makes several acquisitions every year as it consolidates the fragmented specialty chemicals distribution market. With every acquisition, IMCD grows its ability to meet diverse client needs while also gaining access to new clients; these acquisitions have seen it grow its revenues strongly over the last five years.

3. Some suggest Europe could be a leader in the energy transition. What are your thoughts?

Europe is certainly advanced in the decarbonisation agenda. Europe’s regulations and decarbonisation program are more ambitious and far-reaching than the US and China, while there is also significant support for the green agenda among European investors. Regulations, like the carbon emissions trading system, and investor pressure force companies to confront their contribution to climate change but they also encourage innovation. Europe can potentially lead the way in the production of green hydrogen and emissions mitigation technologies such as carbon capture, in part because the regulatory regime is that much more severe than elsewhere, pulling forward companies’ decisions on climate action.  

In the Managed Fund, we do have some exposure to what we would label ‘climate champions’, such as Nibe, the Swedish heat pump manufacturer. However, looking to the future we would hope to see our exposure to companies providing climate solutions grow. We have been applying research effort to understanding which technologies and which businesses can be winners in the energy transition. Many of these technologies and businesses lack scale at the moment, but incremental successes could create a virtuous circle and this is something we will be monitoring as we seek new investment opportunities.

4. Are there any European companies capable of becoming the next Amazon or Alphabet?

Looking at Europe today, it is too early to tell. Importantly, though, there are companies which are becoming global leaders and targeting potentially massive markets. There are two examples from the Managed Fund portfolio I’d point out:

5. Looking 10 years ahead, what are you most excited about within European equities?

We are excited to see the evolution in Europe’s investment landscape. We think that some of the most exciting opportunities in Europe are being driven by younger, rapidly growing companies and the application of nascent technologies. This will transform the opportunity set for European investors. Identifying these opportunities, whether in digitally enabled businesses or in climate solutions technologies, requires creativity and the ability to invest in and support these companies for a very long time, which Baillie Gifford’s partnership structure allows us to. We believe that the Managed Fund’s European equity holdings are a collection of some of Europe’s best businesses which should add value for the fund’s investors over the long term.

Risk Factors

Source: StatPro, net of fees, in sterling. Class B Acc shares, calculated on a close of business NAV. Comparator Benchmark: IA Mixed Investment 40-85% Shares Sector Median (Net). The manager believes this is an appropriate benchmark given the investment policy of the Fund and the approach taken by the manager when investing.

Past performance is not a guide to future returns.


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