Masters in Business Interview with Tom Slater of Baillie Gifford
Tom blames the failure of active investing to the inherent passiveness with which most active managers have run their funds, mostly index hugging with very little active share. “you see so many funds that label themselves as active that charge fees for active management, but have a huge overlap with the index or low active share as it is known. ….in some ways, the industry has been the architect of its own demise….[there are] remarkable results that show a correlation between active share and performance….So, you have this remarkable idea that you don’t even need to know what bets your fund manager is taking. simply the fact they are taking bets is likely to lead to a better outcome”
On the high valuations that growth companies are trading at:
“One of the ways we would characterize our approach to investments would be the idea of growth at an unreasonable price. And what I mean when I say that is that we’re looking for companies that address really big opportunities and that opportunity is often dynamic, it’s often changing. And you have a hypothesis about why this company might be the one to benefit from that change…if the opportunity is big enough, if the edge of the company is great and if there’s something special about the way it goes about that task, then it can generate a huge amount of value.
So, if you look at a company like Alphabet or Amazon, these companies have been vastly underestimated for most of their life cycle. And I think was Michael Moritz at Sequoia who said, why do we persistently underestimate just how great a great company can be?
And so, we don’t really look at multiples of earnings or sales. We look at what might this company achieve and where could it be five years from now….. if you can identify one of those small number of companies that are big winners in markets, then they can justify paying what may appear to be optically high short-term multiples because some of the growth opportunities today are so open-ended and you see a lot of winner takes all or winner takes most economics.”
On how increased availability of quant data is affecting investing:
“our process is very qualitative. What we’re trying to think about are what are the drivers? Where the revenues of this company be 5 or 10 years from now? What are the competitive advantages which is really getting into questions about — about profitability and margins?
But what is the corporate culture? What is it about them that makes this business special? Why can’t somebody else do it?
And we think if we can answer some of these more causative questions, I think it gets you to broadly correct answers. The left of the decimal point, if you will. And I see much more value in that for us than what we see in markets which is this constant attempt to predict where the company will end this quarter or next quarter more accurately than everybody else…in which we have no advantage in and it’s so important for an investor to be able to articulate what they think their own advantage is, we spent so much time asking of companies but so little time asking it of our selves. But we have no advantage in that more precise estimation of short-term earnings than anybody else.
But we do have being in Edinburgh, having a bit of distance and perspective on what’s happening in financial markets is maybe that ability to be patient in the — in this most impatient of industries. We think that’s more likely to add value for our clients over time.”
On why ‘sell discipline’ is actually in not selling winners too early:
“stock markets are driven by a really small number of exceptional companies. And so, what we mustn’t do as long-term investors is truncate the impact of those big winners. …since buying Tesla seven years ago, I don’t know how many times I’ve been told to sell. It’s had seven or eight drawdowns of at least 30 percent in that period. And every time it goes up, people are going when are you going — when are you going to sell? But it’s actually not unusual to see a big winner like Tesla. If you look at over that timeframe. That’s being the case of Amazon over the past 15 years. That’s been the case for us with Tencent, the Chinese gaming company over the past 12 years. Maybe we have not quite the same attraction of headlines that Tesla has had but it — the structure of returns is clear. It’s that small number of big winners.”