‘Biggest economic transformation anywhere in history’

PM and subadvisor of Vanguard International Growth Fund on the markets and companies that reflect his long-term, stock-picking philosophy

‘Biggest economic transformation anywhere in history’

The investment industry has, to some degree, lost its way as hype-fuelled stock markets promote damaging short-termism.

Nick Thomas, partner at Bailie Gifford, laid out his thought-provoking opinions at Vanguard’s 2019 Investment Symposium, where he explained his firm’s portfolio management philosophy and how this informs its 59% subadvisor allocation of the Vanguard International Growth Fund.

Thomas said Bailie Gifford is a stock-picker focused on the long term and outlined the attractive environment in China (19.9% of the mutual fund’s market allocation) and companies like top-two holdings Alibaba (5.5%) and Tencent (5.2%).

He also highlighted the likes of ASML (3.8%), a Dutch semiconductor maker with a strong culture that is uniquely positioned to play a central role in the next stage of the tech revolution. Critically, he backed the firm’s collaborative approach and commitment to research as an antidote to the short-term obsession with dividend and quarterly earnings.

He told WP: “We think our industry has to some degree lost its way. It’s become all about extracting value from companies rather than contributing to long-term investment.

“You see a very strong trend to companies paying out more dividends, buying back more stock, spending less money on CapEx and R&D. We say it’s no great surprise that people don’t think capitalism works any more.

“We think this is partly to do with the way stock markets make people behave. There are two tribes in the market – those who behave in a short-term quarterly capitalism kind of way and those who behave in a long-term way.

“There’s a very strong thread running through the long-term companies; they are insulated from the market, have big controlling shareholders, are run by founders or have an incredibly strong culture. It means they don’t listen to Wall Street.

“How much criticism does Amazon get for making low margins and occasionally having weak quarters? They just ignore it and invest for the long term. It works and it would seem to us the evidence it works is now pretty strong - but people still don’t follow it.”

With a generous weighting to China, the fund looks to take advantage of what Thomas called the “biggest economic transformation anywhere in history”. And he expressed frustration with the western bias that chooses to ignore the growth under way in the rising Far East super power.

Those that claim the technology advances in China are unsustainable or simply copycat versions of what is happening in the US, he said, have been saying that for long enough to dispel that very view.

And while President Donald Trump’s protectionism is damaging, Thomas said investors ignore the long-term big picture at their peril.

He said: “We’ve just tried to be more optimistic about it, understand actually what is going on in the country and build a lot of relationships and knowledge by regular visits. We’ve been lucky to be invested in some of the companies that have driven the change, so we have a great source of what’s actually going on.”

He added: “At any point in time it’s a coin toss about where it’s best to be invested. We’d be the worst people to ask about shorter-term timing but it seems fairly clear, if you take a step back, that this is the biggest economic transformation that has happened anywhere in history.

“So you should be paying serious attention as an investor. And the fact it is happening in a country that is actually fiercely capitalistic and has some fantastic entrepreneurs … that’s a great, fertile environment for stock picking.”

The other subadvisor for the fund is Schroder Investment Management, which manages 40% of the allocation. Portfolio manager John Chisholm said combining with Vanguard – a renowned low-cost provider – puts welcome pressure on you to bring an edge to the table and deliver consistent alpha.

The value of active management comes to the fore, he said, especially in areas where structures exposure inefficiencies in the market.

He told WP: “There are areas - emerging markets, international, small cap – where there are inefficient pockets of the asset class. If you look at what the median manager delivers in terms of alpha, it pays to be active here. It’s in your favour, assuming you are picking a median manager or better.”

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