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Baillie Gifford’s Brodie: Why immature companies are worth a look

28 March 2017

Douglas Brodie explains the firm’s global small-cap strategy and where it is seeing opportunities.

By Rob Langston,

News editor, FE Trustnet

Innovation and the use of technology to grow makes the global smaller-cap universe one of the most interesting parts of the market, according to FE Alpha Manager Douglas Brodie.

Brodie, who manages the £239.5m Baillie Gifford Global Discovery fund and the £266.2m Edinburgh Worldwide investment trust, says less mature, entrepreneurial companies can offer strong returns to investors.

Immature companies with shorter track records can often exploit opportunities as they are more nimble and can grow much faster than their large-cap peers.

“Most smaller businesses don’t define opportunities by countries or sectors,” he explained.

Brodie’s Baillie Gifford Global Discovery fund has risen by 130.08 per cent over the past five years, compared with a gain of 71.08 per cent for the average IA Global fund.

Performance of fund vs sector over 5yrs

 

Source: FE Analytics

“One of the reason the fund is called Global Discovery is that we didn’t want it to be classed as an asset class,” he said.

“We want to invest in businesses that, yes they are small but want to be large. They don’t want to be the thing that the stock markets define them as. Some people misunderstand that.”

The team came into existence in 2009, says the manager, having previously operated on a much more regional basis, but had found that the firm’s smaller companies managers spoke to each other more than regional teams.

From a universe of 20-30,000 companies, the Global Discovery team whittles down the list to a smaller pool of opportunities.

“There is a smaller sub-sector of companies that have the potential to be much larger,” said Brodie. “We’re not obligated to sell if we own a small-cap that joins [another large cap index]. We do end do end up owning some large businesses.”


Brodie says many smaller companies have been set up more recently to solve tackle problems affecting people around the world.

“The most interesting businesses are the ones innovating to solve bigger problems, if the problem is big enough it is probably a global one,” the fund manager said.

One example of a problem-solving company the manager has invested in is online UK supermarket Ocado, an e-commerce website that makes home deliveries.

Brodie says companies like Ocado have identified market opportunities and are trying to change how goods or services are delivered.

Performance of stock vs index over 5yrs

  

Source: FE Analytics

Another example of a company held by the manager is Tesla, the US-based firm that has disrupted the automobile industry and take on automobile manufacturers with its electric vehicles.

Market Axess, the Global Discovery fund’s top holding, is another innovation-led firm, which has benefited from the opening-up of the US corporate bond market more recently.

Brodie says the firm has moved into a market where investment banks have moved out of because of new regulation over capital requirements.

“Sometimes its smaller companies trying to carve out new opportunities and sometimes its healthcare or biotechnology,” he said.

“Between 60 per cent and two-thirds of the portfolio is invested in technology and healthcare in terms of hard sector definitions but we don’t find those helpful.”

Dexcom, a US-based company that uses sensor technology to monitor glucose levels for diabetic patients, is another top holding for the manager.

With rising levels of obesity and ageing populations around the world, the disease has become more prevalent in recent years.

The focus on more innovative companies also means that it stays away from certain areas of the small-cap market, such as those relying on long-term capital or commodities/materials.

He says inefficiencies and valuation anomalies among smaller companies can be pronounced and can lead to highly asymmetric investment opportunities “ideal for long-term, bottom-up investors”.


Brodie says the fund typically holds companies over the longer term from 5-10 years, and has the potential to resemble an all-cap product as it holds smaller companies with the potential to grow.

The other fund overseen by Brodie and the global smaller companies team is the closed-end Edinburgh Worldwide investment trust. Over five years, the investment trust has returned 86.99 per cent compared with the average global investment trust’s return of 82 per cent.

Performance of investment trust vs sector over 5yrs

 

Source: FE Analytics

One of the main differences between the two strategies, says Brodie is the ability to invest in unlisted companies.

Brodie says around 2.5 per cent of the portfolio is invested in unlisted companies, including Oxford Nanopore, a company that can read DNA.

For the manager, immaturity remains key. Smallness in itself does not always result in opportunities for growth, but Brodie remains confident that innovative companies with proven concepts can often help deliver strong returns.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.