1. Rapid take-off

    Mark Urquhart, Investment Manager. April 2016
  2. One of the things we think about a lot in the LTGG team is innovation. We try to understand what factors allow innovation to flourish and to keep an open mind as to what might change in the future. A few months ago I read David McCullough’s excellent biography of the Wright Brothers – a book which I thoroughly recommend – and it caused me to reflect on the nature of innovation and the contrast between the early 20th century and the early 21st century.
  3. ​The early days of innovators often remain lonely as they swim against the currents of established consensus.
  4. What I found most interesting about the book was the use of many primary sources which really transported the reader back to the pioneering days of aviation. Put simply, the Wright Brothers were not meant to succeed – they were two sons of a preacher and they ran a bicycle shop in Ohio. They were not the flamboyant metropolitan types with large financial backers whose much-heralded flying contraptions most often ended up in rivers or not even leaving terra firma. Rather, they lived modestly and experimented in their bicycle workshop and then travelled every summer to the exposed beaches of North Carolina at Kitty Hawk and innovated relentlessly.

    Many contemporary commentators had already decreed that man simply could not fly as the Wright Brothers tirelessly tinkered and improved their machines. They had countless setbacks, some of them life-threatening, but over time by making adjustments to wingspan and width, adding rudders and flaps and more aerial controls, they mastered the art of flying. They had to sail to Europe to display their magnificent flying machines and, with flights of over an hour and the brothers having complete control of the aircraft on take-off and landing, suddenly they were transported to the status of international superstardom and the aviation industry, with all its positive and negative consequences, was born.

  5. Elon Musk attends The Dinner For Equality co-hosted by Patricia Arquette and Marc Benioff on 25 February 2016 in Beverly Hills, California. © Chelsea Lauren/Variety/REX/Shutterstock.
  6. Fast forward 100 or so years and there are both striking similarities and differences. Some of the great pioneers of our time share the single-mindedness displayed by Orville and Wilbur Wright in pursuing ideas which many deem impossible – think of Elon Musk and the scepticism surrounding battery range issues on electric cars, or indeed whether consumers would ever want to buy vehicles with no engines. Likewise the early days of innovators often remain lonely as they swim against the currents of established consensus – Marc Benioff left a secure executive role at Oracle to pursue something called ‘cloud computing’ which most people told him would never take off because of capacity and security issues. At times it takes a real moment of Wright-like genius to change the world irrevocably, such as when, in the mid-1970s, Steve Wozniak thought of a computer where what you typed appeared on a screen, unlocking the path to the smartphone revolution which we are currently experiencing.

    I am struck, however, by the differences which innovators now enjoy compared to their inventing forefathers. Where the Wright Brothers had to pack trunks full of parts to travel by train to Carolina or steamboat to Europe and then assiduously assemble their machines, modern innovators can disseminate their ideas and products almost instantaneously across the globe. Take one digital entertainment company that has been doing very well in gaining new subscribers to its streamed content in North America and Europe and wanted to press the accelerator on international expansion. In January of this year it announced that it was simultaneously launching in 130 new countries around the world. This is more than half the nations on earth and represents a pace of expansion unimaginable until the past few years. Whereas previous international expansion would take many years of building fixed assets and entering new markets one by one, because the goods it is selling are digital, there is no physical barrier to rapid expansion and exploiting first mover advantage.

    This dramatic change in the nature of the innovation has potentially profound implications for how we understand economics and how we analyse companies. As an undergraduate in Politics, Philosophy & Economics at Oxford in the late 1980s it was drilled into me how immutable the economic factors of production were. Every undergraduate textbook had chapters on the importance of land, labour and capital which when mixed correctly with entrepreneurship provided the elixir of profits which then would attract new capital and so on.

    I think many of these economic shibboleths are under challenge when we look at the world in 2016. As highlighted above, many companies do not require the traditional factor of land to expand because they are selling digital and not physical goods. There are large question marks over how much labour will be required in the future, with lots of potential robotic replacements for menial and repetitive tasks. Moreover, the amount of capital needed by businesses is also under challenge which leaves entrepreneurship as perhaps the defining characteristic of our age.

    Those visionaries who can see new opportunities now have the chance to exploit these at an unparalleled speed on an unprecedented global scale. Over the last 20 years, online retailers have grown their global markets exponentially with more and more customers ordering goods on their mobile device – no bricks and mortar retailer has ever been able to expand so fast. Economic theory does not have a good record of adjusting to change and I think many market participants are still adhering to theories which no longer match the economic reality of our times.

  7. These changes are creating companies which have potentially very different structures to those which have traditionally dominated global stock markets.

    As we look forward over the next ten years and prospect for companies on your behalf, I think we have a lot to learn from the Wright Brothers. They refused to believe in limits to human ingenuity and pursued a dream which many thought was an impossible folly. If one thinks back to any major technology change, the desire to decry and say it will never catch on, appears almost overwhelming. There are myriad examples which one could cite here from the invention of railroads, electricity, and television to current dismissals of drones, intelligent robots or driverless cars. The one thing I am certain about today is that there will be devices, services and capabilities, which have not even been invented yet by geniuses whom we haven’t heard of…we will continue to try to keep our minds open to the possibilities of such innovation on your behalf.

  8. Risk Factors

    The views expressed in this article are those of Mark Urquhart 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.

    Important Information

    Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). Baillie Gifford Life Limited is authorised by the Prudential Regulation Authority (PRA) and regulated by the FCA and the PRA. Baillie Gifford & Co Limited is a unit trust management company and the OEICs’ Authorised Corporate Director.

    Baillie Gifford Overseas Limited provides investment management and advisory services to non-UK Professional/Institutional clients only. Baillie Gifford Overseas Limited is wholly owned by Baillie Gifford & Co. Baillie Gifford & Co and Baillie Gifford Overseas Limited are authorised and regulated by the FCA in the UK.

    Persons resident or domiciled outwith the UK should consult with their professional advisers as to whether they require any governmental or other consents in order to enable them to invest, and with their tax advisers for advice relevant to their own particular circumstances.

    Important Information Hong Kong

    Baillie Gifford Asia (Hong Kong) Limited 百利亞洲(香港)有限公司 is wholly owned by Baillie Gifford Overseas Limited and holds a Type 1 licence from the Securities & Futures Commission of Hong Kong to market and distribute Baillie Gifford’s range of UCITS funds to professional investors in Hong Kong. Baillie Gifford Asia (Hong Kong) Limited 百利亞洲(香港)有限公司 can be contacted at 30/F, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong. Telephone +852 3756 5700.

    Important Information South Korea

    Baillie Gifford Overseas Limited is licensed with the Financial Services Commission in South Korea as a cross border Discretionary Investment Manager and Non-discretionary Investment Adviser.

    Important Information Japan

    Mitsubishi UFJ Baillie Gifford Asset Management Limited (‘MUBGAM’) is a joint venture company between Mitsubishi UFJ Trust & Banking Corporation and Baillie Gifford Overseas Limited. MUBGAM is authorised and regulated by the Financial Conduct Authority.

    Important Information Australia

    This material is provided on the basis that you are a wholesale client as defined within s761G of the Corporations Act 2001 (Cth). Baillie Gifford Overseas Limited (ARBN 118 567 178) is registered as a foreign company under the Corporations Act 2001 (Cth). It is exempt from the requirement to hold an Australian Financial Services License under the Corporations Act 2001 (Cth) in respect of these financial services provided to Australian wholesale clients. Baillie Gifford Overseas Limited is authorised and regulated by the Financial Conduct Authority under UK laws which differ from those applicable in Australia.

    Important Information South Africa

    Baillie Gifford Overseas Limited is registered as a Foreign Financial Services Provider with the Financial Services Board in South Africa.

    Important Information North America

    Baillie Gifford International LLC is wholly owned by Baillie Gifford Overseas Limited; it was formed in Delaware in 2005. It is the legal entity through which Baillie Gifford Overseas Limited provides client service and marketing functions in America as well as some marketing functions in Canada. Baillie Gifford Overseas Limited is registered as an Investment Adviser with the Securities & Exchange Commission in the United States of America.

    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.



    Ref: 29176 INS WE 0237

  9. Mark Urquhart

    Investment Manager
    Mark graduated BA in Philosophy, Politics and Economics from Oxford University in 1992. He spent a year at Harvard as a Kennedy Scholar in 1993 before completing a PhD in Politics at the University of Edinburgh in 1996. Mark joined Baillie Gifford in 1996 and was an Investment Manager in the Japanese Equities Team, until he co-founded the Long Term Global Growth strategy in 2003. Mark became a Partner in 2004.