22 Sep 2011 | World

Opportunities for Long Term American Growth 

Ian Tabberer gives an overview of the approach taken by the North American Team when looking for stocks with a potential for long-term growth.

While the US has been rocked by poor economic data, weaker than expected growth forecasts and a downgrade from ratings agency Standard & Poor’s, the North America team at Baillie Gifford remain steadfast in their belief that their American fund can still deliver the performance investors have come to expect. For Ian Tabberer, an investment manager within the team, which is headed up by Mick Brewis, the challenging conditions galvanise the investment philosophy supporting the fund, which is to focus on the long-term potential of individual stocks, creating a portfolio that can deliver over a three to five year period.

He says: “We believe the pace of economic growth is likely to be slower and slightly more volatile than we have seen historically as the US faces the head wind of deleveraging. But, actually, we think now is a great time to invest in companies that have the potential to grow. When the economy is doing well, all companies tend to do well. A rising tide floats all boats. However, if growth is more difficult to come by that will lead to a re-rating of companies that can deliver strong compounded earnings growth.”

It is this idea of compounded returns that sits at the core of the fund, with Mr Tabberer confident that taking a longer term view is more beneficial to investors than simply following the short term trends that dominate the markets. This is a strategy that underpins the entire range of funds at Baillie Gifford and is ingrained in the culture of the teams that work there.

“We have a genuinely long term approach to investing, both as an investment house and as a team,” Mr Tabberer confirms. “That particularly stands out against our peers in the sector. If you look at the New York Stock Exchange, turnover is around 100 per cent per annum. Wall Street and other investors are preoccupied with short term trends, ignoring the power of compounded earnings.

“Conversely, we have a turnover of around 25 per cent, which means stocks tend to stay in the portfolio for about four years on average. We focus on fundamental bottom up research, identifying above average sustainable earnings growth.”

As bottom up stock pickers the team does not use quantitative screens to narrow down the potential universe of stocks, which starts with all North American companies with a market cap of more than $1.5bn, preferring instead to utilise the research of both internal and external sources to produce a list of businesses that may be suitable for inclusion in the fund.

Mr Tabberer says: “There may be businesses on there that we think are attractive, but which are not right for the fund at that particular time. However, we monitor everything over the long term as there may be a point in the future when the business, valuation and opportunity might align.

“In the first instance, we create the list using our considerable stock research and company visits, as well as the experience of individuals on the team, including the senior management at Baillie Gifford.”

Overall, the team is looking for companies with a strong competitive position, a good industry background, positive financial characteristics and a reliable management team. Mr Tabberer cites autoparts retailer and distributor O’Reilly Automotive as a good example of a company that meets all of the criteria. It is currently the 10th largest holding in the fund, with a weighting of 2.8 per cent.

He says: “O’Reilly Automotive has only had one down year in its earnings in the past 10 years and has been able to demonstrate long-term sustainable earnings growth. The reason for this comes down to a number of key factors: its potential to invest to achieve above average returns, a strong competitive advantage, financial strength and management attitude.

“First, it is attractive because the US auto-parts industry does not suffer from competition from either Walmart or the internet. Second, access to capital has allowed them to build bigger distribution centres and a better inventory. It has also consolidated its position through careful acquisitions, most notably of CSK Autos in 2008. It has a strong balance sheet and the founders of the business still sit on the board, meaning it is very shareholder friendly.”

As well as being “genuinely long term” and bottom up, the team also prides itself on being active in a universe that is dominated by what Mr Tabberer calls “closet index trackers”. Indeed, statistics show that, whereas in 1980 60 per cent of US mutual funds assets had an active share of between 80-100 per cent, that figure now stands at only 20 per cent. The American fund has consistently had an active share in the 80-100 per cent range. So, while the team is aware of the index in terms of ensuring the portfolio is properly diversified, it is not constrained by it in any way.

“Another good example of the way in which we put what is right for the portfolio ahead of what is included in the index is our view on the financials sector,” Mr Tabberer adds. “Over the last 10 years we have not owned shares in Citigroup or Bank or America and, although this was slightly painful towards the end of 2009, we maintain the view that this is likely to be a low growth industry. A number of businesses in the sector simply don’t have the quality of management that would tend to lead to strong stock performance over the long term.”

Conversely, a financial stock the team does like is M&T Bank, which is one of only two companies in the sector not to have cut its dividend since 2007. Mr Tabberer also rates its management team, who “act more like owners than employees”, as well as favouring its conservative lending philosophy and strong deposit base, which has allowed it to exploit the weakness of its competitors in the downturn.

Overall, Mr Tabberer believes investors in the American fund, or indeed any other Baillie Gifford fund, stand to benefit from the unique culture that is embedded in the investment house. It is this culture, based on a collegiate structure without a star manager bias, which enables the fund managers to take a long term view, to have the confidence to take punchy off-benchmark positions and to look at each fund from a global perspective.

He concludes: “We are fortunate to work at Baillie Gifford, where all the teams are based in the same office and we can share ideas and the work of the team of analysts that support the various funds. Having frequent cross-company meetings means we are able to question the competitive position of certain companies on a global basis. It really helps give us an edge.”

Please remember that the value of a stock market investment and any income from it can fall as well as rise and investors may not get back the amount invested. Investments with exposure to overseas securities can be affected by changing stock market conditions and currency exchange rates.

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.

Ian Tabberer
Ian graduated with a BSc in Geography from the University of Southampton in 1995. He then joined the Royal Navy where he served as a Warfare Officer within the Submarine Service for six years.  He entered the investment management industry in 2001 and joined Baillie Gifford in 2008 from Scottish Widows, where he was a Portfolio Manager for North American Equities.  Ian is an Investment Manager in our North American Equities Investment Team.