Mike Gush and Sophie Earnshaw joined Baillie Gifford nearly a decade apart and from distinctly different backgrounds. Gush studied mechanical engineering at England’s Durham University but wanted to focus on something less theoretical. Earnshaw was considering a doctorate in 18th-century and romantic literature from the University of Cambridge, but decided to apply her passion for research toward something less specialized.
They each made the transition to investing via a multiyear graduate training program at Baillie Gifford, a century-old investment firm based in Edinburgh, Scotland. Today they are part of an eight-person team managing the $7.1 billion
Baillie Gifford Emerging Markets Equities
fund (ticker: BGEGX), which has returned an average of 15.3% a year over the past three years, better than 91% of diversified emerging market funds tracked by Morningstar. The fund doesn’t have retail shares, but is available to individual investors via major custodial platforms.
Baillie Gifford isn’t a household name among U.S. investors, but the firm is a powerhouse in international investing. As a subadvisor behind the $71 billion
Vanguard International Growth
fund (VWILX), it played no small role in the fund’s 60% return in 2020. The graduate training program illustrates the firm’s unconventional approach, which includes working closely with academic institutions and holding “reading days’’ and discussions focused on major themes.
The overarching goal of the emerging market fund is to find growth companies that have the potential to double in value within five years. “We are trying to exploit three inefficiencies: short-termism, failure of imagination, and volatility aversion,” says Gush, 39, who joined the firm in 2003 and became a partner in 2020.
While every investment decision is backed by analytical rigor, “the type of investing we do is to imagine what the world will look like in five to 10 years,” adds Earnshaw, 35, who joined the firm in 2010.
A would-be holding needs more than a good growth story. The team goes through a rigorous process that includes looking at environmental, social, and governance factors, and sussing out other red flags. They revisit holdings at least every 18 months to make sure key factors haven’t changed.
Sophie Earnshaw joined Baillie Gifford in 2010.
Photograph by Robert Ormerod
The team divvies up regional coverage, rotating every two to three years. While many of the holdings in the 74-stock portfolio cater to a global market, “we have learned that macroeconomics really do matter,” says Gush, who follows Taiwan and shares coverage of China, which represents about 35% of the fund’s holdings. The opportunity is pretty clear: China has about 17% of global gross domestic product and is expected to contribute to nearly a third of global growth in the years ahead, but it represents less than 3% of global investment allocations outside of China.
Note: Holdings as of April 30. Returns through June 7; three-year returns are annualized.
Sources: Morningstar; Baillie Gifford
When it comes to emerging markets, investors can be guilty of a failure of imagination. Every country has its challenges—especially now, during the Covid-19 pandemic. Many markets, however, have seen similar trends in the adoption of e-commerce and digital technology. Perhaps most important, leading companies aren’t copycats of their developed-market counterparts, says Gush. “You hear executives at Western businesses now saying, quite openly, that Chinese businesses are ahead of the game.”
Top holding
Taiwan Semiconductor Manufacturing
(TSM) is representative of this. As one of the world’s largest chip designers and manufacturers, the company is benefiting from an increasingly wider competitive advantage and the proliferation of connected devices.
The chip maker invests about $20 billion a year in new technology and still has a net positive cash flow, Gush says. The market tends to view TSMC as a cyclical company, he says, but its growth is driven by secular trends: “Technology is here to stay, and it’s increasingly ubiquitous.” The company can compound earnings at 15% a year for the foreseeable future.
Mike Gush shares the fund’s coverage of China.
Photograph by Robert Ormerod
Another underappreciated trend is what Earnshaw calls China’s healthcare revolution. The fund invested in Chinese biotech
Burning Rock Biotech
(BNR) when it went public last year. The liquid-biopsy testing company uses small blood samples and bioinformatics to determine the best treatment for cancer. For now, the company is focused on China, which has more than twice as many incidences of cancer a year as the U.S. “The exciting part, and something I think the market isn’t paying enough attention to, is the potential [for its technology] to be used in early-stage cancer detection,” Earnshaw says.
Yatsen Holding (YSG) is also tapping into growing demand, but in a very different sector: cosmetics. The e-commerce company was founded in 2016 and made its debut on the New York Stock Exchange in late 2020. As younger Chinese consumers clamor for “Made in China” brands, the company is leveraging social media and data to create and test new products. Its Perfect Diary cosmetics brand, which accounts for the majority of sales, is following the playbook of Korean and Japanese brands that have built a domestic following. “The company has around 1% or 2% market share and could bring that closer to 10% or 20% over the next decade,” says Earnshaw of the fund’s decision to invest in Yatsen’s initial public offering.
MercadoLibre
(MELI) is a staple of many emerging market funds, but the Baillie Gifford team says investors still aren’t seeing the bigger story with the Latin American e-commerce and payments company. Despite increased digital penetration during the Covid-19 pandemic, its key markets are still in the very early stages of digital adoption. Gush notes that in Brazil, MercadoLibre’s largest market, e-commerce penetration is just 5%. “Thinking outside of the box, why wouldn’t it be able to go to 15%, 20%, or 25% over time?” he asks.
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