Analysts to explorers: investing in European equities.

In my early days at Baillie Gifford, I introduced myself to managers of existing and prospective holdings as being an ‘investment analyst’.

I have since become sceptical of the term.

Achieving extraordinary returns for our clients requires more than traditional analysis.

At Baillie Gifford, we seek companies with the potential to be exceptional. Businesses that can endure and thrive, which we can own for years if not decades.

Exceptional companies are often structurally mispriced because their earnings power grows rapidly and exponentially over a long period.

It strikes me as misguided to approach such opportunities with a fixed view of what successful businesses look like based on metrics assessed over short timespans.

Instead, we must foster an open-minded attitude. An appreciation that extraordinary companies have a habit of looking more and more different to their peers as time passes.

Spotting rare potential and thinking about how the future might pan out above all require creativity and imagination.

Perhaps we should call ourselves ‘explorers’.

Spotify’s tipping point

Two holdings strike me as having the potential to be the biggest pay-offs to our imagination.

The first is Spotify. What’s exciting about the music and podcast streaming service is its opportunity to change the whole audio industry.

By all accounts, we are still in the early innings:

• radio still commands a large ‘share of ear’ and a sizeable chunk of industry revenues
• record labels are still around, although their original role is now mostly fulfilled by others, chief among them Spotify
• most creators still cannot live off their work

We have explored what change could look like.

Given Spotify’s increasing scale and the data that comes with it, the possibilities for it to improve and extend its services seem endless.

It could help artists learn even more about their fanbases, delight listeners by letting them stream live concerts and other kinds of currently unavailable content, and find better ways to connect creators with consumers to the benefit of both.

This could a tipping point for the wider industry.

We believe record labels might eventually disappear, leading to a fairer distribution of profits to artists, among other dramatic, irreversible changes.

We don’t know when this will occur or how extreme the outcome will be, but I’m confident that the odds are increasingly in Spotify’s favour.

Auto1’s new direction

The second company is Auto1. It’s seeking to transform Europe’s used cars market.

The traditional way of buying and selling used cars is broken.

Dealers struggle with not knowing in advance what vehicles private sellers will offer to them. And sellers are disadvantaged as the dealers often propose a suboptimal price.

Meanwhile, car buyers typically face a limited selection on dealers’ forecourts and worry about being saddled with a lemon.

Online classifieds made the process better, but only marginally.

Auto1 aims to change this completely. Its direct-to-consumers Autohero division buys from and sells cars to the public without going via a dealer.

Its business model is capital intensive and low margin – the mirror image of classifieds.

Autohero requires refurbishment and quality control centres to be built, and logistics and delivery infrastructure to be created.

But if it delights consumers by delivering used cars at attractive prices and consistent quality straight to their homes, it has a real shot at transforming this industry.

We can imagine Auto1 creating a marketplace so liquid and a logistics backbone so strong that consumers change their habits at a more fundamental level.

Why shouldn’t families exchange their cars more often to suit their evolving needs? Why should Auto1 confine its ambition to used cars when it could also use its infrastructure to sell and service new cars? Why should Auto1 stop at merely being the middleman?

Its presence at such a pivotal moment of the transaction process means it could expand its revenue base by providing additional, adjacent services and products, from insurance to financing.

Curious and courageous

So what does it take to become great explorers?

 Three elements spring to mind:

• Rather than defining our work too narrowly, we should aim to learn from many disciplines to create fertile ground for new and better insights into how the world works
• Exploring is not a solitary task. It’s a huge source of joy to be surrounded by fellow explorers of different backgrounds who bring their unique experiences, ways of thinking and viewpoints to the table
• Investors typically worry too much about the latest news and extrapolate from the past or analogies. But to achieve extraordinary returns you must dare to be different. One way to foster the courage required is to make our teams safe spaces to discuss ideas, especially the wackier ones

These are traits we must constantly strive for and continue to improve upon.