Baillie Gifford: can a new generation keep riding the tech boom?
Plenty has been written about Baillie Gifford, the Scottish investment firm’s success with technology stocks, much of it has been featured in the 3L&3S as well. But this piece is more about the softer aspects of the organisation that Baillie Gifford is, an understanding of which can give us at Marcellus a sense of what drove this success in the first place – talent management, incentives and most importantly culture. The article’s pretext is the impending exit of its most successful manager James Anderson and the handing over of the baton to the next generation:
“Anderson’s bet on Amazon underlines the principles that have guided his decision-making — the idea that exponential improvements in technology will drive innovation; the contention that the vast majority of stock market returns come from a tiny percentage of businesses; and a relentless optimism about the future. The same philosophy informed his early and fierce backing for Elon Musk’s electric carmaker Tesla — in defiance of many sceptics. “James saw the likely extent of the technological change in the early years of the 21st century and backed it wholeheartedly,” says Douglas McDougall, a former senior partner of the firm who hired Anderson in 1983.”
But underpinning those principles is an obsession with long term thinking:
“Outlook measured in decades “Actual investors think in decades. Not quarters.” Before the pandemic, this sign hung over the door to Baillie Gifford’s Edinburgh headquarters, where the atmosphere is closer to a library than an adrenalin-charged trading floor. Investors are more likely to be reading an academic paper or browsing a history book than screaming orders down the telephone. Although Baillie Gifford has kept its contemplative atmosphere, Anderson led a quiet revolution on its investment floor around 2004. He abolished the firm’s position of chief investment officer and moved away from having a top-down investment policy committee. The new mission was to be genuinely long-term, global and indifferent to the movements of the stock market indices.
The firm pushed out the time horizon of its investments from two to three years to taking a five to 10-year perspective. It has placed more emphasis on trying to imagine the prospects for a company, cutting out the short-term noise around its current profits or valuation — an approach that has now attracted a lot more competition. It also began casting its research net further afield. “We became more ambitious in the sources of information we look to use,” says partner Kate Fox, pointing to industry experts and academics who are at the vanguard of technological change. A crucial influence on the investment process has been Hendrik Bessembinder, a professor at Arizona State University, who found that over many decades, just 4 per cent of stocks accounted for all the net wealth creation. The upshot is that fund managers should seek to own as many of these outliers as possible and allow the magic of compounding to work. “The biggest mistake you can make is not failing to sell something you should have sold, it’s selling something that you should have held on to,” says Slater.”
And critical to that long term thinking is an ownership culture which aligns the investment team’s incentives to the long term:
“The partnership culture is the most distinctive thing about Baillie Gifford — you feel like if you own the business, your instinct is to do things right.” Baillie Gifford is independent and wholly owned by its 47 partners, all of whom have worked at the firm for an average of just over 20 years and have unlimited personal liability. The structure is a great retention tool because its top staff are incentivised by being equity owners of the business, and encourages a long-term mentality.
The real advantage of the partnership is the collective perspective it gives you to make long-term decisions, or rather to remove any pressure for taking short-term decisions,” says Charles Plowden, who retired in April as senior partner. “We don’t have any outsider owners wanting dividends or setting targets for funds under management growth or revenue growth.” The firm has never done any mergers or acquisitions, and continued recruitment during financial downturns in 1987, 2000 and 2008 when rivals typically cut back.”
“Many of Baillie Gifford’s current and former leaders agree the firm’s biggest risk is internal: to avoid hubris or complacency and maintain its culture as an investment-led firm, even as it has grown to almost 1,400 permanent employees in 11 global offices.
Before joining Baillie Gifford, Andrew Telfer, its joint senior partner, worked at Arthur Andersen, the accountancy firm destroyed by its involvement with Enron. Telfer believes Arthur Andersen was brought down by a very small number of people. “I’m very conscious of that when thinking about Baillie Gifford. You need to have shared beliefs that people actually live and operate by,” he says. Anderson believes the biggest risk is “another thing I’ve learned from Amazon, it’s mostly internal . . . You’ve got to keep the attention on being obsessive about investment and obsessive about rethinking everything you know in investment.” In his final yearly letter to Scottish Mortgage investors, Anderson wrote: “My greatest failing has been to be insufficiently radical.” In the same letter, Slater said that Bezos stepping back from Amazon “may reduce the company’s appetite for bold experiments”. As Baillie Gifford faces its own generational transition, its clients may be wondering the same thing.”