Uncommon understanding: Global Alpha Investor Forum

As with any investment, your capital is at risk.

How can you be confident of finding long-term growth in an increasingly uncertain world? Attendees at Global Alpha’s recent investor forum heard that the answer lies in achieving ‘uncommon understanding’ to spot growth possibilities others have overlooked or undervalued.

Introducing the event, investment manager Malcolm MacColl acknowledged that the strategy hadn’t delivered what clients had expected in recent years. The portfolio had become overweight in companies spending more than they were earning, he said, which became problematic after interest rates rose.

“During the 2020-2021 period, we lost balance,” he said. “It’s not a mistake we wish to make again. We’ve learned, evolved our processes and strengthened, particularly in areas such as risk and portfolio management. And in thinking about our different growth styles, the blend today is strong.”

That blend involves a healthy balance across Global Alpha’s three flavours of growth: 

• Disruptors – firms reshaping existing industries and defining new ones
• Compounders – get-rich-slowly enterprises with deep defences
• Capital allocators – those taking advantage of downturns to invest in their business

“We have excellent underlying quality when we’re looking at profitability metrics, when we’re looking at return on invested capital, the level of free cash flow that our companies are producing, but then also the growth,” MacColl said.

“You want us to be buying companies that can compound at a superior rate to the broader market over time, and our forward-looking numbers for the next three years are 14 per cent per annum expected earnings and cash flow growth. That compares to 9 per cent per annum for the market.

“So we’ve got the growth, we’ve got the quality, and we think we have the valuation on our side to set us up for success.”

Three breakout events followed, each exploring different aspects of the strategy’s distinctive approach.

The constant and the evolution

“Valuable insights, by their nature, are uncommon,” said MacColl at the start of his session. “They’re not going to be captured by just absorbing more information than the person next to you or extreme busyness.”

Instead, he explained, you need to have a clear philosophy and process in place to focus your attention and use “uncommon inputs” to give yourself the chance to develop insight.

In terms of philosophy, Global Alpha has three core beliefs:

• Long-termism
  We typically aim to own a company for at least five to seven years from the investment point. Thinking across this extended time horizon gives us an advantage in understanding the price to pay for growth over that timespan versus funds focused on shorter valuation periods.
• The power of asymmetry
  We seek stocks that can “explode growth-wise”, skewing the underlying portfolio’s performance by overwhelming those that don’t meet the benchmark.

• Probabilistic thinking
  We are comfortable with incomplete information and resist narrow thinking. It’s better to consider the big things happening within a company and where they could lead rather than obsessing about its latest financial figures down to the sub-decimal point.

These principles are the backbone of Global Alpha’s processes, which MacColl went on to identify. They include identifying “leverage points”, aspects specific to each business that give it the greatest potential to multiply returns.

“Many people beaver around in spreadsheets, building incredibly complex models,” MacColl said. “I’ve done it myself, and it’s a wasted effort. What’s important are the few spreadsheet cells that actually matter and thinking freely about what difference they might make.”

The aggregates provider Martin Marietta illustrates this. Global Alpha first invested in 2014, after it began acquiring strategically located quarries across the US. This has resulted in “local monopolies” since the cost of transporting construction materials becomes prohibitive over long distances.

That’s given it pricing power: the firm has consistently increased its prices by at least 5 per cent a year and, more recently, by close to 9 per cent.

“Even today, others’ analysis of the firm is wrong, agonising over its near-term volumes and losing sight of the fact that the longer the stuff stays in the ground, the more valuable it becomes,” MacColl said.

“So it’s a great example of how applying our mental model – thinking about what really matters – has provided us with uncommon understanding.”

Long-termism also comes to the fore when meeting companies’ management teams. Global Alpha’s questions often focus on ambition, including asking where they want their company to be in a decade. “You’d be surprised by how often they tell us this isn’t a conversation they regularly have, which suggests we’re doing something uncommon and value-adding,” MacColl said.

The team also speaks to academics to find a differentiated view and to broaden our thinking. MacColl noted that a relationship with the Santa Fe Institute’s Brian Arthur was particularly valuable. The professor has helped Global Alpha appreciate at an early stage how asset-light companies, including Facebook and Google, could flip the ‘law of diminishing returns to scale’ on its head by becoming more powerful as they got bigger.

MacColl added that fresh perspectives also come from other Baillie Gifford colleagues, including the Private Companies Team, whose interactions with unlisted firms give us a greater understanding of emerging trends and competitive dynamics.

More recently, Global Alpha has begun calling on Baillie Gifford’s new Investment Analytics Team, which draws on internal and external data to nudge us towards companies with the greatest potential for outperformance.

“You don’t need to make big adjustments: even moving your hit rate by 1 to 2 per cent can make a great difference,” MacColl said.

Clarity, conviction and ambition

Investment managers Helen Xiong and Mike Taylor hosted this breakout, focusing on recent changes to the portfolio to reflect increasing geopolitical uncertainty. For example, will the US increase or reduce its tariffs and other trade restrictions over the remainder of President Trump’s second term and beyond?

Taylor said one approach Global Alpha is taking is to tilt towards companies that don’t rely on a specific set of geopolitical assumptions to succeed. That has led it to exit holdings that relied upon a globalised world for growth, including Adidas, Estée Lauder and Pernod Ricard.

Instead, the strategy now prefers regional or national champions and companies that are more in control of their own destiny. Taylor gave the recent addition of WillScot as an example of the latter. The firm specialises in providing portable cabins for use on construction sites and has a 50 per cent share of the North American market.

“If the US localises its supply chains, it’s going to have to build more things, which will require more of these temporary storage and staffing spaces,” Taylor explained. “If not, this is a consolidated industry, which means pricing power.

“There’s a further interesting angle in which it upsells customers to value-added structures,” he added, referring to the firm charging extra to make its cabins ready-for-use with working internet, furniture, lighting and security systems.

Xiong shifted focus to a theme that the strategy could be relatively sure about: artificial intelligence being one of the next decade’s major growth drivers.

“We’ll probably talk about it at every meeting in the same way we did the digitalisation of the economy,” she said. “We’re already seeing its transformational potential with autonomous cars, but it also has wide applications across healthcare, education and even finance.”

The portfolio currently includes:

• chip designer NVIDIA, whose products are critical to training and running AI models
• power management specialist Eaton, whose expertise keeps data centres running
• games promotion platform AppLovin, which uses AI to match users to specific titles

Others will follow. But Xiong added that Global Alpha also prizes the diversity of its 90 or so companies in terms of their growth drivers and other characteristics.

She recognised that this variance had weighed against the portfolio’s recent performance versus the MSCI ACWI Index, as the benchmark had become concentrated in a small number of tech stocks and perceived ‘safe assets’, such as the superstores Walmart and Costco.

However, she predicted that this was a short-term situation. So, to get ahead of a recalibration, she said, Global Alpha has trimmed some of its best-performing companies to take stakes in other high-quality stocks that have suffered because of short-term uncertainty. They include Paycom, the payroll software provider, and onsemi, which makes chips for electric vehicles.

“This is a pure upgrade,” Xiong said. “We’ve built up resilience but not compromised on either growth prospects or the quality of the businesses we own.”

The power of perspectives

This breakout discussion highlighted Global Alpha’s research ‘in action’. Global Alpha investment managers Jacob Teal and Calum Holt were joined by high-growth ‘trusted adviser’ Robert Wilson, an investment manager with Baillie Gifford’s International Growth Team.

Teal discussed ways he and his colleagues were using artificial intelligence models to accelerate and strengthen the research process.

“It helps me explore the second- and third-order effects that might impact a business we might invest in,” he said. “I can ask it to suggest areas where we might be wrong, what I might be overlooking, what biases I might be showing.”

Teal revealed the tools had informed a decision in May to buy IT outsourcer EPAM Systems, letting him research it and five rivals in the time it would usually take to analyse a single firm. Additionally, they contributed to the sale of drinkware firm YETI in April after highlighting the extent of its supply chain exposure.

Teal stressed that the team always checks the accuracy of the AI’s information and that asking the right questions was critical.

“I recently did a piece of work where my prompt was 11 pages long, so there’s detailed work involved before I even use the tool,” he said.

Wilson focused on how knowledge swaps benefit Global Alpha and Baillie Gifford’s other strategies, expanding the perspectives of their decision-makers.

“Getting ‘boots on the ground’ is still important,” he said. “I met 160 companies last year. That level of access and the trust we build up through long periods of ownership matters, and that’s something I can bring to Global Alpha.”

Wilson added that at least one person acts as ‘prime contact’ for each Baillie Gifford holding, governing the relationship with that firm. He fulfils the duty for Sea Limited, the Singaporean ecommerce, gaming and fintech conglomerate.

“Global Alpha took a position in 2018, and the stock has been on a very volatile journey since then, requiring real conviction to hold,” he said. “Regularly meeting with the management team and understanding how the firm’s local operations and culture work enabled us to set a thesis and judge that it’s performing against that.”

Holt drew matters to a close with a third way of achieving uncommon understanding. “Find a quiet corner of the office and think broadly about how the world is likely to change in the next decade,” he said. “And then within that, where the bottlenecks and challenges are. If you can find a company at the centre of a few of those bottlenecks and can solve them, that’s a good indicator that its value is likely to improve.”

For example, he said, one investment sprang from considering that electricity demand was growing, but many of the world’s power grids had reached the point of technical obsolescence and faced a shortage of qualified labour to upgrade them.

This led him to research the high-voltage cable sector, where he discovered some sub-sea variants need to stretch over 150km, with spools sometimes weighing more than 9,000 tonnes.

“They can’t be transported over land and have to be built right on the shore and loaded directly on to purpose-built vessels,” he explained. “That requires very deep water and a population that’s numerous enough to provide skilled workers but not so wealthy they oppose a bit of the coastline becoming an industrial zone.”

This line of inquiry eventually led Global Alpha to invest in Nexans. Thanks to a facility it opened in Charleston, South Carolina, in late 2021, the firm is currently the only one capable of making such cable in North America.

The message: Global Alpha deliberately harnesses a depth and breadth of perspective. This allows us to build uncommon understanding and underpins our ability to pursue outsized returns in the future.

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.

Past performance is not a guide to future returns.

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