Baillie Gifford & Co. is showing why sticking to your bets for the long run is a core tenet of investing.
The 112-year-old Scottish investment-management firm is reaping the benefits of being one of Tesla Inc.’s biggest backers through share swings and controversies surrounding Chief Executive Officer Elon Musk. A 400% surge in the company’s shares has propelled a 4.5 billion-pound ($5.8 billion) global equity fund run by Mark Urquhart and Tom Slater to a 72% advance this year, making it the top performer by a stretch among U.K.-based peers.
The next two funds in Morningstar Inc.’s ranking are also run by Baillie Gifford, and the largest holding in all three is Tesla. At a time when investors are increasingly considering deploying their money on their own rather than having someone else do it for them, Urquhart and his colleagues are seeking to highlight the advantage of relying on fund managers who can potentially spot winners among stocks long before they become popular.
Baillie Gifford first bought Tesla stock in early 2013, when it was trading at less than $10 a share. Even after a recent 5-for-1 stock split, its current price is at more than $400. Urquhart’s fund, started in 2017, is now on the lookout for the next Tesla: it’s snapping up stakes in firms at the forefront of social change, from Beyond Meat Inc., which is helping transform the way we eat, to Zoom Video Communications Inc., which has soared as Covid-19 alters how we interact.
Musk “has almost single-handedly transformed an industry,” Urquhart, who drives a Tesla Model S, said in an interview. “He’s got flaws like we all have, but they’re more in the public eye. You have to make it clear to your investors that there will be volatility, but we are invested for the long run.”
Baillie Gifford is a so-called growth investor, meaning its fund managers invest in companies they expect to grow dramatically and hold on to them for the long haul. This approach can mean holding large stakes in the companies managers like most. The Tesla stake accounted for 10.7% of the assets in Urquhart’s Long Term Global Growth Investment Fund at the end of August, the latest data available. The top 10 companies made up 55% of the total.
“Depending on the mandates, some carry higher risk in terms of concentration — something that you should be aware of,” said Fatima Khizou, who covers the firm’s funds at Morningstar Inc. “But it is something that they have been managing well.”
U.K. global growth equity funds wagering on large companies bounced back quickly from the market sell-off in March. They were up 14.9% on average this year through Sept. 30, making them the country’s best-performing fund category, according to data compiled by Morningstar.
Still, the Baillie Gifford funds stand out in a strong field. After Urquhart, a fund co-managed by Kate Fox has gained 56.5%, and a third fund has gained just over 52%. The closest competitor is up about 30%.
“Our style is to invest in disrupters,” said Urquhart, who has been with Baillie Gifford for nearly 25 years. “In January and February, we had no idea what would happen when the pandemic took hold. But we were in a position where many of the companies we owned had disruptive business models, so we were always set up for the pandemic in a way.”
Edinburgh-based Baillie Gifford built its holding in Tesla to become the second-largest owner after Musk himself, though it recently fell to fourth after reducing its stake to 4.25% of the company. The cut was made because Tesla’s soaring share price meant the value of Baillie Gifford’s stake exceeded U.K. limits on the weight of a single stock in investment funds’ holdings.
The firm has no intention of cashing out, however. James Anderson, who manages Baillie Gifford’s Scottish Mortgage Investment Trust with Slater, said at the time that the firm would increase its Tesla stake again if “serious setbacks in the share price” made it possible. The trust also has Tesla as its biggest bet as of Aug. 31.
“There is a collegiate approach within Baillie Gifford, and Tesla is one example of how we share ideas,” said Fox, whose Positive Change Fund also opened in 2017. “Many of my colleagues have spent a lot of time building a relationship with Tesla and the board. We have good access.”
The top 10 holdings in Urquhart’s fund contain established names like Alibaba Group Holding Ltd., Amazon.com Inc. and Facebook Inc. that have helped drive gains. But he’s also looking at trends that have accelerated during the pandemic, such as working from home, that could become permanent features of our lives.
Here are three of Urquhart’s picks for the future:
- Beyond Meat benefited before the pandemic from growing concern about the carbon footprint of meat. “The issue now is that some diseases may pass to us from animals,” Urquhart said. “People are taking a step back and thinking about their health.” The stock’s up about 140% this year.
- Zoom, owner of the popular video-conferencing app, has soared by about 600% this year as businesses and schools shift meetings and classes online. “The Zoom team is fascinating to speak with,” Urquhart said. “They think we’re just getting started in terms of upsides and downsides of the new technology.”
- Fitness technology company Peloton Interactive Inc. has gained about 290% this year with people exercising at home during lockdown. “They’ve had a huge tailwind since Covid when all of the gyms were closed, and we think they have further to go,” Urquhart said.
“It is an exciting time to be a growth investor,” he said. “It’s like the whole world economy is up for grabs. There is almost no industry that’s not disrupted.”
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