UK MARKET RIPE FOR STOCK PICKERS - BAILLIE GIFFORD UK GROWTH FUND PLC Milena Mileva, Investment Manager. Second Quarter 2018
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UK MARKET RIPE FOR STOCK PICKERS BAILLIE GIFFORD UK GROWTH FUND PLC Milena Mileva, Investment Manager. Second Quarter 2018
– UK Market Ripe for Stock Pickers Baillie Gifford
IMPORTANT INFORMATION AND RISK FACTORS
The views expressed in this article are those of Milena Market values for securities which have become difficult
Mileva and should not be taken as fact and no reliance to trade may not be readily available and there can be no
should be placed upon these when making investment assurance that any value assigned to such securities will
decisions. They should not be considered as advice accurately reflect the price the trust might receive upon
or a recommendation to buy, sell or hold a particular their sale.
investment. The value of your investment and any income
from it is not guaranteed and may go down as well as up The trust can make use of derivatives which may impact
and as a result your capital may be at risk. If you are unsure on its performance. The trust’s exposure to a single market
whether an investment is right for you, please contact an may increase risk.
authorised intermediary for advice. The Trust charges 70% of the investment management fee
Baillie Gifford has recently assumed responsibility for and borrowing costs to capital which reduces the capital
the Baillie Gifford UK Growth Fund PLC from Schroder. value. Also, where income is low, the remaining expenses
Stock examples in this article refer to holdings in Baillie may be greater than the total income received, meaning the
Gifford’s existing UK strategies. Trust may not pay a dividend and the capital value would
be further reduced. The aim of the Trust is to achieve
Baillie Gifford & Co Limited is authorised and regulated capital growth. You should not expect a significant, or
by the Financial Conduct Authority (FCA). The investment steady, annual income from the Trust.
trusts managed by Baillie Gifford & Co Limited are listed
UK companies. The Baillie Gifford UK Growth Fund is This article contains information on investments which
an investment trust listed on the London Stock Exchange does not constitute independent investment research.
and is not authorised or regulated by the Financial Conduct Accordingly, it is not subject to the protections afforded
Authority. to independent research and Baillie Gifford and its staff
may have dealt in the investments concerned. Investment
The trust can borrow money to make further investments markets and conditions can change rapidly.
(sometimes known as “gearing” or “leverage”). The risk
is that when this money is repaid by the Trust, the value of The information and opinions expressed within this article
the investments may not be enough to cover the borrowing are subject to change without notice. This information has
and interest costs, and the Trust will make a loss. If the been issued and approved by Baillie Gifford & Co Limited
Trust’s investments fall in value, any invested borrowings and does not in any way constitute investment advice.
will increase the amount of this loss. Past performance is not a guide to future performance. All
The trust can buy back its own shares. The risks from data is current and source Baillie Gifford unless otherwise
borrowing, referred to above, are increased when a trust stated. The images used in this document are for illustrative
buys back its own shares. purposes only.
Annual Past Performance to 31 March Each Year
2014 2015 2016 2017 2018
UK Core Composite Net (%) 10.6 6.4 -3.7 21.3 6.1
Source: Baillie Gifford & Co. Sterling.
Changes in the investment strategies, contributions or withdrawals may materially
alter the performance and results of the portfolio.
UK Stocks 32657 0518.indd
Ref: 32657 IND AR 0457
Second Quarter 2018
UK MARKET RIPE
FOR STOCK PICKERS
Being a UK equity fund manager may seem a somewhat depressing
occupation these days. As the spectre of the country’s exit from the European
Union looms large, there are plenty of doomsayers taking the view that
investing money in UK stocks is a foolish thing to do. Why would anyone
bother evaluating UK investment opportunities when you could invest in the
innovative dynamism of certain parts of corporate America, or the allure of
China’s fascinating journey to global economic dominance? Against these
competing attractions, the fate of the UK PLC seems a sorry one.
We, however, refuse to be disheartened. globe. They feed on powerful, deeply
Rather than being dull and futile, entrenched social trends and, through
investing in the UK market is for innovation, aim to solve some of the
us a greatly rewarding exercise. most intractable challenges facing the
This is simply because there are industries they operate in. We believe
some tremendously exciting British that these companies’ prosperity will
businesses which we wish to help grow not be easily derailed. Their strengths
to become multiples of their current and adaptability should enable them to
size in the years to come. Some of these drive their vision, even amid evidently
companies might not be household seismic political and economic
names, but they are true world leaders events. And, by continuing to be
in their fields. They have built enviable sizeable, highly committed and patient
competitive positions that rivals find shareholders of these businesses, while
hard to match. They are run with acting on our clients behalf, we have
ambition and a real sense of purpose, put ourselves in the privileged position
confidently unlocking large growth of taking a disproportionate share of
opportunities which often span the any future success.
3
– UK Market Ripe for Stock Pickers
TAKE YOUR (STOCK) PICK Animal genetics company Genus Healthcare systems everywhere are
also plays a crucial role in enabling under severe strain. We believe that one
We are unashamedly bottom-up its customers to become much better way to tackle the problem of ballooning
investors. You will not hear us muse at what they do. Through its focus on costs is by shortening drug development
on, or attempt to predict, the daily developing cutting-edge genomic and timelines and increasing R&D
twists and turns of economic data, breeding techniques, Genus enables productivity. Abcam, one of Baillie
stock market sentiment, or government farmers around the world to improve Gifford’s long-standing holdings, is
policy. We do not think we can add the efficiency and sustainability well placed to address this challenge.
much on those issues. What we do of meat and milk production. For The company is one of the world’s
love to talk about, however, is the instance, the company is currently leading suppliers of high quality
companies in our portfolios. As focusing on creating PRRSv resistant antibodies and other reagents to the
the following examples show, our pigs. The porcine reproductive and research and academic communities.
enthusiasm for some of the exceptional respiratory syndrome virus is a major Through its powerful e-commerce
UK growth businesses spans a wide disease costing the global swine platform, its comprehensive data and
variety of different industries. industry billions annually. proprietary intellectual property, Abcam
We are particularly keen on Renishaw,
a manufacturer of high precision
measurement, position sensing and
motion control equipment. The UK
might no longer have the reputation
for being an industrial and engineering
powerhouse but, in Renishaw, we
have a rare example of a truly world-
leading UK engineering business. The
company has more than 70 offices in
35 countries, although almost three-
quarters of its 4,000 employees are
based in the UK. Its products play a
part in a broad range of industries from
auto and aerospace manufacturing,
to semiconductors and dentistry.
We are impressed by the company’s
sustained commitment to high levels
of research and development spending
and its obsession with ultra efficient
automated manufacturing. Renishaw
has effectively become the gold
standard in its industry and secured
an unparalleled competitive position.
And, looking ahead, we believe it is at
the heart of long-term secular trends
towards advanced manufacturing,
helping customers in various industries
across the globe to automate their
processes to become more productive.
4
Second Quarter 2018
aims to help life scientists achieve enables clients to increase operations power of digital technology to create
their mission of understanding human rapidly and flexibly without having innovative business models that
biology and the underlying causes of to cede control of this vital area to make life much easier for customers.
illnesses faster. offshore firms, or resort to the use of Rightmove has brought house hunting
expensive contractors. to the modern age and transformed
Baillie Gifford recently took a the slow-moving real estate industry.
holding in FDM which enables Renishaw, Genus, Abcam and FDM Hargreaves Lansdown has used
global corporations to address a are great examples of dynamic technology to empower UK consumers
chronic and worsening shortage of and entrepreneurial UK business- to save and invest with confidence.
IT skills. Its workforce is drawn to-business champions which aim Just Eat is changing how takeaway
mainly from recent science graduates, to dominate their global markets. ordering works by seamlessly
people returning to work and former However, we have also been fortunate connecting time-poor, digitally-savvy
military personnel. They are trained in identifying a handful of very modern consumers with a huge range
in FDM academies before working exciting consumer-facing businesses. of restaurants. These digital pioneers
as consultants for FDM clients. This Some of them have leveraged the might lack the ubiquity of Amazon,
Facebook, or Alibaba, but have carved
themselves valuable and defensible
niches. We say ‘niches’, but it is
worth remembering that all of these
companies operate in industries where
total profits are measured in billions
of pounds. By being first to market,
they have also established competitive
advantages which are difficult for
Renishaw, Genus, rivals to overcome: one in five UK
adults orders takeaway through Just
Abcam and FDM Eat; Hargreaves dominates the DIY
investment market with over one
are great examples million consumers managing their
savings on its platform; Rightmove’s
of dynamic and online portal registered 1.5 billion
visits in 2017.
entrepreneurial UK In the retail sector, there can
business-to-business sometimes be a perception that UK
companies struggle to replicate the
champions which success they have achieved at home
when they enter markets elsewhere in
aim to dominate the world. However, in Ted Baker we
have identified a UK retailer which
their global defies this rule. This quirky brand is
full of character but seems able to
markets. travel abroad exceptionally well, as
shown by its continued strong growth
in the US and Asia.
5– UK Market Ripe for Stock Pickers 6
Second Quarter 2018
LONG-TERM WINNERS AND THE NEED unduly on store targets and building up large estates. In the
FOR A STRONG CORPORATE CULTURE words of its own eccentric founder, Ray Kelvin:
At Baillie Gifford, we have learnt a lot by owning these “Dominant is an aggressive word, it is just about letting it
great businesses and hope we can use some of those grow naturally. I don’t have a preconception of ‘in five years
lessons to spot other big winners in the future. One of we will be there’ and ‘in 10 years we will be at this level’
the key things we have observed is just how crucial their because if you push it too hard, then the customer realises
unusual corporate cultures have been to their excellence. it is a forced brand. You have to nurture it and feel for it.
This manifests itself in a number of ways. Taking care of our customers and getting repeat business is
the only thing we aim for.”
First, they are all united by an unwavering focus on the
long term. Whilst most companies tend to pay lip service We believe this means that, unlike many of its peers, Ted
to long-termism, it seems to us that precious few have Baker is not going to be disrupted by the accelerating shift
the courage to consistently follow this belief. For most, to online shopping. On the contrary, we see the company
a quarter or two of weak demand or missed earnings fully embracing and capitalising on these changes in
expectations is sufficient to result in ad hoc cost cutting consumer behaviour.
and various forms of financial engineering to shore up the
numbers. In our experience, Renishaw’s lumpy short-term Finally, all of these businesses realise that the only way
profit progression and its volatile share price have never they can achieve their long-term ambitions is by nurturing
had any bearing on its commitment to invest in the long- their own employees. Renishaw, for instance, faces a great
term development of its business and its people. It is an challenge of recruiting enough skilled engineers in the UK.
attitude which has been fostered by its founders, who still It is, therefore, well-known for taking care of its existing
own over 50% of the shares. employees. And, through its long-standing apprenticeship
programme, education outreach efforts, and comprehensive
Second, these great UK growth businesses all have network of contacts with UK universities, it works hard
strong identities and a vision which extends far beyond to find new talent. We are equally encouraged by the great
the imperative to generate profit for shareholders. This work and commitment of the FDM management team to
in turn tends to result in them having a strong alignment increase the representation of women in IT, an industry
with their customers and employees. Take Ted Baker’s where females are grossly underrepresented. Its ex-armed
relentless obsession with the uniqueness of its product and forces and other social inclusion and mobility recruitment
the experience of its customers. Everything the company initiatives are examples of the company’s efforts to ensure
does is in service of this goal. We think this makes it very the sustainability of its own business, but also to contribute
different to other listed retailers which can often focus to positive social change.
7– UK Market Ripe for Stock Pickers
THE POWER AND IMPORTANCE
OF LONG-TERM INVESTING
We are passionate advocates of the merits of
long-term investment horizons. Whilst some of the
companies we have shared with you are relatively
recent discoveries, most have been sizeable
holdings in Baillie Gifford’s portfolios for a long
time – for example, Ted Baker and Renishaw
were first bought by Baillie Gifford in 1996. Our
patience and commitment as shareholders have
been handsomely rewarded. The temptation in
such circumstances can often be to ‘take profits’.
We think this would be a disservice to our clients
because, no matter how successful they have
already been, we are convinced that the best is
yet to come for each of those businesses. With
its expanding product capabilities, Hargreaves is
going after a £1 trillion savings and investment
market in the UK. Renishaw is applying its core
skills in accurate measurement and its engineering
excellence to entirely new (and large) markets such
as metal 3D printing and neurosurgical robotics.
Abcam is increasingly venturing outside research
and academia in order to help customers in the
diagnostics and therapeutics areas. Just Eat, FDM
and Ted Baker are all looking to build successful
international operations.
8Second Quarter 2018
CONCLUSION
We are not arguing that conquering
these new horizons will be an easy task
for our companies. Setbacks along the
way are inevitable, just as they have
been in the past. However, the scale of
the opportunity truly excites us. It is only
through our continued patience and
commitment as shareholders that we
and our clients will be able to fully
benefit from this great potential.
9– UK Market Ripe for Stock Pickers 10
Second Quarter 2018
MANAGERS
IAN MCCOMBIE MILENA MILEVA
Investment Manager Investment Manager
Iain graduated MA in Accountancy Milena completed her MPhil in
from Aberdeen University and trained Politics at Oxford University in
as a Chartered Accountant. He joined 2009, having graduated with a BA in
Baillie Gifford in 1994, and spent Social & Political Science from the
five years training as an Investment University of Cambridge in 2007. She
Manager in the US Equity Team joined Baillie Gifford in the same year
before joining the UK Equity Team and is an Investment Manager in the
in 1999. Iain became a partner of the UK Equity Team. Milena became a
firm in 2005 and Chief of Investment member of the Pan-European Portfolio
Staff in 2013, and is one of the Construction Group in 2014.
portfolio managers for our Global
Select strategy.
11CURIOUS
ABOUT
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