James Dow, manager of the Baillie Gifford Responsible Global Equity Income fund, is the latest guest to appear in our Insider Interview series. He tells us the main attributes he looks for to identify sustainable growth stocks that are resilient dividend payers. Dow names some of the best stock performers since the fund launched nearly five years ago, and picks out a couple of “opportunistic” ideas he is backing.
He also explains how the fund applies environmental, social and governance (ESG) factors, including explaining that exclusions apply which rule out fossil fuels and tobacco companies.
Baillie Gifford Responsible Global Equity Income is one of interactive investor’s ACE 40 sustainable investment ideas.
Kyle Caldwell, collectives editor at interactive investor: Hello and welcome to the latest in our Insider Interview video series. Today, I'm joined by James Dow, manager of the Baillie Gifford Responsible Global Equity Income fund. James, thanks for your time today.
James Dow, manager of the Baillie Gifford Responsible Global Equity fund: Thank you for inviting me.
Kyle Caldwell: So, James, the fund invests in sustainable growth stocks that are also resilient dividend payers. Could you talk us through the key attributes and characteristics that you like to see in a business?
James Dow: Sure. Well, we're quite picky about what we own. We want our clients to own really fantastic companies, so we've got a pretty long list of qualities and attributes that we look for. But let me give you a few of them. A big one for sure is that we want every company to have a really strong, attractive growth opportunity to be able to grow its sales and profits for at least the next 10 years.
So, if you look, for example, at our largest holding in the fund, which is Novo Nordisk A/S ADR (NYSE:NVO), a pharmaceutical company, they're a leader in making insulin for diabetes and appetite suppressants for people controlling their weight. And our view is there's a huge growth opportunity, a really attractive growth opportunity in sales and profits for the company as more people are diagnosed with diabetes and also with the appetite suppressant. So, growth is a really big part of it.
Another key one for us is a really great business model with attractive financial characteristics. So, companies that are doing something that's really valuable for their customers and it's really hard for other people to do so. If you think of Novo Nordisk again, it's definitely really valuable for the customers. It's often a life-saving or life-changing treatment and it's very hard for other people to do and that means they have attractive profits, attractive returns on capital.
The third one would be very cash-generative businesses. So, businesses that not only invest for future growth, but have loads of cash left over at the end, which they can then pay back to shareholders as dividends, and that gives them an enhanced return and even higher return if they're also given those dividends.
The final one I would always pick out would be responsible long-term management of the company, because our experience is that even if you find a company that has that great growth, a great business model, [and is] cash-generative, if it's not run by really good people who have a long-term mindset… And so, in Novo Nordisk case, you've got a charitable foundation taking a long-term view about the science and innovation and so forth. Without that, it probably won't come to pass. So, those are some of the characteristics that we are always looking for to find these really great companies.
Kyle Caldwell: You've just touched on sustainability. Could you talk us through how you apply environmental, social and governance factors into how you invest?
James Dow: Yes. So, the foundation of that for us is a process that we call IAT. IAT stands for Impact, Ambition, Trust. So that's a process, a proprietary process that we use for everything that we invest in, and we put it through that process. So, what we ask with any company we look at is, first, its impact. What is its impact on the environment, on society, on wider stakeholders? Is it a heavy emitter of carbon? Is it having social impacts that we need to think about? Data privacy, something like that.
So, we evaluate that first and give it a score on how well it's doing. We're then looking for ambition because no company is perfect. There's always room for improvement and we want to own companies where the people running them are ambitious to keep getting better. So, even if they've got low emissions, well, how do we get to zero? Have you got a science-based target? We want to see that ambition in them as well.
The last part is the trust part, because, particularly these days, pretty much every company says: 'Oh, absolutely, we're going to do the right thing and we take ESG very seriously,’ but we also know that, unfortunately, not all of them can be trusted to deliver on that. So, a big part of our evaluation, again, is do we trust these people to deliver on their commitments? And why is that?
So, that's the bedrock of our analysis and we're looking for companies that score highly on all those factors to go in. It's very company-specific, as you can imagine, it's not just like a tick-box exercise. It's very long-term oriented because of the nature of what we're doing. But that's the foundational piece of research for us.
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Kyle Caldwell: Every asset manager, particularly nowadays, talks about engagement. So, how do you engage with companies? How do you set yourself apart from competitors?
James Dow: I’d say the big differentiator stems from our long-term investment horizon. So, our average holding period is eight years - it's a typical investment for us. Many go beyond that. And what that means is we have a different relationship with the companies we invest in when it comes to engagement, because these issues are often long term.
They're quite tricky about, getting to net zero or whatever it involves. They often have a short-term cost for a long-term benefit. The difference for our engagement, I think, is that companies know from our record that we're going to be there on that journey for the long term. We're not just there for a quick buck to get a vote and then sell the shares. We're going to be with them on that journey.
So, an example I like to point to a holding in the fund is Albemarle Corp (NYSE:ALB), which is the world's biggest producer of lithium. Several years ago, we said to them in our engagement that we'd really like to see you undertaking independent audits of all your operations to make sure they are as clean and efficient as they can be. It's costly, but we think it will be a good thing to do, good for your business. And they knew that when - we're quite a large shareholder - we asked for that and engaged for that, it’s not like we're going to sell the shares next week. Many years later, they've implemented that. They're getting the benefits of that. We're still shareholders. So, I say that alignment on time horizon is probably the biggest differentiator for when we engage with our holdings.
Kyle Caldwell: So, this particular fund was launched nearly five years ago. Could you name a couple of examples of stocks that you've held since launch that tick the boxes for you, delivering sustainable growth, and [with] resilient dividends?
James Dow: Yes. So, Novo Nordisk would be one that I mentioned. That's been a really strong performer for us. I think a sort-of 300% increase since we first invested. Taiwan Semiconductor Manufacturing Co Ltd ADR (NYSE:TSM), a semiconductor company that’s pretty well-known, has been a great performer for us. Albemarle, which I just mentioned, there’s quite a number of them. And not only have these delivered really great profit growth and share price appreciation, but they’ve had those resilient dividends as well.
And a key sort-of proof point of that is that those names I mentioned in 2020, [was] obviously [when] the world economy [was] having a lot of problems with Covid. All those names actually increased their dividends in 2020. So, I would say, that’s an amazing testament to just how resilient these businesses are, that they were able to even increase dividends back in 2020. So, those will be some examples.
A smaller part of the portfolio is in more opportunistic stocks. So, these are companies that will, hopefully, for the fund grow quicker than the market, but the dividend yields may be below the average market yields.
Kyle Caldwell: Could you talk us through this part of the portfolio and name a couple of stock examples?
James Dow: Absolutely, and by the way, we’re big believers in the benefits of investing right down the yield spectrum. A classic example being years ago when we invested in Apple Inc (NASDAQ:AAPL), and it was at one point such-and-such per cent yield, below 1%. But if you look at the capital growth and the income, it's now delivering over a 4% yield on our book cost now. It's been a fantastic investment, so definitely we're keen to do that.
A couple of examples today would be Cognex Corp (NASDAQ:CGNX). So that's a leader in machine vision equipment. So, you'd probably be aware that lots of companies at the moment are saying, how can I automate what I'm doing, particularly in production? Maybe it's in logistics or whatever. The secret of that is not just a little camera that can see what's going on in the factory, but very clever software on the back end that can understand what's going on in the real world and send the right signals and then deal with that.
Cognex is a world leader in both the vision and the software. A huge growth opportunity, committed to [a] resilient dividend, a cash-generative business model, [and] run for the long term, so all those things I talked about earlier, responsibly managed. Today, the dividend yield is less than 1%, but our view is on that 10-year horizon, given the fantastic growth, given where the dividend is likely to grow, it's likely to be a great investment for our clients.
Intuit Inc (NASDAQ:INTU), the tax and financial services company, would be another example, again, below 1% yield. But think about the next 10 years, the capital return you could get from that. The income growth ticks all our boxes, [and it’s] responsibly managed. So, those will be a couple of names.
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Kyle Caldwell: You compare your performance against peers. So, those funds that sit in the Investment Association Global Equity Income sector. Since launch, how would you say the fund has fared?
James Dow: It's been pleasing. It's been good and over that period, of course, we're quite growth-oriented and growth has come a bit out of favour. Despite that, over three years, the fund is second quartile within its peer group and we're on track over five years. I say on track because the fifth anniversary is just coming up. But we're on track to be first quartile over five years when we get there, despite that growth headwind.
So, we're pretty confident that the values we're espousing around responsible long-term management, [and] great growth opportunities, we are actually seeing work and deliver great results for clients.
Kyle Caldwell: You and your team manage a number of other funds and an investment trust. So how does this Responsible fund set itself apart from those other funds? I notice that there's a lot in common in terms of the top 10 holdings with the Baillie Gifford Global Income Growth fund. I think nine of the top 10 are shares in common. So, how is the Responsible fund different?
James Dow: Yes, that's right. They're very, very similar. Very heavy overlap. There's one key difference between them and it really comes down to how our clients think about ESG. And the best way to illustrate that is with a stock example. So, that's Coca-Cola, which is owned in our Global Income Growth fund, but not in our Responsible fund.
So, if you look at Coca-Cola, you'd say an amazing business model, lots of opportunities for growth. It's going into other types of beverages, really strong, very cash-generative, and run for the long term. But we also know that it produces a lot of packaging, which has an environmental impact and a lot of its products have high sugar levels in them.
Now, when we talk to our clients, there's typically two attitudes that clients will have. Some will say: ‘If you engage with Coca-Cola and you genuinely believe they’re on a journey to reduce their packaging and recyclability, reduce sugar levels and so forth, I'm happy for you to invest in that’. And that would be why it would be in the Global Income Growth fund.
But we've got another section of our clients who say: ‘No, until Coca-Cola has been on that journey and substantially reduced its packaging and sugar levels, I don't want it in my portfolio, I want it out,’ and we do not own it in the Responsible fund. Now we respect both those approaches to ESG, they both make complete sense, but the question we ask clients is: which one are you? So, if you are the type of client who says: ‘I don't want that in my fund until they've improved’, then the Responsible Global Equity Income Fund is the one for you.
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Kyle Caldwell: And in terms of your sustainable process, does this lead you to exclude certain stocks or sectors?
James Dow: Yes, we do have several exclusions. So, fossil fuels will be one example as excluded, tobacco, gambling, a range of sectors like that. So, no BP, no Shell. For income funds, it is a little bit unusual. None of those sectors. And then we also exclude anything where our judgement is that they may be contravening the UN Global Compact principles. So, for example, we look at supply chains to look at potential labour abuses that might be happening, and anything that we're concerned about, that would also be excluded.
I think the key point I would make with exclusions, [is that] some clients ask, or they wonder: is this going to harm my financial returns by excluding these things? What impact does it have financially? And our view is that it's possibly quite good for your returns because, if you think back to what I said earlier about the long-term growth and the attractions of that over 10 years, [for] a business of hydrocarbons, oil and gas, it's pretty hard to believe that's going to be a great growth business over the next decade when you're pumping out oil and gas.
So, our view is that we have these exclusions and probably they're likely to enhance your financial returns, [and] give you better returns [through] staying away from some of these troubled businesses over the long term.
Kyle Caldwell: Thank you for your time today.
James Dow: Pleasure. Thank you for inviting me.
Kyle Caldwell: That's it for this episode of the Insider Interview series. You can check out the best of our interviews on our YouTube channel where you can like and subscribe. Hopefully see you again.
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