1. Diamond and the oasis

    INTRODUCING THE RADAR

    Brian Lum, International Smaller Companies. Third Quarter 2018
  2. INTERNATIONAL SMALLER COMPANIES

    No two diamonds are the same. The unique qualities of each are reflections of individual billion-year journeys through the Earth’s mantle, as well as the effort and skills of the craftsmen responsible for unlocking the gemstones' inner beauty.

    In the industry, diamonds are assessed by the ‘4C’s – Cut, Carat, Clarity and Colour. While the grading system has its detractors, the framework clearly identifies the key attributes that define ‘quality’, and it also serves as an effective way to communicate these properties to others.

    As investors looking to uncover hidden gems (sorry…) in the vast and diverse smaller companies universe, we find a framework in a similar vein helpful for 1. articulating our own investment philosophy and distilling this down to a number of critical factors and 2. using the system to assess ideas in a systematic and rigorous manner, while recognising the idiosyncrasies of each opportunity that comes our way.

    We believe these are six of the key areas for us to consider as investors. We look forward to sharing how we approach each of these radar points in future pieces, as well as exploring the interplay between these factors at a conceptual level. We will start by looking at ‘Opportunity’, using Fjällräven, DaikyoNishikawa, Zooplus and First Derivatives as case studies.

    We may also further develop this as a tool to help us understand the broader profile of the portfolio, as well as to use this as a graphical aid to help us track the evolution of individual cases. This is where the comparison to diamonds breaks down definitively – we do take long-term views but investment cases are certainly not forever.

    It is perhaps worthwhile to highlight what else this is NOT. Numbers and charts often give a misleading impression of certainty, precision and objectivity – this is one of the tricks of the trade that we come across on a daily basis in company presentations. With this in mind, we should emphasise that despite the scoring, our investment process is fundamentally biased towards qualitative analysis; and that we are by no means suggesting equivalence of importance among these six factors (that depends), or indeed direct comparability between ratings from different members of the team.

  3. Like diamonds, great investment opportunities come in different shapes and sizes.
  4. We are also not insisting that our ideas ‘tick all the boxes’. That is neither a practical nor desirable approach – much of what we do is about making judgements on what really matters in an investment case, embracing the inherent uncertainty in what we do, and in aggregate harnessing the benefits of the asymmetry return potential inherent in equities ownership (particularly in smaller companies). If anything, at least my own observation is that investments with one or two outstanding attributes are often more rewarding to own than those that are merely ‘quite good’ at everything. After all, even some of the most valuable diamonds in the world are indeed far from perfect; they are special by being exceptional in some aspects and in spite of their flaws.

    Like diamonds, great investment opportunities come in different shapes and sizes. We think that keeping an open mind to appreciate the individuality of each case is rather important, and we hope that the radar is a useful, albeit imperfect, tool to help us capture the essence of each company that we invest in.

  5. Important Information and Risk Factors

    The views expressed in this article are those of Brian Lum 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 on the stated date 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 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.

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    Ref: 39289 INS AR 0527

  6. Brian Lum

    Investment Manager
    Brian chairs the Portfolio Construction Group for the International Smaller Companies Strategy, a strategy dedicated to investing in the most exceptional smaller companies internationally. Brian graduated MSci and BA (Hons) in Physics from the University of Cambridge in 2006 and joined Baillie Gifford in the same year. He is a CFA charterholder.