All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk.
The last two years have been uncomfortable for investors in Baillie Gifford funds. While apologetic for our underperformance, we remain wedded to our long-term active growth approach. The main catalyst for discomfort has been the hasty rise of interest rates to combat spiralling inflation post Covid.
Markets faced severe supply shocks as the world returned to a form of normality after the pandemic driving up prices on the back of a scarcity of goods coupled with previously pent-up demand.
Geopolitics have exacerbated the situation with the war in Ukraine forcing up energy costs for a while. Intermittent spats between the US and China have created uncertainty in the minds of investors and more recently conflict in the Middle East has added to the gloom. Ascending interest rates put an end to a decade of cheap money casting doubt on the ability of growth companies to expand their businesses or indeed survive at all when the cost of finance has increased exponentially.
Yet the world has not yet slipped into recession. 2023 was fine for most markets with China being the outlier in a negative sense – a case of fear or FOMO for investors.
Once again, the US has led the way albeit dominated by the exceptional progress of the Magnificent Seven – Meta, Tesla, Alphabet, Nvidia, Apple, Amazon and Microsoft – up some 80 per cent in share price terms while the rest of the 493 companies in the S&P 500 remained collectively flat. Strong evidence of the power of asymmetric returns.
Inside the doorway of 2024 sentiment still blows against growth investing. However, the headwinds of the last two years may be dissipating.
These have included value compression where stock prices started from very high levels and bumped into rising interest rates, downward revisions as growth stock prices reacted violently to any negative news and a general deceleration of growth as the world adjusted to the post-pandemic environment.
This triple whammy has caused a lot of pain for growth investors and led to significant underperformance of growth-orientated funds.
Growth companies have had to adjust to a new paradigm putting emphasis on profitability and generating free cash flows to evidence self-financing of their operations – debt being rather less attractive these days. This demonstration of resilience is in stark contrast to the growth at all costs of the previous decade underwritten by uber-cheap cash. Market share was the aim but now it is all about organic growth and the balance sheet.
There have been winners and losers through this transformation towards fiscal prudence. For example, we have sold investments in Carvana and Zoom – the former’s business model struggled as interest rates rose and the latter may find sizable growth difficult post-Covid in an increasingly competitive environment for its services.
Those companies which have responded well to changing circumstances include Shopify, the merchant-focused ecommerce platform which has cut costs and ditched its logistics arm and Door Dash, the food delivery app, which has benefitted from the demise of rivals and delivered close to $900m of free cash flow as a result.
Indeed, we estimate that over 80 per cent of the companies in our global portfolios are either profitable or have positive cash flows.
This resilience gives the lie to the stereotypical view that growth cannot thrive when interest rates are high. Quality growth companies with high returns on capital and robust profit margins are well-placed to deal with any lingering inflationary pressures. Such businesses do not simply rely on the economic cycle to excel. They point to fundamental progress which should be recognised by markets over time in share price terms.
This is beginning to happen as earnings and profits exceed expectation. Share prices tend to follow earnings over meaningful periods.
If 2022 was a year of adaptation and 2023 one of execution for growth companies, we may now be heading into a period of recognition where share prices begin to reflect the underlying strength of quality growth businesses.
We believe that this recognition is now underpinned by a series of tailwinds. Firstly, many of our holdings are seeing robust revenue growth. Secondly, profits and free cash flow are improving and thirdly and perhaps the key, is that these two factors are being helped along by strong structural drivers. We perceive some fantastic opportunities from here for growth investors in areas of structural disruption and innovation.
The digitisation of commerce and finance continues at pace. Companies such as Mercado Libre, Coupang and PDD Holdings are dominating expansion in their respective markets. The confluence of data and healthcare offers the chance to discover new ways to harness the power of machine learning and lend a higher probability to prevention and cure – love it or hate it Moderna is at the fore.
The post-carbon economy is on everyone’s agenda but how to benefit from it is the question.
We see private company Northvolt as strategically important to Europe as a battery maker competing with firms in China and the US. Alongside are Solugen and Climeworks offering solutions to curb future levels of emission.
Then we have the potential of artificial intelligence where the jury is still out as to the winners. As a result, our exposure to AI is diverse and encompasses hardware (ASML), the cloud (AWS), cloud services (Snowflake), industry solutions (Tesla) and the consumer (Spotify).
When this period of recognition takes off it is difficult to forecast with accuracy. Investors are still cautious with interest rates paused and worrisome global and political events bubbling or on the horizon.
The lure of shorter-term and less risky assets such as money market funds and bonds is powerful but for those with a longer-term outlook, equity markets in the shape of growth stocks may prove attractive. In the past investors may have expected to pay a premium for growth but currently (except for the Magnificent Seven) it appears temptingly cheap. Forecasted sales and earnings growth compare favourably to the market while valuations sit below or in line with the average stock.
Closer to home our range of managed investment trusts are sitting on wide discounts – back in 2020 they were all at a premium. Hence, there may be the opportunity for enhancement in both performance and rating terms – a double whammy.
All of this makes us think it could well be time to board the growth train before it leaves the station.
Risk factors
The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.
This communication was produced and approved in February 2024 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.
Potential for profit and loss
All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk. Past performance is not a guide to future returns.
This communication contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research, but is classified as advertising under Art 68 of the Financial Services Act (‘FinSA’) and Baillie Gifford and its staff may have dealt in the investments concerned.
All information is sourced from Baillie Gifford & Co and is current unless otherwise stated.
The images used in this communication are for illustrative purposes only.
Important Information
Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). Baillie Gifford & Co Limited is an Authorised Corporate Director of OEICs.
Baillie Gifford Overseas Limited provides investment management and advisory services to non-UK Professional/Institutional clients only. Baillie Gifford Overseas Limited is wholly owned by Baillie Gifford & Co. Baillie Gifford & Co and Baillie Gifford Overseas Limited are authorised and regulated by the FCA in the UK.
Persons resident or domiciled outside the UK should consult with their professional advisers as to whether they require any governmental or other consents in order to enable them to invest, and with their tax advisers for advice relevant to their own particular circumstances.
Financial Intermediaries
This communication is suitable for use of financial intermediaries. Financial intermediaries are solely responsible for any further distribution and Baillie Gifford takes no responsibility for the reliance on this document by any other person who did not receive this document directly from Baillie Gifford.
Europe
Baillie Gifford Investment Management (Europe) Limited provides investment management and advisory services to European (excluding UK) clients. It was incorporated in Ireland in May 2018. Baillie Gifford Investment Management (Europe) Limited is authorised by the Central Bank of Ireland as an AIFM under the AIFM Regulations and as a UCITS management company under the UCITS Regulation. Baillie Gifford Investment Management (Europe) Limited is also authorised in accordance with Regulation 7 of the AIFM Regulations, to provide management of portfolios of investments, including Individual Portfolio Management (‘IPM’) and Non-Core Services. Baillie Gifford Investment Management (Europe) Limited has been appointed as UCITS management company to the following UCITS umbrella company; Baillie Gifford Worldwide Funds plc. Through passporting it has established Baillie Gifford Investment Management (Europe) Limited (Frankfurt Branch) to market its investment management and advisory services and distribute Baillie Gifford Worldwide Funds plc in Germany. Similarly, it has established Baillie Gifford Investment Management (Europe) Limited (Amsterdam Branch) to market its investment management and advisory services and distribute Baillie Gifford Worldwide Funds plc in The Netherlands. Baillie Gifford Investment Management (Europe) Limited also has a representative office in Zurich, Switzerland pursuant to Art. 58 of the Federal Act on Financial Institutions (“FinIA”). The representative office is authorised by the Swiss Financial Market Supervisory Authority (FINMA). The representative office does not constitute a branch and therefore does not have authority to commit Baillie Gifford Investment Management (Europe) Limited. Baillie Gifford Investment Management (Europe) Limited 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.
China
Baillie Gifford Investment Management (Shanghai) Limited
柏基投资管理(上海)有限公司(‘BGIMS’) is wholly owned by Baillie Gifford Overseas Limited and may provide investment research to the Baillie Gifford Group pursuant to applicable laws. BGIMS is incorporated in Shanghai in the People’s Republic of China (‘PRC’) as a wholly foreign-owned limited liability company with a unified social credit code of 91310000MA1FL6KQ30. BGIMS is a registered Private Fund Manager with the Asset Management Association of China (‘AMAC’) and manages private security investment fund in the PRC, with a registration code of P1071226.
Baillie Gifford Overseas Investment Fund Management (Shanghai) Limited
柏基海外投资基金管理(上海)有限公司(‘BGQS’) is a wholly owned subsidiary of BGIMS incorporated in Shanghai as a limited liability company with its unified social credit code of 91310000MA1FL7JFXQ. BGQS is a registered Private Fund Manager with AMAC with a registration code of P1071708. BGQS has been approved by Shanghai Municipal Financial Regulatory Bureau for the Qualified Domestic Limited Partners (QDLP) Pilot Program, under which it may raise funds from PRC investors for making overseas investments.
Hong Kong
Baillie Gifford Asia (Hong Kong) Limited 柏基亞洲(香港)有限公司 is wholly owned by Baillie Gifford Overseas Limited and holds a Type 1 and a Type 2 license from the Securities & Futures Commission of Hong Kong to market and distribute Baillie Gifford’s range of collective investment schemes to professional investors in Hong Kong. Baillie Gifford Asia (Hong Kong) Limited
柏基亞洲(香港)有限公司 can be contacted at Suites 2713-2715, Two International Finance Centre, 8 Finance Street, Central, Hong Kong. Telephone +852 3756 5700.
South Korea
Baillie Gifford Overseas Limited is licensed with the Financial Services Commission in South Korea as a cross border Discretionary Investment Manager and Non-discretionary Investment Adviser.
Japan
Mitsubishi UFJ Baillie Gifford Asset Management Limited (‘MUBGAM’) is a joint venture company between Mitsubishi UFJ Trust & Banking Corporation and Baillie Gifford Overseas Limited. MUBGAM is authorised and regulated by the Financial Conduct Authority.
Australia
Baillie Gifford Overseas Limited (ARBN 118 567 178) is registered as a foreign company under the Corporations Act 2001 (Cth) and holds Foreign Australian Financial Services Licence No 528911. This material is provided to you on the basis that you are a “wholesale client” within the meaning of section 761G of the Corporations Act 2001 (Cth) (“Corporations Act”). Please advise Baillie Gifford Overseas Limited immediately if you are not a wholesale client. In no circumstances may this material be made available to a “retail client” within the meaning of section 761G of the Corporations Act.
This material contains general information only. It does not take into account any person’s objectives, financial situation or needs.
South Africa
Baillie Gifford Overseas Limited is registered as a Foreign Financial Services Provider with the Financial Sector Conduct Authority in South Africa.
North America
Baillie Gifford International LLC is wholly owned by Baillie Gifford Overseas Limited; it was formed in Delaware in 2005 and is registered with the SEC. It is the legal entity through which Baillie Gifford Overseas Limited provides client service and marketing functions in North America. Baillie Gifford Overseas Limited is registered with the SEC in the United States of America.
The Manager is not resident in Canada, its head office and principal place of business is in Edinburgh, Scotland. Baillie Gifford Overseas Limited is regulated in Canada as a portfolio manager and exempt market dealer with the Ontario Securities Commission (‘OSC’). Its portfolio manager licence is currently passported into Alberta, Quebec, Saskatchewan, Manitoba and Newfoundland & Labrador whereas the exempt market dealer licence is passported across all Canadian provinces and territories. Baillie Gifford International LLC is regulated by the OSC as an exempt market and its licence is passported across all Canadian provinces and territories. Baillie Gifford Investment Management (Europe) Limited (‘BGE’) relies on the International Investment Fund Manager Exemption in the provinces of Ontario and Quebec.
Israel
Baillie Gifford Overseas is not licensed under Israel’s Regulation of Investment Advising, Investment Marketing and Portfolio Management Law, 5755-1995 (the Advice Law) and does not carry insurance pursuant to the Advice Law. This material is only intended for those categories of Israeli residents who are qualified clients listed on the First Addendum to the Advice Law.
Ref: 90645 10044698
