Investors may be cautious about investing in Europe. Economic growth is uninspiring, its politicians even more so. Europe lacks a technology giant and its lacklustre stock market is dominated by large, bureaucratic multinational companies in sectors such as financials, consumer staples and even healthcare. Baillie Gifford is not buying these companies, however. We are investing in a small number of innovative, proactive companies that happen to be domiciled in Europe. Let us explain.
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.
Investing for Growth
Europe is home to many outstanding businesses, from ‘hidden champions’, industrial companies dominating attractive niches to luxury brand businesses which benefit from heritage and provenance, and younger, disruptive, internet-enabled businesses. We believe that the best way to create sustainable and growing returns for shareholders is by investing in such innovative and adaptive businesses, regardless of geographical location or sector.
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For those investing in our European investment trust, the Baillie Gifford European Growth Trust plc, the investment trust can invest in companies of €500 million and above. This gives the portfolio managers a pool of about 1,150 companies, out of which they can select the 40 or 50 companies which we believe are most likely to deliver outstanding growth over the next five to ten years.
Having recently become the portfolio managers for this investment trust (previously known as The European Investment Trust plc), we have been radically reshaping the portfolio to take advantage of the opportunities we see. Over the next two or three years, we also expect to invest in unlisted companies valued at a minimum of €500 million, enabling us to invest in Europe’s most exciting growth companies, listed or not. However, we will not invest more than 10 per cent of the trust’s portfolio in these private companies.
We are not looking to invest in embryonic businesses or ideas, but in established businesses choosing to remain private for longer. Businesses like these tend to be asset-light and do not require much capital, while owners often find it easier to create long-term value without short-term shareholders. Baillie Gifford has been investing in unlisted companies since 2012.
We believe that unlisted companies like these are better held within the structure of an investment trust than a fund. Our shareholders can trade in the trust’s shares at the market price whenever they wish, while the closed-end structure of an investment trust means that there is never any need for us to sell any of our holdings to fund redemptions.
So far, only around 10 per cent of the world’s unicorns – private companies valued at over $1 billion – have come from Europe, so it still has some catching up to do. Yet when we speak to companies in Berlin and Stockholm, we can see that the mindset is changing.
Small can be Beautiful
Looking at the European market over the past 30 years, it is niche industrial businesses that have delivered the best returns, companies such as ASML, whose lithography systems allow light to be projected through patterns to make blueprints for manufacturing semi-conductor chips, or Beijer Ref, whose environmentally-friendly fridges and freezers play a key role in reducing CO2 emissions in supermarkets and other commercial premises.
The internet has made it much easier for smaller companies. The old theory that economies of scale were the most important thing no longer holds. IMCD is a good example of a capital-light business, and has been run by the same chief executive officer and chief financial officer since it was set up in 1995. A Dutch company, it markets and distributes speciality chemicals, which are used in cosmetics, food, drink, cars, detergents, paints and medication, a growing market as more chemical companies outsource distribution.
Adapting to Change
We tend to like family-backed businesses, such as Atlas Copco, and NIBE, a leading manufacturer of heat pumps. NIBE has been run by the same owner for 30 years. These Swedish companies’ business models depend on buying other family firms, and that depends on those owners being prepared to sell. We have seen that family-run Swedish businesses with a long history of successful acquisitions tend to be welcome purchasers.
Europe also has a rich provenance in leading brands such as Gucci, owned by Kering, and Cartier, owned by Richemont. We have been impressed by the way in which both companies have nurtured their brands. Although Adidas is a more mass-market brand, it has its own valuable heritage, while L’Oreal, another strong European cosmetics brand, has stayed ahead of the times, using digital sales and marketing effectively.
As investors, we care most about the long term. It is important for us to be able to trust the people running the businesses we invest in, and the know that they want to pass on the business to the next generation in even better shape than it is today. Despite the negative headlines, Europe is a fantastic region in which to seek out such companies.
The Baillie Gifford European Growth Trust invests in overseas securities. Changes in the rates of exchange may also cause the value of your investment (and any income it may pay) to go down or up. The trust’s risk could be increased by its investment in unlisted investments. These assets may be more difficult to buy or sell, so changes in their prices may be greater.
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.
Baillie Gifford & Co Limited is authorised and regulated by the Financial Conduct Authority (FCA). The trust is listed on the London Stock Exchange and is not authorised or regulated by the FCA. A Key Information Document is available by visiting www.bailliegifford.com
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