Great start for Baillie Gifford US Growth – Baillie Gifford US Growth has published its first set of results and they are pretty good. During the period from 23 March 2018 to 31 May 2019, the share price and net asset value returned 28.4% and 28.8% respectively. This compares with a total return of 22.2% for the S&P 500 Index. The trust’s focus on North American growth stocks tends to mean that there is little dividend income and, in fact, the revenue for the year was negative and so there will be no dividend.
The company’s early success has been drawing in new investors. £70m worth shares have been issued since launch and the trust has traded consistently at a premium.
10.8% of the portfolio was invested in unquoted companies at the year end – this was spread across 11 companies. Exposure to unquoted companies was one of Baillie Gifford US Growth’s selling points. It is much easier to manage this in a closed ended trust than an open-ended one – as Woodford found out. The trust has already seen one successful listing – rise-hailing, Uber competitor Lyft IPO’d on NASDAQ in March.
Here is some commentary on that company and a couple of others taken from the manager’s report.
“Butterfly Network. Butterfly has the potential to be a disruptive force in the medical imaging industry. It has redesigned ultrasound from the bottom up based on semiconductor technology. In doing so, it has produced a product which is smaller, cheaper, and more powerful than traditional ultrasound machines. The device plugs in to an iPhone and, using artificial intelligence, is able to guide a physician to capture an image and then, in an increasing number of cases, process that image in order to augment diagnosis. The device costs US$2,000, which is an order of magnitude less expensive than current equivalents. We believe Butterfly could potentially democratise access to imaging in both developed and developing markets. On the latter, there was recently a wonderful article in the New York Times which outlined how Butterfly’s devices are being used by practitioners to make diagnoses in rural villages in Uganda. Butterfly is a great example of where shareholders’ assets are being deployed to a cause which could be very worthwhile both financially and socially.
Another important aspect that we have stressed in previous communications is the critical role that asymmetry plays in driving long term stock market returns. Academic studies have clearly shown that, over the very long term, most of the net excess return for the market is attributable to a small number of companies that do exceptionally well.
We are of the view that the pattern of returns that we have seen historically may turn out to be even more pronounced in future, given the pace of change affecting many industries. In other words, the gaps between the winners and losers are more likely to widen than shrink. The disruption enabled by the emergence of new technologies started in a few select industries, such as retail and advertising, but it is spreading more broadly. We are now seeing digital, mobile and machine learning technologies applied in insurance, banking and, as outlined above with Butterfly Network, in the healthcare sector.
Another part of the global economy where we expect to see significant transformation over the next decade is the transportation sector. It is an area which has seen little change since the Ford Model T started rolling off the production line over 110 years ago. People still buy cars, fill them up with petrol, and then drive them from A to B. But there are some major problems with this model. Firstly, petrol is a hydrocarbon, and it is probably not in society’s best interests that we keep burning hydrocarbons at the rate we have been doing historically. Secondly, car ownership is inefficient with the average car being used only about 5% of the time. Given that Americans collectively spend around US$1 trillion per year on their cars this low capacity utilisation represents a huge waste of resources. Finally, humans are fallible – we are easily distracted, which leads to accidents. Tragically, 1.4 million people are killed every year on roads around the world, making road traffic injuries one of the ten leading causes of death across all age groups and the leading cause of death in young people between the ages of 5 and 29 years.
These challenges are not insurmountable, however. There are three important and parallel technology-driven shifts underway right now which could reshape the transportation sector over the coming decades. These are: (1) the transition from petrol engines to electric vehicles (‘EVs’); (2) the shift from car ownership to ride-sharing; and (3) the move from human-driven cars to autonomous vehicles. The exact slope of the adoption curve for each of these new products is currently unknown, but the arguments for their mainstream adoption in the long term are compelling.
Whilst all three of these technology-led evolutions are currently at a nascent stage, the first – the shift from petrol to EVs – is most advanced. It sounds strange to say it now, but it was not so long ago that electric cars were undesirable. Tesla has, pretty much single-handedly, made electric cars cool. EVs are fast, safe, clean and increasingly affordable. Whilst true plug-in EVs still represent a small proportion of annual car sales in the US and globally, the trends are indicative of a major shift underway. In the US, EVs made up just over 2% of new car sales in 2018 representing an almost doubling of market share year over year. In California, arguably a leading indicator for the adoption of new technologies, EVs comprised almost 8% of new vehicle sales last year. The astonishing fact that the Tesla Model 3 was the best-selling car in the US by revenue based on the last four quarters, coming in ahead of the Toyota Camry, perhaps marks a major milestone on the coming transformation of the car industry and the end of our reliance on a major finite resource.
The second of the major technology-led shifts in the transportation sector, that from car ownership to ride-sharing, is also gathering momentum, as anyone who has used the services of Uber or Lyft will attest. What we may be seeing with these services is the beginning of a major change in mindset amongst consumers. For so called digital-natives, on-demand services such as Airbnb and ride-sharing are the new normal. The changing attitudes towards driving are strikingly evident in the UK, where the proportion of 17 to 20 year olds with a driving licence has plummeted from almost half in the early 90s to under one-third in 2014.
Last year fewer than 1% of miles driven in the US were on the ride-share networks which serves to highlight the scale of the opportunity. We invested in Lyft for the Company in the middle of 2018 when it was still private. Our work has led us to conclude that Lyft is a company with a strong social purpose and genuinely distinctive culture. These softer points, whilst admittedly intangible and difficult to measure, may add up to a significant source of edge. The fact that Lyft has risen from a very distant position in the US market to challenge Uber highlights the importance of factors like culture in consumer-facing businesses.
If Lyft does succeed in weaning consumers off car ownership it could act as a catalyst for much bigger societal changes. Many US cities have been optimised for cars rather than people. If more trips are taken on the ride-sharing networks then fewer parking structures will be required, freeing up room for more green spaces or perhaps even denser cities, with more people living closer to where they work. There is potentially scope for ride-sharing to be a substitute for a significant proportion of car ownership in its current form, perhaps 5% -10% of miles driven. This is still a very meaningful market opportunity for Lyft. However, for ride-sharing to reach a much greater penetration figure will require the cost of ride-sharing to come down substantially, and for that we need autonomy.
The third technology-led shift, the move from human-driven cars to autonomous-vehicles, is arguably the least mature but the impact of its adoption could be truly transformational across several different domains. A decade and a half ago progress in autonomous driving technology was being led by a select number of academic institutions like Stanford and Carnegie Mellon. However, the centre of gravity has shifted to the commercial space with Alphabet’s Waymo, Tesla and Aurora arguably leading the way, albeit with quite different approaches. We have exposure to all three of these companies in the Company, the most recent investment being Aurora, which is an unquoted company founded by the former head of Waymo, Chris Urmson. We believe broad exposure to this area is appropriate given the potential scale of its impact. There is no consensus on when true autonomy will become mainstream which is not surprising given the enormous range of edge cases that any system will have to deal with (e.g. roadworks, snow), but most would agree that the remaining problems are solvable, and it will not be that long until we are being driven around by computers.
Ride-sharing is still quite expensive on a per-mile basis. Around two-thirds of the total cost is attributable to the driver. By incorporating autonomous technology into ride-share networks, it is possible that costs would fall to a level where it would be almost inconceivable that anyone would want to own a car for practical purposes. In addition, autonomous software, when deployed at scale, ought to have the potential to be orders of magnitude safer than human drivers, leading to a drastic reduction in road fatalities and injuries. It will also free up time that would otherwise have been spent driving for productive work and save consumers considerable money. Lyft is investing significant capital in the development of its own ride-sharing capabilities and is also working closely with Waymo to trial autonomous Waymo vehicles on the Lyft network in a small area just outside of Phoenix, Arizona.
The three major shifts outlined above are likely to lead to a complete redrawing of the landscape in the multi-trillion-dollar global transportation industry over the next decade. This will lead to dislocation not only within transportation but across a whole host of industries which support the current status quo. What will come of the traditional car companies and their supply chains and distribution and support networks? What about the oil companies? Or the car insurers? These businesses make up a substantial proportion of market indices. Fortunately, disruption also brings opportunities and in an actively managed growth portfolio, we can direct capital to exceptional growth companies like Tesla and Lyft and Aurora and Alphabet which are the agents of these changes and where, as with Butterfly, their success could simultaneously result in high returns and strong and lasting net benefits to society.
The above is just a snapshot of the technology led change which is underway in society. We believe that we will come to view these times on a par with the industrial revolution. Baillie Gifford US Growth Trust, with its long term and genuinely active approach which bridges across the listed and unquoted opportunity set, provides the ideal vehicle to navigate these shifting waters and to hopefully identify and own the exceptional companies which are driving these important societal shifts.”
USA : Great start for Baillie Gifford US Growth
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