Key Points
- Engaging with experts from outside the world of finance helps generate distinctive investment ideas and reduces the risk of groupthink
- Insights from academia encouraged Baillie Gifford to invest in Tesla, MercadoLibre and several biotech firms
- A new partnership could identify opportunities to add renewable energy sources to the electric grid
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.
In August 1949, the Soviet Union detonated its first nuclear bomb.
It took less than three weeks for US and British experts not only to discover that the top-secret test had occurred in a remote area of Kazakhstan, but also to pin down its date and time.
The feat involved the coming together of highly skilled practitioners from different fields, including meteorology, radiochemistry, bomb construction, mathematics and flight – the tell-tale particles of debris were picked up by a US Navy plane fitted with a special filter.
Until then, the consensus within US officialdom was that the Soviets were years away from developing an atomic weapon. But by pooling their skills, the specialists changed history, heralding a change in strategic thinking that prompted the Cold War.
WATCH: Academic coordinator Dr Eve Hepburn discusses how Baillie Gifford draws on external expertise in her Disruption Week briefing
Using the same collaborative approach in very different circumstances, Baillie Gifford believes that joining forces with experts from diverse fields helps us to think distinctively. And there’s a kicker to the story above.
Complexity science
One of the test detectives was the nuclear chemist George Cowan. His strong belief in the value of interdisciplinary research later led him to create the Santa Fe Institute in New Mexico, which Baillie Gifford collaborates with and helps to fund.
“Cowan brought together a community of academics who were interested in finding ways to apply the physical sciences to solve some of the most the world’s most difficult problems,” says Dr Eve Hepburn, Baillie Gifford’s academic coordinator, who recently took part in the firm’s Disruption Week series of briefings.
“They realised that what brought them together was the study of complex systems – from how the brain works to climate change – which require multidisciplinary approaches.”
Cowan died in 2012, but his work is continued by the economist Prof Brian Arthur, among others.
Prof Arthur’s pioneering work includes the study of how companies and technologies become dominant via:
- Increasing returns: The tendency for businesses, products and technologies that are ahead to keep getting further ahead, while those that lose the advantage tend to fall further behind
- Network effects: The more people who adopt a product or service, the more valuable it becomes, which in turn attracts additional users. Conversely, as more people drop off rival services, they become less relevant to their remaining customers
“Arthur was interested in how small companies can gain competitive advantage early on in their careers,” explains Dr Hepburn.
“He chats to our investors at least once a year and has played a fundamental role in how they think about the potential of tech-enabled companies such as MercadoLibre, Latin America’s dominant ecommerce and payments service.”
Jessika Trancik, another of the Institute’s academics, helped convince Baillie Gifford investors of the merits of investing in Tesla at a relatively early stage with her work on forecasting the pace of progress of energy technologies.
And theoretical physicist-turned-biologist Geoffrey West’s work on how organisms, cities and companies change as they scale has also influenced the thinking of many at Baillie Gifford.
Global partnerships
Santa Fe is one of more than 30 educational institutions and individual academics with whom Baillie Gifford has forged partnerships.
Others include:
- The Interuniversity Microelectronics Centre (IMEC) in Leuven, Belgium and its research into semiconductor technologies
- The China-UK Low Carbon College of Shanghai Jiao Tong University and its work on the net zero economy
- Arizona State University’s Prof Hendrik Bessembinder and his study into the characteristics of the best-performing stocks
Closer to home, Baillie Gifford funds the University of Edinburgh’s Chair in Ethics of Data and Artificial Intelligence, Prof Shannon Vallor. She helps shape the company’s thinking about the benefits and pitfalls of using machine learning and automation in healthcare, finance and education, among other sectors.
The firm also provides financial support to Prof Alison Hester’s work at the James Hutton Institute in Dundee.
“She’s pioneering climate-positive farming, looking at how our tractors and combine harvesters could switch from fossil fuels to electricity or low-emission hydrogen gas,” says Dr Hepburn.
“Also how we could use soil to capture and sequester carbon. That helps us understand the potential of some of the companies we’ve invested in, like the agricultural machinery maker John Deere and sustainable farming specialist Indigo Agriculture.”
Baillie Gifford also has a sponsorship relationship with Prof Nicky Ragge at the Oxford Brookes University’s Department of Biological and Medical Sciences. Her work in the field of genetics in eye research has informed several biotech investments, including the genomic analysis specialist Illumina.
Funding and community building
These relationships help the company’s investment strategy teams maintain a flow of new ideas and sometimes provide a front row seat to new discoveries. But the aim isn’t to second guess which conversations will be most profitable. As the economist John Kay wrote in his book Obliquity: “Goals are often best achieved when pursued indirectly.”
To the academics, the principal benefit is funding. But that’s not the whole story.
“It’s quite different to the funding they get from research councils and governments as we’re non-prescriptive about their work. And we tend not to attach those types of strings that lead to huge amounts of bureaucracy,” explains Dr Hepburn.
“We also have fantastic conversations where they get to learn as much about the finance industry as we do about their work. And we’re able to introduce them to some of the clients and companies we work with, which builds bigger networks and communities of interested people.”
As well as facilitating such relationships, Dr Hepburn – a former associate professor of politics and international relations – brings academics together into mini-network groups to aid her own research, which Baillie Gifford’s investment managers draw on. That has included a study of the luxury industry and ongoing work on decarbonisation.
“We’re aware of the dangers of groupthink, so we try to get different views and sometimes competing views on the same subject. So I might involve psychologists, economists and business school professors and then try to synthesise their contrasting views and find some common ground.”
New relationships
Many of Baillie Gifford’s academic relationships come from staff members independently contacting a researcher or institution, reflecting the asset manager’s decentralised nature. And there are no set criteria for who qualifies.
Dr Hepburn notes the firm’s most recent engagement is with a Brazilian non-governmental organisation (NGO) involved in microfinance rather than a formal academic body.
“That will help one of our investment strategies understand how to better measure the social impact of fintechs in tackling income inequality and helping financial inclusion,” she explains.
Word-of-mouth has led others to contact Baillie Gifford. That was the case with Imperial College London.
“They originally approached us about AI. But because we already covered that elsewhere, I brought together some investment teams who were more interested in energy. And we’ve instead agreed to fund a team of post-doctoral fellows and professors to research the decarbonisation of the power grid,” says Dr Hepburn.
That’s of interest because the shift towards abundant but ‘unreliable’ renewable energy sources creates issues for the grid’s stability, including the threat of overloaded transmission lines and mismatched supply and demand.
Solving them with new types of batteries, hydrogen generators and other means could lead to fresh investment opportunities.
And as much as Baillie Gifford hopes these kinds of engagements will benefit its academic partners and the world, these wider aims are tied to our priority of improving financial returns for clients.
“If you’re being long-term stewards of clients’ capital then you need to have a long-term perspective when it comes to research,” says Dr Hepburn.
“And if you want the longest-term perspective that’s out there, it’s not going to come from an investment bank. It’s going to come from academic researchers who have been working on these difficult and complex issues all their professional lives.”
Words by Leo Kelion
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