/ BAILLIE GIFFORD / in the automotive market , which is developing in much the same way as the mobile phone market . My decade-old car looks like a smartphone from the mid-1990s . With electric cars there is a real competitive advantage , because they are moving out of engineering and into software . As electric vehicles move to full autonomy , it will open up vast swathes of the market . This creates a new business model and the scope to take huge market share .”
Slater wants to understand how a holding could grow by at least 2.5x over five years . Typically , only around 20 % of stocks do this . He believes this is a far more useful way to determine a company ’ s worth than looking at metrics such as price to earnings ratios . Companies that look expensive on this basis may simply be reinvesting a lot in new ventures . If they are growing very fast , that ratio quickly falls .
He gives the example of electric car company Tesla , which has built a strong franchise in the luxury vehicle market , but is now in the process of building a mid-range car . This will take the company from sales of 50,000 per year to around 500,000 per year , but to do so , it needs to build up its manufacturing capability , which is expensive . However , in the long term , companies making this investment in innovation will have a real advantage .
Their focus is firmly on the long-term . Slater believes this is a key differentiation in a world that too often is simply trying to predict the next quarter ’ s earnings
The new ideas in the portfolio have been in smaller companies , notably in healthcare
statement . This means they take a strong interest in the culture of a company . He says : “ If you ’ re only holding a stock for six months , you don ’ t care about the culture . But if you ’ re holding it for five years or more , cultural factors are very important .
“ What is the purpose of a company and what is its ambition ? The answers can be a real source of competitive advantage . If a company has strong and defined ambitions , they can inspire passion and zeal .”
There are other sources of investment ‘ edge ’. Is the company addressing an outsized opportunity , for example , and how rapidly ? Stocks within the portfolio fall into three main growth objectives : The largest is ‘ transformational growth companies ’ – companies such as Amazon that are significantly disrupting the industry in which they operate . They also seek out ‘ dynamic growth companies ’, which are not bringing revolutionary change , but require capital to grow and are taking market share . He gives the example of Carmax in auto retail , which has a ‘ no haggle ’ model , and incentivises its staff on the volume of sales rather than the value , so they have motivation to help people get the right car .
The final area is ‘ enduring growth companies ’. These are companies with broad and deep franchises . Slater says that the network effect is very powerful for companies such as Facebook – the more users they add , the more powerful their franchise becomes . Investors are only just waking up to the value of this .
More recently , the new ideas in the portfolio have been in smaller companies , notably in healthcare . Slater says : “ We are sceptical on big pharma , with its incremental drugs and its unaffordable cost base , but we like companies such as Abiomed , which makes heart pumps that are improving the clinical outcomes for patients . On the drugs side , we also like Juno Therapeutics , which makes modified stem cells for leukaemia patients .”
Another recent purchase has been online furniture group Wayfair : Slater believes certain categories have been resistant to online and it ’ s time for this category to shift decisively .
In the meantime , they try to stay focused through the news flow emerging from the US . Slater says : “ We try to be owners of shares in a business , rather than reacting to news flow . We are prepared to accept holding things for too long .” They aim to own companies ‘ through the wobbles ’, Trump-related or otherwise .•
IMPORTANT INFORMATION AND RISK FACTORS The information contained within this article has been issued and approved by Baillie Gifford & Co Limited . All portfolio data is source Baillie Gifford & Co at 31 March 2017 unless otherwise stated . The value of your investment and any income from it is not guaranteed and may go down as well as up . The Fund ’ s exposure to a single market and currency may increase share price movements . The Fund has exposure to foreign currencies and changes in the rates of exchange will cause the value of any investment , and income from it , to fall as well as rise and you may not get back the amount invested . The views expressed in this article should not be considered as advice or a recommendation to buy , sell or hold a particular investment . The article contains information and opinion on investments that does not constitute independent investment research , and is therefore not subject to the protections afforded to independent research . Some of the views expressed are not necessarily those of Baillie Gifford . Investment markets and conditions can change rapidly , therefore the views expressed should not be taken as statements of fact nor should reliance be placed on them when making investment decisions .
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