For this week’s Q&A, the Fund Calibre team spoke to Ben James, investment specialist director on Baillie Gifford American.
Ben offers his views on why the US remains a prime location for growth investors, highlighting its innovation, deep talent pool, and unique cultural optimism. A significant portion of the podcast is dedicated to the transformative power of artificial intelligence (AI) in the investment landscape. Ben shares the team’s perspective on AI as a new technology paradigm, its applications in various sectors and the specific companies in their portfolio benefiting from this disruptive force.
Why you should listen to the interview: This interview offers an in-depth view on the disruptive influence of AI and the investment potential that lies within from an extremely knowledgeable commentator. A fascinating listen giving insights into Baillie Gifford’s long-term house view on AI with both healthcare and education among sectors set to benefit.
This interview was recorded on 28 February 2024. Please note, answers are edited and condensed for clarity. To gain a fuller understanding and clearer context, tune in to the full episode of the ‘Investing on the go’ podcast.
What to look out for in this interview:
America – the unrivalled home of ambition
“The US is a wonderful country. It’s the most innovative country in the world, creating more growth businesses than the rest of the world combined, so it makes it a wonderful hunting ground for selective and patient long-term growth investors like us. We are trying to find 30 to 50 of the best growth companies in America and hold them for the long-term.
“And to put why we think it’s so good into context, at the end of 2023, 62 of the world’s 100 most valuable listed companies were US-based. And if you include Canada’s Shopify, which is also one of our holdings, then North America’s tally is 63. If you look at private companies as well, it’s even more dominant. It has over 1,500 billion-dollar startups and the next closest is China with 348, which is under a quarter of the US’s total.
“We think it’s going to remain the best place to find and invest in exceptional growth companies for years to come. And the reasons are manifold. It has the best academic research institutions in the world, a strong talent pool, which is supplemented by immigration. It has a broad and deep venture capital system that supercharges startups’ growth by providing funds in addition to technical and managerial advice, and has strong intellectual property protection business friendly environment. But for me, actually, I think it’s the culture of optimism and ambition and the willingness to accept failure that is unrivalled. It is the home of the American dream and I don’t think that is mirrored anywhere else in the world.”
Investing for long-term growth in the US
“We think that the increased cost of capital environment that we’re in now, is separating the best from the rest. The tough decisions that all of our holdings had to make during 2022 – the year of adaptation – as inflation and interest rate rises started to kick in, started to come to fruition in 2023, and we saw profitability massively increase within the portfolio.
“Companies are going to be leaner and more efficient for a long period of time, making them more profitable over a long period of time. They’re growing with cost controls because of the experience they’ve been through, but they’re powered by these long-term structural changes that will continue to and through economic cycles such as the digitisation of our economy, the electrification of our economy, and the decarbonisation of it, the improvements to healthcare and the new technology paradigm that I mentioned of AI affecting every business and every bit of the economy. This will drive demand and, we think, will put our companies in a good place to continue to grow in the top quintile, which is what we want them to do over a five-year period.”
No one knows the future of AI
“The first caveat I would say is that anyone talking about AI and how it will impact society and making firm predictions is going to be wrong. We have no idea where this will take us on a 50-100 year view, let alone a one-year view or a five-year view. We do think, though, that you can start to make some early tentative discussions about the potential impact it may have on the system. We do think that it is a new technology paradigm.
“When the mainframe emerged back in the late ‘50s / ‘60s, IBM was the major player and one of the largest companies in the world. And then as the personal computer era took over because things got faster and cheaper – because of Moore’s law – Intel and Microsoft emerged as winners. You then had the mobile era take off, and Apple has emerged as this super company. And now we have accelerated computing, and Nvidia is emerging as one of the winners here.
“We don’t know how this will affect our day-to-day work, but if you use some mental models, it might start to help us understand where problems might be solved in the system and where other problems might arise.”
The battle cry of a generation
“ChatGPT essentially devalues the ability to write software. It means that the trust in humanness and security is probably going to be on the increase. If anyone can ask a computer program to mimic Joe Biden’s voice or Donald Trump’s voice, then what does that mean for elections and so on. So, companies that can help provide security, such as CloudFlare, which is one of our holdings, might be more valuable.
“Energy we think is going to continue to be scarce because the amount of energy that these data centres need to use is absolutely massive. I think 1% of the world’s electricity use has just been calculated to be used for these data centres, and the internet’s going to use about a quarter of the world’s electricity use in 2025. To provide that in a clean and zero carbon way is going to be a challenge, but also an opportunity for companies.
“Other things such as data and analysis of data will be really important because AI is all about data and compute power. Companies that can help dig into data goldmines, for example, are going to become more valuable. And if they can connect different data mines together and create new innovations on top of it, they’re going to be valuable too.
“And what might it all mean? Early tentative takeaways are that there could be a lot of big, very profitable private companies with only a few employees. Indeed, the battle cry of this generation could be the billion-dollar startup with three employees.”
The future economics of drug discovery
“I think healthcare, particularly the US healthcare system, is ripe for disruption. It spends more money than any other country on healthcare and has less superior outcomes to many countries. We welcome the fact that AI is going to disrupt this, and we believe we hold some of, if not all, the most innovative healthcare companies addressing these problems.
“Traditional drug discovery is the equivalent of throwing spaghetti at a wall and seeing what sticks. There’s very little correlation of the success of one drug to another, and this is why most large pharmaceutical companies have negative returns on their R&D spending.
“The largest opportunity today is to improve the time-cost of preclinical development through finding targets and screening potential drug target interactions in silico, digitally with AI. So, we have Recursion, which is a company in the portfolio that primarily through better target discovery uses AI, but is now also moving into drug target modelling using AI to improve its preclinical testing for faster iteration times.
“We also have Moderna in the portfolio who designed the drug candidate for the Covid vaccine in something like 15-20 minutes, on a computer using a Word document printout of the genetic code of the spike protein. They then spent the next 48 hours just checking that everything was right and that was the drug that went into trials and has now been put in billions of arms. Thinking about how long that process took 20 years ago for SARS – it took about three years – that’s the condensation of the speeding up the process. It’s incredible. We think it’s great for humanity and it’s great for some companies who are able to embrace it.
“One of the key things in our approach is that we tend to look for platform companies. So, not just a company that will come out with one wonder drug. We are looking for a company that has a technology that – if proven to be effective – can be rolled out across various different diseases. And that’s what we’re seeing with Alnylam, which silences disease-causing genes, or with Moderna, which uses messenger RNA to essentially treat many infections through vaccinations and potentially even treat cancer by getting the body to create the proteins needed to tackle a disease by sending messenger RNA into the body which then makes these proteins.”
Conclusion
Ben’s depiction of the team’s long-term view on investing in America and to their appraisal of the investment potential of AI for companies, encapsulates the Baillie Gifford growth philosophy of seeking out and investing in companies that are capable of maintaining long-term profitable growth. It’s an incredible listen on what could potentially be the future of everything.
Main image: satellite-nasa-1lfI7wkGWZ4-unsplash
