Strong performance from Baillie Gifford US Growth despite negative revenue return – Baillie Gifford US Growth (USA) has posted its annual results for the year to 31 May 2021. During the period, the company’s share price and net asset value (calculated deducting borrowings at fair value) returned 63% and 62.8% respectively. This compares with a total return of 22.4% for the S&P 500 Index (in sterling terms).
USA has no dividend target and will not seek to provide shareholders with a level of dividend due to its focus on capital growth over the long term. The net revenue return per share for the year to 31 May 2021 was a negative 1.78p while the revenue account is running at a deficit so the board has recommended that no final dividend be paid. Should the level of underlying income increase in future years, it will seek to distribute the minimum permissible to maintain investment trust status by way of a final dividend.
The team said the pandemic has caused an avalanche of structural change from the addition of healthcare technologies such as Moderna’s mRNA therapy platform and Teladoc’s telemedicine services into the mainstream, to consumers altering their behaviour and making more purchases online from the likes of Wayfair and utilising apps such as DoorDash.
They added: “We are beginning to see the digital transformation take hold in new areas and have taken new public company holdings in Carvana and Vroom in the second-hand car market, Lemonade in insurance, and Coursera in education.
“We made seven additional private company investments over the last twelve months whilst four of our existing private company holdings went public in the period.” At the end of May, USA held twenty private companies which collectively comprised 16.5% of total assets.
Statement from the manager:
As the world begins to take some significant steps out of the tumult of the past year, it is hard not to look around blinking somewhat as if to say, ‘what just happened?’. Whilst we have always believed that technology-led change was inevitable, its pace and spread during the past year have served to humble us. Lest we forget – inevitability does not equate to predictability.
The stock market is far too complex a system to think in certainties. We prefer to think in probabilities. We combine this probabilistic thinking with one of the most underrated temperaments of investing: patience. These traits afford us the luxury of investing with a long-term mindset and enable us to ride out the inevitable volatility and humbling periods of underperformance. They allow us to focus on what a company could achieve if things go right. We understand that whilst some of the innovators that we own will succeed, others will not, and some we will miss completely but the passage of time allows us to make and own our mistakes, hone our understanding, learn from others, and deepen and develop our thought processes.
In times of rapid change the temptation is to grasp the familiar, ‘the certainties’; take comfort from the recognisable and double down until ‘normality’ returns. But with change comes opportunity. Probabilities enable us to stretch our thinking and imagine these opportunities. There is no ‘normality’. ‘Normal’ is not a static concept. Companies do not operate in a vacuum; they are part of an ecosystem. They evolve, adapt and impact each other.
In nature, many complex systems, like ecosystems, have a tendency to self-organise into a ‘critical state’, a sort of teetering calm, where minor changes or disturbances can lead to avalanche effects of all difference sizes. One way to conceptualise this is by thinking of a sandpile. Consider a flat table covered in a thin layer of sand. The addition of a single grain will have little impact on the other grains; there is stability. However, as more grains are added, the sandpile grows, from a layer, to several layers, to a heap. Eventually, the sandpile reaches a critical point, where the addition of another grain can cause local disturbances or even system wide avalanches.
There are parallels between these sandpiles, natural ecosystems, and the global economy. The Covid pandemic could be thought of as just another grain added to the already complex system that is the world economy. But it set in motion a huge avalanche. In biology the term used to describe this is punctuated equilibrium. Under this definition evolution occurs in spurts instead of following the slow and steady path outlined by classical Darwinism. Long periods of relative inactivity, the building of a sandpile, are interrupted by rapid disruptions, large avalanches. And just like in nature where species evolve or mutate rapidly during periods of punctuated equilibrium, the same can be said of companies during the pandemic. Many businesses had to evolve their business practices and go-to market strategies, and adapt to massive surges in demand and challenges with supply. And just as happens in nature, some thrived, others evolved to survive, and some will no doubt go extinct.
As companies, big and small, evolved and adapted to their new environment, they impacted each other and the environment around them. The biological term for this idea is ‘fitness’. The higher the fitness of a species, the better suited it is to survive and reproduce in its specific environment. And just as the survival of a cheetah depends not just on its own genetic code but also that of the zebra it hunts – if the zebra sprouts wings it doesn’t really matter how fast the cheetah is – a company’s fitness during periods of radical change will depend on how well placed it is to respond to changes in demand and how it is positioned relative to its competitors. Holdings such as Shopify, the ecommerce platform, and Stripe, the payments platform, were there to help offline businesses transition online and generally support small and mid-size businesses to adapt and keep their businesses operating during the complexity of the pandemic. Holdings such as HEICO, the parts manufacturer for the aerospace industry, and Away, the luxury travel brand, struggled during the past year as the travel industry ground to a halt. Replacement parts for airlines were not required whilst planes were grounded and upgrading suitcases was not a top priority for many whilst they were stuck inside their homes. No matter how well run these businesses are, their fitness was significantly impacted by the challenges of the industry into which they sell – travel. We expect these challenges in the travel industry to be relatively short-lived. However, a deeper and more permanent evolution is happening in the way we consume content; and it is not just the content providers themselves that have benefited from this change. Over the past year streaming services like Netflix, Roku and Disney+ have seen significant upticks in subscriber growth. Linear TV has lost out, but there have also been avalanches in other parts of the sandpile. As viewers have shifted to streaming services, the advertising industry has had to evolve its mindset and adapt to follow this customer base. Procter & Gamble has announced that it expects to move away from the traditional upfront model of TV ad buying, a hangover from the 1950s when advertising inventory was sold in advance to fit in with new car releases. Instead of buying up front, advertisers are now turning to demand side platforms, such as The Trade Desk, to buy adverts programmatically in real time. The Trade Desk sorts through twelve million ads per second and matches ad inventory with advertisers based on data about who is watching. Thus, The Trade Desk and the rise of connected TV or streaming has resulted in more efficient, data-driven ways for advertisers to reach their customer base.
Companies need to evolve in periods of rapid change simply to survive. They operate in complex ecosystems where the other agents, their customers and competitors, are constantly evolving and changing. In nature this is known as the Red Queen Effect, taken from Alice in Wonderland. The basic premise being that species, just like Alice and the Red Queen, must run fast just to stand still. Survival is a never-ending race, either you evolve and adapt, or you die. In the long run there is no static equilibrium. Thus structural change is powerful because it does not happen in isolation. It comes in avalanches that impact all companies and industries, changing the landscape for everyone, and driving everybody forward.
The pandemic has caused an avalanche of structural change. The ecosystem has evolved, and the initial grains of sand have triggered many downstream effects. Breakthrough healthcare technologies such as Moderna’s mRNA therapy platform and Teladoc’s telemedicine services have been thrust into the mainstream, out of necessity. Consumers have altered their behaviour and have been making more homeware purchases online from Wayfair; viewing and purchasing homes online from Zillow and Redfin; and utilising apps such as DoorDash for meal and snack delivery. Employers have been forced to embrace remote working, enabled at least partly thanks to the interconnectivity provided by companies such as Zoom. The pandemic has highlighted the importance of employee mental health, and companies have turned to new private company holding Lyra’s mental health platform which connects employees to help and treatment. The last eighteen months have also seen a new wave of entrepreneurs emerge, ready to take advantage of the services offered by the likes of Shopify, Stripe and Brex which are enabling them to start and scale businesses more efficiently than ever before. And more specifically, companies like Pinterest have used the pandemic to enable insight led selling. Harnessing its data, Pinterest was able to see how trends around Halloween and Thanksgiving were different this year, helping Chief Marketing Officers to get in front of those trends and deliver high returning ad campaigns. The perfect illustration of the power of intent on the platform and a significant unlock in bringing advertising dollars to Pinterest.
The changes above run deep. This is beyond a few deviations at the top of a sandpile which are easy to go back on. Covid has moved many grains of sand, touched many industries and the structure of the pile is now fundamentally different. This means it is close to impossible to go back to how things were. New ‘equilibriums’ have been established across industries at levels higher than those prior to the onset of Covid.
USA : Strong performance from Baillie Gifford US Growth despite negative revenue return