Charles Plowden: the Baillie Gifford recipe for success

When Charles Plowden joined Baillie Gifford in 1983, fresh out of Oxford, he arrived at what he calls a “quaint, Dickensian” outfit, where he was issued with a slide rule and referred to the partners as “mister”. The company had fewer than 40 employees, occupying a small wood-panelled office in Edinburgh’s New Town.

However, the firm’s reputation was well established even then. He chose Baillie Gifford because he was told that it was “the best possible training for investment analysis in the UK”. Whoever said this appears to have been vindicated, as the company has grown to become one of the UK’s most successful large asset managers and the only major fund house to have retained its partnership structure. Decades ago many investment firms were partnerships, but most have either undertaken a public listing or been taken over.  

Plowden thinks that Baillie Gifford’s structure is a big part of its success as it is entirely owned by 46 partners, all of whom work full time for the business with full discretion on how it is run and what it invests in. 

“We have no outside shareholders requiring higher dividends or encouraging us to do deals, we can just take an independent view on what’s best for clients," says Plowden. "We have a very strong feeling that what is best for clients in the long term is also going to be what is best for the firm,” which corresponds with Baillie Gifford’s ability to take a long-term view. 

The firm has grown to employ about 1,500 people many of whom work in functions such as compliance, IT and human resources – departments that barely existed when Plowden joined. But he says that it is still very much an investor-led firm. Of the 46 partners, half are equity investors and almost all of the others are involved with looking after clients. 

While many Baillie Gifford funds have delivered strong performance compared with their benchmarks in recent years, the firm has also been losing chunks of institutional clients' money, many of which have turned to passive alternatives. But Plowden defends Baillie Gifford's active approach. 

“The key thing to look for is value added after fees,” he says. “Is active more reliable and is the extra volatility, or risk, worth it? In our case, unequivocally it has been.” Plowden says that the firm has delivered outperformance, after fees, of over £100bn for its clients in the last five or six years.

However, he appreciates that passive funds have lowered costs and welcomes the fee pressure they have brought. “I think in our industry fees have tended to be too high and performance has tended to be too indifferent, and both of those need addressing,” he says, adding that Baillie Gifford has been lowering fund fees over the years. 

He also points out a potential problem with passive becoming too dominant, as money that flows into index funds is not being allocated according to economic benefit. “The money moves into the largest companies, not necessarily the most deserving companies and, as sustainability becomes more important, who is making the decisions as to where the money should go?” he says. 

Baillie Gifford has been appointed as manager of a number of investment trusts in recent years, notably Keystone Positive Change Investment Trust (KPC), Baillie Gifford China Growth Trust (BGCG), and Baillie Gifford European Growth Trust (BGEU). As most of the money Baillie Gifford manages is institutional it has been trying, where it has a team with a track record and a core competence, to add an investment trust as a "shop window" for the the team's capabilities. 

Investment process

Baillie Gifford managers aim to identify promising companies and own them for the long term. Plowden, who managed Monks Investment Trust (MNKS) and Baillie Gifford Global Alpha Growth Fund (GB00B61DJ021) until the end of April, likes companies that have a mission, and are not just extracting from society but making things better. He also favours companies that have a competitive edge and can build a rising share in a growing market. He says that these companies often have a founder or a controlling shareholder who can encourage them to invest for the long term. He adds that his team won’t own a stock unless they see at least a 30 per cent chance of it doubling in the next five years.    

“If you look at a list of our more successful investments, what they have in common is that they don’t invest for short-term profits," says Plowden. "They invest for the long term usually in the customer proposition, making their product easier, more popular or better for customers." 

While much of the investment world worries about high levels of debt, rapid increases in the money supply and the prospect of inflation, these are not a concern for Plowden's team. “If you have a company that is in control of its own destiny and gaining market share in a growing market, the level of interest rates or government debt is not going to have a big impact,” he says. “It’s much more about what the company does and whether it is going to win customers." 

While many investors fear that the types of growth areas Baillie Gifford invests in are too expensive, Plowden says that you have to look forward if you are going to think about valuations. “Too many people look at this year’s valuation and profitability or, even worse, last year’s profitability, and extrapolate and say it is expensive”, he says. “If we thought [our holdings] were expensive, we would find something else that we thought wasn’t.”

When making new investments, the most important thing for his team is not the price. “The most important thing is the fundamental prospects for growth," he says. "Is it gaining market share in a stronger market? Is it growing profits at an above-average rate? Price is secondary to getting the company right.”

Questions have been raised about the same companies, such as Tesla (US:TSLA), being held across a number of Baillie Gifford funds. But Plowden counters that generally there isn’t much overlap and what there is has been reducing. “There are obviously names like Amazon (US:AMZN), Tencent (HKG:0700) and Alibaba (HKG:9988) that appear in a large number of our funds, but they will appear in 100 per cent of index funds and probably 95 per cent of equity managed funds because they are among the world’s biggest and best companies,” he says. 

Scottish Mortgage Investment Trust (SMT) and Monks, which are both global growth funds, have a 20 per cent holding overlap, but have notably different investment styles. Scottish Mortgage has a rapid growth style and can invest up to 30 per cent of its assets in unlisted companies. Monks has a more conservative approach and larger number of investments, and holds rapid and cyclical growth companies, as well as companies that may be closer to maturity. Monks can invest up to 8 per cent of its assets in unquoted companies, but Plowden says the current level is about 4 per cent.

Monks has also tended not to let any one holding become too dominant. For example, although Monks has owned Tesla since 2012, Plowden and his team consistently trimmed the holding as the price increased to manage risk.  

Monks vs Baillie Gifford Global Alpha Growth 

Plowden managed Baillie Gifford Global Alpha Growth Fund since its inception in 2005, and took over the management of Monks in 2015 turning its performance around following a more difficult period for the trust. He describes Monks as a portfolio comprised of the firm’s “best ideas”, as he encourages teams from around the company to feed in investment ideas.

While Baillie Gifford Global Alpha Growth Fund is mainly focused on institutional money, individual investors now own 85 per cent of Monks’ shares. He views Monks as a better vehicle for private investors, as it has lower costs, the ability to gear and access to unquoted companies. However, Monks was trading at a premium to net asset value approaching 4 per cent at the end of April  

The holding Plowden thinks has the most exciting prospects is Norwegian advertising company Adevinta (NOR:ADE), which he describes as “the largest company you’ve never heard of”. It is buying ebay’s classified advertising businesses outside North America and Plowden expects it to double in size later this year when the deal is likely to be approved. “It could grow its revenues at 15 to 20 per cent a year for at least a decade,” he adds.

Another company he thinks could grow substantially is Lyft (US:LYFT), a smaller version of taxi hailing service Uber Technologies (US:UBER) that only operates in the US. Lyft's share price is depressed but it could experience strong growth if the company becomes one of the main operators of driverless transportation vehicles. 

The flotation of insurance company Oscar Health (US:OSCR) in March, meanwhile, was a flop, with its shares down 30 per cent after nearly two months of trading. But Plowden argues that it has a "fantastic app" which is allowing it to win over individual customers and disrupt health insurance in the US, “a massive industry but also a bit of a scandal because everything costs so much, and there is so much wasted treatment and bureaucracy”.

Charles Plowden CV

2006 - 2021: joint senior partner at Baillie Gifford and chief of investment staff

2005 - 2021: manager of Baillie Gifford Global Alpha Growth Fund

2015 - 2021: manager of Monks Investment Trust

1988: made partner at Baillie Gifford

1983: joined Baillie Gifford

1983: BA in Modern History, University of Oxford