Brittle botany: how LTGG cultivates resilience in a fractious world

As with any investment, your capital is at risk.

Every epoch has its own peculiarities. Victorian Britain was no exception. High mortality combined with rigid social codes to drive macabre obsessions with clairvoyance and freak shows. Blurring lines between science and the supernatural fuelled interest in the uncanny and the bizarre. Essential accessories of the day included the nose improver – a metal contraption attached at night – and the system cane – a walking stick that housed various gadgets or firearms. Wealthier ladies sported bird hats, adorned with real wings that moved on wires and springs during the owner’s perambulations beneath. 

But for the really rich, the ultimate status symbol was a glasshouse. Almost every stately home had at least one. These architectural marvels provided stable warmth and shelter from the inclement British weather, and in turn facilitated the Victorian penchant for botanical imperialism. Exotic plants such as orchids, dahlias and lilies all flourished within their regulated confines – very beautiful, but also fragile and prone to rapid expiry in the event of any environmental disturbance. The term ‘hothouse flower’ entered the lexicon of the day as a result – a metaphor for anything, or anyone, whose outward impressiveness or beauty was unable to withstand adversity or change to their surroundings.

In recent decades, the CEOs of most listed companies have come to resemble Victorian botanists. Heads down with their trowels, they’ve been busily optimising their hot-housed companies for skin-deep profitability within the bounds of a carefully managed free trade environment. But in their absorption, they’ve ignored some big cracks in the glass roofs over their heads. And now that the windows are breaking, those introspective corporate leaders find themselves ill-equipped to handle the changeable weather. 

There are no hothouse flowers in the Long Term Global Growth (LTGG) portfolio. Instead, we hold some of the world’s hardiest and most adaptable companies on our clients’ behalf. That’s why we’d venture to suggest that the unpredictable state of global affairs presents your portfolio with possibly the best backdrop for long-term outperformance in its illustrious two-decade-long history. In this update, we’ll unpack these dynamics. First, we explain why we’re feeling optimistic, not despite current geopolitical and economic challenges but because of them. Then, we share some insights around our recent portfolio tyre kicking, before turning to some intriguing new opportunities.

 
Our firm foundations for optimism

1. The opportunity set is broadening

The unpredictable tariff and foreign policy environment means that it’s hard to predict exactly which of the glasshouse windows will break and when. But the direction of travel has been clear for a while now. At the end of the last year, our commentary nodded to a couple of portfolio holdings that were set to actively benefit from increased friction and fractiousness. Symbotic was seeing a surge in orders for its warehouse automation equipment in response to labour shortages, whilst Cloudflare’s cyber security offerings were seeing hot demand as the arms race against hackers intensified. Neither of these undercurrents has changed.

Regional revolutionaries

In addition, we have a good chunk of the portfolio in regional players that have minimal cross-border revenues and are relatively untroubled by rapidly changing digits on reciprocal tariffs boards. Your online commerce holdings illustrate the point. South Korean Coupang is growing nicely. Over two-thirds of local households are on the company’s WOW platform and the nature of the urban geography provides ample scope for online commerce penetration to double from here. In our recent valuation refresh work, we were encouraged by the relative ease with which a 5-times upside scenario was achievable based on the domestic opportunity alone.

In a similar vein, SEA and Mercado Libre are growing at a healthy 30 per cent clip in Southeast Asia and Latin America respectively. In China meanwhile, online delivery platform Meituan has quietly doubled its profit in the last twelve months. Their momentum has been reinforced by an expanding range of merchant services around areas such as order preparation, digital payments and financing solutions. Yet despite this formidable operational progress, Meituan’s market capitalisation isn’t far off the level four years ago and there’s scope for a lot of upside from here. 

Innovation diffusion beyond the US

The thread of American innovation leadership runs strongly through the past two decades of LTGG. Many of the outlier holdings (those that have more than quintupled) have been US domiciled – downstream beneficiaries of deep university research networks, multiculturalism and a vibrant venture capital ecosystem. Irrespective of policy gyrations, these advantages are deep-rooted, but we see notable examples of portfolio holdings domiciled elsewhere in the world and diffusing disruptive innovation with equal success.

NuBank is a poster child on this front. Founded in a small, rented house in Sao Paulo, this financial services platform is now used by more than half of Brazilian adults and is growing adjusted net profit in the high 30s. The fully online nature of this platform conveys massive cost advantages when compared with the legacy banks’ inflexible and expensive branch-based models. NuBank’s Net Promoter Score of 94 is truly remarkable in any industry, let alone finance. It seems odd to us that the share price isn’t far off the IPO level in late 2021, despite a sextupling of revenue since then. From here, there is a massive long-term runway because 4 billion people globally still don’t have access to credit. 

Dutch payment processing platform Adyen exhibits similar dynamism with a business model that helps customers to navigate the intricacies of over 150 different local payment methods. An atomising world only increases complexity in the global payments system, catalysing further demand for Adyen’s services. Core margins are ticking up as processed payment volumes grow in the 20s. Adyen’s share price has doubled since our decision to add when it halved a year ago, but the valuation remains undemanding given their accelerating top line and inherent operational leverage.

2. A world of costly capital helps LTGG

We don’t profess to have any edge in macro soothsaying – never have done. But rising deficits and more sand in the cogs of global trade will likely conspire to drive higher costs of capital in the years ahead. This is good for the LTGG portfolio for a couple of reasons. Firstly, almost three-quarters of the portfolio sits on net cash, in contrast to a heavily indebted index with almost three-quarters on net debt. The advantages of this financial strength are amplified in a higher cost-of-capital environment. Secondly, LTGG holdings earn much chunkier aggregate gross margins than the index (46 per cent v 30 per cent). We’re confident in this margin gap being retained. 

A good number of LTGG holdings have substantial pricing power and some are starting to flex it. Hermès has effortlessly pushed through a 7 per cent price hike recently with additional US increases to offset the impact of any tariffs on the bottom line. Their revenue has increased twelvefold since we bought the holding 21 years ago and the brand allure is stronger than ever.

Netflix, meanwhile, remains in the foothills of its monetisation potential. We recently revisited the upside following a doubling of the share price over the last twelve months. We remain struck by the latent pricing power and the scope to further increase advertising revenue relative to other players. A doubling over the next five years supplemented by strong operational leverage provides the scope for material upside even in the event of a derating.

3. Adaptability is set to be rewarded

The accurate assessment of company management teams is key to effective stock-picking. As a reminder, we cover this through question four of the 10-question LTGG research framework. In the early days, our line of interrogation here was “Are your people consistently better than their people? If so, why and at what?”. But we’ve evolved the wording over the years and today we ask: "Is your business culture clearly differentiated? Is it adaptable?” We confess to a bit of shoehorning here; two sub-questions in one means that we avoid an eleven-question framework which doesn’t quite trip off the tongue in the same way. But the suffix on adaptability is important because it leads us away from hothouse flowers and towards the most flexible companies in the world.

This is particularly relevant right now because artificial intelligence (AI) is set to reshape the corporate landscape and destroy a generation of supposedly safe haven business models. The sudden and serious travails of Alphabet – sold from LTGG just over four years ago – are instructive here. Adaptability cannot be neatly modelled, and it doesn’t show up on a Bloomberg screen but the typical LTGG holding is inherently nimbler – schooled in hard knocks by dint of an unconventional business model where each setback and each bout of volatility has bolstered its learning rate and antifragility.

 Ongoing conversations with the leadership teams of our holdings increase our confidence that the stocks in the LTGG portfolio are more likely to be the architects of AI disruption than the victims of it. By way of example, Shopify’s new AI-powered website builder allows merchants to launch online stores in minutes. Based on simple descriptions, search optimised product descriptions and pricing strategies and email campaigns can be instantly generated. Continuous learning from millions of stores will further improve these already transformational tools and the potential second-order ramifications for start-up business creation are fascinating to consider.

Meanwhile, Rivian is using AI to analyse supplier performance, inventory levels, and logistics data, optimising component sourcing before enhancing vehicle assembly sequences and installation instructions for production workers. The resulting improvements in returns structures and lead times for both companies are particularly important in this period of supply chain uncertainty. 

4. The cygnets are growing into swans

Over the last five years, we have purchased 30 new companies for the portfolio. It’s often within the first year or two of a holding that we can properly validate our initial contentions around competitive advantage and the direction of financial returns. Inevitably, some holdings don’t play out quite as hoped and a cathartic cleanse typically follows. Today, 22 of those newer holdings remain in the portfolio and we’re broadly pleased with the way in which these LTGG cygnets are maturing into swans.

Fleet automation business Samsara continues to impress us with excellent execution. Over 10 per cent of US commercial road traffic is now routed through their platform. We are excited by the scope for product expansion given the demonstrable value that their customers enjoy through lower accident, insurance, maintenance, and tyre costs.

Meanwhile, Roblox is now within a whisker of 100 million users. We had some concerns about this one a year ago, but 30 per cent annualised revenue growth is testament to the fact that more of the monthly users are engaging on a daily basis. The clear ageing up of the user base towards a more affluent cohort helps to unlock the operational leverage that we’ve been looking for.

Indian jewellery chain Titan is doing nicely as well. Soaring gold prices normally scare buyers off, but Titan is pumping out growth in the 20s through the continuous opening of new franchised outlets. Part of our investment thesis for Titan is built on their innovative approach in a slow-moving sector. Their Karatmeters have now been supplemented with Magic Mirrors – digital tools that allow customers to try on jewellery virtually, not only enhancing the luxury shopping experience but also addressing the practical challenge of limited physical inventory in smaller locations. 

Continuous Validation

You’ll be getting a good sense of our confidence in the portfolio’s prospects by now. But our positivity is grounded in realism, and we continue to reflect on several different dynamics.

AI value chains

We’ve talked in previous commentaries about the surge in AI capital expenditure – over $300bn and counting from the Big Four alone (Amazon, Microsoft, Alphabet and Meta). The lexicon is as beguiling as the numbers and it is easy to get lost in a primordial soup of technical terminology: multihead latent attention, diffusion models, retrieval augmented generation, gradient descents, generative pre-trained transformers and so on. But rather than wrestling with the scientific minutiae, we need to step back to consider where the value will accrue.

We know from experience in industries such as solar that there’s no guarantee of industry growth translating into great returns. In this vein, we took a look at Broadcom as a potential portfolio candidate. This infrastructure software company has quietly snuck up to $1tn of market capitalisation without much fuss, but we’ve taken a pass because we see insufficient evidence of a repeatable competitive advantage and scope for upside.

China

Over six thousand companies are listed on the China A-Share and Hong Kong markets. Around 100 of them are held across Baillie Gifford and five of them are held in the LTGG portfolio, so our highly selective approach prevails. Notwithstanding domestic economic challenges, China’s industrial policy inspires both awe and anger from outside observers. The country remains a formidable force in many spheres including AI and batteries.

CATL is a clear leader in the latter domain. Profit has risen over tenfold in the last five years and a monolithic research budget is driving further breakthroughs. It’s pretty interesting to muse on the second-order infrastructure implications of their latest EV battery, which provides 500km of charge in five minutes. Over time, we expect CATL to morph into a more diversified energy solutions company. The Choco-Swap battery swapping network is being rolled out ambitiously and CATL’s majority stake in battery recycling company Brunp provides another interesting angle. A recent capital raise (the largest of the year in Hong Kong) will help to diversify CATL’s supply chain by funding a number of European facilities, including a factory in Hungary to the tune of over €7bn. 

The portfolio’s other four A-Share and Hong Kong-listed Chinese holdings (Horizon Robotics, Tencent, Meituan and Moutai) have domestic demand profiles, so they’re relatively insulated from any flip-flopping on tariffs and their local listings mitigate the risks of sanctions if Sino-US relations get really fractious. Chinese ecommerce dynamo PDD is more exposed on this front due to its sole listing as an ADR and we’ve undertaken a number of engagements with the company on its plans to list closer to home.

Supply and demand impacts

Our work on the impact of ongoing trade skirmishes extends beyond Chinese holdings. In aggregate, the portfolio is aided by its high level of exposure to software-based business models, because it’s harder (though by no means impossible) to apply tariffs to virtual services than physical ones.

On the supply side, we’ve been pointing our inspection lamp at TSMC and e.l.f. Cosmetics – a couple of holdings with more complex cross-border supply chains. In TSMC’s case, we’re reassured by plans to continue diversifying the semiconductor supply chain beyond Taiwan. Further to previous investments in Europe, Japan and the US, an additional $160bn is slated for an Arizona site with of advanced fabrication plants, packaging facilities and a major research and development centre – the largest single foreign direct investment in US history and a welcome diversification of both physical and geopolitical risk for TSMC. 

For e.l.f. Cosmetics, we’re monitoring an uncomfortable mismatch between its US-focussed customer base and its China-centric suppliers. We addressed this topic with CEO Tarang Amin during a broader recent discussion with him. Five years ago, e.l.f.’s suppliers were entirely Chinese, but they’ve been diversifying internationally for a while and a recent price hike to mitigate the margin impact of tariffs has resulted in negligible elasticity from customers, which bears testament to the value of e.l.f.’s products. 

Looking to the future

Different inputs

In LTGG, we’ve always taken the view that our level of insight on any particular topic should be broadly proportional to the number of conflicting views that we can bring to bear on it. In a world of rapid change and breaking greenhouse windows, the need to tap diverse information sources becomes even more important.

We’ve recently been eliciting feedback from a number of advertising agencies on the new suite of Netflix ad offerings. We’ve also spoken to the head of Mercado Libre’s advertising business to assess this potential third pillar of growth for them. On the AI front, we’ve been collating insights from Spotify founder Daniel Ek and the Tencent management team. This helps us to calibrate the implications of progress, profitability and bottlenecks across the technology landscape.

Meanwhile, recent sessions with Professor Doyne Farmer have helped us to assess the challenges and tailwinds facing solar inverter company Enphase. We’ve been triangulating these inputs with the company’s leadership team. We admire CEO Badri Kothandaraman, but the overall industry backdrop has deteriorated significantly since our original investment, leading us to question whether Enphase will be able to meet LTGG's high growth hurdle. 

Beyond these humanoid inputs, we continue to muse on how AI can help us as a team. One exploratory use case pertains to idea generation and experiments with an AI ‘outlier monitor’. Having surfaced historic outlier stocks in the index, the experimental tool can then identify common characteristics such as exceptional capital discipline or unusually high cultural learning rates. The outlier monitor could potentially then scan the investment landscape for these characteristics in the future, proposing new stones for us to overturn in idea generation.

Another experimental application of AI is in using it to parse sell-side outputs to establish the main tenets of a “market view” so that we can make sure we differ from it. We’ve also been using AI to critique our manually written stock research reports, asking it to surface any analytical biases or blind spots. Large language models are also proving particularly helpful in supplementing our climate team’s valuable assessments of potentially material physical risks. 

These are interesting use cases for sure. But they have also reminded us of AI’s limitations. Machines cannot build relationships with management teams, nor can they unpick the finer nuances of a cultural advantage – such important aspects of our process.

New ideas

Earlier this quarter, we followed the Beijing half marathon for humanoid robots. One weak-kneed participant collapsed before the start. Another fell over a few steps later and a third almost immediately ran into a railing. But the remaining eighteen machines successfully completed the course – a prime example of the rapid progress in humanoid robotics. There are good arguments for why robots should resemble human morphology, but the term “physical AI” more accurately encapsulates the work that we are doing on thinking machines. Irrespective of the phraseology, the investment opportunities in robots, drones and autonomous vehicles remain very interesting to us and John is reflecting on his discussions with a range of robotics professors at a recent MIT gathering in Austria.

Elsewhere, we’ve been taking a look at Duolingo (an amazing honeytrap but we’re struggling with upside) along with Zealand and Novo Nordisk (keeping an eye on GLP-1 now that some hot air has been flushed out of share prices). 

We’ve also been discussing the future of the auto market – and taking another look at BYD, 14 years after our first interactions with the company. Their cheapest vehicle (the Seagull hatchback) retails for under $8k, and we are musing on whether the inevitable consolidation of the auto market might play into their hands. Meanwhile, our research on Ferrari builds on the premise that they sit right up there with Hermès as a purveyor of Veblen goods – possibly the only company in the world to successfully blend luxury with a sense of community and a sports team. Ferrari’s economics look nothing like a car company to us and we will conduct further research on their management team.

Peter Beck is cut from slightly different cloth – the only founder we’ve encountered to have left school early in order to build a steam rocket-powered bicycle. The resulting transferrable skills have been applied to great effect as he’s scaled Rocket Lab into a formidable small satellite launch and servicing company. Falling costs are opening up a new space economy and we believe that Rocket Lab has an interesting opportunity as the clear second player to SpaceX (held privately elsewhere at Baillie Gifford), particularly as governments seek to diversify their exposure in this domain. 

Conclusion

The days are long in Edinburgh at this time of the year. Sunrise well before 5am and sunset after 10pm helps us to avoid the market’s hall of futile information mirrors. But the long day doesn’t make the weather any more predictable. We had virtually no rain at all in May. Now, in June, it’s common to encounter deluges, gales and azure sunshine, all within the space of an hour. It can be quite entertaining to watch hapless tourists consulting their weather apps, but we’ve long since learned that this is a futile endeavour. Our focus instead is on longer-term climatic shifts – in geopolitics, consumer behaviours and technology. 

Regardless of which greenhouse windows break when, the stability of the conditions inside will be compromised. This is bad news for the delicate flowers of the index but much less of an issue for LTGG: a rugged plantation of hardy perennials whose long-term resilience remains overlooked and undervalued. Based on independently forecasted annualised earnings growth rates in the 20s for the coming years, we’re feeling optimistic. And we’re ready for more weather – wherever it comes from, whenever it arrives and whatever form it takes.

Annual past performance to 30 June each year (%)

Annualised returns to 30 June 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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