A US manager that delivers

The Interview

It is a well-established fact that few active managers outperform their benchmark index consistently over time. Nowhere is this more evident than in the US large-cap space, where the efficiency and maturity of the market means funds that outperform the benchmark S&P 500 are few and far between. As we have pointed out on several occasions, most investors will be better off opting for passive exposure to this market at a fraction of the cost.

But there are exceptions to most rules, and Mick Brewis, manager of the Baillie Gifford American Fund, is one. He is adamant that it is possible for an active manager to outperform the S&P 500 - something that he has managed to do by an average of 2.4 per cent over the past 10 years, consistently delivering top-decile performance. Mr Brewis's formula for success is fairly simple: "you need a distinctive style and you need to exploit Wall Street's weakness - its short termism".

His investment style, in keeping with Baillie Gifford's investment philosophy across its range of closed and open-ended funds, is long term, bottom up, with a strong quality bias. Taking a global investment perspective and sharing insights with analysts from across the company is also a pivotal part of the process.

"You cannot pick US equities in isolation," explains Mr Brewis. "These are globalised businesses that are very much interconnected with what's happening in the rest of the world - almost half of S&P 500 revenues are derived from outside North America."

Mr Brewis describes his investment process as "genuinely long term" typically taking a three- to five-year view when picking stocks.

"Wall Street is preoccupied with short-term trends - the turnover of the New York Stock Exchange is greater than 100 per cent per year. There is a persistent tendency to undervalue sustainable earnings growth," says Mr Brewis.

Exploiting this short termism and general obsession with market movements is key to his investment approach. In stark contrast to the broader market, the fund's turnover averages at less than 30 per cent a year.

Mr Brewis adds: "A lot of our out performance has come from running our long-term winners - if valuations remain reasonable and the fundamentals strong, we will hold on to a company."

The fund is therefore no closet index hugger and its holdings, relatively concentrated at between 40 and 50 stocks, are markedly different from the benchmark. "We're looking for an angle that will set about some positive change in the growth outlook for a company. This could mean searching for under-appreciated growth in earnings, a management turnaround or upswing in secular growth."

Quality is key, continues Mr Brewis, highlighting his bias towards companies with excellent management teams and a strong competitive advantage. "Capitalism is about new capital coming in and destroying existing profit pools - but if you can find companies with strong business models that can retain their competitive advantage, you can continue to enjoy growth."

As a bottom-up stock-picker, Mr Brewis is not too preoccupied with the macro picture. However, he is positive on the outlook for US economic growth, thanks to employment rising, the falling consumer debt service ratio and a profitable and cash-generative corporate sector. He believes there are some excellent opportunities for American companies to take advantage of huge global opportunities. As such, he is focusing on those players he describes as "really innovative, at the value-added end of the spectrum".

He likes companies that have world-leading competitive advantages and are "global winners", such as Apple (the fund's largest holding) and its growing significance in China. "It is an exciting time for tech stocks. There is a lot of disruptive change going on, but if you can find a company that is on the right side of that change, the growth prospects are good. Apple is a good example - dominating the transition in how we access the internet and use smartphones." Mr Brewis is positive that there are no red flags to Apple's growth story and supports the company's dividend and buy-back strategy - "it's a good way of spending the cash rather than through a pointless acquisition".

Mr Brewis also believes domestic-orientated stocks will benefit from US growth coming through, the pick up in employment and the housing market starting to turn. "It is clear from economic stats and company reports that consumer demand is picking up. Deleveraging has paused and consumers are borrowing again - which shows that confidence is returning."

As such, the two sectors in which the fund holds an overweight position are information technology and consumer discretionary, recently adding to its holdings in companies such as Harley Davidson, which has enjoyed an upswing in motorcycle sales, and Home Depot, a home improvement retailer benefiting from an increase in DIY spending - the company is expected to enjoy huge cyclical upside when the housing market recovers. F5 Networks, an internet traffic management company, is the fund's second-largest holding. Its growth is being propelled by the upgrading of data centres to cope with the rapid increase in internet data traffic. Mr Brewis views the company as a good play on cloud computing and the mobile internet.

While the attractiveness of the US market is being reflected in rising valuations, Mr Brewis believes it is still a good time for the type of quality growth stocks he invests in. "These are at a small premium but in the past it has been higher, so it is still good value on a long-term view. Earnings growth for the stocks in the portfolio on average should be 15 per cent over the long run - compared with 7-10 per cent for the market."

Recent years have witnessed a number of income-orientated US funds launched on the basis that a retiring baby boomer generation will demand greater income along with the fact that a tax change has made the return of capital through dividends increasingly attractive. But Mr Brewis does not buy into this income theme. "We invest to maximise total return - I would argue that yield funds will not do as well in the long run because they are limiting their investment universe - we have no constraints. You are better off investing in the best companies."

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