Part 5 – Insight

    Steve Vaughan, Investment Manager
  2. Investors should carefully consider the objectives, risks, charges and expenses of the fund before investing. This information and other information about the Fund can be found in the prospectus and summary prospectus. For a prospectus or summary prospectus please visit our website at https://usmutualfund.bailliegifford.com. Please carefully read the Fundís prospectus and related documents before investing. Securities are offered through Baillie Gifford Funds Services LLC, an affiliate of Baillie Gifford Overseas Limited and a member of FINRA. 



    In this short series Baillie Gifford’s International Smaller Companies team explores how their radar framework helps them to uncover the most exciting small businesses from around the world.

  4. Not helped by poor health, Maurits Cornelis Escher failed second grade and later dropped out of his studies. His passion was graphic design, but it took 30 years of graft to eventually make a living from it. His first major exhibition did not take place until he was 70 years old. Today, Escher’s works are globally recognised. Like many iconoclasts, his life is a tale of under-appreciated potential, but his work is a lesson in perspective. The segue into our investment approach is deliberately unsubtle. 

    Multi-stable perception is a pillar of Escher’s work. This is the phenomenon behind an optical illusion that causes our visual system to alternate between conflicting interpretations of an image. The conflict is unresolvable and ‘reality’ is in the eye of the beholder. 


    © Cj Gunther/EPA-EFE/Shutterstock.


    Multi-stable perception is a pillar of Escher’s work.


    Neuroscience continues to be fascinated by this conflict, a deep curiosity which was first seriously researched by the polymath Hermann von Helmholtz in the 19th century. It arises because our minds yearn to construct a cohesive explanation about something which is, in truth, completely ambiguous.Sometimes we can see things both ways; we see the first image above as a vase but when we look hard we see the people. But, more interestingly, we often find ourselves completely fooled. Our minds are locked into just one interpretation, unable to even notice the alternative once it is pointed out to us. Some will be unable to see the old woman’s face instead of the hat-wearing woman. Stuck in their ruts, two minds can see exactly the same image yet be in fundamental disagreement. The same phenomenon applies to observations about companies, with interpretations and narratives about the future built from ambiguous inputs. 

    The role of insight within our framework is to remind us that a great business is not necessarily a good investment. The difference of course lies in whether its true potential is misinterpreted and therefore mispriced. Each buy or sell decision an investor takes implies a bold claim that they see the evidence in front of them about the future of the business in a way that the market does not. We think it is far better to be explicit about this key tenet of sound investing. Forcing ourselves to articulate “what the market may be missing and why the company might be undervalued” allows our claim of insight to be critically examined and instils a vital sense of humility. 

    The answer on insight is inevitably specific to each investment case. For example, Yume No Machi is an online takeaway platform in Japan, a business model many people would recognise from peers such as Grubhub. Yet we believe a lack of information means many are confused and unsettled by the company’s decision in 2013 to diversify away from its core competencies by buying a shochu retailer. Shochu is a liquor distilled from rice, barley and sweet potato and is far more popular in Japan than sake – another popular misconception. However, we’ve come to understand, from our meetings over the years with the company’s president, that what looked like an odd and perhaps wasteful acquisition was in fact driven by other factors. The company actually wanted access to a well-staffed and highly trained call-centre, which now provides customer service for the core business. This proved to be a clever way of achieving its aim given that labour is in short supply in Japan. 

    Likewise, we are not convinced that the market has fully appreciated the striking transformation that Noritsu Koki has made. It has ploughed cash generated from manufacturing photo-lab equipment (surely a threatened species whichever way you look at it!) into a range of exciting growth industries. It is now radically different, but type Noritsu Koki into your preferred search engine and you will see how the misperception perpetuates. 


    Each buy or sell decision an investor takes implies a bold claim that they see the evidence in front of them about the future of the business in a way that the market does not.

  5. © Bloomberg/Getty Images.


    A Longer-Term Perspective

    Although these are specific cases, an overarching theme in our approach is a belief in the power of perspective. We are certainly not arrogant enough to believe we are smarter, faster or working longer hours than others, but we do strongly believe that we often come at things differently. Underpinned by Baillie Gifford’s private partnership structure, the whole firm takes a long-term perspective which we believe can often produce insight. Under the right circumstances we are willing to take a leap of imagination into what might be, rather than merely staring intently at what is right in front of us. 

    A butcher looks at a cow and sees a quick buck from carving it into steaks. The milkman knows it is worth far more if he can just patiently accept the income over the years. But the entrepreneur sees organic yoghurt selling for $5 a tub in Whole Foods Market. Same cow (forgive me, I know modern agricultural genetics are somewhat more sophisticated!) but three very different perspectives. The latter involves a belief in an uncertain and far longer-term opportunity, which we think the market often struggles to fully value.

    Take the case of Café 24. This is an ecommerce platform in Korea, allowing small merchants to run an online business. The market valuation probably builds in the potential for online shopping penetration in Korea to rise from 20 per cent, and for Café24 to increase prices and improve margins. But we are less sure that it is willing to value the possibility that the company can expand internationally with its customers, nor that it can continue to dramatically increase its value to merchants by adding services such as financing, logistics or collective purchasing. Such contingent opportunities only matter if you have a long-term perspective. Perhaps the broader perspective that comes from Baillie Gifford being a significant shareholder in Shopify, a similar Canadian business with a market cap over 60 times larger, also helps us consider what Café24 could become.

    A second overarching theme we often think about is the potential for disguised value arising from intangible assets. Baillie Gifford has always emphasised the qualitative aspects of investing over the quantitative, one reason we recruit our investors from a diverse range of largely non-financial backgrounds. It’s highly likely that the market is efficient at copying down the numbers and incorporating past financial data into prices. We are far less sure it gives due credit to things such as company culture or the founder’s ambition which are far harder to capture with clear data. 

    There are countless examples in the portfolio of where such softer factors are a material part of the investment case, but a good one might be Reply. Superficially this is an unremarkable business (IT consultancy) in an unremarkable economy (Italy).  However, on closer inspection, other often-ignored factors create a compelling investment case for the company. Reply has a strongly decentralised and entrepreneurial culture, overseen by eight of the nine founders (one having passed away) who continue to work in the business as well as owning half of it. Our work suggests such factors continue to be overlooked and the beginnings of its international expansion suggests there is still plenty of potential for the future. 

    What ties the two previous differences of perspective together is a willingness to place value on aspects that are contingent and ambiguous, such as an opinion on a CEO or the possible adjacent markets a business can expand into. Investing on the basis of such factors is hard to do and needs the right philosophy and process as well as the support of a collegiate firm with a long-term time horizon. Baillie Gifford is such a firm. ‘Reality’ is in the eye of the beholder, so colleagues need to trust you while your views are unprovable, whilst also challenging you to consider alternative interpretations. Our process supports individual conviction and enthusiasm. You need to be allowed to invest with the patience that allows such things to matter. We support each other, and the companies in which we invest, over the bumps in the road. 

  6. Conclusion

    A great business is not the same as a good investment. Every investment decision carries a claim of insight about something the market is missing. You are only likely to discover that if you are willing to look at things differently. As active, bottom-up stock pickers with a long-term time horizon, we appear to be an increasingly rare breed. We also work in a firm with understanding colleagues and we hope, in time, supportive clients. This all adds up to a different approach which accepts uncertainty and values possibility. Escher eventually found fame by celebrating the ambiguities of perspective. We are merely hoping to use them to find great investment returns.

  7. Risk Factors

    This article contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned. 

    Any stock examples, or images, used in this article are not intended to represent recommendations to buy or sell, neither is it implied that they will prove profitable in the future. It is not known whether they will feature in any future portfolio produced by us. Any individual examples will represent only a small part of the overall portfolio and are inserted purely to help illustrate our investment style. 

    As with all mutual funds, the value of an investment in the fund could decline, so you could lose money. International investing involves special risks, which include changes in currency rates, foreign taxation and differences in auditing standards and securities regulations, political uncertainty and greater volatility. These risks are even greater when investing in emerging markets. Security prices in emerging markets can be significantly more volatile than in the more developed nations of the world, reflecting the greater uncertainties of investing in less established markets and economies. 

    Currency risk includes the risk that the foreign currencies in which a fund’s investments are traded, in which a fund receives income, or in which a fund has taken a position, will decline in value relative to the U.S. dollar. Hedging against a decline in the value of currency does not eliminate fluctuations in the prices of portfolio securities or prevent losses if the prices of such securities decline. In addition, hedging a foreign currency can have a negative effect on performance if the U.S. dollar declines in value relative to that currency, or if the currency hedging is otherwise ineffective.

    The most significant risks of an investment in the Baillie Gifford International Smaller Companies Fund are Investment Style Risk, Growth Stock Risk, Long-Term Investment Strategy Risk, Geographic Focus Risk, Small-and Medium-Capitalization Securities Risk, Asia Risk, China Risk, Conflicts of Interest Risk, Currency and Currency Hedging Risk, Emerging Markets Risk, Equity Securities Risk, Focused Investment Risk, Information Technology Risk, IPO Risk, Japan Risk, Liquidity Risk, Market Disruption and Geopolitical Risk, Market Risk, New and Smaller-Sized Funds Risk, Non-U.S. Investment Risk, Service Provider Risk, Settlement Risk. For more information about these and other risks of an investment in the fund, see ‘Principal Investment Risks’ and ‘Additional Investment Strategies’ in the prospectus. The Baillie Gifford International Smaller Companies Fund seeks capital appreciation. There can be no assurance, however, that the fund will achieve its investment objective. 

    The fund is distributed by Baillie Gifford Funds Services LLC. Baillie Gifford Funds Services LLC is registered as a broker-dealer with the SEC, a member of FINRA and is an affiliate of Baillie Gifford Overseas Limited. 


    Top Ten Holdings as at 31 December 2019

      Holdings Fund %
    1. Li Ning 4.52
    2. Douzone Bizon Co 3.37
    3. Hypoport 3.25
    4. Avanza Bank 2.57
    5. Infomart 2.52
    6. ASPEED Technology 2.47
    7. Outsourcing 2.47
    8. Bengo4.com 2.45
    9. AirTac International Group 2.41
    10. KATITAS 2.40


    It should not be assumed that recommendations/transactions made in the future will be profitable or will equal performance of the securities mentioned. A full list of holdings is available on request. The composition of the fund’s holdings is subject to change. Percentages are based on securities at market value.


    45832 USM WE 0149

  8. Steve Vaughan

    Investment Manager.

    Steve joined Baillie Gifford in 2012 and is an Investment Manager in the European Equity Team. He is a CFA Charterholder. Prior to joining Baillie Gifford, Steve was an Officer in the British Army for nine years. He graduated BA (Hons) in Jurisprudence from the University of Oxford in 2001 and MA in International Relations from the University of Exeter in 2012.