A growth manager's view of global markets
May 17, 2013
Dan Newhall: Hello. I'm Dan Newhall of Vanguard's Portfolio Review Group. I'm here with James Anderson of Baillie Gifford who manages nearly half of the Vanguard International Growth Fund. Notably, this year marks the tenth anniversary of Vanguard's association with James and Baillie Gifford as an advisor to the fund. James, congratulations and thanks for joining us.
James Anderson: Thanks Dan. It's been an enormous pleasure and privilege for us, and we hope the relationship will continue for many years to come.
Dan Newhall: Can you start by talking a little bit about your firm, your team, and your investment philosophy?
James Anderson: Certainly. Baillie Gifford is a very traditional Edinburgh partnership in existence for well over a hundred years, and we think that's an important ingredient in how we manage money for the very long term. The portfolio is effectively supervised by a group of eight of us in what we call a Portfolio Construction Group.
Seven of the eight of us in that group have spent their entire investment career at Baillie Gifford. So I think that element of continuity is important. I would lastly stress that we are absolutely committed to the idea of being growth—with a capital G—managers.
So we have a concentration on being able and willing to identify those great investments that can multiply our money several times over for our clients, rather than worrying too much that individual stocks may go down, which is inevitable.
Dan Newhall: Could you give us sort of your general assessment of economic growth in the major regions around the world?
James Anderson: Yeah. I think the question is fascinating because you put it there, Dan, in a worldwide level. And I think one of the striking elements to us is just how obsessed we've become about what goes on in small parts of the world.
But if you translate it into global growth, the world economy continues to grow quite consistently and quite regularly between 3%–4% per annum, and we think that is probably likely to not just continue but increase over the course of time.
Dan Newhall: Well, I guess what a lot of economists and commentators have remarked on is that the level of growth may be so slow that we could easily slip back into a recession or worse, but you sound like you don't really fear that.
James Anderson: I think that fear of slipping back is partly a reflection of what we've all been through, but it's still more not thinking radically enough about what were the structural challenges. Now I think the reasons we should have had that fear five years ago, because you could see major elements of the economy structurally imperiled, I think that was plainly clear of the financial sector, sadly to say, and absolutely across the western world, and I would also add in Japan. But I think that fundamentally we are in a less risky environment now.
Dan Newhall: You have a number of positions in information technology companies. What is it about these companies that really excites you in terms of their growth prospects?
James Anderson: I'm glad we're going to talk about this because it is an area, which seems to me, profoundly misunderstand and potentially with huge ramifications and huge opportunities for investors and, indeed, for the global economy.
Now I think that there are two particular appeals here, which we haven't really contemplated it enough as investors over the last decades, and I think that's partly because the whole experience of the technology bubble soured people's mental attitudes in these areas.
Now what are these two extraordinary verves? The first one is that progress and change in technology continues to be exponential.
Opportunities arise that we think were completely implausible to start. The scale of the opportunities transforms itself, the scale of the attainment you know. You and I at the start of this meeting were asked to turn off our cell phones. You know, did any of us imagine when that first cell phone was developed that we were going to have a computer much more powerful? And we're using that in our pockets that could answer any query about the world at any moment in time.
The second element, and I think this has got even less attention, is that many of the outstanding technology companies have profoundly different economic characteristics, and here I'm going to make a bold claim, than any companies that existed in the history of mankind before recent years. What do I mean by that? I mean something quite simple, that these companies do not really have a huge demand for capital to be able to grow.
You've now got companies who can fund that growth internally and need very little from us as shareholders to do so, and that means that their return structure is profoundly appealing, really high returns on capital, a real generation of cash flow from very early times.
Dan Newhall: Well it sure sounds like there are a lot of things that you're very optimistic and sort of enthusiastic about, but one thing—one area that you've been pretty consistently pessimistic on has been Japan. But there's a new prime minister. There have been some recent developments that could potentially resuscitate growth but I'd be interested in your thoughts on Japan and recent developments.
James Anderson: Yes, I remain concerned. I wouldn't, in any way, wish to diminish the sheer scale of the monetary stimulus that has been proposed by the new prime minister and accepted by the Bank of Japan.
My problem is whether it really solves the economic troubles that avail Japan for at least 20 years. What we need in Japan is an addressing of the structural problems. Now, monetary easing might help that, but what I would need to see is much more flexibility inside companies rather than a bureaucratic and hierarchical approach, which has very little signs of change.
So Dan, effectively what we're saying is we want to see competitive advantage and innovation at the company level.
Dan Newhall: James, just one final question, you know, once again, congratulations on your ten years of managing a significant portion of the Vanguard International Growth Fund. But as you reflect on that, do you have any thoughts for our investors as they think about the future?
James Anderson: I do, but almost I feel my thoughts are less significant than something that Vanguard themselves said in a recent shareholder letter, which was reciting all that we've been through over the course of that last ten years. As you know we've had a global economic crisis, a near financial collapse, all the issues in Japan and Europe that we're talking about. And your colleagues pointed out that despite all that if you had patience your returns had actually been substantial and rewarding.
But I think that above all what Vanguard implicates in terms of patience and an ability to avoid noise is what we need to concentrate on in the next ten years and I'm sure you'll help us to do that and I think if we can do so then the returns could be compelling.
Dan Newhall: Thank you for your time today, James.
James Anderson: It's a great pleasure as always.
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A conversation with James Anderson of Baillie Gifford
In a recent video interview, James Anderson of Baillie Gifford Overseas Ltd., which manages nearly half of the assets in Vanguard International Growth Fund, discusses his views on global markets and how he's positioning his portfolio in the current environment.
- All investments, including a portfolio's current and future holdings are subject to risks, which may result in the possible loss of the money you invest.
- Past performance is not a guarantee of future results.
- Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets.
- Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility.