Baillie Gifford manager attributes consistent returns to long-term growth opps
Over the last year, North America sector funds have outperformed all other IMA sectors apart from Global Emerging Markets, with the average vehicle returning 32.4% over the 12 months to 7 June.
According to Morningstar, Baillie Gifford’s American fund is up 33.9% over the same period. The £127m vehicle, which has been run by Mick Brewis since its 1997 launch, is ranked 13th out of 68 vehicles over three years, up 10.1% compared to a sector increase of 1.7%.
Brewis describes his investment style as a “long-term, bottom-up stockpicking approach”, and takes a three- to five-year view when making an investment.
“We are looking for attractive growth stocks that can grow their earnings at an above-average rate over a period of years,” he says.
The manager considers whether a company’s competitive position is sustainable, and targets management that will score highly on integrity, operational management and attitude to shareholders.
He explains: “What really gets me excited is after you have sifted through a lot of companies you suddenly come across a really exceptional management team or a company with a particularly strong competitive position.
“This can translate into above-average growth prospects, often by gaining market share, but also by factoring in the likely industry background outlook.”
Brewis attributes the fund’s outperformance to his long-term view on the American market.
“We have been able to add value and it is partly because we think Wall Street is occasionally too short term,” he says
“This leads to companies with sustainable earnings growth tended to being undervalued.”
His approach is to try and exploit those opportunities by taking a longer-term approach, thinking about a company’s potential earnings growth not just over one or two quarters, but over several years.
“If some of the qualities we think exist in one of our investments do come through, and if it leads to higher-than-expected earnings over a period of years, this is what should lead to outperformance,” he says
Brewis believes this has been true over the last year, when growth stocks in various sectors have contributed strongly to performance.
“I would not necessarily point to any one sector, “ he says.
“In the first half of last year in particular, some of the energy stocks were bouncing back, while more recently it has been technology stocks, industrials and some consumer discretionary.”
In recent months, the manager has increased the weighting in consumer discretionary stocks based on his optimistic outlook for the US economy.
“There are some interesting retailers, such as Home Depot, we feel will benefit from the upturn in the economy and consumer confidence,” Brewis says.
He adds: “The company is focusing back onto its core business, which it was not doing a few years ago.
“It is now getting the operational aspects right, such as customer services, merchandising and distribution. We think this will really help earnings growth over the next few years as well as the upturn.”
He has also increased the fund’s weighting in information technology stocks.
“The amount of internet data traffic going over the network is increasing rapidly, “he says.
“This is leading to a real strain on many networks, and therefore companies are starting to spend more on those networks.
“A firm like Cisco Systems, for example, should be a beneficiary of this. The mobile internet is also in the midst of a rapid growth phase, which is another interesting trend going on in the background we like.”
Cisco Systems is the top holding in the portfolio, accounting for 4.7% at 30 April. The second largest holding is Apple at 4.6%.
“We expect iPhone sales growth to continue as international distribution expands substantially,” Brewis says.
“We are overweight the technology sector and optimistic about its prospects.”
The manager has also shifted the fund away from global cyclicals and towards domestic US stocks.
He says: “In some ways, what is happening in Europe argues for slightly less global growth, but if anything it means interest rates will be lower in America than they otherwise would have been.
“It argues for better domestic prospects in the US, and the shift I have already made in the portfolio is factoring this in.”
He believes the fund will benefit in future from continued US economic recovery.
“I am particularly encouraged by the low inflation rate in the US, which means monetary policy can stay accommodative for some time,” he says.
“The corporate sector is also in great financial health at the moment. Its profitability is strong and it is generating cash.”
He thinks this will lead to spending on technology and other cap-ex projects. However, the manager is not making any macro bets in the portfolio.
“Offsetting our consumer discretionary and technology positions, we have been underweight in banks,” he says.
“We think there are still too many risks attached to some of the large bank stocks, whether it is regulation or capital spending.”
Brewis believes investors should still be looking at North America funds.
“If you take a long-run view over the last five or more years, US assets have been laggards,” he says.
“There is such a broad selection of US companies with attractive growth prospects for the long-term benefit of shareholders.”
Meanwhile, fears about the dollar have been put into perspective by recent issues about the euro, he adds.
“We are pretty upbeat about the prospects for the companies in the fund,” he says.
“In the long run, we think the earnings growth of our stocks should come through faster than the market’s earnings growth because of some of the qualities we have identified in them.”
