Compounders: our reliable growth engine

As with any investment, your capital is at risk.

Imagine yourself behind the wheel of a 1980s Toyota Hilux. It’s a noisy and uncomfortable experience, and the dashboard in front of you appears to have been designed exclusively with a ruler. What the car lacks in comfort and style, it more than makes up for in its cockroach-like indestructibility. Its 22R diesel engine is almost infallible. Its steel frame, drivetrain and gearbox are essentially bombproof. That is why you could realistically imagine yourself in the driver's seat, peering at an odometer with over 500k miles on the clock. 

This model’s robustness was famously put to the test in the British car show Top Gear. Jeremy Clarkson, the host, submerged it in the Atlantic Ocean, dropped it from a crane, and hit it with a wrecking ball, before, finally, attaching it to the roof of a building while it was being demolished. With some light repairs using basic tools, the engine started, and Clarkson drove away into the sunset, much to the other hosts’ astonishment. 

Built for resilience 

The Toyota Hilux’s legendary reliability is one of the key traits we’re looking for in the portfolio’s compounders growth profile. This is the dependable ‘engine’ of the portfolio, filled with companies we believe that can chug out consistent index-beating profit growth, year after year, even decade after decade.  

Due to its evergreen nature of growth, this pocket of the portfolio can provide a solid foundation in good times and a safe haven in a storm. This foundation enables more reward-seeking in our faster-growing disruptors and cyclically sensitive capital allocators growth profiles.  

The set of characteristics that underlie this steady growth is also consistent, as demonstrated by Mastercard, the payments company. Its vital position at the heart of the global payments system and its well-earned reputation for security create unassailable barriers to entry for rivals. Its forward-thinking investment in the payment rails of the future, such as blockchain and virtual cards, further entrenches its position and enhances the reliability of its future growth.  

A light service 

Due to its important role in the portfolio, we have spent time ensuring our Compounders are firing on all cylinders. We found that the engine is running smoothly, but to ensure it remains so, it may need an oil and filter change. To complement the likes of Mastercard, we have refocused our idea generation to identify the dependable growers of the next decade and move on from those that didn’t pass closer inspection. 

We’ve added companies like MSCI, a financial data and analytics leader that exhibits classic compounder traits, and moved on from Sartorius Stedim and United Health, which have both struggled with execution issues. The upgrade is only beginning, with ideas emerging from areas as distinct as factory automation, used car websites, and board games. 

New components 

MSCI is a great example of this consistency. Its brand and data are embedded in the infrastructure of global capital markets. Over $16.5tn in assets is benchmarked to its indices. Once an index becomes standard, it becomes difficult and costly for clients to switch, resulting in pricing power and customer retention rates of nearly 99 per cent. Nearly three-quarters of its revenue is recurring in nature.  

It, like Mastercard, has invested early in evolving capabilities to spur growth and head off competition. This includes growing areas of risk analytics, Environmental Social Governance (ESG) and climate data, private markets data, and, most recently, direct indexing, a threat to its core index business. 

This has all led to more resilient growth than the market around it. For example, MSCI managed to eke out growth during the 2021/2022 market downturn, which hit its asset management customer base hard. Its valuation premium to the broader market is at its lowest level in five years due to slightly decelerating growth. We believe this valuation is understating the durability and longevity of MSCI’s own growth engine. 

Powering the portfolio forward 

The push for new ideas in this area is ongoing, as we remain optimistic about the potential impact of enhancing our Compounders. While they might be overshadowed by the disruptors and capital allocators in any given year, the quality of our Compounders tends to shine through over the long term.  

Compounders can provide both resilience and growth. Two traits we have been focusing on balancing carefully across the portfolio, as evident in the portfolio’s metrics. Expected growth, margins, profitability, and debt levels have all improved this year and are at far superior levels to the index.  

So far in 2025, the market has climbed past any source of worry or uncertainty, powering returns upward. Looking ahead, we’re optimistic, but we can’t predict whether the market will continue to drive on unobstructed or hit unexpected obstacles. Either way, having a reliable compounder engine under the hood that can drive earnings growth, whether on rocky terrain or flat tarmac, is vital. We can only aspire for a similar level of indestructibility to the trusty Toyota Hilux.

Risk factors

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.

This communication was produced and approved in December 2025 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

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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.

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The images used in this communication are for illustrative purposes only.