Baillie Gifford US Discovery Fund: An American Voyage Into The Future.With the US continuing to be at the forefront of innovation, it seemed only fitting to develop a new and exciting fund says Svetlana Viteva.
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.
It is said that you can’t really know where you are going until you know where you have been. Before I share where we are going next, please indulge me in a brief retrospect of where we have been.
It has now been more than a decade since the Discovery investment team set out on the journey to find and invest in the world’s most innovative companies early on in their life cycle. Originally set up as an incubator of ideas for Baillie Gifford’s wider investment floor, the team has built a successful track record of unearthing the next generation of growth companies. For example, in 2015 when we first invested in online furniture retailer Wayfair its total market capitalisation was $3.6bn. Today, Baillie Gifford’s stake in Wayfair, across multiple strategies, is bigger than the total market capitalisation when we originally invested.
What really stands out to us is that some of the most exciting smaller companies in the world seem to be in the US. The breadth and depth of the US in terms of innovative growth companies is simply unparalleled. Warren Buffett summed it up well in his latest shareholder letter, stating: “There has been no incubator for unleashing human potential like America”. Indeed, even though we search worldwide for exciting growth businesses, we believe that the US market is unparalleled in its entrepreneurial flair and innovation, for instance with the healthcare companies Novocure (oncology) and STAAR Surgical (creating implantable lenses).
The wider Global Discovery Strategy is focused on early-stage growth companies addressing global challenges. US companies represent just over 60 per cent of the strategy, so the team decided to start the Baillie Gifford US Discovery Fund to capture disruptive US businesses with both a domestic and global focus. We are so excited to launch the US variant of our existing Global Discovery Strategy, which will leverage the expertise, experience and – above and beyond all else – the genuine enthusiasm of the team for investing in US innovation.
While US Discovery is therefore a new product for Baillie Gifford, its foundations are based on a philosophy and process which we have had in place for over a decade. Our approach centres on three core principles – investing for the long term, investing actively, and investing for growth. To truly benefit from the potential of smaller growth companies, you need to be active in finding the most promising ones and thereafter own them for long enough so that the advantages in their business models become dominant drivers of their share price. With the Baillie Gifford US Discovery Fund we will seek to identify the highest potential growth companies and own them as they grow to become multiples of their starting size.
The managers of the Fund will invest in between 40 and 75 US companies and retain ownership in them as they grow. They aim to hold securities for long periods – typically between five and 10 years – which is expected to result in relatively low portfolio turnover and to be in line with the Fund's long-term investment outlook. To identify these companies, the managers will assess a range of factors including long-term growth potential, geographic and industry positioning, competitive advantage, management, financial strength and valuation.
Importantly, it is not simply small companies we are searching for. We look for immature ones, companies that we believe have the potential to be among the winners of tomorrow but which, at the time of our investment, are still very early in exploiting what we think can be very large opportunities. The US Discovery portfolio will benefit from the ideas that we have already identified for the Global Discovery Strategy and be complemented with businesses which have a more pronounced domestic focus. While these are not always natural candidates for a global strategy, their investment merits are too compelling for us to overlook.
I would like to state upfront that this is not going to be your traditional small–mid cap portfolio. And that is by design.
US Discovery will be concentrated
The inevitable consequence of this is that performance can be very volatile over short periods of time. It requires patience and courage of conviction to be a successful long-term investor and the private partnership structure of Baillie Gifford gives us a unique cultural advantage in being able to apply the same ownership mindset to our holdings that we do to our Firm.
US Discovery will be very different from the benchmark
The portfolio will comprise what we believe are a select number of companies, each of which have the potential to redefine the industries in which they operate or create completely new ones. We look to own transformational growth companies. We will not invest in businesses with little scope to differentiate themselves from competition. We will not invest in companies for a limited 20 per cent upside.
US Discovery can retain exposure to transformational companies
While the majority of the strategy’s holdings will not exceed an upper market cap limit, we have reserved some capacity to hold on to some of the rarest companies which successfully grow beyond that limit, while still remaining immature relative to their potential.
Our promise to you is that we will continue to push our curiosity to new and uncharted territories in the pursuit of identifying the most innovative US smaller companies. We will look for the most exciting opportunities and developments on the horizon. We will seek to own the next generation of problem solvers. We will look for management teams with whom we are aligned, in terms of ambition and timelines. We will challenge ourselves every day. Along the way there will inevitably be disappointments. That is okay. Implicit in owning a portfolio of high potential companies so early on in their lifecycle is that some investment cases will not work out as we hypothesise they will. But ultimately, it is the asymmetry of returns which really matters in long-term equity investing.
Our tomorrow will be defined by entrepreneurial companies across multiple industries, from healthcare to software, which dare to dream big and which are not afraid to experiment; to take risks and to develop new technologies and business models. For example, there’s unprecedented pressure for software developers to write more code and to do it faster and cheaper. This has created a whole new market for companies selling tools to software developers to help them improve productivity and automate the more tedious tasks. Examples include JFrog, a company helping developers to store and manage the source code they write and automate deployment across multiple environments.
While the start-up investment universe is vast, the Baillie Gifford US Discovery Fund’s focus area is small. Many US small cap companies stay small because they either lack structural growth potential or have little scope to differentiate themselves from their peers. Baillie Gifford is constantly seeking to identify which companies should have transformational growth potential.
With US Discovery we are dedicated to the pursuit of positioning ourselves along the frontiers of this innovation and technological development. With innovation accelerating at an unprecedent pace across industries and sectors, we believe the opportunity is more exciting than it has ever been for those companies willing and able to experiment.
It will be an incredibly exciting journey and we look forward to what the future holds.
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.
The most significant risks of an investment in the Baillie Gifford U.S. Discovery Fund are Small- and Medium- Capitalization Securities Risk, Growth Stock Risk, Investment Style Risk, Long-Term Investment Strategy Risk, Geographic Focus Risk and Non-Diversification Risk. The shares of small-and medium -capitalization companies can be more volatile than larger companies. This can be more evident during market downturns as they may have potentially reduced liquidity and shorter operating histories. The prices of growth stocks can be based largely on expectations of future earnings and can decline significantly in reaction to negative news. The Fund is managed on a bottom up basis and stock selection is likely to be the main driver of investment returns. Returns are unlikely to track the movements of the benchmark. The Fund is managed on a long-term outlook, meaning that the Fund managers look for investments that they think will make returns over a number of years, rather than over shorter time periods. The Fund focuses on investment in the US, meaning it may offer less diversification than other funds. The Fund may have a smaller number of holdings with larger positions in each relative to other mutual funds. Other Fund risks include: Conflicts of Interest Risk, Equity Securities Risk, Focused Investment Risk, Government and Regulatory Risk, Information Technology Risk, IPO Risk, Liquidity Risk, Market Disruption and Geopolitical Risk, Market Risk, New and Smaller-Sized Funds Risk, Service Provider Risk and 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 US Discovery 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.
All information is sourced from Baillie Gifford & Co and is current unless otherwise stated.
The images used in this article are for illustrative purposes only.
|1. Upwork Inc||4.29|
|3. Sprout Social||3.16|
|4. STAAR Surgical||3.06|
|6. ShockWave Medical||2.79|
|7. Axon Enterprise||2.75|
|9. Stitch Fix||2.59|
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.