Don’t underestimate the US growth engine – Slater

Added 14th November 2016

Baillie Gifford’s North America head says investors have persistently underestimated the strength of the US economy and continue to do so

Don’t underestimate the US growth engine – Slater

It is clear Tom Slater is passionate about the US. “There isn’t an engine of wealth creation anywhere else in the world like the west coast of America,” he says, responding to a question about whether or not he remains bullish on the outlook for the country.

While he was appointed head of Baillie Gifford’s North American team only around a year ago, Slater’s focus on the region has been in place for some time.

Since 2008, when he took the role of deputy manager of the Baillie Gifford Scottish Mortgage Investment Trust, he says as much as three-quarters of his time, when measured by research output, has been dedicated to US equities. He also moved his family to the west coast during visits in order to better understand the companies in the region.

The result is a number of long-term holdings, such as Amazon, across both the Scottish Mortgage Investment Trust and the newer Baillie Gifford American Fund.

Although Slater’s focus did not change when he took charge of the North American team, the appointment did afford him and the rest of the team the opportunity to return to first principles.

“We have gone back and looked at the philosophy and process. We discussed what we think is important and what we believe in as individuals. That is not just Gary Robinson, who led the team on an interim basis, and I, but the other two fund managers as well.”

And while Slater is quick to reiterate the changes are small rather than wholesale, he says it was fun to go back to basics.

“The result of this work is a fund that seeks to take advantage of the asymmetry of equity markets; the fact you can make much more if you are right than you can lose if you are wrong,” he says.

Growth goals

“Our goal is to own the most exceptional growth businesses in America for long periods of time, until the quality of management, the strength of culture and the growth in profitability become the dominant drivers of the share price,” he says.

Because of this focus on culture, it is not a coincidence that around two-thirds of the portfolio by weight is invested in companies run by founder-owners.

According to Slater, attractive companies are those that are addressing big opportunities. They must fall into one of three categories:

  • Transformational growth companies that are changing an industry and introducing completely new business models.
  • Those that are growing within an existing industry but taking share either as a result of a better product or better distribution.
  • ‘Enduring growers’ that rely mainly on brand or franchise value for their growth.

The focus on these three buckets is predicated on a piece of work that looked at the five-year returns on the S&P 500 over the past 30 years. It demonstrated that during any five-year period, about 20% of stocks go up two and a half times, and that is fairly constant across the 30-year period.

Says Slater: “You have to own stocks for a long period of time in order to be able to identify that asymmetry. It is only if you are genuinely long term and delivering a low level of turnover that you can see that outcome in the portfolio.

“Not only do you have to identity the companies with those opportunities but you have to hold them for long enough to see the benefits accrue.”

According to Slater, it is an approach that requires a strong stomach in the face of short-term results. “We run a concentrated portfolio; it will be volatile and there is not much we can do about it.

“You have to be prepared to sit through that weakness and be unafraid to back winners. You cannot be tempted to continually trim them because that would reduce the effect of the asymmetry.”

An example of such a holding would be Amazon, which Slater has held for a long time in the trust. It is currently the fund’s largest position but is also one of the darlings of the recent Fang (Facebook, Amazon, Netflix, Google) rally.

“The idea that Amazon would peak at 1% of US retail sales when the proposition continues to get better and better is odd. I still think there is a huge opportunity for that business,” he says.

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