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181. Bull, Bear & Beyond – Baillie Gifford US Growth Trust: executive interview
5 Plays8 days ago
In this interview, one of Baillie Gifford US Growth Trust’s (USA) managers, Kirsty Gibson, introduces the trust, the portfolio of which is made up of both listed and private companies. She then explains the strategy for finding outliers, which are growth companies that can generate disproportionate outcomes over the long term. While these businesses may not look inexpensive on traditional measures, consensus expectations do not take account of their significant growth opportunities. Kirsty also outlines the enhancements and guide rails that were introduced following a period of volatile performance and she highlights how they relate to portfolio construction and the increased clarity they bring regarding the balance between ambition and risk. She discusses USA’s private company exposure and some recent transactions and their investment cases. She then talks about AI-related businesses and other areas of the portfolio where the prospects look particularly bright before summarising what the trust offers investors.
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About ‘Bull, Bear & Beyond’
Bull, Bear & Beyond': features candid conversations with senior executives and from our own team of experts from across industries, exploring strategy, innovation, and the opportunities shaping their markets and 60-second pieces are a compressed summary of content designed to convey our message in a single, easily shareable hit.
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Edison covers 50+ investment trusts, read about them here: https://www.edisongroup.com/equities/investment-companies/
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Transcript
Introduction to the Trust's Investment Philosophy
00:00:07
Speaker
Welcome to Edison TV. I am delighted to be joined by Kirsty Gibson. Kirsty, for those less familiar with the Trust, and perhaps provide a brief introduction to the Trust and yourself. Yeah, so we are looking to invest in the most exciting growth businesses in America, whether they are publicly or privately traded. And we're looking to invest in those companies driving structural change and those which we can invest our clients capital into for five plus years. Those that we believe have the potential to deliver disproportionate
Investment Strategy and Market Focus
00:00:38
Speaker
outcomes over a time. And the trust is managed by Gary Robinson and myself.
00:00:42
Speaker
And, you know, we know from academic research and from our own internal work that it's a small number of companies that drive all the return over longer periods of time. So therefore, it's not about how often you're right.
00:00:54
Speaker
It's about how much you can make for clients when you are. We also recognize that the path to success will not always be smooth. you know Driving change takes time. There are paradigm shift changes in the environment. and But we do believe that the trust company shares some common characteristics.
00:01:13
Speaker
They are addressing large and often expanding market opportunities. They have strong competitive positions or the opportunity to build one. And they have distinctive cultures. And in short, those are the features of the exceptional growth businesses that we spend all of our time trying to find.
00:01:28
Speaker
yeah and reading about Reading about the approach, i mean the strategy really talks about finding outliers. ah Perhaps just inform us a little bit more in terms of what you mean by outliers. And then also explain the opportunity map. Are you finding plenty of opportunities at undemanding valuations?
00:01:46
Speaker
I think outliers by definition rarely look cheap on conventional multiples or metrics, especially when they're early in their growth journey or they're reinvesting really heavily. So ultimately, we're not screening for low valuations per se, but for those situations where we feel the market is underestimating the range or potentially the scale of future outcomes.
00:02:09
Speaker
This is particularly powerful in periods of paradigm shift when something genuinely changes, whether that's ah a new technology, a step change in productivity or a different way of delivering outcomes. The past becomes a less reliable guide.
Impact of AI on Investment Landscape
00:02:25
Speaker
And I think one thing is that markets are very good at pattern matching backwards. but they're much less comfortable imagining structurally different futures. That's often when traditional valuation anchors can obscure opportunity rather than actually reveal it.
00:02:41
Speaker
And I think AI is a really good example here. you know Many businesses exposed to AI are still being valued through a lens shaped by pre-AI economics. We're looking at historic margins, historic cost structures, historic growth ceilings.
00:02:57
Speaker
But if AI meaningfully changes how work is done, how software scales or how decisions are made, for example, then the long-term profit pools and the competitive dynamics could look quite different from the past. And in that context, in some cases, near-term uncertainty can dominate even as that long-term optionality increases. So while we're not finding undemanding valuations in the classic sense, We are finding situations where expectations are low relative to the the sort of scale of the change that's underway.
00:03:33
Speaker
And that's where upside asymmetry ultimately comes from. And that's what we're trying to focus on. It's not from extrapolating the past. but it's from recognizing when the future is likely to be structurally different and backing the company's best position to benefit from that shift.
Portfolio Management and Strategy Enhancements
00:03:51
Speaker
Okay. um And last year you introduced, ah I think, that the concept of enhancements and guide rails in terms of managing the trust. What led to the introduction? What were the specific measures, how they've implemented? And have you started to see this approach actually show up in the the trust performance?
00:04:11
Speaker
So i think the enhancements and guide rails that we've spoken about, they came from a period of reflection that we were very keen to ensure wasn't done in a moment of crisis. and You know, we've been through a period of volatile performance and we wanted to be more explicit about where conviction should be highest, where uncertainty is completely acceptable. and where we should be potentially more cautious. And the guide rails are really about discipline in portfolio construction more than anything else. So, for example, they're ensuring we are thinking about the breadth of potential outlier businesses available to us. So recognizing that
00:04:50
Speaker
exceptional growth businesses come in a lot of different forms and ensuring we don't become too narrow in our focus. they're They're also about helping us think about the ability of the trust holding to survive the long term and navigate the, sorry, survive the short term and navigate the long long term.
00:05:08
Speaker
you know, how much of the portfolio is in profitable or cash generating businesses, for example. It's about that resilience and that adaptability. It's also recognizing the underlying correlations in demand drivers that we have within the portfolio and how much exposure we're comfortable with to a specific demand driver, such as, you know, the battle for attention. You know, we're spending more and more time potentially doing things on online. And how many of those sorts of companies do we feel comfortable owning?
00:05:36
Speaker
And then I think the final thing is, you know, ensuring that we're stress testing our own narratives as well. Ultimately, these guide rails don't change the philosophy. And I think it really is too early to draw firm conclusions on the performance impact. But I'd say that one of the biggest benefits so far has been clarity, both internally and and for our shareholders, about how we balance ambition and risk.
00:06:01
Speaker
note The performance of the trust will be volatile. We are investing in growth businesses driving structural change, but we also recognise that that volatility needs to be within reasonable bounds.
00:06:12
Speaker
Okay. um And the trust invests in both public and private market um securities. um What's been your historical range in terms of private company exposures? I know you've got a maximum of 50%, but I'm interested to know how how close you get to that. And is the level of private exposure a source of pushback from potential investors? um Is this something that they are concerned about?
00:06:40
Speaker
So that the private exposure has varied meaningfully. And I think that reflects opportunity rather than a target. you know, Gary and I don't manage this portfolio to have 50% private. it's It allows us the flexibility to own exceptional growth but businesses, whether they are public or private.
00:06:58
Speaker
and It's often been well below the 50% limit. It was closer to 20% when the IPO market was highly active in 2020 and 2021. It currently sits at about and And periods of higher exposure have been driven by exceptional you know exceptional private companies staying private for longer alongside public market valuation declines. So obviously, when when public market valuations have declined, that has pushed the percentage of private investments up if they haven't if their valuations haven't haven't reacted in the same way.
00:07:32
Speaker
In terms of pushback, I think it highly depends on the investor. Some might want it to be higher. Some actually want it to be lower. I think a long run average with a healthy IPO market. So I would say the IPO market during 20 and 2021 was probably and more enthusiastic than it's been historically. And I'd say that the past few years have been, you know, we've been in a period of almost closure. So I think, ah but ah a long run average is probably in the 25 to 30% range.
00:08:01
Speaker
why And because we're not looking to invest in early stage businesses, we are investing in later stage. And while we don't push companies for an exit, many have an IPO on their medium term agenda.
00:08:15
Speaker
So we would expect that in NOAA, several of these companies are going to IPO on an annual basis. I think secondly, a more healthy IPO market would see both ends ends of the funnel flowing. So companies becoming public and new companies entering the funnel as as interesting potential investments for the trust.
00:08:32
Speaker
i think I think what's really key to mention, though, is the reason we launched the trust was to provide investors with access to some of the most exceptional private companies in the US s alongside those in public markets.
00:08:44
Speaker
and harnessing the reputation of Bailey Gifford as a long-term supportive shareholder to provide trust shareholders with access to the most exciting private businesses in the US.
00:08:55
Speaker
And I do believe that we have done this well. You know, Anthropic, SpaceX, Stripe, Zipline, Rippling are holdings in the trust and they are evidence of this. Yeah, fantastic names and household names as well. um We've talked theoretical ah quite a lot about sort of investment philosophy approach, a little bit about sort of risk management and and sort of guardrails.
00:09:18
Speaker
I feel like it always brings it to life when you start talking about actual transactions and things that you've got involved in. So perhaps give us a couple of examples and rationale for recent portfolio transactions, either things you bought or sold and the reasons why.
Case Studies of Key Investments
00:09:33
Speaker
Absolutely. So but i mentioned one there, one of the private companies, and obviously it's ah it's a name that is certainly on people's agendas at the moment. That would be Anthropic. So Anthropic is a a private AI company building and large language models, specifically focusing on the enterprise.
00:09:50
Speaker
What sharpened our conviction over time here is seeing the company move from being research-led to having increasingly clear commercial relevance, particularly in enterprise use cases like coding,
00:10:04
Speaker
tools such as clawed code are starting to embed in real decision-making processes. And it's not just an experiment anymore. And ultimately, there is a possibility that Anthropic becomes a foundational layer in how intelligence is deployed across organizations. And I think that's important because if they succeed, they don't just grow, they become infrastructure within the economy.
00:10:27
Speaker
and Another one, a relatively relatively new buy for on in the public space is an IPO that we participated in of a company called Circle. So Circle is a financial technology company that operates um USDC, which is a stable coin to move digital dollars quickly and cheaply across the internet.
00:10:45
Speaker
So with Circle, we're investing in the plumbing of digital finance. Stablecoins are not about speculation. They're about settlement. They're about liquidity management. They're about cross-border payments.
00:10:57
Speaker
as more commer As more commerce becomes digital and global, the ability to move value instantly and reliable becomes much more important, not less important.
00:11:07
Speaker
And so Circle sits at a really interesting intersection of technology, regulation, trust, and its role in USDC, its engagement with regulators, and its focus on compliance all matter because money is a system where credibility compounds. So if stablecoins continue to be adopted as rails for payments and financial infrastructure, we believe that Circle has the potential to sit at a really interesting control point within that mechanism.
00:11:37
Speaker
and Completely different type of business. We bought a holding in a company called Knife River, which is a US-based producer of aggregates and construction materials used in roads, infrastructure.
00:11:50
Speaker
um Knife River illustrates that long-term compounding doesn't always come from flashy technology. you know Infrastructure demand is persistent. It's local and long-lived. And aggregates are heavy and expensive to transport and hard to substitute.
00:12:06
Speaker
And that creates a lot of natural barriers to entry. And it rewards scale, reliability and and the ownership of the actual assets. So we believe that its local advantages will allow it to compound steadily with the opportunity for significant margin expansion.
00:12:23
Speaker
Okay, that's that's really good. It, I think, gives you both ah a sort of how you look at the world, but also the breadth that you're looking at. um i can't let you go with that. I mean, I think you've... I'd like to stitch together a couple of points you made. so ah And the outliers, you sort of hinted at what the the world might look like if AI was deployed. And also youve you've touched on, you know, Anthropic and it becoming sort of the infrastructure, an opportunity to bring that together. So just express why you're so upbeat about your AI exposed holdings. And then perhaps highlight a couple of other areas in the portfolio where you think that the prospects are equally bright.
00:13:04
Speaker
Sure. m i think I'm upbeat on our AI exposed holdings, not because ai is a fashionable theme, but because of where those companies sit in the system and how AI potentially interacts with their existing advantages.
00:13:20
Speaker
So in in some cases, AI is reinforcing businesses that all were already structurally very well positioned. You know, NVIDIA is the clearest example here. It sits at a foundational layer of the ecosystem, supplying the commute commute sorry the compute to almost every serious AI workload that depends on it. and and And as AI adoption broadens, that position doesn't necessarily get eroded. In fact, it probably becomes more central.
00:13:48
Speaker
And the same is probably true of a company like Meta. you know, Meta already has global distribution. It has very deep data. It has highly efficient monetization engines. And AI allows them to improve relevance, efficiency, creative output across the system, and crucially to deploy those improvements at scale almost immediately.
00:14:10
Speaker
And so what gives us confidence in that is, in these cases, is that AI acts as an accelerant rather than a disruptor. It magnifies the advantages that were already there in terms of distribution, data, workflow. And that ultimately tends to widen the gap between leaders and everybody else.
00:14:29
Speaker
At the same time, we are also really excited about the areas where AI has the potential to reshape an industry structure rather than just enhance it. So businesses like Anthropic, I mentioned earlier, or Runway AI sit at emerging control points in the stack, where small changes in capability or adoption can have really large downstream effects.
00:14:52
Speaker
Now, these are earlier stage, but they offer a very different return shape. where one one where the upside feels genuinely unbounded if they become foundational to how intelligence or a creative work is deployed, for example.
Future Prospects Beyond AI
00:15:06
Speaker
Now, Beyond a i there are other parts of the portfolio we think the long-term prospects are really quite bright as well, even though they don't always grab the same number of headlines. and One is digital infrastructure more broad and broadly, you know the plumbing that supports how data, commerce and communication actually happen. And then I guess healthcare would be another area that i would I would flag as well, because while progress can be uneven and the underlying engine of innovation of AI potentially enables better science, It enables better tools, enables better data.
00:15:40
Speaker
That's going to continue to help expand that opportunity set
Long-term Vision and Philosophy
00:15:43
Speaker
as well. So I think what links all of this is less about predicting which trend will be strongest next year and more about owning businesses that we believe can convert any type of change into their advantage.
00:15:59
Speaker
That's great. m the i mean, i I think we've had a pretty broad sort of coverage of you know the trust. Are there other any elements of the story that you'd like to emphasize before we wrap up?
00:16:13
Speaker
I think I maybe just say that the Bailey Gifford U.S. Grubhs Trust is designed for a very particular kind of journey. you know Returns are unlikely to be smooth. Narratives will change and patience is essential.
00:16:26
Speaker
But we believe that by staying focused on a small number of exceptional businesses and holding through periods of discomfort, we ultimately maximize the chance of capturing the kinds of outcomes that really matter over the long run.
00:16:38
Speaker
you know, it's not about being right every year. It's about being right on those few things that really, really matter. I love the approach. I love the clarity. um I found it for for someone who's been looking at markets, it's been a pleasure to hear about particularly some of these sort of really interesting companies like Anthropic and your views on AI.
00:16:57
Speaker
ah Thank you very much for coming on Edison TV. And I hope we can reconnect with you in a few months time to see how much progress you've made. Great. Well, thank you very much for having me.