Actual investors build relationships. Not just portfolios.
But this only gets us so far. Who actually instigates and runs the projects that create this value? The real ‘investing’ is done by the managers of the companies themselves. They decide how to exploit opportunities and make the many day-to-day decisions determining success or failure. It’s their reactions to changing circumstances, their new perspectives, their knowledge and their inspiration that make the difference. Much depends on how well management sees beyond immediate needs and the culture it creates.
For Baillie Gifford, the job of Actual investors is not just to invest from a distance but to learn from and support those companies we back. We hope that, using the experience and perspective we’ve acquired, we can help and encourage management to make sensible long-term decisions. This is always a challenge in our quarter-to-quarter world. But success is ultimately driven by inspirational founders, entrepreneurs and managers with the ambition and farsightedness to see ideas through to realisation. Without meaningful relationships with these key people, we can’t do the best for our clients.
Take Amazon as a stand-out example. Before Baillie Gifford met Jeff Bezos, our long-term vision of the new world of ecommerce was informed but limited. Because we asked him about his long-term vision, not ‘how much money are you going to make this quarter?’ he took the time to explain how he saw the potential for ecommerce, for Amazon and the way he’d build it. He talked about branching into new areas such as cloud computing and helped us to understand the enormous potential of that business – Amazon Web Services – at a very early stage. Our relationship with the founder and admiration for his approach was key to our support for Amazon as it constantly reinvested for growth, despite the disapproval of more short-term investors. The far-sighted launch of Amazon Prime in 2007 is a case in point.
Good relationships can bear fruit in other ways. Baillie Gifford was able to invest at an early stage in private US cancer-detection company Grail thanks to our relationship with its parent company Illumina. This goodwill was generated in part because of the support we gave Illumina management when it received a hostile takeover bid from Swiss pharmaceutical giant Roche in 2012. We refused to sell, despite an offering at 80 per cent premium to the prevailing share price. We could see that the future for Illumina’s cutting-edge gene-sequencers was potentially worth vastly more. This readiness to delay gratification has helped us to build a reputation as a go-to investor for long term-growth capital among private companies. And for the Baillie Gifford strategies that can invest in such companies, this has proved to be enormously valuable.
To discover if a firm can thrive in the long term and generate our desired multiples of the initial investment, we must understand management’s motivation. We need to buy into their capital investment strategy, even if it depresses short-term profits. This patient work with business leaders to bring ideas to fruition is very different from pressuring them to send ever more cash back to investors in the form of dividends or share buybacks, regardless of foregone opportunities.
The closer the relationship to management, the better we can judge whether a firm is focused on creating long-term value, and the more confidently we can invest. Clearly not all of our investments work out, but being aligned with that company’s aims and time horizons is a good place to start.
Conversations with companies are not about knowing their business better than them, let alone telling them what to do. We encourage businesses to articulate their long-term goals and to stick to them. During the coronavirus pandemic we wrote to many of our holdings reinforcing support in difficult times.
Of course, this commitment doesn’t mean we can’t sell an investment. This may be because of a disagreement over management or strategy or it may be due to external events nobody predicted. In any case, if we do sell out of a company we usually tell management why. What matters is to have the kind of relationship that makes that conversation possible.
Openness, transparency, understanding, collaboration and co-operation. These are the principles on which Actual investors build supportive relationships. Over the years we’ve learned that connections with companies built on these foundations are the ones that last longest.
Below is some of our most recent in-depth writing, which will provide some insight into how Actual Investors see the world.