Baillie Gifford European Growth reports positive year as region’s start-up ecosystem ‘booms’ – Baillie Gifford European Growth (BGEU) has published its annual results for the year ended 30 September 2021. Over this time, its NAV total return was 24% compared to a total return of 23% for the FTSE Europe ex UK Index (in sterling terms). The share price total return for the same period was 25.2%.
The chairman said performance over both time periods was driven by several names, including Addlife, IMCD and Nibe. These companies are respectively involved in MedTech distribution, specialty chemicals distribution, and climate solutions including heat pumps. These are very different end markets, but all afford the potential for attractive organic growth. He added that each of the companies named is run by astute management teams which are adding further value through acquisitions that have helped drive consolidation and improve sector fundamentals.
Any dividend paid will be by way of a final dividend and be the minimum required for the company to maintain its investment trust status. Revenue per share for the year was 0.42p and the board is recommending a final dividend of 0.35p per share which will be paid on 11 February 2022, subject to shareholder approval at the company’s AGM. This is due to be held at 11.00am on Thursday, 3 February 2022 at The Institute of Directors, 116 Pall Mall, London, SW1Y 5ED.
This is the second set of annual results published from the company since Baillie Gifford took over management.
Statement from the manager
It is tempting to focus this report purely on the two years since our appointment as managers. Indeed, there would be plenty to discuss. Covid-19 wreaked havoc with many companies, the economy and stock markets alike. Our shock at the exponential rise of this horrible virus was matched by our amazement at humankind’s capacity to devise viable vaccines in record time and bring hope to billions around the world. Too seldom do we harness the power of collaboration and the transformative capacity of innovative technology. Throughout this turbulent period, we’ve been privileged to witness the adaptability of our portfolio companies, which have largely thrived in a context of chaos and driven strong performance. Tempting as it is to dwell on this, such short-term gyrations tell us little. Most companies’ share prices don’t change much in the short term. If they do, it’s because of an outsized impact from investor emotion and sentiment on valuation multiples. Widen the timeframe, however, and company fundamentals and corporate cultures play much more important roles in value creation. Our recent marketing slogan – ‘actual investors think in decades, not quarters’ – may sound like righteous admonition, but it is absolutely central to our investment philosophy. Having it written down and so publicly advertised helps galvanise and reinforce a set of behaviours that underpin successful long-term investing.
Widening time frames also means you get to see just how extreme positive returns can be from a few companies able to compound their inherent advantages and benefit from positive feedback loops. Our belief that stock market and portfolio returns are driven by a relatively small number of big winners, or outliers, is now deeply ingrained into our philosophy and might be familiar to some of our shareholders. This has been heavily influenced by academics such as Professor Hendrik Bessembinder whose seminal paper, “Do Stocks Outperform Treasury Bills?” revealed the hidden asymmetry of markets, and the fact that very few companies actually matter. This has encouraged us to be more ambitious in our search for potential outliers and extreme outperformance.
You only need look at our European investments ten years ago to see how much this has influenced our thinking. Back then our largest holdings were Nestlé Svenska Handelsbanken and Roche. These were classic examples of what Europe had to offer. Such ‘quality’ businesses, founded in the late 1800s and with low but stable growth rates, were considered safe places to invest. What took us a while to really understand though, was that companies like these had almost no chance of producing the extreme returns that would propel them to outlier status. This was less to do with our imagination and more to do with average growth rates and returns on capital that we now believe to be insufficient to generate outsized returns.
Our three largest holdings now, IMCD, Adyen and Zalando, are anything but average. They are relatively young, founder-run businesses that have the potential to be much, much larger over the next five to ten years. IMCD may look like a dull speciality chemicals distributor, but it is driving the consolidation of its extremely fragmented industry and should substantially increase its market share percentage which is still in the low single digits. Adyen, a digital payment processing platform, founded in 2006, listed in 2018 and now one of Europe’s most valuable companies, processed over €300bn in volume in 2020 but is still growing at more than 30% per annum. Zalando, Europe’s leading online fashion platform, founded in 2008, continues to leverage its economies of scale and expects to grow gross merchandise volume by 20-25% per annum over the medium term. We believe each of these, as with every company in the portfolio, has a good chance of at least doubling in value over the next five years, but that’s just the beginning. Not all of the companies in our portfolio will be successful, but we believe that the big winners will more than make up for any mistakes.
A lot of the work done on outliers and asymmetric returns has focused on companies that have generated the most wealth. This, however, is influenced by how big a company is to begin with. A €100bn company that increases in ‘value’ by 10% to €110bn creates the same amount of ‘wealth’ as a smaller €1bn company that increases by 1,000% to €11bn. Companies like Nestlé and Roche are examples of the former but we are much more interested in the latter. While we look for stocks that can at least double, we’re really interested in those with the potential to increase in value by 10x, commonly called ‘tenbaggers’, or even more. What we always find fascinating, and encouraging, is just how many companies in Europe manage this remarkable feat. Over the last decade, there have been 60 companies from our investment universe – currently this includes around 1,200 public companies – that have increased in value by more than 10x. The last decade of course has been very favourable for growth investing, but a 5% hit rate for finding such extraordinary companies is very impressive from a region which suffers from a reputation as a low growth market.
Outlook
Despite the rich opportunity set Europe has to offer, our industry has not done enough to support our most promising companies. Europe has failed to provide sufficient capital and strategic support to allow enough of our growth companies to scale without worrying about short-term profits. Europe’s corporate leaders must also take responsibility for not being as ambitious as their counterparts in other regions. This is changing. Europe’s start-up ecosystem is now booming, helped by an influx of funding from venture capitalists around the world. These investors have helped shape the next generation of European outliers and develop strategies to scale and create global champions. Niklas Östberg, the CEO and co-founder= of Delivery Hero, highlighted this change in mindset recently when he said, “Don’t buy our stock unless you believe we sit strategically right to scale efficiency and become >10x larger.” This is a company that in 2020 doubled its revenue but has the ambition to create something much larger. Europe needs more of these companies, and those that have shown how innovative Europe can be, to provide inspiration to all those other entrepreneurs.
We want to match this with our own ambition to become Europe’s best growth manager. To do this, we must continue creating value, for both our clients and society, by investing in Europe’s outliers. When it comes to their growth potential, business economics, or corporate cultures, these companies are not just better than average, they are outliers at the extreme end of the spectrum. Their potential returns, as a consequence, are also extreme. To capture this though, we must focus on the things that matter most, be optimistic and creative when imagining how a company or industry might look in a decade from now, have the confidence to hang on when things go wrong and be comfortable ignoring large parts of the market.
BGEU : Baillie Gifford European Growth reports positive year as region’s start-up ecosystem ‘booms’