The century-old saga of Baillie Gifford: an investment that began before the First World War

Source: Smart Investor

Author: Dongtian Yu

Compared to the well-known Berkshire, BG is as low-key and quiet as the city of Edinburgh. But in fact, over time, BG has performed better than Berkshire.

Throughout the 100-year history of BG, BG’s vision has always been accurate.

Few people started investing before World War II and are still alive today, and BG has been in operation for 114 years.

In the past 100 years, what kind of wind and rain has BG experienced? And how to cultivate the existing investment ideas step by step?

Compared to the bustling New York and Hong Kong, Edinburgh does not seem like a commercial city.

This city is located in Scotland, the most northern part of the UK, like a knight who has fallen asleep after guarding the land under his feet for thousands of years. On both sides of the street are cashmere scarf shops and cafes full of classic flavors. Someone is playing bagpipes under the old castle. The heavy sense of history even gives people the illusion of traveling to another era.

This is the place where JK Rowling wrote “Harry Potter” and where Jay Chou shot the MV. Everything is full of romantic art.

Over the past 10 years, investment and research personnel from domestic public fund companies have organized groups to exchange here every year.

There are many long-standing asset management institutions in this city, especially Baillie Gifford, a century-old ultra-long-term investment giant that has become famous in China for investing in Tesla.


Compared to the well-known Berkshire, BG is as low-key and quiet as the city of Edinburgh. But in fact, over time, BG has performed better than Berkshire.

Since the early 2000s, BG’s flagship fund, the Scottish Mortgage Mortgage Trust (SMT), has returned close to 1,500%, while Berkshire has returned about 500%.

The value investing community is roughly divided into two factions: Graham’s focus on mispriced companies and hold them for a long time, and Fisher’s focus on mining high-growth companies and long-term holdings.

Early Buffett belonged to the former, while BG belonged to the latter.

Later, under the influence of Munger, Buffett gradually incorporated the concept of growth into his investment strategy. From this perspective, Berkshire belongs to the mixed faction, while BG belongs to the pure growth faction, which is good at exploring long-term big opportunities.

Throughout the 100-year history of BG, BG’s vision has always been accurate.

Few people started investing before World War II and have survived to this day, but most investors who bought and held very early on have seen significant income and capital growth.

In the past 15 years alone, more than half of the more than three dozen trusts that have existed since the beginning of World War II and are still in operation today have returned 300% or more, while the top five performers The trust fund has returned more than 500%.

Since the beginning of the last century, the financial market has experienced many ups and downs. Major events like the two world wars, the Wall Street crash, the Korean War, the oil crisis, Black Monday of 1987, the internet crash, and the global financial crisis are all disrupting financial markets.

However, many cycles end in corrections, and market corrections often provide investors with opportunities to buy good companies at bargain prices.

On long-term charts, declines tend to be short-lived.

The slogan of long-term investment has been shouted loudly by everyone.

But the biggest question is whether investors can survive every disaster and have the patience to persevere.

And BG has been running for 114 years. In the past 100 years, what kind of wind and rain has BG experienced? And how to cultivate the existing investment ideas step by step?

1908-1947: The era of raising money

Early investments in the rubber industry and American railroads, fame in WWII

Baillie & Gifford WS was established in 1907 by Augustus Baillie and Carlyle Gifford.

These two people, one is an army officer and the other is a lawyer, actually had no investment experience at the beginning.

Lieutenant Colonel Augustus Bailey grew up in Scotland. Despite having an officer title, he seems to want a career more than the military

: Augustus was originally commissioned as the Royal Horse Artillery in 1880, but he resigned in 1886. During the Second Boer War at the end of the 19th century, Bailey rejoined the army and took part in the war, which was also Augustus’ battle of fame.

After the war, Bailey was promoted to major in 1903 and to lieutenant colonel in 1908, the second year after the BG was established, but he resigned again in 1910 to focus on his career.


Augustus Baillie, one of the founders of BG

March 25, 1861 – January 8, 1939

Another founder, Carlyle Gifford, was a lawyer by training. He was born in Kirkcudbright, southern Scotland, and was educated at George Watson College and the University of Edinburgh, specializing in land law and securities trading.

Originally, BG was a law firm, but the financial environment at the time presented too many opportunities in their eyes, so BG’s business switched to the investment field in 1908.

As early as 100 years ago, when BG was just established, their founders showed extraordinary investment vision:

In 1909, BG created the Straits Mortgage and Trust to invest in British Malayan rubber plantations that supplied rubber for automobile tires. Investing in a business in the rubber industry was also one of BG’s first deals, at a time when the Ford Model T was taking the U.S. by storm, a groundbreaking vehicle that BG believed could “revolutionarily change the world.”

In 1913, the Straits Mortgage Trust was renamed the later famous Scottish Mortgage and Trust ( S MT) , and several other investment trusts were subsequently introduced by BG.

Fortunately, BG’s customers and employees survived World War I “unscathed.”

After World War I, BG seized the opportunity again. They saw the United States, which had made a fortune in World War I as a compelling emerging market, and invested heavily in railroad companies such as the Union Pacific Railroad, which at the time invested in US assets account for 20%.

Looking back, investing in the United States was a correct decision at that time, and it can also confirm BG’s growth investment decision.

Before the First World War, neither the United States nor a debtor country could compete with European countries such as Britain, France and Germany in terms of status and economy. But after a few years of war, the United States became the lender.

As European countries made reserves for the war, the export of American materials to Europe continued to increase, creating the economic prosperity and rise of the United States.

The Roaring Twenties provided BG with many opportunities to expand the company’s investment business.

During this period, the average annual industrial growth rate of the United States reached 4%, and the gross national income increased from 65 billion US dollars in 1919 to 82.81 billion US dollars in 1929.

Moreover, the automobile industry chain and railway infrastructure laid out by BG are in the golden age of development.

By 1927, with the founding of Baillie Gifford & Co., Baillie & Gifford WS had officially transformed from a law firm dealing with institutional investments into a partnership that managed investment trusts.

What is even more amazing is that the collapse of Wall Street in 1929 not only did not let BG collapse, but instead allowed them to seize the opportunity to continue to expand.

In the case of General Investor and Trustees Limited (GIT), the predecessor of China Growth Trust, before the crash, their investment managers foresaw the impending stock market crash and switched more than half of their portfolios into cash and UK government securities.

In addition, BG also took over some industries that fell in the Wall Street crash.

In 1931, BG took over the Monks Investment Trust and two other related companies.

Monks was one of a series of investment trusts launched by commercial bank JC im Thurn & Sons in the late 1920s, and was the last trust the bank launched before it collapsed due to the Wall Street Crash. Monks has continued to operate until now , and as of the third quarter of 2021 , the size of the investment trust has reached 3.4 billion pounds .


During the starving thirties, BG continued to grow steadily until the outbreak of World War II.

War is often devastating in the eyes of many, but BG had its best moments at the time during World War II:

In 1940, one of the founders, Carlisle Gifford, was sent to New York for British government affairs. At the time, the Governor of the Bank of England chose BG to sell British state assets on the New York Stock Exchange to build an arms depot and finance Britain’s war effort.

In other words, BG was not only rich at that time, but also equivalent to having the “endorsement” of the British government, which also made BG famous in the United States.


BG founders Augustus Baillie and Carlyle Gifford mock portraits

Source: BG official website

1947-1978 post-war era: Britain’s recession brings negative impact, nearly ‘dies’ after losing major clients

Neither the Wall Street Crash nor the two world wars brought down BG, but it nearly died out in the post-war recession.

After World War II, BG first continued its glory for a period of time. The devaluation of the British pound brought prosperity to the British financial industry, and BG and its main client, the investment trust company, also made a lot of money.

One of the original founders, Augustus Bailey, died in 1939, and Carlisle Gifford retired in 1965. After the war, BG was already in power by the second generation of managers.

The short-lived glory after the war seemed to make them temporarily close their eyes, feeling that they could live a nourishing life by focusing on the local market and being a small and beautiful fund, while giving up their curiosity and ambition to look outward.

Crisis came quickly. After the end of World War II, Britain followed the planning system of World War II. The bureaucracy was too large, resources were concentrated in the center, trade unions were powerful, and the economy was inactive and rapidly declining.

At the same time, British domestic politics are also extremely unstable. Before Margaret Thatcher, Prime Ministers frequently stepped down and policies lacked continuity.

In 1965, Labour’s Chancellor of the Exchequer, James Callaghan, introduced a new finance bill that introduced complex new tax regulations that changed everything about investment trusts. For example, every fund transaction incurs capital gains tax.


James Callaghan unveils new finance bill

Although many of the changes were reversed by subsequent legislation, the immediate impact at the time was very large, the burdensome additional administration placed many burdens on the trust, and the BG’s funding began to decline.

In addition, the global market at that time was not very peaceful. Inflation is rampant and interest rates have reached very high levels. The Middle East war in 1973 triggered the first oil crisis, and oil prices soared from $2/barrel to $11.5/barrel…

There are more and more problems in the market, and investors are caught off guard.

At the time, BG’s senior partners believed that expanding into a new business would be a distraction and wanted to focus on their immediate client base, and refused to pursue any opportunity to continue their trust business.

But making companies too reliant on trusts was a strategic mistake, and soon the glory days of the trust industry were over.

Then, in 1978, BG suffered a near-death experience – it lost its second largest customer.

In the spring of 1978, the state-owned British Rail Pension Fund successfully acquired the share capital of Edinburgh & Dundee Investment Trust, BG’s second largest client.

Former senior partner Richard Burns recalled that the client’s outlay was even “higher than the company’s profits” and that after his departure, BG was “almost worthless as a business”.

Despite these pressures, “no partner left at this bad time,” recalls former senior partner Douglas McDougall.

BG had considered merging and selling the company, but its partners insisted on remaining independent, and in the end, the company never made any mergers or acquisitions and continued to hire during the financial downturn in 1987, 2000 and 2008, when rivals Companies often opt for layoffs.

“The partnership culture is what’s unique about Baillie Gifford — you feel like if you own the company, you’re going to instinctively get things right , Douglas said.

BG is currently wholly owned by its more than 40 partners, all of whom have worked in the company for more than 20 years on average and have unlimited personal responsibility. This structure is a good tool for maintaining the company’s long-term operations, and senior employees are motivated by equity to maintain a long-term work mentality.

1979-1999: The great bull market, the key to growth was the pension fund business

In 1979, the British Conservative Margaret Thatcher came to power and began to implement comprehensive economic and political reforms: the abolition of foreign exchange controls and capital gains tax, and a substantial reduction in personal tax. This series of measures has greatly promoted the development of British enterprises and the asset management industry. In this regard, the United Kingdom has started a bull market that lasts for about 20 years.

Richard Burns, a former senior partner of BG, recalled that in the early 1980s, BG was still in a fragile state after the downturn of the investment industry in the 1970s.

However, with the advent of the bull market in the 1980s, the removal of foreign currency controls, and the rapid growth of Japan to become the fastest growing stock market in the world (BG began to deploy in Japan in the 1960s), exciting times came, and BG also embarked on a path to The road to new business opportunities.

In 1983, two prominent fund managers and later partners, Charles Plowden and James Anderson, joined BG. They have managed two of BG’s oldest funds, Monks and SMT, respectively.


Charles Plowden (standing) in the late 1980s with partners (left to right) Gavin Gemmell, Richard Burns and James Anderson.

The key to the growth of B& G during this period was the shift to pension funds.

Fortunately, BG’s consistent investment approach has attracted a large number of pension fund clients. In 1984, the company obtained its first pension through a competitive advantage, and in 1987 began to play a major role in UK pension investment.

Charles Plowden said that BG’s goal has never been asset growth, but continuous improvement in investment capabilities and customer service , the former closely followed by the latter.

In just a decade or so, BG’s assets under management have grown from £3.5 billion to £16.2 billion, which is inseparable from their loyal customers.

With Iraq’s invasion of Kuwait, the recession of 1991-92 and Britain’s sloppy entry and exit from the European Exchange Rate Mechanism (ERM), the 1990s got off to a bad start for markets. (UK joined ERM in 1990 and left in 1992)

Soon, however, the market moved forward rapidly, fueled by the internet and technology boom.

In 1993, Clinton was sworn in as the 42nd President of the United States, the year BG launched the UK Small Business Fund, which aims to expose clients to the best young businesses in the UK.

In hindsight, the breakthrough innovations that emerged at the end of the 20th century made small companies a lot of opportunities for long-term growth investors.

2000-2021: In the era of global investment, the bottom-up investment concept takes shape, focusing on overseas markets

Entering the 21st century, BG’s new mission is long-term investment and globalization, and less attention to short-term stock indexes.

The investment method and philosophy of ” looking for truly high-quality companies, highly holding positions and holding them for a long time” also began to form at this stage. The firm is deferring the time horizon for investments from two to three years to five to ten years, putting more emphasis on a company’s prospects and removing short-term noise from current profits or valuations.

In 2000, the bursting of the Internet stock bubble also brought some setbacks to BG, but unlike the closed Tiger Fund, BG did not suffer a devastating blow.

One reason is that long-established portfolios like Monks don’t have much exposure to the Internet, and their managers prefer more sedate blue-chip companies.

The second reason is that at a time when most investors are fleeing companies like Amazon, BG is steadfastly supporting Jeff Bezos’ vision. This also confirms BG’s principle of “avoiding consensus” in investment research.

Amazon’s extraordinary resilience and success has also contributed to BG’s “think first, then critique” approach. At the same time, BG has become more and more certain of their bottom-up investment philosophy:

Around 2004, James Anderson sparked a quiet revolution in BG’s investing world: he relinquished his role as chief investment officer and left the top-down investment policy committee.

“We’re starting to notice that big companies are getting better and stronger, and as they grow, the returns are getting better,” James Anderson said.

In addition to bottom-up investment, BG also believes that if we want to continue to grow, we must pay attention to overseas emerging markets. Among them, China is the main driver of global growth, followed by India and Brazil.

Benefiting from the global attention to overseas markets, the strong demand for equity management, and the growing reputation of BG in the investment field of emerging markets, the company’s overseas business has grown rapidly.

By the end of 2007, BG’s overseas asset management scale accounted for 40% of the total. By the time of its centenary in 2008, BG had offices in New York and London, in addition to its headquarters in Edinburgh, and had £50 billion in assets under management.

Its clients include five of the top seven U.S. pension funds, and it has also attracted significant business from Japan and Australia, and continues to make inroads into the Far East and other parts of the Middle East.

Under the guidance of such a mission, BG successfully bet on some big technology companies——

In 2012, BG successfully captured emerging trends such as cloud computing, as well as Asian tech giants such as Alibaba and Tencent. In 2013, BG bought Tesla and has made a profit of nearly 9,000% so far.

BG has spent the past two decades looking for companies to invest in R&D and technology, and they particularly like projects that might not be immediately profitable but could drive the economy a decade from now. While quantitative investing is all the rage, BG is less traded. Their turnover rate is less than 20%.

In addition to investing, the BG also uses a portion of its research budget to sponsor academic fields. For example, it sponsors the Baillie Gifford Award for nonfiction books.

Marathon runners who are not afraid of making mistakes, where will they run in the future

There are also many pits that BG has stepped on, such as Brazilian oil company OGX, Airbnb and luggage manufacturer Away.

However, they are not afraid of stepping on thunder, and they have the confidence not to be afraid: as long as they bet on one or two big opportunities like Amazon, Tesla, and Tencent, the return will far exceed the loss.

Tom Slater, one of SMT’s current managers, said: “If you can hit one or two outstanding companies that really drive the long-term market, they will pay for the inevitable mistakes.”

James Anderson has said that he likes marathon runners very much because “they managed to create a space for themselves where they can go (in this space) as they want, not as the system dictates.”

BG is also like a marathon runner.

When investing, they create a 10-year-long space for themselves, deep research, not concerned with macro, interest rates, or politics.

However, BG’s own “marathon runner” James Anderson is about to leave BG next year. Why did the asset management expert who joined BG in 1983, became a partner four years later, and increased the return of SMT investors by nearly 16 times, left in the most glorious period?

In March 2021, Anderson revealed in an interview with The Times that BG’s culture had become more “introverted and bureaucratic” as the company’s management grew larger.

“We now have more compliance officers than the company had when I first started. There are 1,500 people in the company, and at most 100 people are actually investing.”

In the process of increasing expansion, it is increasingly difficult to retain the original culture of the company. Some investors also believe that as the scale of BG becomes larger, it will gradually lose the partnership spirit and academic management culture that it has benefited greatly, and eventually become an “ordinary” large-scale asset management company.

Can the century-old tree of BG continue to bloom, and can it continue to be like the slogan in their Edinburgh headquarters that “real investors think in ten years, not quarterly” , so that We will wait and see.



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