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.
It is said that you can’t really know where you are going until you know where you have been. Before I share where we are going next, please indulge me in a brief retrospect of where we have been.
It has now been more than a decade since the Discovery investment team set out on the journey to find and invest in the world’s most innovative companies early on in their life cycle. Originally set up as an incubator of ideas for Baillie Gifford’s wider investment floor, the team has built a successful track record of unearthing the next generation of growth companies. For example, in 2015 when we first invested in online furniture retailer Wayfair its total market capitalisation was $3.6bn. Today, Baillie Gifford’s stake in Wayfair, across multiple strategies, is bigger than the total market capitalisation when we originally invested.
What really stands out to us is that some of the most exciting smaller companies in the world seem to be in the US. The breadth and depth of the US in terms of innovative growth companies is simply unparalleled. Warren Buffett summed it up well in his latest shareholder letter, stating: “There has been no incubator for unleashing human potential like America”. Indeed, even though we search worldwide for exciting growth businesses, we believe that the US market is unparalleled in its entrepreneurial flair and innovation, for instance with the healthcare companies Novocure (oncology) and STAAR Surgical (creating implantable lenses).
The wider Global Discovery Strategy is focused on early-stage growth companies addressing global challenges. US companies represent just over 60 per cent of the strategy, so the team decided to start US Discovery to capture disruptive US businesses with both a domestic and global focus. We are so excited to launch the US variant of our existing Global Discovery Strategy, which will leverage the expertise, experience and – above and beyond all else – the genuine enthusiasm of the team for investing in US innovation.
While US Discovery is therefore a new product for Baillie Gifford, its foundations are based on a philosophy and process which we have had in place for over a decade. Our approach centres on three core principles – investing for the long term, investing actively, and investing for growth. To truly benefit from the potential of smaller growth companies, you need to be active in finding the most promising ones and thereafter own them for long enough so that the advantages in their business models become dominant drivers of their share price. With US Discovery we will seek to identify the highest potential growth companies and own them as they grow to become multiples of their starting size.
The managers will invest in between 40 and 75 US companies and retain ownership in them as they grow. They aim to hold securities for long periods – typically between five and 10 years – which is expected to result in relatively low portfolio turnover and to be in line with the long-term investment outlook. To identify these companies, the managers will assess a range of factors including long-term growth potential, geographic and industry positioning, competitive advantage, management, financial strength and valuation.
Importantly, it is not simply small companies we are searching for. We look for immature ones, companies that we believe have the potential to be among the winners of tomorrow but which, at the time of our investment, are still very early in exploiting what we think can be very large opportunities. The US Discovery portfolio will benefit from the ideas that we have already identified for the Global Discovery Strategy and be complemented with businesses which have a more pronounced domestic focus. While these are not always natural candidates for a global strategy, their investment merits are too compelling for us to overlook.
I would like to state upfront that this is not going to be your traditional small–mid cap portfolio. And that is by design.
US Discovery will be concentrated
The inevitable consequence of this is that performance can be very volatile over short periods of time. It requires patience and courage of conviction to be a successful long-term investor and the private partnership structure of Baillie Gifford gives us a unique cultural advantage in being able to apply the same ownership mindset to our holdings that we do to our Firm.
US Discovery will be very different from the benchmark
The portfolio will comprise what we believe are a select number of companies, each of which have the potential to redefine the industries in which they operate or create completely new ones. We look to own transformational growth companies. We will not invest in businesses with little scope to differentiate themselves from competition. We will not invest in companies for a limited 20 per cent upside.
US Discovery can retain exposure to truly exceptional companies
While the majority of the strategy’s holdings will not exceed an upper market cap limit, we have reserved some capacity to hold on to the most exceptional and rare companies which successfully grow beyond that limit, while still remaining immature relative to their potential.
Our promise to you is that we will continue to push our curiosity to new and uncharted territories in the pursuit of identifying the most innovative US smaller companies. We will look for the most exciting opportunities and developments on the horizon. We will seek to own the next generation of problem solvers. We will look for management teams with whom we are aligned, in terms of ambition and timelines. We will challenge ourselves every day. Along the way there will inevitably be disappointments. That is okay. Implicit in owning a portfolio of high potential companies so early on in their lifecycle is that some investment cases will not work out as we hypothesise they will. But the ones that do succeed should more than compensate for that. Ultimately, it is this asymmetry of returns which really matters in long-term equity investing.
Our tomorrow will be defined by entrepreneurial companies across multiple industries, from healthcare to software, which dare to dream big and which are not afraid to experiment; to take risks and to develop new technologies and business models. For example, there’s unprecedented pressure for software developers to write more code and to do it faster and cheaper. This has created a whole new market for companies selling tools to software developers to help them improve productivity and automate the more tedious tasks. Examples include JFrog, a company helping developers to store and manage the source code they write and automate deployment across multiple environments.
While the start-up investment universe is vast, US Discovery’s focus area is small. Many US small cap companies stay small because they either lack structural growth potential or have little scope to differentiate themselves from their peers. Baillie Gifford has a strong track record of identifying which companies should have transformational growth potential.
With US Discovery we are dedicated to the pursuit of positioning ourselves along the frontiers of this innovation and technological development. With innovation accelerating at an unprecedent pace across industries and sectors, we believe the opportunity is more exciting than it has ever been for those companies willing and able to experiment.
It will be an incredibly exciting journey and we look forward to what the future holds.
Risk Factors
The views expressed in this article are those of Svetlana Viteva and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal 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 September 2021 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.
Stock Examples
Any stock examples and images used in this article 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. Any individual examples will represent only a small part of the overall portfolio and are inserted purely to help illustrate our investment style.
This article 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 article 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.
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 and is authorised by the Central Bank of Ireland. Through its MiFID passport, 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'). It does not constitute a branch and therefore does not have authority to commit Baillie Gifford Investment Management (Europe) Limited. It is the intention to ask for the authorisation by the Swiss Financial Market Supervisory Authority (FINMA) to maintain this representative office of a foreign asset manager of collective assets in Switzerland pursuant to the applicable transitional provisions of FinIA. Baillie Gifford Investment Management (Europe) Limited is a wholly owned subsidiary of Baillie Gifford Overseas Limited, which is wholly owned by Baillie Gifford & Co.
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.
Oman
Baillie Gifford Overseas Limited ('BGO') neither has a registered business presence nor a representative office in Oman and does not undertake banking business or provide financial services in Oman. Consequently, BGO is not regulated by either the Central Bank of Oman or Oman’s Capital Market Authority. No authorization, licence or approval has been received from the Capital Market Authority of Oman or any other regulatory authority in Oman, to provide such advice or service within Oman. BGO does not solicit business in Oman and does not market, offer, sell or distribute any financial or investment products or services in Oman and no subscription to any securities, products or financial services may or will be consummated within Oman. The recipient of this material represents that it is a financial institution or a sophisticated investor (as described in Article 139 of the Executive Regulations of the Capital Market Law) and that its officers/employees have such experience in business and financial matters that they are capable of evaluating the merits and risks of investments.
Qatar
The materials contained herein are not intended to constitute an offer or provision of investment management, investment and advisory services or other financial services under the laws of Qatar. The services have not been and will not be authorised by the Qatar Financial Markets Authority, the Qatar Financial Centre Regulatory Authority or the Qatar Central Bank in accordance with their regulations or any other regulations in Qatar.
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.
10402 10002290
