Baillie Gifford's newest trust has seen its returns cool after a stellar first year as it continues to take stakes in the 'economic fabric of the digital age'.
Baillie Gifford US Growth (USA) has snapped up a stake in unquoted tech infrastructure group Stripe as the trust sees the brakes slammed on returns after a stellar start to life.
The Edinburgh-based fund manager has increased its exposure to unlisted companies to 14% in its newest portfolio, up from 11% in May, as Stripe becomes the fifteenth unquoted company in the £373m fund.
Managers Gary Robinson and Helen Xiong described Stripe as ‘a company that is building the commercial infrastructure of the internet’.
The managers also added US-listed, Canadian company Shopify (SHOP.N), which provides e-commerce software to online retailers, to the portfolio, stating that both Shopify and Stripe ‘have [the] potential to become the economic fabric of the digital age’.
‘Their impact is only getting started and, should they be successful, will be felt for decades to come,’ they said.
In a bid to find ‘new leaders of the economy’, the managers seek out companies disrupting traditional sectors.
‘Disruption is a process, not a technology, and it is only with significant time-lags that the fruits of technological revolutions can be repeated,’ they said.
‘We are still discovering the fruits of the internet-software-mobile revolution today.’
The businesses that emerge from these revolutions will ultimately ‘demand shifts from incumbents to a new generation of companies’.
‘Nowhere is this more true than with Amazon (AMZN.O), the company’s largest holding at 7.6%, where we saw an acceleration in Amazon’s north American retail sales despite lacklustre US retail sales, as consumers continue to shift spending from offline to online,’ said Robinson and Xiong.
While Amazon, Alphabet (GOOGL.O), and Microsoft (MSFT) – all of which are held in the portfolio – have established themselves as dominant tech companies, the managers said they are ‘encouraged by a new generation of companies that are emerging with equally large opportunities’, such as Shopify, which is now the second largest position at 4.6% of the fund.
The managers are well aware that their disruptors can also be disrupted, and note the rising popularity of video-sharing site TikTok, whose owner ByteDance is eyeing a flotation on the Hong Kong stock exchange.
The increasing use of TikTok ‘suggests that social media may be subject to generation shifts in preference’.
‘We cannot always predict these shifts in advance but we aspire to back the companies which are adaptable and can respond to them,’ said the managers.
While the managers said they are ‘very optimistic’ about the next decade, the fund has seen returns slow in the six months to 30 November after a strong start, reporting net asset value (NAV) gains of 28.8% in its maiden annual results, outstripping the S&P 500’s return of 22.2%.
In its interim results, the investment trust delivered a NAV return of 7.5%, lagging the 12.3% managed by the benchmark.
Robinson and Xiong said technological progress will ‘power sustainable increases in share prices’ over the next 10 years and markets and business models that are currently being developed will become ‘the new normal’.
‘Technology will become ubiquitous and extend to all parts of society,’ they said, adding that businesses being internet-enabled will be expected.
‘The technology is maturing, but the opportunity is only beginning.’