18 Jan 2012
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Opinion
The Worm's Eye View
Baillie Gifford invests around £15bn in European equities on behalf of clients, from our Edinburgh headquarters.Despite turmoil in the markets and daily press commentaries about the crumbling of the Eurozone, we continue to find what we believe to be excellent wealth creating businesses in which to invest. In the article below Tom Coutts, Head of our European Equity Team, describes how we go about doing so.
The Worm’s Eye View
“When you can hold the world in your palm and see it from a bird’s eye view, you tend to become arrogant—you do not realize that when looking from such a great distance, everything becomes blurred, and that you end up imagining rather than seeing things. I opted for what I called the ‘worm’s eye view’. I thought I should rather look at things at close range and I would see them sharply.”
Muhammad Yunus, Banker to the Poor
Like Muhammad Yunus, who five years ago won the Nobel Peace Prize for his pioneering work in microfinance, we emphasise the little picture, not the big one. Such an approach seems increasingly rare, to judge from the number of commentators and analysts trying to hold the world in their palm. Despite its unpopularity, though, we think our more modest approach holds the key to investment success.
Perhaps the clearest bird’s eye / worm’s eye conflict today is to be found in the Eurozone, in the widening gulf between the people at the top trying to take decisions and the people at the bottom whose votes elected them to their position of power. The common call for stronger institutions at the heart of the Eurozone is ultimately a plea for greater centralisation of decision making, for power to be moved even further away from the man in the street or the protester in his tent. The birds seem to be winning out over the worms, and the link, already tenuous, between citizens and their elected representatives risks being stretched to breaking point. George Papandreou’s downfall came from his attempt to call a referendum that would give the Greek people a say in the decisions being taken on their behalf, an act that was met with panic by both financial markets and German politicians – misery acquaints a man with strange bedfellows. Replacing elected politicians in Greece and Italy with market friendly central banking technocrats may be greeted with a sigh of relief in the short term, but while we wish them well in their endeavours, we can’t help feeling that disenfranchising whole nations in order to keep financial markets happy is a dangerous game to play, and one whose results will not be apparent for some time.
The Eurozone crisis may be a topical illustration of the distinction that Yunus makes between the bird’s eye view and the worm’s eye view, but it can also be clearly seen in three critical aspects of how we manage money.
Bottom-up Stock Picking
Those who know us well may tire of hearing us talk about the importance we place on bottom-up stock picking, but it is so central to what we do that it bears repetition. We invest in companies, not economies. Like Yunus, by looking at things at close range, we hope to see them sharply. We devote our time to analysing businesses, trying to find those that have a strong competitive position, a clear opportunity to grow, and a management that will take a determinedly long-term view. We aim to construct all-weather portfolios of businesses that will grow profitably through the cycle and out-compete their rivals whatever the economic environment. We spend no time trying to predict whether it will be rainy or sunny.
The companies in which we invest are often decentralised and non-hierarchical, which improves their chances of successfully anticipating and adapting to change. There are few better examples in our portfolios than Swedish bank, Svenska Handelsbanken, which sets no central budgets but simply empowers its local branch managers to run the business in the best way they can, focusing not just on lending money out but on getting it back. This rather old-fashioned approach to banking follows the advice given by Walter Bagehot in Lombard Street, written in 1873: “A banker who lives in the district, who has always lived there, whose whole mind is a history of the district and its changes, is easily able to lend money safely there. But a manager deputed by a single central establishment does so with difficulty. The worst people will come to him and ask for loans. His ignorance is a mark for all the shrewd and crafty people thereabouts.” Knowing your customers and being free from head-office interference are modest aspirations in a business, but in banking at least they are rarely met.
Backing Individual Enthusiasms
One of the major perils for any team or organisation is groupthink. We counter this by picking stocks based on clear support from one individual, rather than requiring consensus or even majority agreement. We believe decisions that are taken on the basis of general head-nodding agreement around a table rather than reflecting strong individual views carry significant risks, particularly in the investment world, where a large proportion of decisions is likely to be wrong. We should emphasise that our desire for clear responsibility is based on the behavioural benefits it brings: we want people to feel motivated to argue the case for investing in companies they believe in, trusting that their colleagues will support their enthusiasm and judgement when buying it, even if they disagree with the specific analysis. Responsibility for individual investment decisions is clear, and lies with one person. Accountability for the whole portfolio is equally clear, and lies with the entire team. The distinction may be fine, but it is critical.
Working in Small Teams
We aim to be a partnership, not just in terms of our corporate structure, but also in terms of how the people working at the firm behave towards one-another. Decision making is devolved and investment teams can develop as they want, or more accurately in the direction that the personalities within those teams takes them. There is no house view, imposed from on high and mandated for all to follow, merely a commitment to excellence, to continuous learning, and to creating an enjoyable and supportive working environment. The evolutionary biologist, EO Wilson, believes that “within groups, the selfish are more likely to succeed. But in competition between groups, groups of altruists are more likely to succeed.” Applying this to our own industry, the star fund manager culture may work wonders for the star, but we see little evidence that it produces good long-term returns for either the business employing them or, crucially, its clients.
Summary
Muhammad Yunus’s innovative – and inspirational – approach to finance in Bangladesh has its roots closer to (our) home in the writings of the Scottish economist Adam Smith and is a terrific illustration of how Smith’s ‘invisible hand’ works. The first money Yunus lent, $27 split between 42 women, wasn’t borrowed because the women thought it would benefit society, it was borrowed because they thought it would benefit themselves and their families. As Smith wrote in The Wealth of Nations: “Every individual… neither intends to promote the public interest, nor knows how much he is promoting it… he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this… led by an invisible hand to promote an end which was no part of his intention.”
Smith and Yunus are worlds, and centuries, apart. But their work seems to us to share some common insights: that thinking small is often better than thinking big, that individuals make better decisions than committees, and that, ultimately, people’s desire to better themselves will lead to better societies. These are insights we apply in our work, and which, despite the profound problems facing many debt-laden developed countries, leave us optimistic about the future, and about the ability of the many worm-like companies in which we invest to create lasting wealth for our clients.
Please be aware that investments can go down as well as up and you may not get back the amount originally invested.
Please remember that ongoing stock market conditions and currency exchange rates will also affect the value of investments and any income from them. Investors may not get back the amount invested.
The views that are expressed in this article should not be taken as fact and no reliance should be placed upon these when making investment decisions. They should not be considered as advice or a recommendation to buy, sell or hold a particular investment.
This 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.
Author: Tom Coutts
Tom Coutts graduated BA in Modern Languages from Oxford University in 1994. He joined Baillie Gifford in 1999 and spent a number of years in our UK Equity Team before joining the European Equity Team in 2007. Tom became Head of the European Equity Team in May 2011.