Waves of change

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

Phil Rae (PR): Hello, everyone. Thank you to all of you who've joined the call and a very warm welcome from an unusually bright and sunny day in Edinburgh today. The title of today's webinar is “Waves of change: the bright side of US disruption”. 

I think we're all looking on at what's been going on in the US and it's been quite a turbulent time and a rapidly changing backdrop. That's been impacting markets and we will address that. But the main purpose of today's webinar is to provide you with an update of the Baillie Gifford American Fund. 

As you will know, the Fund aims to invest in the most exceptional growth companies in the United States. Just by way of quick introductions, my name is Phil Rae. I'm an investment specialist and I'm part of the wider US Equity Team. 

I'm very pleased to be joined today by Dave Bujnowski, Dave is one of the four portfolio managers managing the strategy. Dave is also a partner at Baillie Gifford and he's based in our New York office. He joins us from the US today. So firstly, good morning to you, Dave. 

Dave Bujnowski (DB): Good afternoon, Phil. Hi, everyone. 

PR: Dave, glad you could join us today. And I know there's a lot for us to get through in markets and more broadly in what's going on in the US. Before we dig into that, and just by way of housekeeping, Dave and I are going to keep our remarks to run about 30 minutes or so. Dave's presentation will wrap up around about then. But we want to make sure we leave plenty of time to address any questions you have. We will try and wrap up the entire webinar at that 45 minute mark. 

In terms of format, we're going to cover three broad areas. Dave's firstly going to recap 2024 and put that in a longer-term context. I think that'll tee us up nicely as we begin to look ahead to the outlook. Secondly, Dave's going to spend some time talking about where the team is focusing attention now, so that both in terms of opportunities and also potential threats. And then finally, what that means for the portfolio outlook in 2025 and beyond. 

Just to remind you, this is an interactive webinar, so please do submit your questions via the Q&A function at the bottom of your screen. We're going to make sure we leave plenty of time for those important questions. And thanks to all of you that have already submitted questions. 

So Dave, with that, perhaps we can just kick off and I'll hand it over to you to address that first area and give us a recap of 2024. 

DB: Yeah, thanks, Phil. Great, and thanks everyone for joining. Lots to cover today, as Phil said, but the overarching message I hope to leave you with is that we remain very excited about the shape of the portfolio. 

And by shape, I mean things that range from the businesses that make it up and their fundamental health, it's strong, to the underlying structural drivers of their growth, they're powerful, to the fitness of the portfolio, which is as important as ever in a world filled with uncertainty, it's resilient and robust. To finally, portfolio construction, where we have made some changes since 2022, and the aim here, less volatility. 

So as Phil mentioned, we'll start with a recap of 2024, what it means for today. So I'm going to start by zooming out a little bit. Now, given Baillie Gifford's long-term approach, starting by zooming out and getting out of the weeds might seem familiar to you, but given the volatility that surrounds us, I think it's a particularly good time to set some perspective. 

And when I say volatility, I don't just mean the last few weeks, I mean the last few years. The perspective I want to start with involves a white paper I wrote in 2022 called the Engines of growth. It's available on our website. Maybe some of you have seen it, but at the time I wrote it, growth stocks were in tatters. 

And the question I posed, really to myself largely, was whether the engines that drove such a wonderful decade of performance for growth stocks previously were still intact. Now, I concluded that some engines were in fact sputtering out, say the low cost of capital, but that others were intact and still others were just revving up. 

Now, through 2022 and much of 2023, that hypothesis was just that, a theory. I'd like to think that the logic was sound, I believed in the conclusion, but admittedly, the conclusion was far from being proven out. 

Fundamentals at the time were still rocky from a post-COVID slowdown. E-commerce growth had seemingly plateaued. Enterprises were still cutting costs on software and other IT. Inflation was still high. The rate cycle hadn't yet turned for the better. 

However, entering 2024, things were changing for the better. I recall doing marketing and seeing clients in early 2024 with that message, the headwinds that had been facing growth stocks for the previous couple of years were not only subsiding, they were turning into tailwinds. Yes, the rate cycle had peaked, but more importantly, fundamentals across much of the portfolio were improving. 

Growth across much of the portfolio was accelerating. The estimate revisions were upward, not downward. And perhaps most exciting and I think most underappreciated at the time, many of the companies in the portfolio had used the slowdown to cut costs aggressively. They were leaner and they were set up to deliver very rapid earnings growth once revenue growth had recovered. 

So I wanted to start with this perspective because to me, this is what 2024 was all about. And we see this in the first couple of slides. So first on the left, Of course, a two-year track record is not at all what we measure ourselves by, but 2024 was another strong year relative to the benchmark after a nice recovery in 2023. 

Now, on the right, this is important. This shows that the portfolio performance over the last five years has been driven largely by fundamentals, not by valuation re-rating or sentiment improvements, as has been the case, more of the case, with the S&P 500. And I say that's important because over the long term, share price performance follows fundamental growth. 

Now that's good news. In fact, this isn't on the slide, but average revenue growth in 2024 across the portfolio was 20 per cent. That's outstanding. And 2025 is currently expected to be 18 per cent. So fundamentals are strong. 

Okay, the next slide. I mentioned the leanness and the cost efficiencies that have been created during the downturn. Here are three of our larger positions, but the trend isn't limited to just them. At Meta, 22 per cent top-line growth in 2024 generated 35 per cent growth on the bottom line. 

DoorDash, 25 per cent top line and 60 on the bottom. And Shopify, 26 per cent top line growth generated 92 per cent EBITDA growth. The next slide shows how this caught many by surprise. This is extraordinary and not uncommon, frankly. The left-hand column is what consensus 2024 earnings estimates were in January of 2023. So a little over two years ago when the streets started setting expectations for 2024. 

The next column to the right shows what those estimates were as we exited 2024. So essentially what earnings per share turned out to be, the actual number. And we see significant upside, significant surprise over those two years. Shopify's final 2024 EPS was roughly five times higher than what folks had modelled less than two years earlier. 

Duolingo and Cloudflare, three times, just remarkable numbers. So the upshot, well, why I began my remarks with the engines of growth is that the key point here is that the long-term engines of growth were always intact. They never left, they're structural, they're deep. And they were here even during the poor performance in 2022. They were merely obscured by temporary factors, a rate cycle and a post-COVID temporary air pocket in demand across some of the segments we invest in.

So those engines drove strong growth in 2024 fundamentals, and they remain very much intact as we look ahead. Now, what gives me confidence to think they are very much intact as we look ahead? Well, the answer is found in the source of that growth, the causes of great growth businesses. 

What's the fuel behind those engines of growth? And it's change, it's dynamism, and it's disruption, and there is an abundance of it out there. 

PR: Thanks, Dave. And that's really helpful context for our listeners. And what I'm hearing is companies have emerged from a challenging period shaped by the pandemic, but they're fitter, leaner, and that's coming through in profitability.

And that's really what's underpinned the strong recovery we've seen in terms of returns over the last couple of years. I wonder if we just might double-click on that last point you mentioned and talking about engines of growth and maybe just how they're influencing yours and the team's current thinking. 

DB: Yeah, happy to. So yeah, this gets us on to where we're focusing our attention. When I wrote that Engines of growth paper, one of the top takeaways involved the role that change and dynamism play as drivers of growth, the fuel. 

Now to those who have heard me talk about this before, I apologise for the repetition, but it's really a critical premise we work from as a team. And today I think it's more relevant than ever. And the point is there is a very strong temptation to think that a certain type of backdrop is necessary for growth stocks to flourish. 

Say, the expansionary forces that we saw from 2010 to 2020, a strong economy or a cheap cost of capital, loose regulatory environment, globalisation, things like that. Now, that might be true for growth as a category or as a rising tide that lifts all boats. But if you're looking for individual growth stocks, then no, that's not necessary. 

And particularly for active investors looking to fill a 40 to 50 stock portfolio or looking for six to seven new companies per year to add to that portfolio in a competition for capital, or looking for the handful of outliers that really drive performance over the long term, then not at all. 

The key point is that the critical ingredient for growth and a business to grow is change and dynamism, not just the expansion of the system. So I wanted to set that scene a little bit, Phil, and then perhaps we can get into some examples. 

PR: Yeah, I think that'd be helpful, Dave. Why don't we just, a couple of examples that bring that to life for listeners. 

DB: Super. So I'll give you two, and I'm going to focus on situations where there was great change, but not necessarily change that would intuitively seem for the better for growth stocks. So the first one, and it's one, again, perhaps some have heard, because I do enjoy talking about it, it's Infosys, the Indian IT outsourcing company around the time of the bursting of the internet bubble. 

Now, out of that 2001 rubble came companies like Infosys and the Indian offshore outsourcers who went on to grow at a compound annual growth rate of nearly 40 per cent for a decade, the ensuing decade after the bubble burst. Now, why did that happen? How did that happen? Well, there was a change. There was a change in the system. 

When the bubble burst, there emerged a new type of demand in the C-suites of the Global 2000 or the S&P 500 or any enterprise on the planet for that matter. That new demand was do more with less. It was ROI. It was unlike the previous 30 or 40 years where people were just spending anything on technology during the heyday of kind of building up the internet. But it was the opposite of expansionary. But it was a change and it's what Infosys sold. They suddenly had, upon the bursting of the bubble, they suddenly had product market fit and they flourished. 

Another example, we'll go farther back and it's IBM. Not particularly an attractive growth opportunity today, but in the 50 years that spanned 1935 to 1985, that period that saw a world war and 10 distinct economic recessions, IBM grew annual revenue less than 10 per cent, only eight times. And its norm was more like 20per cent annual growth. 

Now, how did it manage that during all that uncertainty? Again, it was a monumental change that was afoot. IBM was laying down the infrastructure, mainframes and whatnot, that would enable the information age that emerged in the second half of the 20th century. So at any rate, Phil, hopefully that brings it to life a little bit. 

The aha moment for me here as an investor was that to identify great growth opportunities on a case-by-case basis, the great growth opportunities of tomorrow, or determine whether there will be any at all for that matter, the important question an investor should be asking isn't necessarily what's growing, it's what's changing. So what's changing? And I think the answer here is good news for growth investors. The answer is a lot.

PR: Yeah, I think that's helpful context right now when you feel the effects of that disruption. There's a lot of change and dominating headlines coming out of the US. And I think the important point here is, despite the current growth scare, is that it's not about the expansion of the system or the economy. It's about the underlying change, like you mentioned. The dynamism, the disruption, that's what matters to us as long-term growth investors. 

Dave, maybe just again for our listeners, could you add some more colour around that and perhaps highlight a couple of the major areas of enthusiasm for you and the US team? 

DB: Yeah, it's fun when you start with a premise that change drives growth and you start looking for change, it really opens up the aperture of where you can look. So I'll highlight a few areas to show where both where our enthusiasms are, but also hopefully how we think a bit differently about some topics that are generating headlines. 

So the first, obviously there's technological change, right? And AI is dominating that narrative for all the right reasons. Now, our perspective on this, on Wall Street and in the markets, the AI discussion has seemed to been reduced to a very narrow lens around NVIDIA and NVIDIA's earnings and NVIDIA joining the $3tn club and all that stuff. And we appreciate that enthusiasm about NVIDIA. We have held it in the portfolio since 2016. 

However, there are many places in the AI hardware and software stack, the broader system that will ride this megatrend as well. And it will benefit from it. From infrastructure companies like Amazon, Cloudflare and Snowflake to apps that are incorporating AI to bring a step change in user experience and charge for it and monetising it, and we're seeing it today. 

To those who are creating, if you think about the fuel that feeds AI systems, it's data, right? And so if you are a company and you're creating a proprietary data asset, there's the potential with AI to unlock entirely new intelligence and answer some questions that were never before addressable. 

So this would involve or include someone like Samsara in the Internet of Things, a holding to Recursion or Tempus in Life Sciences, also holdings. In fact, as I look through the portfolio, it's really funny. A year ago, people would be asking, what are your AI plays? How are you positioning for AI? I think today, the more relevant question is what company is not exposed to the AI trend? 

So a bit later, We'll get into more detail about what we're doing in the portfolio with all this in mind. But yes, I think AI is worth the attention it's generating. We are hyper-focused on it. That said, we're less interested in what has been the hot AI play and much more interested in where value will accrue in the system over the long term. And I think that is changing in front of our eyes. 

PR: Yeah, I think it's hard not to get excited about the long-term implications of AI as a growth investor. And it's remarkable just how quickly a lot of these tools have spread and impacting a wide range of industry. And I'm sure many on our call today can relate to that. 

Dave, maybe you could just touch on other opportunities elsewhere beyond artificial intelligence. 

DB: Yeah, sure. So the idea here, even, and this is something we're deeply interested even before AI came along, is that the structural change. That word structural is so important, the structural change that has taken place over the last 20 or 25 years, that being the infrastructure change out that has driven digitisation and much of the innovation that we're seeing. That being the internet and the cloud. The implications are not confined to e-commerce or enterprise software. This infrastructure underlies the entire economy and society as we know it. So, the implications are pervasive across the system. 

Now, some systems will change at slower rates for a variety of reasons, but change will come. Innovation is only accelerating. One thing we're looking for beyond AI is what systems are still early in that phase of disruption, or in a way, you know, they're late to being disrupted, but it's coming or it's here. 

There's four that I'll call out. So local commerce, food delivery has been around, online food delivery has been around for quite a while, but DoorDash has much bigger aspirations to go beyond restaurants delivering after ordering online to digitising local commerce much more broadly. And that has been slower to digitise. 

The second is physical operations. I mentioned Samsara, but their customers are, it's a $4tn addressable market, these physical operations companies. So from fleets to telcos, to utilities, to airlines, anyone with physical operations - they are digitising. They're starting to digitise to make their businesses more sustainable, more efficient, more safe for their employees. And Samsara is helping to do that. 

And interestingly, not unlike Infosys in the example I gave earlier, they have breezed through the economic uncertainty that has hurt a lot of other software businesses over the last three years, because they sell a very clear ROI to these customers. So they're getting immediate benefits. And they're still growing upwards of 40 per cent on the top line. 

The third area I'd call out, there are some very popular experiences that were previously offered only in person. Think about retail 25 years ago and how it shifted online. Well, there's other experiences that are popular that are in the midst of shifting online as well. Online sports, gambling, and iGaming in the United States is an example. 

Now, as someone who lives in America, I can tell you firsthand that it is reshaping the sports entertainment experience broadly. It's not just a subset of people who used to go to the casinos in brick and mortar. This is becoming part of the sports entertainment experience and we took a position in DraftKings late last year as one of the leaders here. 

And then finally, restaurants. Historically, they've spent a very small per centage of their CapEx on IT, not the most digitised industry. But then there's someone like Sweetgreen, another holding of ours, who's rolling out their so-called infinite kitchens to their base of stores. These automate the preparation of food, and this automation can radically transform the cost structure of restaurants and improve margins significantly. So yeah, Phil, there's a lot more we're excited about beyond just AI when it comes to technological change. 

So shifting gears entirely, I'll go to maybe a third area that we're focusing on and that involves change. And we'll go from sort of the left brain technological thinking to very much the right brain, and this involves culture. 

This has been a fascinating journey. I think the upshot is technological change isn't the only big change that's afoot. Now, I'll set the scene a little bit. Last year, I read a book called ‘The Scientist’. It was about the life of E.O. Wilson. He's a world-renowned biologist and naturalist. He passed away a couple of years ago. He's sometimes referred to as Darwin's heir. He made a big impact on biology. 

Now his claim to fame was studying ants and insects. And he said he embarked on that study around the same time Watson and Crick discovered the double helix in genomics and everyone in science rushed into genomics. Now he went into studying insects because he thought perhaps the best way to generate an insight and make a difference is to look where no one else is looking. 

So why do I mention this? I think as someone who has studied technology for the past 20-plus years, I'm absolutely guilty of this too, but I think it's common for folks to associate disruption with technology. But as the world of investors kind of focuses on AI, I thought it might be useful to search for disruption elsewhere. 

And if we work from that premise that change drives growth, then surely we ought to be looking for it in as many places as possible. So the place I've been looking is American culture. Is that changing? And to answer this, we developed a relationship with a leading anthropologist in the US to help us assess and understand cultural and cultural change. And it's been fascinating. 

There are several lessons from our studies so far, but the one that I find most powerful involves the notion that yes, indeed culture in America is being disrupted too. It's rampant. The contrast that this anthropologist uses, he contrasts today's culture with post-World War II America. And he suggests that then there was change, but the change was very orderly and predictable. 

So as new trends emerged, you as a person or a company just needed to adapt. You can see it coming. Today, there's disorder. And the implications of this are massive fragmentation. So culture is fragmenting, consumers are fragmenting, roles and norms are fragmenting, business is fragmenting. 

One anecdote that he likes to use is Starbucks claims to have something like 87,000 different drink combinations available. Now, I don't know if that's true, but even if the real figure is something more like 870, it is an impressively larger number than the traditional choice between cream or sugar. That's what I grew up with. 

So anyway, fragmentation, change, disruption. The analogy he uses that I think captures this wonderfully involves waves and the beach, funnily enough. And he suggests there's Waikiki waves, those smooth rolling waves in Hawaii. They're powerful, but they're predictable and orderly. That was post-World War II America. Today is more like the North Sea. It's chaotic. It's turbulent. It's unpredictable. And that's today's culture. And the relevance for an investor is that, again, it's change. And with change comes opportunity and threats we need to identify.

PR: Yeah, thanks Dave. I certainly know where people would prefer to go surfing on the Waikiki waves than the North Sea ones. I think, you know, the sort of analogue here is the volatility in markets as well. Certainly we've seen some reactions to that. The constant now seems to be disruption, change and the uncertainty. We've seen volatility just really back this year. 

As a long-term investor, Dave, maybe you could just help. You sort of mentioned about looking where others don't, but also how do we turn that volatility to our advantage as long-term investors? 

DB: Yeah, it is fascinating as the study of culture is, it can't just be academic, right? It might be interesting and okay, Waikiki versus North Sea is fun and all, but the bigger question is, are there investment implications? And we see that absolutely there are, that certain types of companies and brands are better positioned than others for this North Sea world. 

So what comes to mind for me, I think there were four or five different areas that I think involve some opportunities. So first, it makes, the North Sea makes certain business models more attractive than others. So platforms like Shopify or Netflix or Roblox or Meta can remain robust and resilient while, because they're a platform, while the content that sits on top of them can be frenetic and turbulent. So what's popular on Netflix today might not be popular tomorrow, but Netflix as the platform doesn't care so much as long as something new comes in. So that, I think, lends itself to a North Sea world. 

Second, I think this North Sea, it makes cultural mainstays even more valuable. And what I mean by that, in a fragmenting world, there's even greater value in that which is protected. And sports is an example. So when you think about what social media has done and the fragmenting of attention that's splintering the entertainment world, there's no longer, I'm dating myself here, but there's no longer that must-see TV, that Thursday night TV where it was like Seinfeld and Friends, where everyone viewed it at the same time, right? It's all been fragmented. 

But sports is one area where people still aggregate live, at the same time. And there is great value in that scarcity. And to the extent it becomes more scarce, it becomes more valuable. I mean, Super Bowl advertising rates are the perfect demonstration of this. They keep going higher because the Super Bowl is one of the few events that draws people in a large audience all at the same time. So we're really interested in these cultural mainstays. And it's not the core of that DraftKings thesis, but certainly DraftKings can benefit from this as a pioneer and a change that's happening inside the sports arena. 

The third that I call out, this North Sea change, it presents opportunities to those companies who exploit the shift from mass, which was a very Waikiki implication, was sort of defined by mass, mass media, mass production, to fragmentation as a growth opportunity. 

So what I mean here is that the Waikiki notion of culture suggests relative homogeneity, whereas the North Sea is much more heterogeneous. And with that shift comes more white space. So as things fragment, there's more fragments to address. And if you can be a company that is addressing those fragments instead of playing into the mass world, there's an opportunity. 

So towards the end of last year, we invested in Shark Ninja. It does just this. So Shark Ninja is a maker of home appliances. It doesn't seem perhaps like the most exciting growth opportunity in the world, but it's a fascinating company. So they make anything from vacuum cleaners to blenders. 

Now the tie to culture here is that unlike most home appliance companies whose entire brand caters to one category, think Dyson and vacuums, Shark Ninja is broad across 28 categories and growing. So these categories, that's the fragmentation, that's the white space. They'll make products to serve those new fragments that are popping up and they do so incredibly successfully. 

There's two more I'll highlight. Fourth, and maybe least relevant for near-term, but most relevant for long-term investors, this North Sea culture really shines a light on the importance of corporate culture and a business's ability to adapt. So agility, I think, is turning into a genuine competitive advantage. It plays into these founder-led companies where the founder often has more control to pivot and move the business in a certain direction quickly. 11 of our top 15 holdings happen to be led by founders. 

And then the last thing I'll mention, Phil, that ties into the North Sea world is it really demands robustness and financial resiliency in the portfolio. So here on slide nine, the portfolio is in very good shape. So 91 per cent of the portfolio is positive earnings or free cashflow positive. 

Our companies are further building fitness by investing for the future, out investing the S&P in R&D by a factor of three. And as I noted earlier, outgrowing the index significantly. So I think all that kind of lends itself to this North Sea disruptive world and types of companies we look for. 

PR: Yeah, I think, Dave, that's really helpful. It sort of loops back to what you started the conversation with about companies showing that fitness and emerging from the period with a higher degree of profitability. 

The portfolio, as you show on slide nine, is in good financial health, but still tapping into those disruptive forces affecting system change that you outlined. Maybe this is a good point, Dave, just to transition to portfolio changes, what's been going on there, and then we can take it from there. 

DB: Super. So in 2024, we added seven new companies, ranging from, as I said, Shark Ninja, DraftKings, to autonomous trucking technology pioneer Aurora, to Tempest AI, who I'd say the best analogy for Tempest is they have the potential to become the Moody's of the life sciences industry. 

They're building a massive database that has live patient clinical data, genomic data, biomarker data. And the unmet need here is to better understand a disease, whether you're a doctor in academia or a pharma company, you can call on Tempest for insights from their data, their massive data repository. So really no shortage of ideas in the pipeline. 

I think Meta and CloudFlare are also probably worth pointing out. We made multiple additions to them. over the course of 2024, largely with AI in mind. They're both very well positioned. And to fund them, we sold some smaller positions whose theses were just not playing out to the extent we hoped, but the larger pool of capital has come from recycling winners. 

So a year ago, Tesla and NVIDIA were nearly 14 per cent of the portfolio between them. Today, they're roughly five. So we recycled a lot of capital to fund these new ideas. I think Tesla and NVIDIA are both strong businesses with bright futures. We've owned both for roughly a decade. And in both cases, I think the market has caught up a bit to our thinking. So we trimmed into their strength. 

PR: Thanks, Dave. Maybe we can just quickly touch on, I'm cognizant of time, we can talk through some of those enhancements, those portfolio construction changes that, in terms of evolving the process that you touched on in your opening comments. 

DB: Yeah, I think then we could get to Q&A. So I'll start by acknowledging that we do embrace volatility in the portfolio. We consider it a feature, not a bug. It comes with being a long-term investor. And if you are long-term and patient, you will endure the volatility and patiently hold through the rocky times so you can benefit from the extreme upside that's possible on the other. We don't want to interfere with compounding, right? 

One of our favourite stats is during our period of ownership, there were at least 20 times when Amazon shares fell by over 20 per cent, including a handful where the value halved. But over that period, shares have appreciated nearly a thousand per cent. So patience pays. 

Now, that said, the extreme nature of the volatility that our portfolio generated from 2020 to 2022 is not at all what we strive for. It's not what we aim to deliver in the future and we've taken steps to avoid that. So we spent a lot of time in 2024 reflecting on the shape of the portfolio during that extreme volatility and where we needed to improve, lessons learned, make changes. 

So a couple observations during that volatility, there was a skew towards younger, unprofitable businesses, which was just not adequately offset by more mature companies. There's also a skew towards high growth with less weight and the more mature enduring growth companies that we are still very much attracted to. 

So on a stock by stock basis, the ideas were exciting, but on the whole, I don't think we managed concentration or correlations adequately. So the changes we made, we implemented a few guardrails that we're holding ourselves to, quantitatively. 

First is sources of demand. We'll actively monitor these to ensure we aren't overly exposed to one area, like e-commerce or enterprise software or healthcare. as far as sectors go. The second, financial maturity. This is a big one as defined by profitability. We've committed to have at least 50 per cent of the portfolio generating EBITDA. So this compares to 38 per cent when we studied it in the first half of 2024 and 54 per cent today. So we're hitting that commitment. 

And then there's the types of growth. I mentioned those enduring growth companies. We split the portfolio from early to enduring and mature, and we've committed to having no more than 5 per cent of the portfolio at time of purchase in the early category. These are less resilient, less robust, could really feel the pain in a downturn. We're roughly at 3 per cent today. 

And then a third of the portfolio we're committed to having in these enduring growth companies by the end of this calendar year. So we're building this out. This is 25 per cent according to the slide, but I think it's risen since we printed these. The key message here, Phil, and this is to ensure there's safeguards against unwanted correlations and volatility. 

We think it's important and it's a healthy evolution for the portfolio, but it's also worth noting like what has not changed. And that's our mission to find the most exceptional growth businesses of tomorrow. I think our edge in US growth is not about owning the companies that everyone knows about. 

It's about being early in these monumental societal shifts. It's about identifying the best of the best companies, the founders and teams that are positioned to capitalise on these big changes we're talking about, the companies on the right side of those change, the companies that will make up whatever 2030s version of the Mag 7 is and own them today. 

So I think it's a healthy evolution, but we're still really excited about the companies that make up the portfolio. So I'll stop there. We're obviously excited about what's to come and hope you all are too. 

PR: Thanks, Dave. A great point to turn it over to questions. And I think, like you say, it's no change to the ambition or the philosophy or process. This is just about putting some sensible guardrails around that to help dampen any sort of volatility based on what was experienced.

Yeah, let me just start by looking through the questions here. We've had a number of questions come in, Dave. So, you know, first one's first. I think one that's front and centre for a lot of clients right now is Trump's impact. 

And obviously, we've seen tariffs being used recently on and off. And the uncertainty, we touched on that earlier, that's causing a lot of uncertainty in markets and that's leading to volatility. How are you, how do you deal with that as a long term growth investor and the volatility we're experiencing in markets? 

DB: Yeah, I'd start by saying, acknowledging the high degree of unpredictability, and with that comes a low likelihood of potential insight or conviction from how the tariffs will be implemented to the impact to when they'll be implemented, how big they'll be, the timing of them. 

And then maybe most important of all is the second and third-order effects once they are implemented. I think we all learned over Covid that there can be a shock to the system. And then the second and third order effects are the biggest ones that will have the biggest impact. And they're utterly unpredictable in a complex system. 

So the point from the top down, we are not making any sweeping changes in the portfolio as long-term investors or bets based on a view on tariffs. What we are doing, is first ensuring the portfolio isn't overly exposed on a relative basis. And we're good here. We're overweight North American revenue. We are asset light. So I think a lot of software and digital names. So I think perhaps we have some insulation there. 

The second is where we are exposed, we need to ensure there's a strategy to mitigate this. For example, both Shark Ninja and Yeti both have goods manufactured in China. We've been in touch with both management teams and been very vocal about strategies to, and they both are, moving US supply aggressively out of China or diverting goods made in China to countries where there are not tariffs. So yes, in those specific use cases, we've incorporated threat into our analysis and our positioning. 

But big picture, long-term. I think what does matter most is being financially resilient, riding the long-term structural trends, and being adaptable. I think tariffs are emblematic of the North Sea. It's chaotic, it's turbulent, it's unpredictable. I think we covered a bit of that big picture in the North Sea conversation earlier. That's how we're handling it. 

PR: Yeah, I think that reinforces the agility points you made earlier about companies having to adapt, like you say. 

Dave, we've got a question around the reductions to Tesla and NVIDIA, and maybe just briefly touching on the team's current view around those two companies. 

DB: Sure. So we have two decisions where we will trim or sell a stock. One is if, I think as you all know, we have a forward-looking hypothesis for every stock in the portfolio. So it's a fundamental thesis about what the company will do and the opportunity for the next five years plus. 

And then there's math. There's the upside hurdle, our return hurdle. Given the valuations, will the math work to generate two and a half times upside over five years, which is our hurdle? And if we think that's unlikely, we will trim. 

So in both cases, I already mentioned, I think the street has largely caught up to our thinking over the past decade. And that's something we ask in every single stock discussion is, do we have a differentiated insight here? And if we think the answer is no, and the math the street has caught up to our thinking, valuations have expanded, the math gets a lot harder to make that two and a half times upside case. 

So in both cases, whether it was last year with NVIDIA or early this year with Tesla, one of the things we focus on is, and I touched on this in the very beginning of our remarks, is has the share price performance been driven by fundamentals or has it been driven by a re-rating? 

And so in Tesla's case early this year, it had just phenomenal run post the election, yet fundamentals did not support that run. So we took that as an opportunity and we had already been, had a lower position size in Tesla than we had say two years ago. But our most recent cuts have been around that, kind of trimming into that strength and recycling the strength. 

As for Nvidia, I think its future is very bright. Demand for its chips will remain very strong. But I think it is in the early stages of an evolution from going from an absolute pristinely perfect position in the AI food chain, where all of the attention and all of the dollars were being deployed to training models, where it had a monopoly position and it was pricing its products for that, to that system looking for more efficiencies. 

We saw this with DeepSeek. But it's not just DeepSeek. It's also companies looking to second source alternatives for very expensive NVIDIA chips. It's for people like Amazon and Google looking to build their own silicon.

Now, I don't think that is going to tear apart NVIDIA's business. The demand for their chips is too strong. But we believe going from this pristine position and a monopoly position to over the next five years, maybe merely just a very strong position, doesn't merit the valuation that NVIDIA had. So we've been deploying that capital elsewhere into the system where we think the value will accrue. 

So, you know, I think both very strong businesses, we are happy owners just at a lower position than we were a year ago. 

PR: Thanks, Dave. I'm just mindful of time. So for those of you who have asked questions that we maybe haven't had the chance to get to, we will circle back offline. I just want to say a big thank you to all of you who have dialled into today's webinar. Hopefully you found it very useful. 

Let me just quickly summarise what we've heard from Dave today. The portfolio has emerged from a pretty volatile period and very good financial health. The companies delivering strong fundamentals and that's what's driven the recovery over the last couple of years. 

Dave touched on some of the guardrails and enhancements to portfolio construction. So I think from that perspective, that sets us in great shape for the future. But ultimately, the mission hasn't changed. It's about investing in those exceptional growth businesses and holding them for the long term and taking advantage of those periods of disruptive change like we're facing at the moment. 

So from us, just a big thank you for dialling in and please do reach out to your individuals at Baillie Gifford, your client contacts should you have any further questions or want to hear from us any further information. Thanks again and have a great rest of the day.

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

Source: FE, Revolution, S&P. Total return net of charges, in sterling.
Share class returns calculated using 10am prices, while the Index is calculated close-to-close.
*S&P 500 Index.
**IA North America. Sector

Past performance is not a guide to future returns 

The manager believes this is an appropriate target given the investment policy of the Fund and the approach taken by the manager when investing. In addition, the manager believes an appropriate performance comparison for this Fund is the Investment Association North America Sector.

There is no guarantee that this objective will be achieved over any time period and actual investment returns may differ from this objective, particularly over shorter time periods.

Important information and 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 March 2025 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. 
Baillie Gifford & Co Limited is authorised and regulated by the Financial Conduct Authority. Baillie Gifford & Co Limited is an Authorised Corporate Director of OEICs. All data is sourced from Baillie Gifford & Co unless otherwise stated. 

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• Custody of assets involves a risk of loss if a custodian becomes insolvent or breaches duties of care.
• The Fund's exposure to a single market and currency may increase share price movements.
• The Fund's concentrated portfolio relative to similar funds may result in large movements in the share price in the short term.
• The Fund has exposure to a foreign currency and changes in the rate of exchange will cause the value of any investment, and income from it, to fall as well as rise and you may not get back the amount invested.
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