Our investment edge: the hunt for ‘uncommon understanding’

With 20 years of hindsight, 2005 seems a sedate and peaceful time. The world was still mostly analogue. The average internet speed was only 1 Mbps, forming a natural throttle on the lure of the digital realm. 

The term ‘information superhighway’ had only been coined a decade earlier, and YouTube had yet to enjoy its first birthday. The Motorola RAZR was the mobile, not smart, phone of choice for cool kids, with the iPhone still under research and development in Cupertino, and two years away from launch. 

How did we ever achieve anything without the now ubiquitous super computer in our pocket and the world’s information at our fingertips? The pace of work must have been... glacial?

And yet, perhaps this wasn’t such a bad thing. Our core purpose at Baillie Gifford is: “…to add value for clients, support companies and benefit society through thoughtful long-term investment.”  

It’s possible that the volume of information analysed, or the number of analyst reports produced, is correlated with achieving this objective. However, rather than engaging in frantic, superficially productive activity, it seems far more plausible that a more focused approach is likely to yield superior results. 

Anchoring our day-to-day behaviours in the disciplined hunt for rare and valuable instances of differentiated insights. We call this the search for uncommon understanding. 

Often, such insight is deceptive in its simplicity. Moody’s is one of the four companies in the Global Alpha portfolio that we have owned on behalf of our clients continuously for the full 20 years since inception.

An internal report on the company written in 2005 stated,

Twenty years later, little has changed. The core of the insight, that Moody’s offered an exceptionally durable, gently rising royalty on increasing debt issuance, has survived for two decades. 

Despite the most severe stress test we could have imagined in the aftermath of the Global Financial Crisis, the company’s ratings remain embedded in the financial architecture of bond markets. 

Netflix is a more recent purchase for client portfolios, having been held since early 2018. Buying at such a point, after a more than fivefold increase in the share price over the prior four years, certainly gave us pause. 
However, we identified three simple contentions which helped us develop sufficient conviction: 

• that viewing habits would continue to shift to video-on-demand streaming,
• that Netflix’s unprecedented range and quality of content would underpin significant pricing power
• and that significant operational leverage would follow as the investment in content started to plateau. 

These contentions have helped anchor our investment case throughout significant share price volatility in the years since this initial purchase.

Patience and informed inactivity

We often refer to companies such as Moody’s, which we’ve owned for long periods, as examples of ‘coffee can’ investments. Shares which might be profitably locked away for decades, allowing the value of compounding to flourish. This speaks to the first crucial aspect of our investment edge: patience. 

Amid the wild gyrations in markets and the periodic panics and manias, the pressure to ‘do something’ can be almost irresistible. The pressure to attempt to mitigate this volatility through ‘canny’ trading – a Scottish word meaning shrewd or well-judged, especially when it comes to financial matters – is acute. 

Sometimes, however, the hardest, but ultimately most rewarding, course of action is informed inactivity. To deliberately sit on our hands and resist the urge to interrupt the power of compounding.

The importance of this resolution is highlighted by reminding ourselves of the largest share price falls experienced by those companies which have delivered the greatest overall returns. 

Of the top 10 most successful investments within the Global Alpha Strategy over the last two decades, the average maximum drawdown during our ownership has been over 50 per cent. Meta exhibited the largest single drawdown among these top 10, with the share price declining by over 75 per cent over a 13-month period from late 2021. 

The impact of a broad market sell-off was compounded by more specific worries about the competitive threat from TikTok and challenges to their ability to effectively target ads, primarily due to the introduction of Apple’s greater privacy controls for iPhone users. 

Despite this tumultuous backdrop, our investment hypothesis remained that the power of the platform, measured by user engagement, was intact. We also recognised that Meta possessed the financial flexibility and cultural willingness to move aggressively to combat these threats by deploying vast amounts of capital in response. 

This analysis gave us the conviction to hold through these challenges and benefit from the subsequent dramatic recovery, which saw it go from a low of around $90 in November 2022 to an all-time high share price of >$740 in February 2025.
 
It’s important to recognise that at the portfolio level, such patience is not always appropriate: low turnover should be considered and informed rather than dogmatic. 

In hindsight, towards the end of 2020, it would have been prudent to more aggressively recycle capital from the parts of the portfolio where valuations were most stretched. 

To help us be more alert to such periods of exception, we have introduced a variety of enhancements to our risk and portfolio construction tools. These provide a more effective challenge to our natural long-termism. 

The first 20 years of Global Alpha have seen dramatic technological changes and an exponential increase in the volume of information available to us. However, despite this changing context, patience remains a fundamental building block of our philosophy and investment edge. 

Uncommon perspective

The second aspect that has remained constant is the value of cognitive diversity. Uncommon understanding requires an uncommon perspective. A willingness to see things differently. 

When recruiting the next generation of investors, we consider that curiosity and imagination are at least as important as numeracy and raw intellectual horsepower. 

While there are nuances in how different teams and strategies interpret growth and time scales, we speak a common investment language and pull in the same direction. We hire selectively to enhance our lineup, but we are very careful to avoid cultural dilution.

This desire to harness natural intellectual curiosity leads us to encourage our analysts to follow their interests rather than be siloed in narrow specialisations. 

We believe this freedom of movement helps maintain energy and enthusiasm. It also encourages flexibility of thought and an openness to new and emerging business models, which challenge traditional sector classifications.

The Global Alpha Team has always sought to benefit from broader research and idea generation across our investment floor. The sharing and nurturing of insights and opportunities, which happens naturally between investment teams, is a vital facet of our culture. 

We have, however, always sought to complement this organic flow of ideas further with more structured, regular input from our network of Trusted Advisors. 

The role of these advisors is to share the investment insights developed within their teams. To challenge us with regards to where we should be reflecting deepening conviction by increasing holding sizes, or where we may be missing opportunities to upgrade the portfolio by introducing new ideas. 

Over the last 20 years, as Baillie Gifford’s client base has evolved from one that was heavily invested in our regional equity capabilities, to one much more heavily weighted towards our Global and Global ex-US strategies, so too has this network of advisors evolved. 

Most recently, by adding new representatives from some of our larger global equity teams, including Global Income Growth, International Growth and Long Term Global Growth. 

Analytical rigour

The term ‘rigour’ carries a whiff of precision to four decimal places. In contrast, we see value in being broadly, directionally right in our analysis, rather than precisely wrong. To be right on the big things, on the small number of things that really matter on a five-year view, without getting bogged down in areas that are unlikely to ever move the needle for shareholder returns. 

For instance, sell-side analysts expend a lot of energy modelling the impacts of weather patterns across each of Martin Marietta Materials’ operational regions. This meteorological lens matters for shareholders investing with a 12-month horizon, as climatic conditions can significantly impact year-over-year demand for their aggregates. 

However, it clearly matters far less for the long-term investment case than recognising the impact of ongoing industry consolidation and the transformative effect this has on pricing power. 

The market obsesses about volumes. Pricing power is a far more important lever in driving long-term returns, as it doesn’t just affect this year’s revenues. It also means that the reserves which remain in the ground become more valuable.

In our recent article Let’s talk about Actual Investing some more, we articulated our analytical focus as consisting of four key areas:

• First, identify areas of expanding opportunities. These can be driven by technological breakthroughs, changing market dynamics or smarter business models.
• The second is to find companies poised to take advantage of that opportunity, whose management also has the ambition, alignment and skill to make the right decisions to build long-term value.
• The third task is to act as a quality shareholder. This means giving management time to execute, holding it constructively to account, encouraging ambition and creating an environment in which the pursuit of long-term goals can flourish.
• Finally, we need to be clear-eyed on whether our view is still differentiated from that of other investors (as reflected in the valuation).

Retaining this analytical focus only on what really matters for a long-term investor, on the search for uncommon understanding, requires discipline amid such insistent clamour. 

This willingness to embrace the task differently isn’t an excuse for a lack of analytical rigour. It is a recognition that we are unlikely to add value through the superior accuracy of our forecasting, or even preferential access to management teams or the development of ever-deeper domain expertise. 

Where we can seek to unlock valuable insights is by being willing to ask different questions of management. ‘What is your vision for this company on a 10-year view?’, ‘What do investors persistently misunderstand about your business?’ for instance. 

While the ambition of this analytical approach and our willingness to approach the task differently have remained constant, the recent incorporation of artificial intelligence (AI) tools into our processes offers the potential for a step change in productivity. 

As such, this focus on ensuring that we are asking the right questions has only sharpened further over the last few years.

The long-term relationships we develop with companies enable us to assess how answers to these questions evolve over time. We can also contextualise, joining the dots across industries, opening broader conversations between management teams, analysts, industry specialists and academics, constructing a view of the future from a mosaic of different perspectives. 

Finally, we can build and apply mental models offering a means to separate signal from information in the ceaseless blizzard of daily news flow, where our work with the likes of Gary Klein, author of the thought-provoking Seeing What Others Don’t, has helped us to expand our toolkit.

Our short holding of Ferrari provides an excellent, if frustrating, example of the importance of using the right mental models. 

Having received the shares in a spin-off from Fiat Chrysler, we sold after the shares had risen by 50 per cent, concluding that the resulting valuation left little room for upside. An automobile manufacturer, no matter how high-quality, is still an automobile manufacturer. 

Except when it isn’t. With a business model built on brand power, deliberate scarcity and extraordinary pricing power, Ferrari shares more in common with luxury brands such as Louis Vuitton than it does with the likes of General Motors or Hyundai. 

As the market has grown to appreciate this appeal, the share price has risen another fivefold since our sale.

Ownership mentality

If our time horizon gives us an advantage in sticking to our style, then patience also allows us to be good owners of growth companies. This naturally includes challenge, delivered through the medium of time and resource-intensive engagement. 

These interactions are a fundamental part of being an active owner of businesses, in contrast to passive approaches, which typically eschew this aspect of holding management teams to account and seek to free-ride on the work of more engaged owners. 

But it is not just about challenging management where appropriate; support and encouragement are equally important, encouraging entrepreneurship and ambition. 

When investing in private companies, the importance of understanding how a business is deploying capital and the fundamental progress being delivered is obvious. This diligence is no less important for listed businesses, but again is often lacking in a shareholder register of disengaged investors obsessed only with movements in the share price. 

Note that none of these areas incorporates trying to predict whether or not a company is likely to miss or beat its earnings guidance in a given quarter. Sometimes this can leave us looking foolish.

In February 2025, when programmatic advertising business The Trade Desk reported results which fell marginally short of its revenue and earnings guidance for the first time in its seven-year history as a public company, the share price roughly halved in response. 

While others panicked and headed for the exit, our discussions with the founder-CEO have provided us with reassurance around the reasons for the miss being both temporary and addressed. 

With the company still growing at over 20 per cent per annum and the share price having subsequently bounced by 50 per cent, even while acknowledging that the share price still remains well below its peak of December 2024, the market may be implicitly admitting to having had something of an overreaction. 

Staying true through change

It feels challenging to articulate our investment edge in Global Alpha at a time when relative performance over recent years has been difficult. Perhaps this makes it more important to do so. A reminder of the touchstones and competitive advantage that should guide us back towards a more rewarding period. 

The past few years have been very difficult. We’ve seen huge valuation swings and very narrow markets. But we know there is strong evidence that those who adopt a high-conviction, low-turnover approach and meaningfully engage with the companies they invest in generally outperform in the long run.

To deliver this outperformance, we must be clear-eyed in continuing to harness the dramatic changes we have seen in the world over the past 20 years. 

Both as exciting opportunities within the Global Alpha portfolio and also in sharpening and adapting our investment processes. We look forward to sharing our perspectives again in another 20 years.

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Source: Baillie Gifford, MSCI. US dollars. Returns have been calculated by reducing the gross return by the highest annual management fee for the composite. 1 year figures are not annualised. *Inception date: 31 May 2005

Past performance is not a guide to future returns.

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