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In an uncertain world, some investors seek security in the tidy pigeonholes of ‘growth’ or ‘value’. Malcolm MacColl does not. His sole focus is on finding the wealth creators of the future. “At Baillie Gifford, we’re trying to identify businesses with the ability to grow underlying profits and cash flows over long periods. But it has to be growth in value. There’s no point in a business growing without the underlying margin structures or the returns and the capital being there to support higher valuations into the future,” MacColl explains.
Questioning whether growth assets are in or out of favour is a distraction for the deputy manager of The Monks Investment Trust and manager of Global Alpha Growth Fund and Global Alpha Paris-Aligned Fund. What matters is how these businesses deliver what they promise. “We should be focusing on fundamentals and the direction of travel for businesses over a five to ten-year horizon. It is about how they deliver relative to their potential, because it’s the underlying growth and change within that business that will dominate a company's future valuation.”
Growth can take the form of high-growth companies, such as Amazon, to more subtle growers, such as the US health insurer, Anthem. MacColl is a fan of both. He uses Amazon to illustrate the futility of pegging a company either to growth or to value. Although not traditionally categorised as a value stock, in many regards, he quips, “it’s perhaps the best value investment we’ve ever made.” The business was widely misunderstood in its formative years. Market inability to understand Amazon’s dynamism and failure to imagine how it would build out from ecommerce into media and cloud services, led to significant mispricing over the long term.
For other growth companies, getting the right price as an entry point and maintaining patience are prerequisites for compounding. Here, MacColl borrows a phrase from his colleague, Spencer Adair, who describes Anthem as “a small car with a large engine”. “What he means,” he says, “is that you don’t realise it’s there until it accelerates away from you at the lights.” The business has compounded its profits at 10 per cent per annum over the past 10 years, roughly double the market growth rate. “Although a fantastic growth business, it has never commanded a very significant multiple, which has allowed compounding to transfer into very significant underlying share price performance.”
For investors, spotting mispriced growth relies on seeing the big picture and pinpointing what it is that could transform expectations. This applies even when prices are rising. “While we can fret about inflation’s impact on asset values, the primary thing to focus on is the operational performance of individual assets.” After all, as MacColl points out, for the likes of Amazon and Anthem, growth is not driven by the existence of investors’ spreadsheets that try to pinpoint how businesses might fare in a higher or lower interest rate environment.
“The vast bulk of the businesses we’ve invested in for clients are asset light. They’re very scalable. They typically have large margin profiles and good pricing power.” This makes them good candidates for coping with a more inflationary environment.
MacColl is sceptical of the view that growth assets have outperformed over the past 10-15 years because we’ve been in a declining interest rate environment. “An element of that will have played through into valuations,” he concedes but, “[that factor] has been completely overwhelmed by the fact that we have seen some enormously successful businesses bursting through because of change.”
The digital revolution and the rebirth of China as an economic superpower are reminders of the strong link between value creation and change. And, looking ahead, it is this that excites MacColl: “Change is going to accelerate in certain areas over the next ten years.” One such area would be healthcare. “The availability of data coming from gene sequencing and the availability of computational power, those two coming together with the slower moving aspects of biology fills me with a huge amount of optimism regarding what we can see next.” The question, therefore, is not whether businesses are growth or value stocks, or indeed if they will perform well in an inflationary environment. MacColl sums it up, “I’d much rather be involved in businesses on the right side of change than businesses that look cheap or lowly valued, which are on the wrong side.”
Words by Gillian Christie
You can hear more of Malcolm’s thoughts in the Baillie Gifford podcast Short Briefings on Long Term Thinking.
Annual past performance to 31 December each year (net %)
|The Monks Investment Trust
Source: Morningstar, share price, total return
Past performance is not a guide to future returns
Investments with exposure to overseas securities can be affected by changing stock market conditions and currency rates.
This article does not constitute, and is not subject to the protections afforded to, independent research. Baillie Gifford and its staff may have dealt in the investments concerned. The views expressed are not statements of fact and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. Data as at 31 December 2021, unless otherwise stated.
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