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<p><strong>As with any investment, your capital may be at risk.</strong></p>
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<p><strong>Connor Warren (CW): </strong>We’re about halfway through the day now, so I’ll start by just echoing the sentiments of my colleagues that have been up here so far today, and just say thank you for taking the time to join us up here today. Regardless of why you made the choice to be here, even if you’re like me and just wanted a short 24-hour break from planning a wedding, we do appreciate the fact that you did just that and came here to join us. Now, as far as our session goes today, our goal isn’t to sit here and come and pitch a strategy to you. But really, just to simplify it down, at the end of the day, all we’re looking to do is provide you all with a handful of worthwhile and hopefully insightful data points that you can then take back to your investment teams and potentially your end clients to better inform you all during those discussions. And as far as all the content so far today as well, I hope you found it insightful, and if you haven’t enjoyed it, we’re only about two hours away from happy hour, so there’s a light at the end of the tunnel.</p>
<p>So maybe for a good starting point, I’ll just quickly introduce ourselves. My name is Connor. I’m a director on Baillie Gifford’s US Financial Institutions team based out of Denver, Colorado. And I’m pleased to be joined today by Paulina McPadden, who is a portfolio manager on our International Concentrated Growth team. And for our session titled Creative Destruction, I’m a little ashamed to admit that I had to reach out to a close personal friend of mine, ChatGPT, to help to explain the concept and put it into context for me. So maybe for anyone else in the audience that’s in a similar position to me, could you talk about what that actually is and practically speaking, what it looks like to invest through multiple cycles of creative destruction?</p>
<p><strong>Paulina McPadden (PM):</strong> Well, I hope that you will have gotten a very good answer through ChatGPT, because creative destruction as a theory dates back to 1942. So, I think it was definitely in the training data for the model. And the idea was popularised by Joseph Schumpeter. And it’s basically him trying to explain how innovation feeds into economic growth. And his theory was that as technology develops, as new innovations and business models come about, and they are adopted, they displace old ways of doing things. And this causes short- or medium-term displacement and disruption, but in the long run feeds into long-term economic growth.</p>
<p>We heard from Christina earlier from Nubank, and the financial services industry is a perfect example of creative destruction at work over time. Decades ago you will have had bank tellers who were replaced by ATMs, and while this did cause a loss of jobs in the medium term, it enabled the industry to expand and serve more people. And obviously, with Nubank now, their ability to lower the cost to serve and therefore expand access to banking services to unbanked and underbanked populations across Latin America is yet another example of how creative destruction isn’t just about disrupting existing incumbents. It’s also about expanding addressable markets as well. Other theorists have built on this foundation.</p>
<p>So Carlotta Perez has talked quite a lot about how cycles of boom and bust form the foundation of long-term economic growth. In a boom cycle, you get a dislocation of financial and productive capital, and the financial industry gets rather ahead of itself, but this enables the investment in capital that becomes productive after a bust. This was perfectly encapsulated in the dot-com bubble, where massive overinvestment in fibre capacity was not used for a while, but it created the foundation for ongoing digitisation in the decades thereafter. Another theorist that I quite enjoy is Brian Arthur, and he talks about how technology builds upon itself, almost like Lego blocks in a way. He has this idea of combinatorial evolution of technology, that when you have a problem, you can take different technologies together, put them together and solve that problem by creating a new technology.</p>
<p>And the new technology that you have created becomes yet another Lego block that you can use to solve future problems, which I think is quite exciting because it kind of implies that actually the rate of change and innovation should keep increasing as that bank of technological Lego blocks continues to increase. And the reason I think all of this matters is that it creates a really exciting background for a long-term growth investor. If you believe that the world is constantly changing, that businesses are constantly evolving, that incumbents are threatened and not all of them can adapt to new innovations, then that creates a rich hunting ground for somebody who’s thinking about the next 5 or 10 years and trying to find the most innovative and disruptive businesses to invest in.</p>
<p><strong>CW:</strong> And a quick follow-on to that before we move on too, if you’re looking across the market right now, is there anywhere that’s either overlooked or underappreciated in terms of ripe for rapid expansion or ripe for disruption?</p>
<p><strong>PM</strong>: I mean, there’s so many ways you could answer that question. There’s obviously quite a lot of focus on artificial intelligence, and we’ll be hearing from Robert about AI in more detail in the session after this one. But despite the level of attention it’s getting and the amount of investment that’s going into capital equipment and chip production, I think we still haven’t quite grappled with what the actual long-term implications of it as a technology are, both economically and for the businesses that are going to grow up AI-native in a way. So actually working with Robert and sitting quite close to him on the investment floor is really helpful from that perspective because I think the companies that are most likely to leverage that technology sooner are currently private, and having that insight is tremendously valuable. But the other angle of it is that all of this focus on AI, I think, is also risking. It risks obfuscating or forcing people to miss out on other disruptions that are happening and have been going on for some time.</p>
<p>And we’re heavily invested in e-commerce companies, for example, and they’re kind of unfashionable at the moment. But the fact of the matter is that e-commerce penetration of retail is still only 20 percent, and that will vary by country. So some countries are relatively underpenetrated, Latin America being one of them. And I think that’s still a really exciting disruption that is just temporarily not having enough attention paid to it.</p>
<p><strong>CW:</strong> And if we take a step back then and look at it from a top-down perspective, can you apply this to the age-old debate of international versus US? And maybe said a bit differently, the US stock market has continued to outperform for decades plus, like we talked about in the emerging markets presentation earlier. How should allocators be really thinking about accessing this international opportunity and successfully capitalising on what they’re seeing there?</p>
<p><strong>PM:</strong> There’s a few elements there, I suppose. I’ll start with the top down, and then I’ll tell you why I think that doesn’t actually matter for the way that we invest. So from a top-down perspective, I think it’s interesting to note that the US is something like 25, 26 percent of global GDP, but about two-thirds of global market cap. And that’s nearly a historical high. We’re not quite at the levels of the dot-com bubble, but getting there, I would say.</p>
<p>Now, that may not be perfectly rational. If you believe that artificial intelligence drives massive productivity increases and therefore raises GDP, if you believe that the investment into artificial intelligence is largely going to land in the US and also raise GDP, then that gap should narrow over time. That makes sense. That does require you to believe that the productivity increases of AI happen significantly faster than any other technology in history. Admittedly, this is quite an unusual innovation, so that’s not impossible.</p>
<p>And at the moment, the capital investment happening in AI, it’s largely going to companies based outside the US, particularly in places like Korea and Taiwan. And that is changing. TSMC is building fabs in Arizona. So none of this is static, but it’s just worth bearing that in mind. And another top-down perspective is that historically, in turn over very long time periods, I should say, international markets do perform roughly in line with the US. And now the concentration level within the US market at the moment, particularly the Magnificent Seven, has changed that over the past few years.</p>
<p>But if you believe in the power of reversion to the mean at the market level, then perhaps you have a view on that shifting or not. There’s a structural point as well. The environment that enables and fosters business formation and growth in the US, a supportive government, indirect subsidies, in this case, a very, very large domestic market, those environments exist elsewhere as well. You can see similar characteristics in China, for example. You can see similar characteristics in India.</p>
<p>And there’s a case to be made that actually with deglobalisation and rising geopolitical tensions, that perhaps governments are going to be much more willing to use industrial policy as a lever for government and therefore support local companies to a greater extent than they have before. And here’s why none of this matters. When you’re investing in disruptive, innovative businesses that are changing the world, that are disrupting existing industries, they’re creating entirely new ones, capturing huge addressable markets, it matters in the context of the price that you’re being asked to pay for a particular company, but in the context of the long-term returns that you are generating for clients, it’s really nearly irrelevant, I would say. The types of companies that we invest in, like Nu, for example, like MercadoLibre, they operate in often very difficult macro environments. It’s under different market regimes, and yet they’re still capable of growing at such a rate that they outpace any currency deflation that they might face or any valuation pressures that come and go in cycles.</p>
<p>So from a bottom-up perspective, what actually makes me really excited about international markets is just the existence of truly unique businesses. Companies like Spotify, for example, the dominant global music streaming platform that has managed to out-compete the likes of Amazon and Apple and is expanding into podcasts and audiobooks and advertising and video as well. Or companies like CATL, which has a 40 or 50 percent global market share of battery production, but actually represents effectively all of the profits in the industry, simply because of the sheer power of their scale and their ability to keep driving incremental innovation and commercialise at a much faster rate than any of their peers. And these are the types of businesses that you just can’t find in the US. It’s not like we’re looking for me-too companies elsewhere. These are genuinely unique business models.</p>
<p><strong>CW:</strong> And since, potentially, it doesn’t matter what the macro is for performance to be strong, and it gives me an opportunity to ask an unfair question, especially since you forgot to pack your crystal ball, but if you had the ability to tell the future and you weren’t afraid to just make one prediction in terms of what that catalyst may be to actually see that throne swapping and the cycle start to switch and you’re seeing international emerging markets outperform for a sustained period of time, is there anything you could pinpoint?</p>
<p><strong>PM:</strong> I mean, there’s so many more intelligent people than I who spend their entire careers trying to analyse these sorts of factors. If I had to guess, if you look back historically at sort of past instances where international equities substantially outperformed the US. So after the dot-com bubble burst, for example, or in the 1980s. A common factor seems to have been a weakening dollar. But again, I don’t think that really matters from a business model perspective or the types of companies you invest in.</p>
<p>I think that might matter for asset allocators because we will focus on finding excellent companies, and you might get a nice little boost from a weaker dollar benefiting your returns. And in terms of when it might happen exactly. There’s a case to be made that it already is. So last year, developed international markets were up 30 percent or so versus about 20 percent for the S&P 500. And even in local currency terms, international still outperformed slightly. So perhaps that cycle has already started to shift.</p>
<p><strong>CW: </strong>We’ve got about five minutes left here. I want to make sure we leave a few minutes for Q&A from anyone that would like to ask questions. But I guess before doing that, Paulina, is there anything you would like to end this session on in terms of your favourite sector, your favourite stock out there in the market, or thoughts around how to be a good portfolio manager across international markets?</p>
<p><strong>PM</strong>: Yes, well, I’ll finish how I started, which is excitement about long-term growth investing in international markets and the things that specifically are exciting me at the moment. So we talked a lot about AI, so I won’t touch on that. I think it’s obvious that I think that’s one of the biggest structural changes going on at the moment. But another theme that I’m really interested in is defence technology specifically. I think that’s an area that has been underinvested in historically, and you’ve seen a massive uplift certainly in Europe following rearmament given the sad state of the Ukraine war. But what I think is still relatively underappreciated is the extent to which technology could modernise military forces worldwide.</p>
<p>So there’s a French submarine drone company that specifically does navigation systems and mine destruction drones, which, given what’s going on in the Strait of Hormuz, is probably going to be more important rather than less over time. But the other thing I would say is, long-term growth investing and outlier companies and exceptional growth isn’t all just about technology. There are many different types of growth that we’re invested in. One of the ones that I’m really excited by is luxury, actually. Of all the companies in the portfolio, if I had to identify one that I think is probably still going to be around in 100 years’ time, it’s Hermès, the handbag company.</p>
<p>Which I actually struggle with on a personal level, because every time I spend too much time looking at it, I’m seized by this deep desire to purchase a bag. But I think it’s a phenomenal company, and the reason it’s an outlier is twofold. One, it has the ability to compound over incredibly long time periods, not just decades, but potentially centuries. That is tremendously rare. And two, that ability to compound is driven by a very rare characteristic, and that is its management’s commitment to scarcity. Because the only way in which you can grow sustainably at the rate that Hermès has done over long periods of time is by creating desire amongst consumers, and consumers desire scarcity. But markets don’t tend to reward that over short periods of time.</p>
<p><strong>CW:</strong> Interesting. Any questions from those of you in the audience?</p>
<p><strong>Audience member 1 (AM1):</strong> I’m just wondering if you’re seeing any opportunities open in the software space given the implied disruption from the market.</p>
<p><strong>PM</strong>: Yes. We own Shopify in the portfolio, and I think that’s a really interesting company that’s being rather unfairly hammered by the SaaSpocalypse. I think there’s been a tendency to conflate all software as being the same, but actually when you dive into it, there are definitely different types of software. So things like a Monday.com, for instance, which is basically just a way for you to communicate with team members about what you’re up to and how projects are tracking. I think that is fairly disruptable.</p>
<p>That is something that probably could be vibe-coded relatively quickly. But something like an infrastructure platform or a company that effectively mediates complexity for millions of merchants worldwide and connects them to payment platforms and distribution and cross-border e-commerce, and it’s constantly innovating and driving new ways of adding value to its merchants. I think that’s a lot harder to disrupt, and that creates an opportunity for Shopify, for example, to seize on artificial intelligence, implement it in its own platform, and just keep accelerating, really.</p>
<p><strong>Audience member 2 (AM2): </strong>So if most information is noise, and your biggest risk is opportunity cost, and you constantly underestimate what your companies are going to do. How do you balance all of that to actually be successful?</p>
<p><strong>PM</strong>: Oh, that’s a really good question. It’s a constant struggle. It’s a constant balancing act. I think it’s about filtering information. It’s about knowing where signal-rich information tends to come from. It is probably not going to come from reading yet another broker note about a company.</p>
<p>It’s much more likely to come from the management teams of the companies we already own because they’re at the forefront of innovation and change. They can see what’s coming down the pipeline much better than we can. It’s about balancing… We can be as optimistic as we want about designing an upside scenario or a blue-sky case. But you also have to be realistic, you have to be willing and able to design other scenarios. So we use a probability-adjusted evaluation when we’re looking at companies, for example.</p>
<p>We combine that with a conviction factor, which isn’t a number, it’s more of a feeling. It’s more of a reflection of how well we know the company, how comfortable we are investing in this particular space, how well the three of us, how comfortable, sorry, the three of us feel about it. And then we combine those two factors with the asymmetry skew of a company. So how likely is it to go up fivefold or tenfold versus how likely is it to go down 100 percent? Typically, the companies that can generate truly stupendous returns are the ones that also could go very, very wrong.</p>
<p>But that’s not always the case. If you can identify a company where the competitive edge deepens over time, that there’s a flywheel effect, perhaps, in terms of that competitive edge, where the addressable market keeps expanding and surprising you on the upside, there’s a pattern recognition about that, but it also just takes time as you get to know a company over years.</p>
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<h3>Risk Factors</h3>
<p>The views expressed should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.</p>
<p>This communication was produced and approved in May 2026 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.</p>
<p>Potential for Profit and Loss <br>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. </p>
<p>This communication contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research, but is classified as advertising under Art 68 of the Financial Services Act (‘FinSA’) and Baillie Gifford and its staff may have dealt in the investments concerned.</p>
<p>All information is sourced from Baillie Gifford & Co and is current unless otherwise stated. </p>
<p>The images used in this communication are for illustrative purposes only.</p>
