Amazing year for Baillie Gifford US Growth – Baillie Gifford US Growth Trust has published results for the year ended 31 May 2020. It was a great period for the trust as it returned 46.5% in share price terms and 44.2% in NAV terms against a 15% return for the S&P500.
The managers made eight additional unlisted investments over the last twelve months: Ginkgo Bioworks, Thumbtack, Stripe, RigUp, Warby Parker, Convoy, Airbnb and Snowflake. Two existing unlisted holdings, Slack Technologies and Peloton Interactive, went public in the period. The net result was that, at the end of May, the trust held positions in 17 unlisted securities which collectively comprised 12% of the total assets.
The managers note that many of the companies in the portfolio have been beneficiaries of the changes forced upon us by COVID-19. They bought two particularly successful examples of these ahead of the pandemic – Zoom (video conferencing) and Teladoc (online medical consultations). Here is an extract from their report:
“…the lockdowns have forced consumers to change their habits and shift their purchases online. E-commerce penetration rose as much in the first half of 2020 as it did in the prior five years combined. Amazon had to hire an additional 175,000 workers just to keep up with demand. Wayfair’s revenue growth rate accelerated from around 20% year-on-year in the first quarter to 90% year-on-year in April. Given the advantages of online shopping, some consumers may continue with it even as the offline world re-opens. The old habits have been broken. Rather than a demand spike, what we may be seeing right now is pull-forward of the future.
Habit-breaking forces are also underway in the world of work. Why is it that most workers still come together in the same place at the same time, five days per week? This structure made sense when jobs were primarily concerned with making physical things. However, in today’s knowledge economy, there are many jobs which do not require colleagues to be together in space and time to collaborate. Remote working is not optimal in every circumstance, but the flexibility that it affords is better for some. Many companies have learned this first hand as they have moved to home-working in response to the pandemic. Portfolio holding Shopify is one example. Founder Tobi Lütke recently tweeted that the company was going ‘digital by default’ and declared that ‘office centricity is over’. If workforces do become more distributed, this will make communication and collaboration more challenging, creating opportunities for enterprise software companies like Zoom and Slack.
Some of our healthcare holdings have made direct contributions to the Covid-19 response. Moderna Therapeutics is attempting to develop a vaccine. It is moving swiftly. It took just 25 days for the company to produce its first clinical batch, which is testament to the strength of its novel drug development. There is still much work to do but early read-outs from its clinical trials have been encouraging. Elsewhere, unlisted holding Butterfly Network’s handheld ultrasound machines have been used on the front lines to assess and monitor patients with Covid-19 both inside and outside of hospitals. Teladoc, the leading telemedicine provider which we bought in December last year, has been helping patients to connect safely to their doctors via remote services. Usage almost doubled in the first quarter of the year. In all three cases these companies have displayed impressive agility in the face of rapidly changing market circumstances.
The backdrop has been challenging for all, but the companies in the portfolio which interface with the real world have been particularly affected. For example, Lyft, the ridesharing company, saw demand fall by 75% in April. Medical device company Glaukos’ revenues have been impacted by the postponement of elective procedures such as cataract surgeries. As previously mentioned, we have little insight in to the exact timing and trajectory of the recovery. However, we are confident in the resilience and adaptability of the holdings in the portfolio and remain enthused about their long-term growth opportunities.”
Cloud infrastructure leverages growth
The managers also talk about the portfolio companies that are using cloud-based infrastructure to leverage the growth of their business. These include payments platform Stripe, which is the largest unlisted holding (2.2% of the portfolio). “Stripe was created to solve challenges associated with starting and scaling businesses. The payments world is messy. There is complexity within and between regions. Each geography has its own unique banks, credit card rails, mobile wallets, cultural norms, regulators and regulations. It is an extraordinarily challenging landscape for any company to navigate, never mind a start-up. Stripe helps its customers overcome these complexities. Its platform sits above the financial system and interacts with it on their behalf. It aims to make sending and receiving money as simple as transferring information.
Stripe is a cloud-based infrastructure platform. Three other portfolio holdings – Shopify, AWS (a division of Amazon), and Twilio – also fall within this category. These companies perform a similar intermediating role to Stripe but within different domains: e-commerce, IT infrastructure, and communications respectively. Each of the platforms has a distinctive approach, but there are common threads that cut across all of them. They can all be thought of as operating systems which sit above complex networks of institutions or infrastructure. They use software to remove this complexity, making it easier for the underlying infrastructure services to be managed and consumed. Their business models transform capital costs into operating costs and enable their underlying customers to run more flexible and leaner operations. They deliver their services over the internet.
These businesses are helping to lower barriers to entrepreneurship. Instead of investing vast sums of money up-front in building data-centres and other types of infrastructure, companies can rent access via these scaled platforms. For example, through Shopify, online retailers can gain access to all the tools they need to run their business, from order management to fulfilment. Twilio enables its customers to build communications functionality into their applications without the need for relationships with telecoms companies or millions of dollars in capital investment. It has never been easier to start and scale an online business. All an aspiring entrepreneur needs to get going is a good idea and a smartphone.”
USA : Amazing year for Baillie Gifford US Growth