When James Anderson first invested in Amazon in 2004, the fund manager from Baillie Gifford in Edinburgh wasn’t offered a meeting with the ecommerce group’s founder, Jeff Bezos.
A decade later, Anderson’s early bets on some of the world’s most successful and disruptive companies had won him a growing reputation — and dinner with Bezos at the Sun Valley Conference in Idaho.
The small gathering in 2013, which also included Facebook’s Sheryl Sandberg and Tencent president Martin Lau, was “one of the more surreal, nerve-racking and educational experiences I’ve had”, Anderson says.
Bezos explained how Amazon’s key raw ingredients, such as processing power, bandwidth and disk space, were becoming twice as cheap every 12 to 18 months. “Bezos then paused and added: ‘I don’t know where this will take us, but I know it’s going to be exciting,’” Anderson recalls.
Anderson has also had an exciting time. He has become one of the most successful stockpickers of his generation — in an era when many active managers have struggled to justify their very existence and fees.
In the two decades that Anderson has managed Scottish Mortgage Investment Trust, Baillie Gifford’s best-known vehicle with about £18bn of assets under management, it has recorded 1,500 per cent returns for shareholders, compared with 277 per cent for the FTSE All World benchmark. The trust is a member of the FTSE 100 in its own right.
While Ark and its media-friendly head Cathie Wood attract a lot of the hype around investing in tech stocks, it is Baillie Gifford — a 113-year-old Scottish partnership, formed to finance far-flung rubber plantations — that has the most impressive record.
Anderson’s bet on Amazon underlines the principles that have guided his decision-making — the idea that exponential improvements in technology will drive innovation; the contention that the vast majority of stock market returns come from a tiny percentage of businesses; and a relentless optimism about the future. The same philosophy informed his early and fierce backing for Elon Musk’s electric carmaker Tesla — in defiance of many sceptics.
“James saw the likely extent of the technological change in the early years of the 21st century and backed it wholeheartedly,” says Douglas McDougall, a former senior partner of the firm who hired Anderson in 1983.
At the start of next month, Bezos will formally step down as chief executive of the ecommerce giant. Baillie Gifford is at a similar inflection point. Anderson, 61, will retire next April, almost 40 years after he joined the firm as a history graduate of the University of Oxford. Tom Slater, 43, who has jointly managed the trust with Anderson since 2015, will take control next year along with deputy manager Lawrence Burns, who is 32.
Some also wonder if the firm has already become too big. Its investment performance has propelled a 15-fold surge in Baillie Gifford’s assets under management over the past two decades, from £22bn at the end of 2000 to £326bn at the end of 2020. “I would have said Baillie Gifford was running too much money five years ago, three years ago, two years ago,” says one of its investors.
All of this raises the question — can Baillie Gifford navigate the next two decades of markets and technological disruption without its visionary investor? One of its answers is a surprising one at a moment when a new cold war is in the air: China.
Outlook measured in decades
“Actual investors think in decades. Not quarters.” Before the pandemic, this sign hung over the door to Baillie Gifford’s Edinburgh headquarters, where the atmosphere is closer to a library than an adrenalin-charged trading floor. Investors are more likely to be reading an academic paper or browsing a history book than screaming orders down the telephone.
Although Baillie Gifford has kept its contemplative atmosphere, Anderson led a quiet revolution on its investment floor around 2004. He abolished the firm’s position of chief investment officer and moved away from having a top-down investment policy committee. The new mission was to be genuinely long-term, global and indifferent to the movements of the stock market indices.
The firm pushed out the time horizon of its investments from two to three years to taking a five to 10-year perspective. It has placed more emphasis on trying to imagine the prospects for a company, cutting out the short-term noise around its current profits or valuation — an approach that has now attracted a lot more competition.
It also began casting its research net further afield. “We became more ambitious in the sources of information we look to use,” says partner Kate Fox, pointing to industry experts and academics who are at the vanguard of technological change.
A crucial influence on the investment process has been Hendrik Bessembinder, a professor at Arizona State University, who found that over many decades, just 4 per cent of stocks accounted for all the net wealth creation. The upshot is that fund managers should seek to own as many of these outliers as possible and allow the magic of compounding to work. “The biggest mistake you can make is not failing to sell something you should have sold, it’s selling something that you should have held on to,” says Slater.
Baillie Gifford’s best bets
Amazon shares have risen by more than 6,500% since Anderson first began buying stock in the ecommerce company in 2004.
The rise in the share price of Tesla has been even more dramatic since Baillie Gifford first invested in the company in 2013.
Increasing the focus on a company’s ability to expand over decades led Baillie Gifford’s pivot to the US west coast and then to China, which it now sees as the source of the most compelling opportunities.
When it comes to investing in China, Slater says: “I’ve learned that you have to suspend disbelief when you’re talking to some of the founders there.” When he met Wang Xing, the founder of Chinese food delivery app Meituan in 2015 in San Francisco, he recalls thinking that the company’s ambition to deliver tens of millions of meals a day sounded “completely improbable”.
But he says the experience of investing in tech conglomerate Tencent led him to realise that “in China, this is possible” and so that year Baillie Gifford initiated a position in Meituan. The company has now exceeded its goal for daily food orders.
The political risks to investment in China came into sharp focus last year when authorities pulled the IPO of Ant Group, a company Scottish Mortgage has backed. “My worry is that Baillie Gifford is so caught up in the tech story and the growth potential that it underestimates the political risk of investing in China,” says one of its investors.
Those risks are even sharper at a time of growing geopolitical tensions between the US and China and the push in Washington to “decouple” from the Chinese economy.
Slater responds: “I don’t see political risk as an issue that’s unique to China,” pointing to former president Donald Trump’s executive order to ban Chinese-owned app TikTok in the US.
“We have no direct evidence that the west’s way of development is the only one or the superior one,” says Anderson. “The political decline of America is so great and so enormous and so threatening. Am I sure that America will be a democracy in 10 years’ time? I’m not sure at all.”
Baillie Gifford’s backing of Meituan, ByteDance and ecommerce giant Alibaba when they were still private companies reflects Anderson’s pioneering move around a decade ago into venture capital investments, which now account for a fifth of Scottish Mortgage Trust’s assets.
Many companies are staying private for longer and so this “allows you to foster really good relationships with the next generation of Bezoses and Musks”, says Slater.
The overall success of the investment approach has propelled a rapid growth in assets, prompting some to question at what point Baillie Gifford closes its funds to new money. “If we are not able to deploy capital into our best investment ideas, then we’ll close strategies,” says partner Stuart Dunbar. “We’re pretty far away from having capacity challenges at the moment, because there are so many good ideas.”
Baillie’s best bets
Shares in the Chinese ecommerce company have increased 319% since its 2018 IPO, although Baillie Gifford first invested in company in 2015 when it was still private.
Boosted by its successful Covid vaccine, shares in the US biotechnology company have soared since its 2019 IPO, when Baillie Gifford took a stake in it.
Critics have suggested that in an inflationary environment, it will be difficult for growth stocks to continue their unbridled ascent. “Inflationary expectations have traditionally hampered growth stocks as much of their future earnings expectations become impacted by the weight of higher borrowing costs,” says Nick Lawson, chief executive of investment house Ocean Wall.
Slater is unmoved. “If inflation is coming back, and value-oriented stocks are going to do really well, then that is an environment in which we will underperform,” he says. “Personally, I’m pretty sceptical because I think there is such an abundance of growth. There are so many investment opportunities, there is such radical change.”
Slater says “it has been a phenomenal period to be a growth investor” but believes the technological revolution is only just beginning. “There are huge swaths of the global economy that haven’t been affected by this,” he says, pointing to areas such as the post-carbon economy, gene sequencing, synthetic biology, human-to-robot delivery and even flying taxis. Baillie Gifford is tapping these themes with positions in companies such as vaccine-maker Moderna, battery developer Northvolt and gene sequencing group Illumina. “There’s just huge scope for efficiency gains and different models once you break out of the existing paradigm,” says Slater.
Surviving a near-death experience
The past two decades may have been successful for Baillie Gifford, but it has had to rebound from struggles in the past. In spring 1978, the firm suffered a near-death experience. The nationalised British Rail Pension Fund made a successful bid to acquire the share capital of Edinburgh & Dundee, an investment trust that was Baillie Gifford’s second-largest client. According to A Century of Investing: Baillie Gifford’s First 100 Years, written by former senior partner Richard Burns, the fee from this client “was greater than the firm’s profits” and following its departure, Baillie Gifford was “virtually worthless as a business”.
Despite these pressures, “none of the partners left at this bad moment,” recalls McDougall. “The partnership culture is the most distinctive thing about Baillie Gifford — you feel like if you own the business, your instinct is to do things right.”
Baillie Gifford is independent and wholly owned by its 47 partners, all of whom have worked at the firm for an average of just over 20 years and have unlimited personal liability. The structure is a great retention tool because its top staff are incentivised by being equity owners of the business, and encourages a long-term mentality.
“The real advantage of the partnership is the collective perspective it gives you to make long-term decisions, or rather to remove any pressure for taking short-term decisions,” says Charles Plowden, who retired in April as senior partner. “We don’t have any outsider owners wanting dividends or setting targets for funds under management growth or revenue growth.”
The firm has never done any mergers or acquisitions, and continued recruitment during financial downturns in 1987, 2000 and 2008 when rivals typically cut back.
Entry to the partnership is by way of an annual vote among existing partners and candidates need to achieve a two-thirds majority to be admitted. Crucially, individuals buy in and out of the partnership at book value, rather than the market value, which would probably give it a much higher valuation.
But while Baillie Gifford’s partnership structure is an anomaly among its peers, like the wider asset management industry it is overwhelmingly male. Of the 47 partners, only nine are women, and only two of these women are investment partners who manage portfolios.
Historically its recruitment policies were skewed towards hiring male Oxbridge graduates, but it has been trying to widen the net. In the 2020 intake of new graduates, it was 63 per cent male and 37 per cent female.
Most of the firm’s talent is recruited through its highly-competitive graduate programme and trained in-house by rotating through different teams. Just 10 of 2,721 applicants made the cut in the 2020 intake for the investment department. The firm’s partners look for curiosity and imagination, and seem almost to view a finance or economics qualification as a negative.
Baillie Gifford’s performance has led to a mounting pile of applicants each year, which gets increasingly challenging to sift through, says Slater.
The firm has historically prized retention. “If you were good you were expected to stay forever,” says Max Ward, a partner between 1975 and 2000 who was instrumental in the firm’s development. But as it has metamorphosed from a small boutique to a vast investment organisation, it must also hang on to talent.
This month Crux Asset Management, a £1.7bn London-based boutique firm, hired Baillie Gifford Asia investment manager Ewan Markson-Brown to lead its expansion into the region. “Crux is a bit more of an entrepreneurial landscape,” says its chief executive Karen Zachary.
Many of Baillie Gifford’s current and former leaders agree the firm’s biggest risk is internal: to avoid hubris or complacency and maintain its culture as an investment-led firm, even as it has grown to almost 1,400 permanent employees in 11 global offices.
Before joining Baillie Gifford, Andrew Telfer, its joint senior partner, worked at Arthur Andersen, the accountancy firm destroyed by its involvement with Enron. Telfer believes Arthur Andersen was brought down by a very small number of people. “I’m very conscious of that when thinking about Baillie Gifford. You need to have shared beliefs that people actually live and operate by,” he says.
Anderson believes the biggest risk is “another thing I’ve learned from Amazon, it’s mostly internal . . . You’ve got to keep the attention on being obsessive about investment and obsessive about rethinking everything you know in investment.”
In his final yearly letter to Scottish Mortgage investors, Anderson wrote: “My greatest failing has been to be insufficiently radical.” In the same letter, Slater said that Bezos stepping back from Amazon “may reduce the company’s appetite for bold experiments”. As Baillie Gifford faces its own generational transition, its clients may be wondering the same thing.