Investors often overlook the growth potential of companies exposed to megatrends like the energy transition and artificial intelligence. Those who discern the transformative potential early and stay invested might reap significant returns in the next decade.
“Despite rising interest rates, growth stocks, especially tech giants, are showing remarkable strength this year. Valuations are up, and the recession threat lingers,” John MacDougall, the fund manager of the Long Term Global Growth Investment Fund and a partner at Baillie Gifford, told Investment Officer.
For MacDougall, this isn’t an indicator to retreat. “We don’t focus on market timing or economic predictions; we can’t add value there. Our entire focus is on identifying top growth stocks for the coming decade.” The fund, with a portfolio of 30 to 60 stocks held for an average of 8-10 years, invests globally. Its primary holdings include Nvidia, Amazon, Tesla, PDD Holdings, and ASML.
Ditching traditional metrics
“We target companies that can potentially double their sales in the next five years and sustain growth,” MacDougall said. “Traditional valuation metrics don’t guide us. Our analysis aims to spot firms that could quintuple in size over a decade. We have several such potentials in our portfolio, promising ample upside despite current hefty valuations. Our ten-year goal is to quintuple returns.”
Baillie Gifford has relied on this strategy for its growth funds for two decades. “Firms making a ten-year difference often seem overpriced by conventional measures. Icons like Tesla, Amazon, and Nvidia have long graced our portfolios,” MacDougall said. “While our projections sometimes miss, even nearing our quintuple-sales-in-a-decade goal renders current P/E ratios less critical. New team members learn early to sidestep short-term market noise.”
Despite today’s inflationary trends and hesitant consumers, MacDougall remains unflustered about the companies they back. “These are quality firms, adept at transferring increased costs to their customers, thereby shielding their margins.” He cited the price hikes by Spotify and Netflix, without any subscriber loss. Luxury brands like Kering and Hermès, and SaaS providers demonstrate robust pricing control too.
AI and green energy
Discussing the AI wave, MacDougall commented: “Companies like Intel in the 1970s reshaped industries despite economic concerns. Today’s rapid growers lie in green energy and AI sectors, poised for expansion irrespective of short-term economic jitters.” He emphasized the significance of AI, with about a quarter of their portfolio including names like Nvidia, ASML, and Amazon, highlighting generative AI tools like ChatGPT as revolutionary.
MacDougall foresees many firms leveraging such tools soon, particularly for customer interactions. “Emerging companies will introduce novel AI solutions. Our team is on the hunt for such startups, aiming to invest early and possibly gain from future IPOs.”
This article originally appeared in Dutch on InvestmentOfficer.nl.
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