1. The Pursuit
    of Extreme Returns

    Lawrence Burns, Investment Manager.
  2. February 2018


    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 Fund’s 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.

  3. The sad truth is most companies don’t really matter. It is only a very small selection of companies that genuinely change the world.
  4. Companies like Ford introducing mass automobiles, Bayer with antibiotics, DuPont with new materials and Apple with the iPhone.

    The same is true in investment. Research has shown that, as one would expect, equities have collectively outperformed US Treasury Bills over a 90 year period. However, it has also shown that most stocks actually underperform US Treasury Bills. The reason is that long-term wealth creation is driven by positive outliers: exceptional companies that reshape our world and in the process reap the rewards for doing so. It is these companies that make equity investing worthwhile.

    Consider that academic research has shown that from 1926 to 2016, a mere 90 companies were responsible for half of the $35 trillion of wealth created by US equities. It is then you realise that the story of investing is really the story of big winners, it’s the story of a small number of exceptional companies.

    Given this, we believe that active fund management should be almost exclusively dedicated to the pursuit of identifying, owning and supporting these exceptional businesses that ultimately drive long-term equity returns. However, we also believe this requires a very different approach to investment, portfolio construction and research.


    Stock market wealth creation is defined as an accumulation of value (inclusive of reinvested dividends) in excess of the value that would have been obtained had the invested capital earned one-month treasury bill interest rates.

    Reading the data: The data includes all 25,967 CRSP common stocks (25,332 companies) from 1926 to 2016. Beyond the best-performing 1,092 companies, an additional 9,579 (37.8%) created positive wealth over their lifetimes, just offset by the wealth destruction of the remaining 14,661 (57.9% of total) firms. The implication is that just 4.3% of firms collectively account for all of the net wealth creation in the US stock market since 1926.

    Source: Hendrik Bessembinder, Do Stocks Outperform Treasury Bills? (August 2017).

  6. A 10-Year Time Horizon

    First and foremost, at Baillie Gifford we believe the pursuit of extreme returns requires a long-term and patient approach to investment. Truly great companies are not built in a single quarter nor over the course of a few years. It takes time for companies to seize large market opportunities, for formidable competitive advantages to be recognised and for management’s vision to come to fruition. Amazon did not become worth half a trillion dollars in a single year. To benefit from its astronomical rise you had to hold the shares for many years and hold on through the inevitably tumultuous periods.

    Claiming to be long term and being long term are, of course, two very different things. With financial markets becoming ever more short term, we are fortunate to be able to invest within a century-old independent partnership structure that provides shelter from external pressures. Moreover, this structure has helped to create a patient and long-term culture. The result is the ability to take a genuinely long-term approach as demonstrated by our average holding period of over seven years.


    Focus on the Upside

    Second, we are adamant that what matters most in investment is what could go right for companies, not what could go wrong. We focus our analysis and decision-making accordingly and very much take to heart Jeff Bezos’ remark that:“Given a ten percent chance of a 100 times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten.”JEFF BEZOS

    We try, of course, to tilt the odds further in our favour but the central point is clear. Our biggest mistakes are therefore not the investments we made that lost money, but those exceptional companies we failed to recognise and invest in. This is because the pay-offs in equities are asymmetric. The maximum possible downside is capped at the funds invested, while the maximum possible upside is near unlimited.

  7. Inside the WeChat Open Class Conference
    © Bloomberg/Getty Images.


    Third, Baillie Gifford’s International Concentrated Growth Fund believes in concentration, operating with 20–35 holdings. We view this as a rational response to the reality that companies able to deliver extreme returns are rare. Moreover, we do not wish to dilute the transformative return potential of such companies under the pretence of diversification.

    Rather than view ourselves as highly concentrated, we view others as over diversified. We want every holding to matter to our clients. Moreover, we believe it is a luxury to be able to avoid the large swathes of the index from retail to energy that are under structural threat. We fear similarity to the index, not difference.


    An Analytical and Research Challenge

    This approach does, however, pose challenges both practically and psychologically for analysing companies. It means dealing with the future a decade from now and the inherent uncertainty that comes with it. In this context, current earnings mean little as do spot multiples. Information may be plentiful today, but it still predominately concerns the past and present alone, and if it comes from Wall Street and the City is already well known.

    Our response is two-fold. We opt more for creative imagination than cold data analysis and we seek information sources that are both geographically diverse and distant from the financial markets.

    To understand how companies could transform themselves and the world in the decade ahead you cannot create comforting yet meaningless discounted cashflows (DCFs) that merely extrapolate the present. It requires multiple mental models and the acknowledgment of different possibilities. This is reflected in our analysis through the creation of multiple scenarios with differing levels of probability and through placing serious focus on positive tail scenarios. As with Bezos, even a 10% chance of a transformational outcome still matters to us. We focus on the possibility of great change, not extrapolation nor reversion to mean.

    We also believe that the quantitative approach, so persuasive in finance, downplays those qualities that cannot be measured such as a founder’s drive, ambition and vision.

    For information sources we recognise and are grateful that there is more genius outside of the world of finance then there is inside it. We seek to build links with academia, such as with the Santa Fe Institute concerning power laws, exponential progressions and scalability. We have also formed a link with Sussex University to fund new work in Deep Transitions, and with the understated Delft University of Technology, who are helping us better understand everything from robotics and quantum computing to the ethical implications of social media.

    Our long-term approach to investing also allows us to build relationships with our holdings. This enables us to talk with visionaries from Elon Musk to Jack Ma gaining invaluable perspective from those creating the future. We also believe that whirlwind investment trips, where fund managers spend a few days meeting companies and seeing different hotels and conference rooms, are likely to provide superficial insight at best. Instead, we are increasingly opting for longer stays of several weeks and preferably months in places such as Berlin, Amsterdam and India. This is allowing us to hear a wider range of views from public companies, private companies, bloggers, students and entrepreneurs.

  8. Decision-Making

    We try to have our decision-making reflect our philosophy as well. Our International Concentrated Growth team work together closely as a team of three, but limit ourselves to meeting formally no more than once a month. This reflects our desire to remain focused on the long-term development of our companies, rather than reacting to incessant and often meaningless news flow and quarterly results.

    It also reflects our wariness to spend too much time at our desks in the office staring at computer screens. Needless to say this is not where genuinely differentiated insights come from. Instead we believe in spending time outside the office, meeting informed, interesting and knowledgeable people and hearing what they have to say.

    Importantly, when coming to an investment decision consensus is not a requirement. This means it only takes one of us to be enthusiastic for a holding to be taken, without the need for agreement from the other two. This reflects the reality that the best ideas are often the most controversial.

    We recognise that the task of identifying, owning and supporting exceptional growth companies capable of producing extreme returns is challenging. However, with a number of industries on the precipice of great structural change we are more excited than ever by the decade ahead. Furthermore, through our partnership structure and the culture it has created, we believe we have a strong foundation through which to invest both patiently and radically, as well as to continue to improve and evolve what we do.

  9. Important Information and 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 International Concentrated Growth Equities Fund are Investment Style Risk, Growth Stock Risk, Long-Term Investment Strategy Risk, Geographic Focus Risk, Non-Diversification Risk, Asia Risk, China Risk, Conflicts of Interest Risk, Currency Risk,  Emerging Markets Risk, Equity Securities Risk, Focused Investment Risk, Information Technology Risk, IPO Risk, Japan Risk, Large Capitalization Securities 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, Small-and Medium-Capitalization Securities Risk, Valuation 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 International Concentrated Growth Equities 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.


    The Baillie Gifford International Concentrated Growth Equities Fund (Share Class K) as at 30 June 2020

    Gross Expense Ratio 0.90%
    Net Expense Ratio 0.72%

    Source: Baillie Gifford & Co


    Standardised Past Performance to 30 June 2020

      1 Month 3 Months YTD* 1 Year Since Inception
    The Baillie Gifford International Concentrated Growth Equities Fund (Share Class K) 10.72 44.42 29.29 48.08 21.63
    MSCI AC World ex US Index 4.56 16.30 -10.76 -4.39 -1.52

    Source: Bank of New York Mellon and relevant underlying index provider(s). Net of fees, US dollars.
    *Not annualized. Fund inception: December 14, 2017. The fund is more concentrated than the MSCI AC World ex US Index.

    The performance data quoted represents past performance and is no guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For the most recent month-end performance please visit our website at bailliegifford.com/internationalgrowthequitiesfund

    The Baillie Gifford fund’s performance shown assumes the reinvestment of dividend and capital gain distributions and is net of management fees and expenses. Returns for periods less than one year are not annualised. From time to time, certain fees and/or expenses have been voluntarily or contractually waived or reimbursed, which has resulted in higher returns. Without these waivers or reimbursements, the returns would have been lower. Voluntary waivers or reimbursements may be applied or discontinued at any time without notice. Only the Board of Trustees may modify or terminate contractual fee waivers or expense reimbursements. Fees and expenses apply to a continued investment in the funds. All fees are described in each fund’s current prospectus.

    Expense Ratios: All mutual funds have expense ratios which represent what shareholders pay for operating expenses and management fees. Expense ratios are expressed as an annualized percentage of a fund’s average net assets paid out in expenses. Expense ratio information is as of the fund’s current prospectus, as revised and supplemented from time to time. The net expense ratios for this fund are contractually capped (excluding taxes, sub-accounting expenses and extraordinary expenses), through April 30, 2021.

    The MSCI All Country World ex US Index is a free float-adjusted market capitalization weighted index that is designed to measure equity market performance in the global developed and emerging markets, excluding the United States. This unmanaged index does not reflect fees and expenses and is not available for direct investment.   


    International Concentrated Growth Equities Fund Top 10 Holdings
    As at 31 March 2020

    Holdings Fund %
    1 ASML 9.5
    2 MercadoLibre 8.6
    3 Tencent 6.9
    4 Alibaba 6.5
    5 Meituan Dianping 5.7
    6 Tesla Inc 5.4
    7 Spotify 4.7
    8 Zalando 4.5
    9 Kering 4.5
    10 Amazon.com 4.5

    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.


    MSCI Legal Disclaimer

    Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indexes or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied upon as such.


    47364 USM WE 0096

  10. Lawrence Burns

    Investment Manager

    Lawrence is an Investment Manager in our International Growth Research Team. He has been a member of the International Growth Portfolio Construction Group since October 2012 and took over as Deputy Chair in July 2019. Lawrence is also a co-manager of the International Concentrated Growth Strategy. He joined Baillie Gifford in 2009, spent time working in both the Emerging Markets and UK Equity Departments and became a partner in 2020. Lawrence graduated BA in Geography from the University of Cambridge in 2009.