Fairytales and fundamentals: what makes Long Term Global Growth different?

This transcript has been produced from a recorded discussion with the assistance of AI.

James Fearon (JF): Welcome, everyone. Thank you very much for joining us today. My name is James Fearon, and I'm delighted to be joined by Jonny Greenhill from the Long Term Global Growth team. Our plan is to talk for 30 minutes or so, and thank you to all those who have submitted questions in advance. We'll do our best to answer as many of these as possible today.

The past few years have been a torrid time for active managers, with many global equity funds struggling to outperform the index and justify their management fee. One client recently mentioned to me that out of all their global equity managers, only two have managed to outperform the index over the past three years. I'm pleased to say that LTGG is one of these.

What's more, our healthy returns over the past 12 months, and indeed three years, have further strengthened our outstanding 20-year track record, outperforming the index by 4 per cent per annum back to 2004. Jonny, can we start with your reflections on that period, please?

Jonny Greenhill (JG): Sure. We know that very few active growth managers outperform. We know that very few outperform over a 20-year period or more. I think it's useful to spend a little bit of time thinking about what's actually happened over that 20-year period. We had the global financial crisis. We had the European fiscal debt crisis. We had the China slowdown, Covid, the post-Covid higher interest rate environment. So a whole bunch of different events which were volatile in their own ways.

And yet the portfolio delivered. In 97 per cent of all rolling five-year periods it outperformed net of fees, and in 100 per cent of all rolling 10-year periods it outperformed net of fees. So that's quite remarkable, given all those events over time. But that's what we're seeking to do here, right? Deliver over the long term.

JF: And LTGG has a truly differentiated approach to investing. Many clients will be familiar with that, but perhaps you could provide a quick refresher, please.

JG: We just try to do one thing. We're looking to deliver really exceptional returns over the long term. Now, we know if we look at global equity markets, very few companies are responsible for the majority of returns over the long term. These are the outliers, often called the disruptors. So we want to invest in them if we're going to deliver those extreme returns. But how do we identify them?

They have certain characteristics. These are companies that typically are delivering very strong operational performance over time. They may, for example, be investing much more heavily in R&D as a portion of sales than the average company. They typically might be founder-run, and these are people who are really on a mission to change the world. This isn't just caretaking over a company.

We also know that they are volatile in the short term. These outlier growth companies are more volatile in share price terms in the short term. But that is a feature of those companies. It's not a bug of our process. We expect that volatility.

So we want to find those companies, hold them over time, and also hold them in size in a concentrated portfolio, because we know that's what really moves the dial on portfolio returns.

And so, that whole approach is really baked into what we do in Long Term Global Growth: long-termism, a five- to 10-year investment horizon, and global in the sense that we are not benchmark-constrained.

We just want to find the best ideas wherever they may be. And then finally, the growth, and it's extreme growth. We are looking for companies that could be worth many times more than what they're worth today.

JF: And in terms of the role that LTGG can play in clients' portfolios, we believe it can firstly turbocharge the return profiles. I've talked about that 4 per cent per annum outperformance. But also we believe that it can really serve to future-proof clients' portfolios by investing in what we believe to be the next generation of growth companies.

JG: I think that's fair. So if we were to take the first bit of that around the turbocharging growth, if we're thinking about an equity allocation, a growth allocation in a portfolio, it's best designed, because of the asymmetry in markets, for that capital growth. That's what many of our clients are really looking for.

For the sorts of companies that we invest in, in this portfolio, these outlier companies, they are, as I mentioned briefly before, the kinds of disruptors. These are companies that are pioneering change or disproportionately benefiting from change. In other words, hopefully on the right side of change.

And in that sense, that can lead to those more extreme returns. But we know also that they are difficult to model. How do you easily model change? And that means pricing them can be really a challenge, but that's where we see this opportunity, and that's where there's potential for those extreme payoffs.

The second bit then of what you mentioned, around how we think about future-proofing: if these are the companies on the right side of change, and if we believe that actually change is always happening – big structural advances in electrification or in healthcare or in computing – and that change is accelerating, then if we're thinking about a total portfolio, the role that an LTGG can play is by offering a degree of future-proofing in that kind of scenario over the coming decades.

JF: And that feels really pronounced in the environment that we are in right now, where change seems to be happening at such a rapid pace. I think it's quite interesting from my perspective, a lot of people focus on the risks of having LTGG in their clients' portfolios, i.e. that volatility that you mentioned.

But over the last few years, we've seen the risks of not having an LTGG or transformational growth manager within clients' portfolios and the underperformance that that can deliver. That's true.

JG: And you mentioned the last few years. I would say, though, going back over the 21-year history of the strategy, the thing for us in terms of what's been really important in our mindset for capturing the returns that we look for is this constant risk of missed opportunity. If we're not finding the next outlier, that's what's going to damage returns. Everyone in the past few years has talked about the Magnificent Seven.

Long before the acronym was created, we were invested in all of the Magnificent Seven stocks at some point during our history. We invested something like 13 per cent of the portfolio in those companies over time. And we recycled over 60 per cent of the portfolio out of those names into other ideas over that period of time.

So they have played an important role, but not just in the past few years. That acronym was created, I think, in 2023. They have played an important role for us over the past 21 years. But we're always thinking about, well, what's next?

JF: I think that leads on to one of the questions that we've had, in terms of what is driving LTGG's performance over the last 12 months and three years. And it is notably different from what has been driving the index. Could you provide a bit of detail on that, please?

JG: A lot of focus in the index broadly, we know, has been driven by the [Magnificent] Seven or, increasingly more recently, the more obvious AI names, your NVIDIA's and others. It's quite striking that, yes, while we have some exposure to some of those companies still in the portfolio today, and they have been contributors over different timeframes to returns, there are a bunch of other companies too.

Companies like AppLovin, which is the ad tech platform best known in mobile gaming, or companies like Roblox, the online gaming platform, or a company like Reddit, the social media platform, have all featured among the recent contributors to performance.

JF: Another question, which has been coming in various guises, has been in regard to the market commentators that are increasingly talking about a bubble in valuations, particularly in the US, really driven by those AI names. Could I get the team's reflections on that, please?

JG: There's no shortage of opinion on whether there is a bubble in the market, and I don't want to pontificate about that. Everyone has a view on this. It reminds me a bit of the work of Professor Carlotta Perez, who has done a lot of work, a lot of research looking at past historical revolutions over the past several centuries, where there's always this build-out of the new infrastructure to support a new technology, which tends to then be accompanied by a degree of financial mania.

That financial mania, though, is in some ways productive, because then, ultimately, that infrastructure build-out leads to the diffusion of that technology for decades to come, and a kind of golden age that follows. So that's been the past examples, at least.

Maybe we're in something similar today. I think, though, whilst we can all talk about the broader market – is it in a bubble or not – it's important to focus on what's actually in this portfolio.

This is a portfolio of just shy of 40 stocks. We focus all the time on bottom-up stock selection. So it's important to look at what we actually invest in in that context. We're in companies that are more in the infrastructure layer of AI: NVIDIA, TSMC, ASML.

And we're also in a lot of companies that are in the more application layer of AI, using AI to enhance their products. That could be an AppLovin, like I mentioned before. It could be Netflix, it could be Spotify, Shopify.

There are companies which we are not invested in in the portfolio, and I think it's important to bear that in mind.

Again, it's about finding where we think value is accruing and where we have the greatest conviction in what is a very concentrated portfolio.

JF: You mentioned that we're particularly excited about companies which are almost surfing on top of this new technological development, using AI to really empower new business models. AppLovin and Cloudflare would be examples of that.

Of course, LTGG has been invested in NVIDIA since 2016. You won't be surprised that there's been a number of questions about the team's latest views on that. It reported earnings last week. Does the team still remain very optimistic, or what is the view of the team?

JG: It's interesting, isn't it? You mentioned we invested in 2016. At that stage, it was best known as a gaming company. It was making the chips for processing graphics on games. At that stage, we had some inkling that maybe it could be useful for AI down the road, but that seemed like a very distant prospect. But clearly, things have moved on a lot since then.

It broke through earlier this year the $4tn market cap, more recently the $5tn. That's fallen back a little bit since then. But over that period of time, throughout our holding period, it's delivered over a hundredfold return. So one might reasonably challenge us and say, well, it's done all of that. It is where it is.

Shouldn't you think about trimming or moving on from it at this stage? But that's not how we approach things. We're always having to challenge ourselves to think, well, even from here, how great could it be? Because the biggest risk we face, as I mentioned earlier, is missed opportunity. And one of those missed opportunities would be selling too soon.

So, when we look at NVIDIA today, it strikes us: is it overvalued? Really? The PE ratio for NVIDIA today is roughly around its 10-year average. That's by virtue of the fact its fundamentals have been so strong. It's been doubling earnings roughly year on year over the past few years.

The market today seems to think that revenue growth will be around 15 per cent year on year over the next five years or so. We think, based on conversations and research that we've been doing, there could plausibly be a scenario whereby it grows revenues more like 25-30 per cent year on year.

You could keep your margins around where they are today. You could even account for some derating from here. And still we could see a doubling, potentially even a tripling, from here over the next five years or slightly more.

So on those grounds, we exercise patience. We retain a strong degree of conviction in NVIDIA.

JF: And I suppose that comes down to the webinar title, Fairytales and Fundamentals. It's about getting back to basics and looking at what the fundamentals of that company are doing. And it is remarkably continuing to deliver.

We talk a lot about the differentiated insights that are incredibly valuable in terms of our investment process. One of those is speaking to the technical founders that are driving these world-leading businesses. And I think that's been a really important piece of insight in terms of our views on NVIDIA. Could you share some of the latest views there, please?

JG: Yeah, sure. Whenever we're doing our research, we have to think about what information, what sources of insight we are using. We're not using broker reports. We're not looking at what the rest of the market is looking at, because it doesn't give us any real insight into the case.

One of the key aspects of what we do is speak to actual founders, the visionaries, the people who are leading the way. We've had some conversations in recent months with the likes of Mark Zuckerberg at Meta, Sam Altman at OpenAI. We've been speaking with Anthropic and other companies too.

It's interesting, based on those conversations, just how existential the capex spend is for them, because it's better to be spending now, potentially early, than to be left behind in what could be the most predominant technological shift over the next couple of decades. So that's important when we're thinking about demand for AI. But we also triangulate with others, right?

We're speaking with different research institutes. There's a research body called IMEC in Belgium that we spend a lot of time with as well, understanding semiconductor trends over time. We speak with various academics in other parts of the world too, again just trying to draw on this mosaic of inputs as we come to our view about our upside scenarios.

JF: I remember speaking to one of the team a few years ago, and this was in the context of Tesla, which is another one of those outlier companies that LTGG invested in early. He said, actually, the biggest winners are often the hardest to keep hold of, are often the most difficult to own. And that certainly would resonate with NVIDIA at the moment.

If we could change tack slightly, we've talked about the fundamentals of NVIDIA specifically, but maybe we could view that from a portfolio level. How does the portfolio shape up today relative to the index?

JG: Sure. I mentioned at the start when I said we look for outliers, and a characteristic of those outliers is that they tend to demonstrate very strong operational performance. So it's a really important proof point for us that the portfolio in aggregate is showing very strong fundamentals.

If we're looking at all the companies in the portfolio, around 95 per cent of them are either self-financing in some way through being free cash flow positive or earnings positive.

Their revenue growth, their free cash flow growth, is around four times greater than that of the average company in the index. Their earnings growth is around two and a half times greater than that of the index.

And if we're looking also at the strength of their balance sheets, 70 per cent of the portfolio is sitting on net cash. And over 70 per cent of the market is sitting on net debt.

So no matter which of these characteristics we're looking at, we can say the portfolio is in very solid shape in terms of fundamentals. It is quite striking if we're thinking about – and I should say that's generally been the case over time – it is quite striking now in this current environment.

If we look at the portfolio's exposure to really exceptional growth, let's say the top quintile earnings growth, it's at around the highest it's been over the past decade. And the valuation premium that you may expect to pay for that level of growth is at around the lowest it's been over the past decade relative to, say, the MSCI AQUA index.

That's pretty striking, right? That presents opportunities for us as long-term stock pickers to find ideas, opportunities in the portfolio or beyond, at valuations which are actually pretty broadly undemanding.

JF: Can I just pick up on one of the points that you made there? So the premium of the portfolio relative to the index is as narrow as it has been over the past decade. That's really surprising to me. In fact, that's something that I had to challenge myself on and go and read back on. Could you elaborate a wee bit on what's driving that?

JG: Sure. So, whether you're looking at this on the forward price-to-sales or price-to-earnings basis, it's at around a decade low. And that is striking when you're considering the strength of the fundamentals of the portfolio. The top quintile earnings growth exposure for the portfolio has ticked upwards over time over the past decade.

What I think we always have to be clear about is those numbers vary over time. Many clients will look at and want to ask about, say, the price-to-earnings growth ratio, and it fluctuates over time.

That evolves. What, though, gives us, again, coming back to what's the proof of our process, if we look at the past 21 years of history of the strategy, is that it's not valuation or multiple expansion that has been the biggest contributor to returns.

By far and away, it's been operational performance. And that, again, for us, is a really important proof point that shows that by virtue of investing in companies that demonstrate those fundamentals, that's translating into the share price returns over time.

JF: And I often find when I speak to clients about LTGG's investment philosophy, they assume that we're looking to invest in very early-stage, potentially quite flaky growth companies.

And I think, speaking to the fundamentals, that simply is not the case. These are robust and resilient companies that are really stealing ahead of their competitors, or marching ahead of their competitors, in terms of building out their competitive advantage.

You talked about the valuation of the portfolio there. Could you discuss the approach that the team take to valuation? Because I think this is an area that, again, people are often unsure on.

JG: Sure. Well, when we founded LTGG back in the early 2000s, it was just after the dotcom crisis. There was an opportunity, we felt, to take quite a differentiated approach to valuation discipline.

We didn't want to rely on any single metric or model, because frankly, as I mentioned before, it's relatively meaningless when you're looking at these companies at the forefront of change. There's no one model or one metric that can really help you there.

So for us, we decided to approach this in a way that would do all of the quantitative analysis and take that as your bread and butter of what we should be doing anyway, but also couple that with various qualitative aspects of those businesses that we needed to be able to get a better appreciation of if we're going to be investing over a five to 10-year investment horizon or more.

And so we developed a 10-question framework back then that we still use to this day. It's changed very little, but it marries the quantitative and the qualitative. And it really came from that recognition that we felt there's more fiction being written in Excel than in Word, right?

And so we want to be able to bring this together. So if I'm thinking about some of those qualitative aspects, that could be, for example, one of our questions that looks at company culture.

If I'm looking at a company like Rocket Lab, which was a New Zealand-founded business by Peter Beck, it struck us in our research in that company just how important that kind of bootstrapping culture, doing more with less, has been to that company's trajectory.

We're also looking at adaptability of these businesses. How do you model that, right? So for us, it's really important to get a sense of that through speaking with the companies.

And so when we look at a company like Netflix, we see how it's evolved over time from a DVD-by-mail business to doing its own content, online streaming, now having an advertising business too in the past few years.

That is so important when we're thinking about our valuation discipline. It's an unconventional approach, but it's ultimately what we feel works best for these kinds of outlier companies.

JF: And conventional approaches to valuation generally produce conventional results. Exactly. I'm going to push you a wee bit further on valuations, if you don't mind, because we've had a couple of questions specifically on the topic, and it's clearly on the front of mind of a lot of clients at the moment. Could you provide an example or two of where we have felt that valuations have got excessive within the portfolio and taken action, please?

JG: Sure. In several cases over time, this has been – there are many examples that I could mention. One that would come to mind from earlier this year would be Tesla, a longstanding holding, as I think we mentioned earlier, held since 2013. It did exceptionally well for our clients over that period of time. But we felt ultimately, as we were getting towards the point of our complete sale, that the market view had gotten closer to our view, at least insofar as the core auto business was concerned.

That would require us, then, to continue holding it and believe in the upside potential, to attach much more significance to the more nascent parts of its business, the humanoid robotics or autonomous driving. And we just didn't have that degree of conviction. And there were other aspects too, which ultimately led us to make that sale.

So that would be one. Another one from the past few months I would highlight would be Cloudflare. We mentioned earlier it's been one of the top contributors, doing fantastically well. We continue to retain a lot of conviction in it. But it seems to have been caught up in a lot of this AI enthusiasm in the broader market.

It's very well placed in that regard. But we always have to ask ourselves, if we're thinking about valuation, what's the gap between the market view and our view in terms of our upside scenarios?

And if that gap has narrowed somewhat, then it might be grounds for us to say, OK, maybe we should trim or maybe we should move on. In this case, it was a small trim.

JF: And could you tell us a bit about how the investment risk team work with the LTGG team, really to challenge their views, particularly around valuations?

JG: Yes, absolutely. This is something which, frankly, we've stepped up quite a bit over the past few years in terms of our degree of interaction with that team, partly as a reflection of that team becoming ever better resourced and having more tools at its fingertips.

One of the ways that we feel that they're exceedingly useful for us – we're a strategy that's been around for over 20 years – is because they know the philosophy of the team so well, they can help us to show where we may inadvertently be deviating from that core philosophy over time. So the longitudinal analysis that they produce for us is really important in that regard, and we have regular meetings with them on those kinds of points.

Specifically to your question on valuations, they're also looking on a stock-by-stock basis, producing valuation heat maps, doing correlation analysis, looking at what the growth projections are based on more classic traditional market metrics. How does that correlate with your own fundamental analysis of the companies?

So actually, the two examples I just cited on Tesla and Cloudflare, those were companies that showed up in the analysis that the risk team provided. I think, though, just one key aspect of the risk team's work is it's not a classic risk team. It's not just that kind of policing, surveillance function.

It's a risk analytics and research team. That's the full name. And for us, that's key because we genuinely use them as a source of insight. We commission them to do analysis. And so it's additive to our process in that way. It's not just basic monitoring.

JF: One of the really interesting pieces of work that they have done is the misgrowth analysis. We won't delve into it today, but it's definitely one to share with clients. A really good question here: Baillie Gifford have been talking a lot about the opportunities that they're seeing in the private market space.

Clearly, we're talking to clients invested in LTGG today. This client is saying, how does this serve to benefit me as an LTGG shareholder? Is this a potential distraction for the firm?

JG: I would say it's the opposite, actually. If we didn't have it, if we didn't have that degree of insight into private companies, then arguably we would be worse off for that. The reason for that is private companies, we know, are staying private for longer, and there are many great disruptive growth companies that are in that private space. So for us that presents two things that we should bear in mind.

One is that these could be real sources of competition for some of the existing public equities that are in the portfolio. So we have to bear that in mind. I mentioned Rocket Lab before. You can't talk about Rocket Lab without thinking about SpaceX.

The other thing which I think is important to bear in mind is that if we can get to know those companies before they then list in public markets, then we're able to really hit the ground running in our relationships with those companies and potentially invest straight to IPO. And we've done that at times.

Companies that have been held privately elsewhere at Baillie Gifford, that we've then been able to invest in really promptly for this portfolio when they list in public markets.

JF: That's interesting. So increasingly, if we weren't looking into the private market space, we'd only be doing half our homework, if you like. And have there been examples of companies that we have held privately that have gone on to be held within LTGG?

JG: One I would mention that's one of the more recent holdings is Horizon Robotics, which is the Chinese company specialised in hardware and software for autonomous driving, essentially.

That was a company that was held privately for around four years before IPO. And so getting to know that company over that period of time was genuinely a value add for us, such that when it did IPO in 2024, we were able to invest for this portfolio.

JF: You mentioned China in the context of Horizon Robotics. I think there's a good question here. Are the team being pushed into investing within emerging markets, including China, because of the valuation disparity between the US and EM? Because valuations are so expensive in the US, are we having to look elsewhere to find that outlier growth potential?

JG: No. So it's true that the degree of US exposure is – there's an underweight there relative to the market. But again, we don't think in terms of underweights or overweights in this portfolio; it's entirely bottom-up. So genuinely, we're just following where the best ideas are that we find at any point in time.

And the EM exposure in the portfolio has varied over the past 21 years. It's been anywhere between 15 per cent, 16 per cent, up to over 30 per cent. And so any increase that we've seen in very recent times, again, is just a reflection of where we're finding the best ideas.

There are companies which are growing so rapaciously in Latin America, like MercadoLibre, or like Nu Holdings that we're invested in, through to Coupang in South Korea, through to Sea in Southeast Asia.

There's a whole suite of companies that we hold in this portfolio because of the genuine bottom-up characteristics. And at the same time, we continue to find great examples in the US as well.

JF: And I think that's a nice illustration of why LTGG today looks nothing like the index. In fact, one third of the portfolio today is within emerging markets. And I know that's an outcome of our bottom-up stock picking, but that's an area that we're very, very excited about.

Jonny, we've answered as many questions as we can, but we're out of time. Perhaps you could wrap up with some closing remarks, please.

JG: Sure. I mean, what I would say in a nutshell is, if we think back to something you mentioned at the start – the performance over the past 21 years – it's been extremely robust, 4 per cent outperformance year on year net of fees.

We've done that just by virtue of us doing what we always do. It's investing in those outlier companies. And so we're not making any dramatic changes to what we do. We're just going to continue doing what we always do: invest in those outliers, look at the fundamentals, take the long-term perspective, and just be open minded and optimistic when we're thinking through how great those companies could be.

JF: Thank you very much indeed to everyone for joining us today. I think the webinar is neatly summed up by the idea that we don't believe that anyone should have all of their client's portfolio invested within LTGG, but we certainly believe that everyone should have at least a portion of it. Thank you.

Annual past performance to 30 September each year (%)

Annualised returns to 30 September 2025 (%)

Source: Revolution, MSCI. USD. Returns have been calculated by reducing the gross return by the highest annual management fee for the composite. LTGG composite is more concentrated than MSCI ACWI Index.

Past performance is not a guide to future returns.

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