“Profit Is What You Record When You Have Run Out Of Ideas”

As 109-year-old Scottish investment company Baillie Gifford became one of the leading technology investors in the world. Bloomberg told how the firm, located far away from the technological world, managed to become the leading global investor in it companies.

Billionaire Jeff Bezos, the founder and CEO of Amazon — is trying not to spend a lot of time talking to investors. Every year he meets only with several Fund managers — shareholders of his company. But when he arrives in the UK, this list always includes a representative of the investment firm Baillie Gifford. The name of this investment company located in Edinburgh, Scotland, which manages assets with a total value of £159 billion ($206 billion) and which has a history of 109 years, is not known even in the UK.

However, over the last decade, Baillie Gifford became one of the most active technology investors in the world. This is one of the few European funds, which have influence in Silicon valley and in Shenzhen China (China town, where are located the headquarters of Alibaba and Tencent). In addition to the Amazon, Baillie Gifford owns significant stakes in Facebook, Google (the company that owns Google), Netflix, Nvidia and Tesla.

The Fund also invested in Chinas Baidu, Tencent and Alibaba Group. In addition, in February 2016, the firm became one of the largest investors of the Russian “Yandex”, consolidating 6.7% of the securities of the company. Baillie Gifford is now the second largest shareholder in the Russian search engine (by number of shares, but not on the number of votes) after the founder of the company Arkady Volozh.

The Funds story began in 1907, when Colonel August Bailey and Carlyle Gifford registered a legal partnership. The following year they had engaged in investment management, seeing the opportunity to give a loan to the Malaysian and Sri Lankan rubber plantations, which supplied tyres for the new car of Ford — Model ts.

Soon the company opened a division in the United States, to provide financial support to American railroads in the 1920-ies, and then, car manufacturers and steel — it was the fastest growing company in America in the mid-twentieth century. Baillie Gifford was one of the first international investment companies, who had engaged in venture capital investment in Japan in the 1960-ies. Despite international activities, Baillie Gifford still has its head office in Edinburgh, where they live 43 partner of the Fund.

Baillie Gifford is now mainly acts as an institutional investment Manager. About 64% of assets under management — retirement savings, and about 19% are managed on behalf of another financial company. However, about 45% of investment funds — money from the US, for example, the investments of the pension System of civil servants of the administration of California or Florida.

In the past five years, the Scottish company joined the group of American asset managers such as Fidelity funds and T. Rowe Price, investment in fast-growing technology companies that have global ambitions. In “the stables of the unicorn” (portfolio company of the Fund, estimated cost of which exceeds $1 billion) Baillie Gifford appear on Airbnb, Spotify, Dropbox, Palantir Technologies, an Indian e-Commerce giant Flipkart, a rival of Uber, Ola and other.

In mid-April, the Fund has become one of the investors in the round for $600 million in the course of which the taxi Lyft was valued at $7.5 billion.

These technological investments have helped to grow the main Fund Baillie Gifford Scottish mortgage investment trust (Scottish Mortgage Investment Trust PLC). It is traded on the stock exchange investment Fund with a market capitalization of £5.1 billion ($6.5 billion). According to Bloomberg, over the last twelve years its average annual return before expenses amounted to 14.6%. For comparison, other global investment funds or trust FTSE World TR Index (it on a 7.4 database on thousands of companies from 47 countries since 1986, counting the London stock exchange and the Financial Times) show an average annual yield of 9%.

Not all investments Baillie Gifford was successful. So, a Scottish firm was one of the main investors in the German incubator of Internet startups Rocket Internet, founded by brothers Samirami. Rocket Internet, the world-famous copy successful projects from Silicon valley and their repetition in other markets — from Europe to South America in October 2014 completed the IPO of its shares on the Frankfurt stock exchange, and since then they have fallen in price by 58%.

Baillie Gifford, the fourth largest shareholder of Rocket Internet, a Scottish Fund owns 6.5% of stock portfolio incubator. He also acted as the main investor in rounds of the largest companies, owned by Rocket Internet, for example, the delivery service HelloFresh food or online furniture seller Home24. One of the co-managing Fund Scottish Mortgage Investment Trust — Tom Slater is a protected investment in Rocket Inernet, despite the fall in the value of the German “factory of startups” in the stock market.

Berlin may be one of the main technological hubs, which must compete with Silicon valley and investment in a company is a good way to get a place at the Berlin technology scene, he explained. Principal analyst at research company Morningstar (tracks the shares of companies and reports on quotations) David holder warns that you should not consider Scottish Mortgage Investment Trust Fund “for widows and orphans” (so-called funds or stocks that pay high dividends and thus not subject to high risk of changes in value on the market vc.ru).

The Foundation was seriously damaged during the financial crisis in 2008, losing almost 45% of its value, and in 2011, its market capitalization has fallen by more than 15% due to investment in American biotech company Illumina, Spanish Bank Banco Santander, manufacturer of agricultural machinery Deere & Co. And several mining companies — Brazils Vale and the Polish KGHM Polska Miedz. In 2016 despite the yield, expressed by a two-digit number, for this indicator, the Fund lagged seven percentage points from the target index (FTSE World Index) and on five of the comparable funds.

“But if you are targeting a long-term investment, it is a good chance to earn,” says holder. Slater in addition to his leading role in the Scottish Mortgage Investment Trust is one of the main people who make decisions in technology investment Fund Global Growth Fund and head of the division of investment in the North American market.

He notes that the firm is always in a sense has invested in advanced technology. Between the Model T produced by Ford in the early 20th century, and the production of the Model 3 Tesla — not such a big gap. Baillie Gifford is the third largest shareholder of Tesla, the Fund owns a share of 8%.

The current interest in Baillie Gifford to technological companies was connected with the desire of the Fund to refresh its portfolio in 2004. A while the Fund showed quite unstable dynamics and lagged yield of the target index. Then 57-year-old co-Fund Scottish Mortgage Investment Trust, James Anderson refused a proven investment in a Western oil company and began to invest in Amazon and eBay.

They were the few “survivors” after the first crisis, the “dot-com” (so-called crisis of 2000, when the overheated market for tech companies fell down and brought the NASDAQ with a high of 5132 to 1100 in a year vc.ru). “Our investment in Amazon is very important for where we are today, in terms of investments in the technology sector, said Slater, — we learned a lot from Bezos and his approach [to the business]”.

One of the lessons is to focus less on margins and more on growth, constant investment in innovation and the size of the market in which the company is going to work. “Profit is what you get when you have run out of ideas,” this quotation Bezos loves Sam Slater and his managers.

In the first year, when Baillie Gifford holds shares of Amazon, quotes technology companies fell by almost 50%, but the Scottish investor did not dispose of securities of the. To date, the cost of the initial investment of the Fund in the Amazon increased by 15 times. The decision of the company to look to companies not traded on the stock exchange, and to begin to Fund rapidly growing companies which are about to IPO, it was forced, says Slater.

Digital marketplaces such as Uber and AirBnb provide services without incurring many costs — on staff or capital costs. In turn, this allows companies to grow much faster and do not apply for funding in the open market or to the investors who need to guarantee a speedy exit from the company with a profit. However, the only way for investors to participate in the fate of these companies is to invest in closed rounds in the later stages.

“Analog Airbnb in the stock market does not exist. But were not trying to play venture, says Slater, is a sustainable business, whose shares in any other circumstances would have long traded on the stock exchange”.

However, in this strategy there is a serious risk. There are plenty of examples of companies soaring to “unicorns” — for example, the British advertising company Ve Interactive, digital American insurance company Zenefits or cloud service CloudFlare — billion-dollar estimated cost of which is subsequently lowered investors. Moreover, shares of companies which are not traded on the exchange, less liquid than securities of public companies.

39-year-old Slater studied computer science and programming at the University of Edinburgh. He spent a lot of time touring around Silicon valley, including three trips when he, along with his entire family moved to San Francisco for a few months. All in order to get a better feel for how the ecosystem inside.

But Slater believes the strong side (his own or his firms) understanding of the technology itself. Baillie Gifford, with rare exception, has avoided investing in hardware manufacturers or software companies solely. Instead, the company is looking for “large configuration possibilities” — for example, the development of green energy for both homes and for transport in the case of Tesla, or the idea of “store only” in the case of Amazon.

The company also invests in “undermining” business model, in which industries technology is not happening these changes. Entertainment is Netflix, retail — Alibaba or in the advertising business — Facebook or Tencent.

In addition, Baillie Gifford seeks to invest in companies where the founder continues to “stand at the helm”. “It is very important that Bezos still manages, while Pierre Omidyar, who founded eBay around the same time when Amazon was created, enjoy the good life in Hawaii,” says Slater, so explaining the continuing growth of Amazon and the difficulty eBay. According to him, the firm spends a lot of time to learn from their mistakes.

Under error means not buying $100 of shares, which then fell to $50. The firm examines the reverse situation. Why was so little bought of securities of the company, the quotations of which grew from $50 to $250, they could buy significantly more.

As an example, Slater leads Nvidia, the stocks of which represent about 1% of the portfolio Scottish Mortgage Investment Trust. Baillie Gifford made a bet on Nvidia in the hope the market growth of artificial intelligence. The chip manufacturer makes graphics processors, which are very popular for large-scale calculations, which are required for machine learning. However, the firm was afraid to invest too much in hardware. “We were too modest with the size of our investment in this company,” says Slater.

Unlike venture capital funds, Baillie Gifford acts as a financial investor. The firm doesnt need a place in the Board of Directors of its portfolio companies and does not try to give them advice on doing business. In addition, according to Slater, at the time of investment, the firm does not think about the potential sale of its stake.

“If we do everything right, we dont want to be a seller,” he notes. This does not mean that Baillie Gifford — the passive investor. Co-Manager of Scottish Mortgage Investment Trust — Anderson — told reporters that he was surprised when Tesla put investors before the fact of purchase of the company SolarCity in June 2016.

After much analysis and consultation with Tesla, Baillie Gifford in the end still supported the companys decision about purchasing experiencing financial problems of the energy business.

The most difficult decision for the Baillie Gifford does not affect investment, and asset sales, says Slater. One of the reasons that can cause this to happen can be some changes that undermine domestic spirit companies, for example, gets its CEO. The company also may sell shares if the company for several years could not reveal their potential.

Finally, Baillie Gifford were several occasions when all seemed to be going too well and the company has become a victim of its own success. Could not support growth at the same level. According to Slater, thats why the firm sold the paper Apple in 2016.

Baillie Gifford owned shares of the iPhone maker since 2008, but now has decided that “the new market of a billion devices for Apple will be no more”. At the same time, Slater does not believe in similar predictions of analysts in relation to Google and Facebook — many people assume that the company has reached the limit and then not be able to maintain growth at the same level. “I think economies of scale work so that the leaders of the — Facebook or Google — will continue to outpace all others in the moment when artificial intelligence and machine learning will be a key technology,” says Slater.

Machine learning gives better results in case if the algorithms are trained on large amounts of data, and this gives an advantage to companies that already have access to a huge data arrays. Also these companies have an inexhaustible access to computing power and the best computer engineers.

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