New Ways To Grow: Face to Face with James Anderson

Baillie Gifford & Co., Edinburgh, is one of the larger non-U.S.-based managers of U.S. client assets. Some $12 billion of its $50 billion in assets under management are from North America. The firm also was one of the fastest growing money managers in the P&I/Watson Wyatt Megamanagers 2004 survey; assets jumped 58.2% to $48.2 billion last year. James Anderson joined Baillie Gifford in 1983 as a graduate investment trainee. In July 2003, he was appointed deputy chief investment officer and head of the global equity team. He discussed his investment views and the firm's fortunes with reporter Beatrix Payne.

A We would not even think about taking on new mandates unless we were confident to do so. In both U.K. equities and emerging markets, we have closed to new business. Of course, we have worried that there might be new business strains, but we can cope with (them) because we have invested very substantially in our human and IT resources over the last five to 10 years. It's a liquidity question more than anything else, and it applies to specific specialized mandates rather than the broader EAFE mandates or even the emerging markets leading companies strategy, where there is more liquidity. … Once you get to taking substantial portions of any company it can hurt your performance.

A On the whole we have found it much more appreciated by the client if we stick to the growth style in precisely the way we said at the time of our presentation. It is most unlikely in the long run that growth will carry on underperforming. … Being a growth manager you can't simply look at an index and say "Those are the growth companies." What growth investing is about is trying to work who will have the earnings and cash flow over the sustainable future ... It may be that the ultimate drivers of growth in the world have shifted from being the American and British consumer to being the process of industrialization in emerging markets. And plainly that makes a very different selection of companies that are more likely to grow. You really have to assess it on the future growth of these companies rather than what the index is telling you. At the same time, you have to be very careful in stressing to your clients that it is because these companies are going to grow in the future that you are interested in them.

A The potential analogy is with the 1950s and 1960s where, with the process of industrialization in the Western world, the breakthrough of Germany and Japan into economic health meant there was more demand for everything from raw materials to infrastructure, to manufacturing and capital goods. I suspect that is what is going on now. We have to be aware that it may be companies that historically have not always been regarded as growth companies that may be growing over the next 10 to 15 years.

A If you take many of the Swedish industrial companies, the Swedish economy is not necessarily growing terribly hugely but Swedish companies have done a fantastic job internationalizing their business in the last 15 or 20 years. They have been thinking about these issues years ahead of many of their competitors. So you are seeing with companies such as Atlas Copco AB or Sandvik AB that they are very well-positioned for demand in China, India and greater Asia. They are not simply in a position where they have to put up new factories, they are in a position where they are already getting service and spare parts revenues. Equally, take the oil industry. We think the places where there are oil reserves that are going to grow in the world in the future are in the emerging markets, so everywhere from Russia to China to South Africa. I think that at both a micro and a macro level growth is shifting toward industry and away from the consumer, and away from companies domiciled in Britain and America to companies domiciled principally in Asia and in the emerging markets overall.

I think that many of the capital goods companies that can prove their worth in emerging markets are extremely strongly positioned. In addition many of the luxury brands that you have in the world are just as popular in emerging markets as they are in their domestic markets. The allure of a Porsche or a BMW is just as great in China as in its domestic markets.

A "The long-term trends are still supportive of them. Even at high technology levels, companies are increasingly finding there is better labor cheaper in these emerging markets. China is coming up with nearly four times as many science graduates as America. The same would apply to India, too. You can get stages where temporarily emerging markets are overbought, and most of what our emerging market team would worry about is that sometimes bond spreads get too compressed too quickly in these markets. Structurally, we would be surprised if emerging markets were not the main driver of growth in the next 10 to 15 years.

A There are many companies in Europe that are surprisingly well placed in a world that is becoming dominated by … emerging economies. There are a lot of companies that offer brand names which are quite difficult, even for the Chinese, to reinvent — companies that have disappointed in share price performance, L'oreal would be an example. You have to play off depressingly low growth and price squeezes in some of their European markets with genuine opportunities in some of these emerging markets. I think the odds are that Europe will carry on in GDP terms growing relatively slowly. We think British stocks are quite cheap now because there are so many institutions that are forced to buy bonds and equities have become too cheap in the U.K. But earnings prospects for U.K. companies are less delightfully attractive than a consistently growing economy ought to have made them.

A We tend to look not at Chinese companies themselves but at what Western companies are doing in these markets. So if everybody from Wal-Mart onward are making adequate returns, you can get a reasonable read of what is going on in China. Beyond that, I think that our actual impression at the moment is that probably China is working reasonably well. When they put up interest rates recently, they were effectively moving toward more market-based responses, which in the long run we would regard as healthy. What we would like to see in the medium to long term is some evidence that this is feeding through to currency management. We do think there is a need to revalue up the renminbi. That will rebalance growth toward the domestic consumer. We find it quite difficult investing in China directly because it does seem that with the cost of capital being low and with huge competition, it is quite difficult for a company to make adequate returns. So we have to be very sure they have some defensible competitive advantage there. ... By and large, actual returns from investing in Chinese companies have been pretty low.