Mark Urquhart, Partner, Baillie Gifford

Baillie Gifford partner Mark Urquhart shares lessons from a 27-year career that’s involved investing in Microsoft, Hermès and Netflix.

All investment strategies have the potential for profit and loss, capital is at risk

Long-term growth investing has an enduring aim: to find companies that increase their performance and value over many years. Baillie Gifford has stayed true to that goal over the decades, but the kinds of companies we have backed keep changing.

When Mark Urquhart joined Baillie Gifford in 1996 as a trainee, neither Google, the iPod, nor even wifi existed, let alone some of the cloud computing and app-based services he’s since invested in.

“The advent of the internet, connectivity, the whole idea that we’ve all got supercomputers in our pockets, changed everything – everything was disruptable,” Urquhart reflects in a recent episode of Short Briefings on Long Term Thinking.

In the podcast, the Baillie Gifford partner shares key lessons he’s learned in the years since abandoning academia for finance.

Lesson one: chase faster growth

The first dates from his early days on the US team. “Back then we didn’t have desktop computers,” he says. “I think we had one terminal, which had internet access, at the end of the desk, which people treated with suspicion. I was seen as the chap that might understand this new-fangled technology called ‘software’.”

Before long, Urquhart pitched his superiors on the merits of investing in Microsoft.

“Here was a company that had 90 per cent market share, was growing really effortlessly because every computer sold had Windows installed, had huge operating margins and was led by a visionary in the form of Bill Gates.”

The US team had a reputation for thinking tech stocks were “not for them”, so Urquhart was surprised when the partner in charge bought the stock on his recommendation. Its subsequent strong performance helped establish Urquhart’s reputation and taught him a lesson: “That you could get these companies which could grow very quickly, that could double again and again.”

As Urquhart explains, over subsequent decades, he and his colleagues have become more ambitious in the type of growth they pursue.

“A good growth company then would be a 10 to 15 per cent compounder,” he says. “A company growing at 15 per cent for five years is attractive: it will double.

“But a company growing at 35 per cent for five years will go up nearly five-fold. So it’s that sort of difference in the opportunity, which is hugely exciting, and something we seek to systemically exploit.”

Lesson two: look for maverick leaders

In 1999, Urquhart moved to the Japan team, a switchover he didn’t relish because of a misconception that it represented a shift to “a backwater 10 years into a bear market”.

“I had gone in with the impression that Japanese firms are staid and boring, and they won’t change,” he says. But meetings with the leaders of some of the country’s smaller-sized companies led him to reverse his view. They included Takao Yasuda, founder of the discount retail chain Don Quijote.

“His idea was that shopping should be chaotic, should be madness,” Urquhart says. “Through western eyes that made no sense: we wanted Marks and Spencer’s and regimented underpants. But actually, shopping as entertainment was brilliant, and the Japanese loved it and lapped it up.”

This appreciation for chief executives who combine seeing the world in unusual ways with an ability to deliver on the operational performance to achieve their ambitions later influenced his investments in Amazon, Tesla and other entrepreneur-led companies.

“We’re looking for special individuals: mavericks, madcaps, people who will take risks and do things differently, will see the world differently, Urquhart says. “So from the Japanese startups to the Elon Musks of the world, for me, there’s quite a connection.”

Lesson three: recognise the disrupters can get disrupted

Over the years, Urquhart has spotted a recurring theme: things can change in unexpected ways leading even the most innovative companies to come undone.

He notes how a historic Baillie Gifford holding, Kodak, went from being one of the world’s largest companies to declaring itself bankrupt in 2012. The company had popularised photography and made movies possible. But it failed to capitalise on its own pioneering work in digital cameras, resulting in others cannibalising its business.

“It’s that classic sort of innovator’s dilemma when an incumbent doesn’t see the opportunity because it has huge existing revenues it wants to protect,” Urquhart explains.

He adds that something similar occurred to Nintendo after Apple launched its App Store in 2008. The move created a giant market for downloadable casual games that ate into sales of Nintendo’s more expensive, cartridge-based titles.

“We managed to get out of its shares in fairly short order,” Urquhart says. “You have to be open-minded sometimes about these companies that are sailing along, that something can come from left field and disrupt the entire business model.”

Lesson four: be adaptable, and look for companies that are likewise

By his reckoning, Urquhart has faced 10 financial crises over his career, ranging from 1997’s Asian slowdown to the current fallout from the war in Ukraine and inflation surge. “Quite often equities take the brunt of it because they are liquid,” he reflects.

As a long-term investor, he adds, you must avoid getting caught up in the panic and rather check if your holdings are still hitting their operational targets. But that doesn’t mean ignoring game-changing events.

“There are times when the macro does invade the micro – where some business models are just hugely disrupted,” he acknowledges. In recent months, he and other investment managers have sold some stocks because interest rate rises and increased living costs had reduced their growth prospects. But there are many others in which he retains confidence, because of their ability to switch course.

“I’d cite something like Netflix, which had a big fall in share price but is now back to growing, has the strongest balance sheet in its industry by a mile, and is doing interesting things in terms of different revenue streams,” he says. He’s referring to the TV streaming service’s new ad-supported plans and account-sharing fees.

“There’s a key point that you want companies which are adaptable.”

The observation also applies to Baillie Gifford. That’s not to suggest the company is about to cease being a long-term growth investor. But as Urquhart explains, we are continuously on the lookout for new sources of growth and wary of complacency.
“The secret to investing,” he concludes, “is to hold your ideas passionately, but lightly.”

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This update is solely for the use of professional investors and should not be relied upon by any other person. It is not intended for use by retail clients.

The views expressed in this article should not be considered as advice or a recommendation to buy, sell or hold a particular investment. The article contains information and opinion on investments that does not constitute independent investment research, and is therefore not subject to the protections afforded to independent research.

Some of the views expressed are not necessarily those of Baillie Gifford. Investment markets and conditions can change rapidly, therefore the views expressed should not be taken as statements of fact nor should reliance be placed on them when making investment decisions.

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