Actual investing: why thinking differently matters
- The Actual investing message remains sound, despite recent market upheaval according to Baillie Gifford partner Stuart Dunbar.
- Reflecting on higher interest rates and inflation, Dunbar looks at prospects for future investment including on battery technology and new approaches to healthcare
- Investment managers should strike a balance between keeping faith in great, transformative companies and challenging themselves and each other on their growth case
All investment strategies have the potential for profit and loss, capital is at risk. Past performance is not a guide to future returns.
Investment managers have had a wild ride these past few years. They’ve risked being knocked off course by Covid and its aftermath, rising interest rates and a war on Europe’s doorstep. Then there’s the dawn of a new era of ‘generative’ artificial intelligence, that can create new content by learning from existing data.
It's been five years since ‘Let's talk about actual investing’, Baillie Gifford Partner Stuart Dunbar’s provocative statement of the firm’s deepest beliefs.
In that article, Dunbar challenged the investment industry to focus on allocating capital to entrepreneurial and visionary companies rather than fixating on short-term share prices and market noise. He argued that investing in great companies, many with world-changing ideas over the long term, was more likely to be profitable for our clients and create value for society than speculation around the stock markets.
But in light of the recent destabilising times we’ve endured, how does he think the ideas behind it have stood the test of time?
“The last few years have shown us how much we can't control,” Dunbar told Baillie Gifford’s Short Briefings on Long Term Thinking podcast. “What we’ve learned in respect of growth companies is that the market can get very over-excited and then very gloomy. And the difference in prices between those states can be really very dramatic.
“There’s not much we can do with that, except keep on focusing on companies, and opportunity and how we're allocating capital in the real world.”
Dunbar explains how the term ‘Actual investors’ emerged from the firm’s common beliefs about its role, valuing long term thinking, conviction, patience and seeking out alternative sources of information when deciding on where to allocate capital. He stresses that the ‘Actual’ tag does not only apply to the equity growth emphasis for which the firm is best known but also to its multi-asset and income strategies. It’s about investing with conviction, and not being buffeted by short-term considerations.
These principles, he argues, are far more central to the company’s approach than the type of company the firm has tended to invest in.
“People talk about Baillie Gifford as technology investors. We're not, we're investors in companies harnessing technology to create a competitive edge or new business models or new products. It’s an important distinction.”
Following an exceptional period in which the spread of digitalisation has combined with cheap capital to foster exceptionally high growth companies, Dunbar believes the next period of growth will be different.
“Some of the new technologies that interest us most now are those that are required to enable huge and much needed change in the world such as new approaches to healthcare and facilitating the carbon transition. These are quite capital intensive. You can't build battery gigafactories all over the world without raising a lot of capital to do it. Growth investors are going to need more patience as I don’t think we're going to see as many large-scale businesses generating cash within three years of being launched as previously.”
Battery technology, essential to a greener energy system is one focus of Baillie Gifford’s interest. So too are the high-end cables, that bring the electricity from offshore wind turbines on land; high-yielding solar panels; and the AI-enabled software required to make a smarter, more complex electricity grid function better.
Health is another area that excites Dunbar. “Healthcare systems are already vastly expensive and that will get worse as there are fewer and fewer young people to fund the spiralling medical and care costs of an ageing population.
“Something has to give at some point. We have to find far more cost-effective ways of dealing with this challenge. It’s early days but we are beginning to see progress in the world of gene sequencing and gene manipulation, again aided by artificial intelligence.
“Moderna, which we were interested in long before Covid, is a good example. It has a fabulous platform in which it can effectively tell your body to programme itself, to either vaccinate you or treat you against forms of cancer and forms of viruses.”
Whatever the sector, Dunbar believes that good companies with strong earnings growth and the power to raise their prices are likely to emerge unscathed from the recent volatility. Baillie Gifford investment managers have, he says, been reassessing and readjusting their portfolios in light of the changing financial conditions, examining cash flow, pricing power, and profitability.
The important thing, Dunbar believes, is that Baillie Gifford retains its culture of constructively challenging and testing ideas and seeking new sources of information.
“For Actual investors, thinking differently is crucial. We need to guard against static thinking or groupthink and keep evolving.
“You can’t be a good investor if you're worried about being wrong all the time. We think Actual investing is about thinking about what might go right, not wrong. We need to challenge each other without negating the optimism and positivity that you need as an investor.
As colleagues reassess the growth potential and resilience of portfolio companies in the light of recent upheaval, Dunbar concedes that it’s not enough simply to claim that, as long-term thinkers, measurement over short periods is irrelevant.
“Just wait a bit longer isn't a sufficient answer. We've been very strongly encouraging investors to go further and think more deeply to satisfy themselves and their colleagues that our Actual investing thesis is still valid. Having stress-tested it, we’ve found the thesis remains valid. So on we go.”
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This communication was produced and approved in June 2023 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.
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