Investing for growth with Baillie Gifford’s Global Alpha team
By Conor Hafner, senior investment product specialist, Vanguard Europe
A combination of high valuations and rising interest rate expectations present a mounting challenge for growth investors over the coming years, with many analysts calling the end of growth’s run as the dominant style of equity investing.
While ‘value’ as a style may return to favour in the coming years, the shake-up caused by the Covid-19 pandemic has accelerated certain trends that offer exciting growth opportunities – if you know where to look, according to Spencer Adair, portfolio manager on the Global Alpha team at Baillie Gifford.
“Periods of change and upheaval present huge opportunities for the innovative and ambitious to challenge incumbents and to reshape industries or create new ones entirely,” he says.
“As investors looking to identify durable growth opportunities, the likelihood of continued flux, the scope for innovation and the potential for new value creation across broad swathes of the economy excites us,” he adds.
Along with Malcolm MacColl and Charles Plowden, Adair leads the Global Alpha team, which manages 50% of the Vanguard Global Equity Fund – with the other half of the portfolio managed by Wellington's Opportunistic Value team. Whether or not growth continues to be the dominant style of equity investing, the philosophy, process and talent that drives the Global Alpha team gives Vanguard confidence in its ability to deliver alpha for our shareholders even under the toughest of market conditions. In this blog, we examine the dynamics that give the team an edge in a highly competitive sector.
Growth comes in many shapes
The Global Alpha team at Baillie Gifford believes in making long-term investments in well-managed businesses which enjoy sustainable, competitive advantages. Their core belief is that share prices ultimately follow earnings. For this reason, the team selects stocks that offer the prospect of sustainable above-average growth in earnings and cash flow. They believe it is easier to generate outperformance for their clients by assessing a company’s prospects for sustainable growth rather than by predicting short-term share price movements or macro-economic trends.
Part of the team’s edge is an open-minded approach to growth. They recognise that companies expand at different rates, some more cyclically than others, and they are also prepared to invest in companies whose potential is not yet fully appreciated by the market. Their long-term investment perspective allows them to ignore short-term market noise and find companies with strong prospects in a range of industries that other growth investors may overlook.
The team uses four growth ‘profiles’ to distinguish companies based on their expected earnings growth trajectory. They are labelled either ‘stalwarts’, ‘rapid’, ‘cyclical’ or ‘latent’, as the graphic below illustrates. The analysis also serves as a valuable tool for evaluating a company’s performance against the team’s expectations. Today, around 70% of the growth portfolio falls into either the stalwart or rapid growth profiles.
Baillie Gifford Global Alpha team’s four ‘profiles’ of growth
Source: Baillie Gifford.
This multi-layered approach to growth investing means the portfolio benefits from companies with durable products and services that continue to dominate in an ever-changing world, like Mastercard Microsoft, Prudential and Estee Lauder, for example. At the same time, the portfolio will include high-growth companies (think Tesla), more cyclical businesses (Taiwan Semiconductor Company) and companies whose earnings growth is expected to accelerate over time (Ryanair).
Taking the classic ‘bottom-up’ approach, the team place much more emphasis on information gleaned from companies than on economic statistics. They then compare their view to that of the consensus, viewing any discrepancy as a potential opportunity to add value. The result is a diversified yet balanced spread of around 100 stocks, which chimes with Vanguard’s portfolio-efficiency philosophy by removing unnecessary bias and repetition.
“Active investment management is not about processing power, trading and speed,” says Adair. “It is about imagination and creativity, and working constructively on behalf of our clients with inspiring individuals and companies who have greater ideas than our own.”
The index is never the starting point at Baillie Gifford, and success is driven by identifying and backing inspirational founders and managers with the ambition and farsightedness to see ideas through to realisation. The privately owned company expresses its approach to managing money as ‘actual investing’. It’s a philosophy founded on the belief that the most effective way of maximising value for clients is to provide capital to help businesses grow over the long term.
MacColl, Adair and Plowden leverage the expertise of more than 100 research analysts who are predominantly located in their head office in Edinburgh. They are also supported by Helen Xiong, who rejoined the team to backfill Plowden’s position ahead of his planned retirement at the end of April. She returned following a stint focusing on the North American market and has been with Baillie Gifford since 2008.
At Vanguard, we know that identifying the winners is hard to do consistently and that’s why we advocate a long-term balanced approach to equity investing. There may be long periods when growth investing as a style could be out of favour, but we do believe high-quality growth companies will always be a part of a well-balanced equity portfolio.
Founded in 1908 and based in Edinburgh, Baillie Gifford is one of the UK’s longest-established asset managers. The relationship with Vanguard dates back to 2003 – before the growth style entered its recent run of form. Today, Baillie Gifford manages approximately $70 billion on behalf of Vanguard shareholders, making Vanguard its biggest client1.
Find out more about the Vanguard Global Equity Fund here.
1Baillie Gifford, correct as at 31 March 2021.
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