Baillie Gifford’s Coutts, Burns Look Beyond US

hold price. So, and also when you listen to the management comments, so far they are seeing a limited impact from higher energy price or supplied disruption, so I would say at this point it is quite encouraging in terms

of earning the outlook. However, one of the caveat is that if we look at the PMI data which were released today both in Japan and in Europe, it seems that companies have been able to pass through higher price, which is good potentially for their profitability, but it could create some tension in terms of inflation, and potentially central banks may have to increase rate in regent quite aggressively if inflation is stick here as we saw in twenty

two twenty three, so it could have a negative impact on equick evaluation.

reason to invest internationally is the range of opportunities. And bear in mind that the Amsterdam Stock Exchange was founded in sixteen oh two, so there have been international investment opportunities going back a very very long way. Three quarters

of global GDP is outside the US. There are some very rapidly growing markets, but critical for US as bottom up stock because there are simply some great companies which stand comparison to the best businesses in the US, and which in certain industries have by far the dominant players. So think luxury goods, think some cosmetics, for example, Loreal

of great French business. You'll know well, Laura, clearly evs and batteries in emerging technologies today, as well as a host of hidden champions operating in seemingly niche markets which have large growth opportunities. And then we can't talk about

international without talking about China. So for all the geopolitical competition since reform and opening up in the late nineteen seventies, China is the one country on Earth I think with a similarly vibrant entrepreneurial attitude to the US, at a similar scale and at a speed that may, over the coming years even exceed that of the US. So there's lots of reasons we think to be interested in international markets.

We stand or fall by how good a job we do for our clients ultimately, and then the investment philosophy, David, to your point, stems from that. So it's about long term structure. It's about patience and boldness and curiosity as we look for the outlier companies, which academic research shows are the ones that really drive long term returns. So then if you go down to our portfolios, we're long

term owners, typically five to ten year holding period. We have highly active portfolios, very different from the benchmark, and we're willing to be different. To me, investment is as much behavioral as it is Analytical imagination matters as much as the ability to craft a nice neat DCF.

It's about those one hundred and fifty investors going out into the world, immersing themselves in different ecosystems, whether that's Brazil, whether that's China, whether that's Southeast Asia, and talking frankly, to as many people as possible, talking to the leaders of businesses that we're interested in, talking to their competitors, talking to their suppliers, talking to government officials and regulators, and trying to build up a picture that is rich

and diversified of inputs. And when you take a step back, what that getting out on the world is really trying to do is, firstly, it's trying to leverage more insight than we as a firm and our own can produce, leveraging the inside of others. And then it's also trying to get inputs into the process that are genuinely differentiated in proprietary that can't be found for a search on

AI or on Google. You know, those conversations, the access that you can get from management to tas, from companies both public and private, and then bring all of that back to wedding bro those one hundred and fifty investors, where you share that information, you discuss what you found,

and you try and triangulate across it. And then that's the process that eventually leads to sitting down and riding up an investment report in the company and thinking, at a very basic level, what does this industry, what does this company look like in five to ten years time, and how does that differ from the current market valuation.

Because again, the entire process has to be not a static analysis of what a company's like now, but what it might look like in five years time, And it's trying to think through what the unit economics look like and whether that growth is sustainable. And I think it's then trying to triangulate it against some of the industry experts, some of these academics, trying to probe where we might be wrong or might be right about that at growth theory. But I think the other thing you framed it is

long term, sort of durable growth and hype. I think as a growth investor, you have to sometimes embrace the fact that some opportunities may turn out not the way that you thought they were going to be, that there may have been a bit of hype, but that it's worth it if you can get a good hit rate, and for the ones that work out, those small number of big winners that Tom talked about earlier, I will read what makes up the real returns for clients in the long run.

and time again. Companies really able to burst through that hype if they are truly exceptional.

in our universe ferrari. Nobody forces the twelve thousand people a year who buy a Ferrari to do it. So companies that have that ability to really command their customers attention to solve a problem for them, whether the problem may be a lack of ferrari in some cases, So how do you avoid overestimating that? To your point, we look on a first principle basis, using in analytical frameworks

like portified forces and that sort of thing. But we just observe the behaviors of management teams over years and try to judge whether they are doing exactly what they said they would do, and judge the outcomes in that way. And then if you get that right, then over time

that clearly comes through in the financial outputs. But we are inclined always to trust management that we think are exceptional to run their business in the right way as long as we as long as we're comfortable in the competitive advantage and in the growth opportunity they see before them.

the idea that this growth opportunity is real. And I think it's only when you've done that that you can start to have conviction. And that again goes to you want to hear from the people that they're disrupting or that they're competing with why they won't be able. You

need to hear the counter each time. And that's been an incredibly important part of our process of we can have a hypothesis, but we've got to test it with the outside world as much as possible before we test it with client's capital.

So on the access side, I think we do have pretty good access across international markets. And then in terms of the conviction, it's about mental models. It's again the point I'm made earlier. Do do management act in the way they say they do. I'm a big fan of Phil Fisher, who wrote Common Stocks and Noncommon Profits. He talks about do the management talk freely when things are going well, but clam up when troubles and disappointments occur.

So you want people who are honest with you, as we try to be honest with our clients when things are going well and when things are going badly. And then I'm a bit of an annual report nerd. I think you can learn a huge amount just how management presents its business year after year. Do they do it in a consistent, concise, this honest, frank way, and then do they back that up when you talk to them?

And do they back that up when you through their actions, and then to Lawrence's point, you can always triangonate that with other companies in an industry. Who do you most admire in the industry, those sort of questions. So it's triangulation, it's trust, it's the cumulative mental models of doing this over many, many years. And that's the fact that we do have pretty good access, i think, to the companies we want to talk to.

But the question that you come back to is, as we're building out our scenario analysis, looking at the growth rate thinking of the margins that they can earn when you look out five to ten years, can you see that possibility from a multiple of upside from the starting point. And that really comes back to our scenario analysis focusing on what the value will be in five or ten

years time rather than the immediate spot multiple. And then I think the other element is what we've tended to find is you need not just analysis, but also Tom mentioned the word imagination earlier. You need to be imaginative in thinking about where this business can go in the very long run. And I don't think financial markets do a good job of imagination. And what we see is that our very best investments are actually those that have multiple opportunity sets. They succeed at one thing and they

leverage that and they go into succeeding another. And so often what you need is to go for an analyze it and say what are the other potential market oportun it is this company could have. So an example what we'll be familiar with was Amazon started as a bookseller, became a broad dra online retailer, but then a lot of the values actually accrued from aws. We had a similar one with Maccada Libra Latin American e commerce company

and looking at it going into finance. So it's a combination of thinking fighting years what these companies can be and making sure we don't underestimate just how attractive and valuable they can be in the very long run.

but that doesn't give you an advantage. What you need to do is retain the curiosity, the imagination, the openness that you had when we recruited you, and then kind of bolt on the analytical framework the analytical processes on top of that. And if you if you get that

balance right, then it gives you much better chance. We think of being able really to hold the outliers in the way that Lawrence explained being able to think what if this really works over five or any of you, and in a sense not be too bounded by the constraints of a DCF with its inevitable false precision.

years time? And yes, you want to consider the journey, but that is helpful to have that luxury, to have that structure from the firm and the patience from our clients to do that, and that puts us in a different mindset where if you look at a lot of the academic research, it would tell you that humans have a far grea dislike for losing a unit of loss than they would from a unit of gain and the same emotional action as not even And I think it's trying to find ways where you reduce career risk so

that people can weigh upside and downside appropriately. Because a lot of the companies at the starting point great growth companies are often controversial. People will tell you that it's overvalued. Are there many reasons why it's fail? So you have to be prepared to look foolish. So that's one layer on the behavioral The second layer then comes from where we get our insights from, and we've kind of touched a little bit on that. I don't think access is

even to companies. I think if you want to go and spend time with use American examples with Jeff Bezos or Jenans and Juan and try and understand their vision, that opportunity isn't equally available to everyone. Similarly, for our companies, it's the ability to go and have one of our larger holdings mentioned early McCaul Libray can go and have six hours and meetings of the management team and get

to know various different executives. They'll tell you nothing about what the next quarter is like, but they'll tell you an awful lot about their long term vision for the company and their views on culture. So I think you do get different inputs into making that long term element of an investment case. And I would just focus again on culture here because I think that's something that doesn't

fit into the DCS that Tom was talking about. You can't ascribe a number to it, and you have to spend a lot of time with a company and with an ecosystem to truly understand the company's culture. But I think if we took a step back from a common sense approach, we'd say culture has a huge amount to deal to do with whether a company will be successful

or not in the long term. So I'd see our edges being behavioral combined of the insights that we can get from our network of company access across public and private and for academia.

the investment case constantly. So more usually for us on the on the cell side, it's a gradual erosion of the investment thesis, either because the moat, the competitor moat becomes less deep, or the growth just fades. So we sold a business for years ago called Novozymes Novhenesis, which is a Danish enzyme business. We've held it for many years.

It's a very good company. They made a big acquisition and often when a management team does that, it tells you their own confidence in their organic growth prospects are less high than you would have liked. And that's still an interesting business. We may come back to it at some point, but it's fundamentally if those core aspects of the investment fade in some way that we're likely to sell. And I would say, honestly, you know, a lot of investment is about trade offs. We aim to be good

buyers and good owners. We are less good sellers. Doesn't mean we're bad at it, but it's not what we're what we're really optimizing for. We're optimizing for holding, and we can accept a bit of slowness, if you like, on the cell discipline as a price we're willing to pay for being really good owners to get the skewness of markets to work for our clients to benefit.

comfortable with that? Are we comfortable with the risks? Are the individual businesses correlated or idiosyncratic that all of that kind of stuff, you know, I'm very happy having a fifteen percent overweight in Sweden because there's not much political risk there. Am I happy having a fifteen percent overweight

in China? No, I'm not, because there are political risks there that I think we need to be where over the portfolio level, I mean, Lawrence, maybe the Meley one is an interesting case of where if you're like this stock specific overrode the macro concerns.

we've owned the company. But it's an example of where you have a structurally grown company that executes exceptionally well and is able to deliver multiple acts of growth, you're able to overpower that and so over that time period you will have had a very high multiple return of revenues and profits and US dollar terms, despite a macroeconomic backdrop that has probably been a roughly flat in US dollar terms, and I think for US that's an important

learning of the very best companies can overcome all but the most harshest of economic conditions, and sometimes it is the difficulty of those conditions is why they succeed. So why are Amazon not the number one company in Brazil? Well, part of the reason was it was a very hard market to crack. The logistics was terrible, there was protectionism, there was a need to buy products on credit, and

none of those things Amazon wanted to do. And so sometimes what you see of international markets is that the the flaws, the inefficiencies of what enable exceptional companies to actually thrive.

actively is defense within Europe. Clearly there's big long term demand. You clearly had a rerating of those businesses, but the industry economics, we think still are pretty challenging. You've got a concentrated customer base, you've got very long cycles, you've got limited pricing power in the long run. Frankly, and more importantly for us, the nature of warfare I think has probably changed. So the big defense companies of yesterday are it's not obvious to me those are going to

be tomorrow. It's winners, and we think out as Laurence said, five ten years, we think a lot about technology. So that's that's an area of live debate. I wouldn't say it' structurally unattractive, but it's an area that's that's run pretty hard. We've done five or six rounds of work on that. We haven't taken any holdings yet within the defense area. So that maybe it broadens out your question a little bit and gives a bit more context to how we think about some of these areas.

environment for the foreseeable future. The broader answer, I think underpinning that is that while on the one hand you've got potential deflation from AI, over the long run, the world is I think a more complicated, more uncertain place than it was a few years ago. So discount rates generally, I think you would expect to be higher, and I think that's likely to last. Lawrence talked about academics, we talked to. We had Adam Two's the economic historian, in

chatting to us last week. His take is, this period of deep uncertainty in the global economy, let's date it back to Brexit in twenty sixteen as a starting point, perhaps is here to stay. And I think that's right. So, in a period of elevated risk, more diverse opportunities in some ways, whether that's defense or not, I think it makes spread sense for us to kind of spread our bets across a wider range of industries and perhaps geographies than we did ten years ago. Maybe so's and we've

done that process, have been through that process. That's not directly maybe on the interest rate question, on the bond market vigilante question, but I think structurally that the world economy is a tougher place, is a more uncertain place than it has been for most of my investing career twenty seven years now. And I think we're reflecting that in some of the changes we've made to the portfolio and how we think about individual names and correlations across the portfolio.

across a wide range of industries. And then maybe specifically, the big thing that we're seeing driving markets clearly at the moment is AI AI capex in a In an international context, there are many choke points, frankly, many monopolistic quasi monopolistic type businesses where demand is far exceeding supply, and most of those businesses, with the exception in video in the AI semikapex chain operates a domicile in outside the US, so ASML in the Netherlands is a great example.

T SMC in Taiwan, and then a bunch of companies like people would't have heard of, like advantest or Disco in Japan, which which are small parts but critical critical parts of the semi supply chain. And that's an area where we're pretty constructive.

So actually where we look in the portfolio, we're not seeing anywhere near nose bleed valuations, but we're obviously thinking about over many years the degree to which this can be sustained. And I think where we come to is, and this goes back to getting out and talking to people, is is there going to be a good enough ROI on that AI cap extent? Mean people are going to want to keep growing the amount of it year after year.

And I think one of the things that's given us a increased conviction has been versus eighteen months ago, the companies we're talking to in all manner of industries and now telling us we think AI is having a material impact on our business, whether it's cutting costs or whether it's helping generate revenue. And they're saying, yeah, we are getting really good returns on our tokens that we're using here. We want to use more of them. We're rolling out

into new areas of our business. And you may see our growth inflect because of some of this. And that's a very different change mating months ago. And so when you combine that with valuations that might be a bit elevated versus the pass but are far from those bleed. We think that that still remains attractive within our portfolio context.

And then the only other point I would make think is a key one and builds on this idea of AI semiconductor bottleneck, is it's very hard to know how AI is a technology develops, which applications win, which one don't win. It's also quite hard to know because they keep jocking in terms of position, which AI model provide at which frontier lab is the best? Is it Google's Gemini,

is it anthropic? Is it open AI? The advantage is that whoever wins at the application level layer in AI, whoever wins in the ALI model race, These semiconductor companies benefit regardless, and so it's an interesting simplification of owning them that they benefit in all scenarios where AI grows, whereas a lot of the US tech companies that isn't necessarily the case. They depend on winning or a certain type of AI rollout.

naturally on the way. As one of these things develops, there are signs that you'll probably look back on in five or ten years time and say, okay, that was one of the indicators that we were heading towards a bubble or a bubble was forming. So yesterday, for example, one of the Asian brokers that covers Korean Taiwanese chip makers removed made all its ratings on those companies hold

or buy ratings. That may be the perfectly rational thing to do given the supply demand constraints, but also it's the sort of thing we might look back on an ten year's time and say, well, that was the sign that we were getting towards the stage where the companies could do no wrong. So I think clients should expect to see us probably continue to take money out as these companies do well over the next cooming years. But I think this has still got quite a long way to run.

they are sustainable and good investment opportunities? And the last one is really is a dollar weakness and of that we have seen in twenty twenty five a little bit in twenty six before the conflict. So how are you thinking or so about donald weakness in your investment process, especially when you look at the emerging market names.

so that's potentially interesting. German fiscal policy I don't spend much time thinking about the last time I used to run our European equity team for a few years. The last time we seriously paid attention to European macro was twenty eleven twelve the Arizona crisis, when we thought things were well oversold, and we did make some allocations to a few European companies quite narrowly on the back of that,

and some of those worked very well for us. So I don't see erman fiscal stimulus as being in the same category on the dollar. Again, unhelpfully add out of a strong view on the dollar, I would say, on a bottom up basis, you have to look for You have to think in hard currency terms. Picky currency okay, but currency volatile matters. Lawrence touched on South American businesses, for example, you have to look at the dollar return. Most of our clients are a US or Canadian clients.

You have to look at the dollar return, the dollar growth rates of companies you're investing in. And I would much rather have a business that faces the short term headwind of a strong currency, let's say a Swiss company or a Singaporean business, because you don't have the easy comfort of operating in a in a debasing currency, which I think can make life a bit easier artificially easier

for a business a business owner. So I'd much rather have a strong currency business than a week currency business, and companies operating in markets where there's a weaker currency, we just translate it back to the to the currency the matters to our client, which for most of them is the US dollar, and where that goes from here. I'm afraid I don't have a strong.

growth names really fall by the wayside. We've taken holdings in a couple over the last six twelve months, and I wouldn't be surprised if we buy a couple more over the next six twelve months. There are some really interesting, high quality, good growth businesses available at pretty attractive prices in Japan right now, I think.