Hamish Maxwell, investment specialist, Baillie Gifford.
As with any investment, capital is at risk. Past performance does not predict future returns.
Over the past decade, tailwinds such as globalisation, low interest rates and many disruptive changes have driven economic growth in general and the performance of growth companies in particular. Now some macro factors, including geopolitics and monetary policy, have darkened the environment for growth companies. However, we are optimistic that the companies that will continue to excel on the stock market will be those that most successfully exploit the changes in technology, business models and consumer behaviour. There is plenty of evidence to support this optimism.
As Joseph Schumpeter said, companies and societies are in a constant state of innovation and transformation. This process of "creative destruction" is a natural and essential element of capitalism, as it enables the replacement of outdated technologies and business models with newer, more efficient ones.
But it is also an essential element of human nature. Our curiosity drives us to explore and invest in the future. Our social nature helps us to share knowledge and tackle problems together, which ultimately increases our individual performance. And human progress increases rapidly when our populations are larger, better educated and better connected. Gaia Vince points out this connection in her book Transcendence; it has to do with the frequency and spread of good ideas.
The "waves of change" developed by the World Economic Forum (WEF) show that the accumulation of knowledge over generations means that each revolution creates more value than the previous one. From an investment perspective, it is important that we do not look at these revolutions in isolation, but as successive stages in the ongoing history of human innovation.
In our modern phase of the industrial revolution, technologies such as artificial intelligence (AI), gene editing and advanced robotics are coming together to erase the boundaries between the physical, digital and biological worlds. For example, the human genome was decoded in 2003 through a series of earlier innovations, such as Watson and Crick's discovery of the double helix, Sanger's sequencing method and the internationally coordinated effort of the Human Genome Project. These breakthroughs have created entirely new industrial opportunities for the healthcare sector, which are being utilised by a new generation of growth companies.
We are investing in some of them. Moderna, for example, is a company that is using humanity's accumulated knowledge of genetics to develop new treatments using messenger RNA. Another pioneer is the European company Genmab. This company is making great leaps in immunotherapies against cancer.
Another example is the progress made in innovation in renewable energies. Solar energy is becoming increasingly efficient and its rapidly falling price is making it more and more attractive to consumers and investors. Further progress is being made in electricity distribution and storage. Global electricity consumption is expected to double by 2035 and triple by 2050. The energy transition is therefore becoming an enormous economic opportunity. Our holdings SolarEdge, the Israeli solar inverter company, Vestas, the Danish wind turbine company, and Tesla, the US manufacturer of electric vehicles and static storage, are examples of innovations in the field of renewable energies that are being driven forward commercially.
From the work of Professor Hank Bessembinder of the State University of Arizona, we know that stock returns are highly asymmetric. Of the 60,000 listed companies worldwide, only about 900 have created the net worth above the value of US treasuries between 1990 and 2018 - $45bn. That's why we at Baillie Gifford look for these few companies.
Change doesn't come for free; it requires investment in research and development. And patience: the stocks that perform best in the long term are often the ones that fluctuate the most in the short term. However, humans are not very patient by nature; this is the flip side of the same evolutionary development that has made us good innovators. Human impatience is evident in the stock market, where the average holding period for a company is less than a year - nowhere near long enough to translate a company's competitive advantages into substantial growth.
The best solution to this problem is a kind of institutionalised patience. Management must align a company's culture with the long-term perspective. This also applies to us asset managers. The long string of positive results for companies that allocate more capital to growth than to distributions to their shareholders shows that investing in innovation is the key to success.
Let's take Intel in the 1970s as an example. The 1970s were very difficult economically: armed conflicts, oil crises, inflation, unemployment, slow economic growth and difficulties in the transition from manufacturing to a service economy. Nevertheless, Intel's share price rose almost 20-fold during this difficult decade. This was achieved through creative destruction. Intel recognised the coming revolution in PCs, invested heavily in the development of its fantastic 8080 and 4004 microprocessors, rapidly increased its profits, and the share price followed suit.
I chose a 50-year-old example because it is comparable to today's situation. The macroeconomic environment of the 2020s may have become more challenging, but change remains a powerful driver of growth today, thanks to the industrial revolution of our generation.
The combination of human ingenuity and scalable technologies is unleashing tremendous power. In the modern industrial revolution we find ourselves in, we expect to see huge demand for things like accelerated computing, artificial intelligence, drones, clean technology and biological technology, to name but a few. As investors, we need to be patient. The opportunities we face as growth investors are as exciting as ever.
Important information
This update is solely for the use of professional investors and should not be relied upon by any other person. It is not intended for use by retail clients.
Baillie Gifford Investment Management (Europe) Limited provides investment management and advisory services to European (excluding UK) clients. It was incorporated in Ireland in May 2018. Baillie Gifford Investment Management (Europe) Limited is authorised by the Central Bank of Ireland as an AIFM under the AIFM Regulations and as a UCITS management company under the UCITS Regulation. Baillie Gifford Investment Management (Europe) Limited is also authorised in accordance with Regulation 7 of the AIFM Regulations, to provide management of portfolios of investments, including Individual Portfolio Management (‘IPM’) and Non-Core Services. Baillie Gifford Investment Management (Europe) Limited has been appointed as UCITS management company to the following UCITS umbrella company; Baillie Gifford Worldwide Funds plc. Similarly, It has established Baillie Gifford Investment Management (Europe) Limited (Amsterdam Branch) to market its investment management and advisory services and distribute Baillie Gifford Worldwide Funds plc in The Netherlands. The representative office does not constitute a branch and therefore does not have authority to commit Baillie Gifford Investment Management (Europe) Limited. Baillie Gifford Investment Management (Europe) Limited is a wholly owned subsidiary of Baillie Gifford Overseas Limited, which is wholly owned by Baillie Gifford & Co. Baillie Gifford Overseas Limited and Baillie Gifford & Co are authorised and regulated in the UK by the Financial Conduct Authority.
