Collinson: Baillie Gifford European fund takes the long view

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Tom Coutts is in the champions league of European fund managers, running a fund at Baillie Gifford that is top quartile over almost every time period you care to look. Yet he is happy to admit “large parts of the European market are highly unattractive”.

Coutts, though, doesn’t worry too much about the macro outlook for Europe; that its banks are hammered, its pharma giants overpriced, its auto companies fatally compromised or its utilities over-indebted. He doesn’t even care about the currency. He is happy he can find plenty of good businesses that have solid franchises and relatively visible future profitability.

Yes you can find them in consumer staples, he says. But helping to drive his returns has been his investments in industrial and engineering groups. He’s also a serious buy-and-hold merchant.

“We are emphatically bottom-up, we don’t worry about the macro. We are very much about the long term. Baillie Gifford is a partnership, I’ve been here 17 years and will probably be here for another 17 years.

“You can see the evidence in our turnover which is 10 to 20 per cent a year. Lots of people say they are long term, but we really are.

“We try to find franchise-type businesses, where you can be confident in their pricing power and growth potential. But that doesn’t mean we are choc-full of consumer staples. Some of the best franchises are in industrials, such as Atlas Copco.”

The fund’s biggest holding, Atlas Copco, has seen its share price rise in an almost straight line over the past year from SEK 200 to SEK 300 on the Stockholm market.

Lift maker Schindler is another of his industrial success stories, operating in a market with hefty barriers to entry. “It’s the sort of business that lends itself to pricing power.”

Schindler is also an example of something he likes – a company with significant family holdings. “It means there are major shareholders who are not interested in the next quarter earnings but are focused on the long term. Around two-thirds of our holdings have a long-term owner. Paradoxically it means the business is less concerned about people like us!”

There are 50 stocks in the fund and the figure won’t go above 60. Holdings are mostly 1-4 per cent in size, representing an interesting approach to stock selection. There are three other co-managers in the team run by Coutts, and if one manager really likes a stock, but the other three disagree, then it goes in at 1 per cent, or if two agree, then it’s 2 per cent and so on. “I don’t operate a veto regime,” he says.

The fund is predominantly mid cap, says Coutts, but not because he set out that way. “We tend to find the best opportunities in the mid to large cap space of £2bn to £10bn. We have no pharma, no utilities and hardly any banks.” There is also no currency hedging.

Performance has been pretty much across the board. Some of it has been about consumer staples, some about industrials.

But while dismissive of the majority of banks, he has a lot of time for Handelsbanken. “It survived the early Swedish meltdown and sailed through the recent crisis. At one point it was able to borrow more cheaply than the Swedish state. It has followed a path of radical decentralisation, with local managers enjoying high levels of autonomy.” When you give people autonomy it’s very powerful he says, drawing parallels with Baillie Gifford
itself. Its share price is up from 100SEK to 134SEK over the last six months.

Handelsbanken now has 200 branches in the UK and is expanding rapidly in the Netherlands too. Coutts is impressed by its org-anic growth, building businesses in those countries without having to acquire and painfully integrate a foreign bank. It appears to have no shortage of frustrated ex-bank managers applying for positions.

New holdings include Infineon and Novozymes. Infineon is a German semiconductor maker that Coutts reckons is well placed to benefit from the shift towards autonomous driving. That’s also a reason why he holds no auto makers, seeing their future clouded by new IT-led rivals.

But he acknowledges that Infineon nearly went bust in 2008 and needed a rescue rights issue. It is a capital-intensive, cyclical business. “The question here is that there are clear long term growth opportunities, and it has a comparative advantage, but at some point the industry will fall out of bed. Which is why it is a relatively small position at the moment.”

Novozymes is a Danish enzyme business which he believes has terrific growth potential. But this is not a pseudo tech fund. Coutts laments the lack of large tech companies in Europe. Europe is good at branded consumer goods and industrial companies, but only has relatively niche players in technology.

Pharma is an area where European scientific achievement matches anything in the US, but Coutts is no fan. “The reality is that prices are not going to go up in the way they have for the past decade. They are already very profitable. They may be an accident waiting to happen.”

The fund has only £190m in assets despite its outperformance, and is a fraction of the European giants. Coutts accepts asset allocators do not have a huge appetite for Europe, but argues investors should ignore the macro noise and concentrate on the great individual, and often global, companies he can find.

And if you are wondering about that surname, Coutts is not a scion of the bank or the Money-Coutts who ran M&G. He hails from rather more humble stock, the son of a Scottish vicar. Now that’s a rarity in finance I have no hesitation in recommending.

BIO

Tom Coutts has been with Baillie Gifford for most of his career. He joined the investment firm in 1999, starting out in UK equities before transferring to the European Equity team in 2007. He graduated from Oxford University in 1994 with a BA in modern languages.

NUMBERS

£190m Baillie Gifford European fund’s total assets

50 Number of stocks in the portfolio

17 Number of years Coutts has been at Baillie Gifford

10-20% Annual portfolio turnover