November 16, 2020 | Expert Perspective
The global pandemic and its effect on the global economy and markets have accelerated some current trends, but the long-range effects aren’t completely clear.
We were privileged to have James Anderson and Thomas Coutts of Baillie Gifford Overseas Ltd., based in Edinburgh, Scotland, participate in a conversation about their observations of the global markets and their thoughts on portfolio positioning.
James and Thomas, both partners and portfolio managers at Baillie Gifford, are responsible for the management of more than 60% of Vanguard International Growth Fund (Admiral™ Shares, VWILX), and they are obsessed with growth.
James Anderson: We think about it in the context of our investment philosophy, process, and time horizon. But at its very foundation, what we try to do is help build and imagine the future. Rather than looking at an investment, sector, or region from a historical perspective, what we try to build is expertise in the future. We accomplish this in two ways:
For us, growth investing isn’t about buying glamour and momentum, but rather about investing in and supporting companies not just for 5 or 10 years but for 10 to 20 years.
"One of our mentors and academic gurus, the late great Hans Rosling, had this simple phrase: We should never underestimate 'the secret silent miracle of human progress.'1 And that is what our investments are trying to promote."
1 Hans Rosling, Anna Rosling Rönnlund, and Ola Rosling, 2020. Factfulness: Ten Reasons We're Wrong About the World—and Why Things Are Better Than You Think. New York, N.Y.: Flatiron Books.
Thomas Coutts: One is around the continued reemergence of China to a position on the world's stage that, frankly, it has occupied for most of the last 2,000 years, just not for the last 200 years.
The second is around technological innovation. This year we have witnessed the creation of new, exciting, innovative, and fast-growing companies, while also seeing, in an accelerated fashion, the disruption created in existing industries.
The final one surrounds our belief in asymmetrical returns, whereby fewer and fewer securities are driving a greater percentage of the markets’ returns as we look forward. We clearly underestimated the sheer scale and degree of impact that a very small number of companies have had on market performance. This is an area where we have used academic research to really put the right amount of weight on this contention.
Thomas Coutts: Currently we try to distinguish between what is acceleration and what is simply the creation of new demand and expansion of the opportunity. While acceleration brings forward the demand, what we look for are businesses where the opportunity has expanded in a more permanent manner. And in this new world, only a handful of really remarkable, culturally strong, flexible, adaptable businesses, which are still relevant to consumers, will be able to survive and thrive.
Example: Ocado Retail Ltd.
Ocado is an online food retail business that had been struggling with adoption by consumers. Now with the friction to adoption being completely removed as a result of the pandemic, the potential market opportunity should shift from 10% or 20% to maybe 50% or 60%. So you've not only had a huge acceleration, but also an expansion in the market opportunity. Those are two things that we're trying hard to distinguish between in our investment process.
James Anderson: So the collapse in oil prices is the primary one that comes to mind and may be the most significant signal in the current market that has profound long-term implications.
Over my 40 years at Baillie Gifford, I’ve never seen anything like this. While we’ve sadly had many, many pandemics in history, we've actually only had three energy regimes. We've gone from wood to coal and from coal to oil.
This has led to an accelerating trend around the complete replacement of the fossil fuel economy. We need this for climate reasons and productivity reasons to usher in a new carbon age. And we believe there are encouraging data that this is taking place. Prior to the pandemic, we saw two important milestones that signified this change was happening and its importance for the global economy.
Thomas Coutts: I think there are really three overlapping reasons that drive our investment in China. The first is the sheer scale of the country. China has a population of almost 1.5 billion, four to five times larger than the population of the United States. Size matters, clearly in terms of geopolitics. But for us, more importantly, it matters because there is a huge domestic market that companies can grow up and can serve. The second factor is the speed of China's development. After 40-plus years of incredible growth, China's GDP per capita is a quarter or a third the level of that of the U.S., depending on how you measure these things. There's still a very long way for it to go.
So for stockpickers and long-term investors like us, it's pretty irrelevant whether the GDP growth figure in any one year is 4% or 6% or 8%. We believe that process of economic reemergence will continue for a very long time given the large population and high rates of growth. And that creates an incredibly favorable backdrop for individual companies.
And the third reason is we're currently in a period of extremely rapid, technological change, with overlapping technologies building one on top of the other in a way that will allow for the creation of new products and uses—in a way, frankly, we can't even imagine today.
When you put these three factors together, it creates an incredibly strong environment for the creation of new companies that potentially can expand very rapidly for long periods of time.
Example: Meituan Dianping
This Chinese company transformed itself into a super app, offering users the ability to access items from food and product delivery to hotel services. While U.S.-based Grubhub was delivering around 300,000 meals a day, the Meituan figure was more than 25 million meals a day!2 This clearly demonstrates the sheer scale of the urban Chinese market with its huge cities. Combining delivery forces with technology can make it happen.
James Anderson: We found it's very important to be involved with and thinking about certain areas well before we make quoted equity investments. We spent a lot of energy and commitment over the last five years in building up our presence in unquoted companies. And that has proven to be very important when we later see these trends emerging. We get to see who the industry leaders are and who has real competitive advantages. We also get to know the companies in depth, so the trends become apparent to us early on.
But we have found we need to resist the temptation to invest too early. We need to have deep insight into how powerful the trend is, how long lasting it will be, and which companies have the advantage. And that's where I think we morph into how we think about trends between different markets, different companies, and regionally.
So while we may think about these trends on a global scale, it’s how they manifest themselves in individual companies that is profoundly different from market to market.
"We are proud of our long and successful partnership with Baillie Gifford dating back to 2003, when it was hired to manage a portion of the International Growth Fund. Since then Baillie Gifford has delivered some of the strongest and most consistent performance we've seen across our suite of active money managers."
—Hugh Watters, Vanguard Portfolio Review Department
2 Source: Baillie Gifford as of June 2020.