What If?

It takes a concerted feat of imagination to identify companies, such as the Ford Motor Company, that can engender and benefit from technology-led transformation. It takes a further imaginative leap to predict the wider implications of that change. What would mass car ownership mean for the supply and price of rubber for tires? Or for property prices on the newly-accessible urban fringes?

For Actual investors, questions about the shape of the future matter more than past or present short-term market movements or even economic storms. As with Covid-19 however, crises can help to accelerate change.

At Baillie Gifford we think about the barriers to human progress, and consider the companies best placed to make breakthroughs. From excessive carbon emissions, to congested roads, to shortages of agricultural land, to incurable diseases: we imagine how the future could be different when human ingenuity eventually finds a fix.

When seeking investment ideas, we believe that companies promising more of the same are unlikely to achieve outstanding results. We prefer to invest in the transformational growth companies that dare to ask the ‘what if?’ questions. These are the companies with a clear vision of how the world is changing and investing in their own ability to compete.

Only constant innovation makes growth possible, the kind of growth that benefits investors and society more widely. The great companies are those that embrace new technologies to expand existing markets and to create new ones. So rather than fixating on how a company or nascent industry might fail, we ask: ‘What could happen if its vision becomes reality?’

What does it mean for the treatment of disease if gene sequencing for all new-born babies becomes both possible and ethically acceptable? What happens if low Earth orbit satellites can widen internet access for a fraction of the costs of existing broadband? What if solar cells on the ground become worth more than the oil under it?

Actual investors pose these ‘what if?’ questions from other angles as well: ‘How can this company solve peoples’ problems, or show them new ways of doing things?’ Often this ability emerges almost accidentally, as a by-product of a company’s original plan and purpose. We ask: ‘What if this flexible, entrepreneurial firm uses a breakthrough in one field to address a larger, more profitable market?’

What if, for example, US biotech company Moderna’s mRNA protein-manipulating technology could be used not only to tackle the challenge of Covid-19 but to fight other big killers such as autoimmune and cardiovascular disease?

Assessing a company or an industry’s potential takes a balance of imagination and realism. We can’t back every biotech start-up with the potential to find a cure for cancer, but we do look carefully and think deeply about what could happen. If the scenario is plausible, we invest on the basis of ‘what if?’.

Actual investors know that often the projected supersized investment returns won’t materialise. Many of the companies we back won’t transform the world. They may not even go on to be successful businesses.

But that doesn’t mean we were wrong to ask the questions and to back the ideas. The upside from those that do succeed is by far the dominant factor in successful growth investing. By looking beyond current reality and imagining what could happen, we give ourselves a better chance of finding the big winners of the future.