The Independent Adviser for Vanguard Investors
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June 2014
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INTERVIEW
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CHARLES PLOWDEN
Going for Growth, Globally
CHARLES PLOWDEN, 53, is one of three Baillie
Gifford partners tasked with running the 105-year
old Edinburgh firm’s Global Alpha strategy, the
same strategy put to good use in the approxi-
mately one-third of
Global Equity
’s portfolio that
the team manages. Eschewing a trader’s mentality,
Plowden says the only way to build wealth is by
buying and holding good growth companies. Jeff DeMaso and I spoke
with Charles just last week. Listen in.
Charles, I often detect a mention of themes in your writing. Are
there some themes that are central to the work you do, and how
often do they change?
The main themes are that we are long term in our approach. And by
long term, we mean five years plus. The second theme is that we are
growth investors. All of our investment strategies have a growth bias
and a growth focus, and all of our research is aimed at identifying long-
term, above-average growth stocks.
And what exactly is growth?
We are looking for a minimum of double-digit long-term growth in
earnings, cash flows, assets or dividends, whatever the measurement,
on a five-year plus horizon. We are looking for winning companies.
Who doesn’t look for winning companies?
I would say an awful lot of value investors don’t look for winning
companies but look for cheap companies. And in our view, if you look
for cheap, you tend not to find the winners, whereas if you look for the
winners, you sometimes manage to find them when they are cheap—
particularly if you are patient.
Give me an example.
Three or four years ago, we bought shares in eBay, which was strug-
gling. Its core franchise, the auction site, was beginning to lose share to
Amazon, and the website was tired and the management was strategi-
cally a little confused, and the stock was trading at about 12 times earn-
ings. We knew it pretty well, and we saw that it owned this asset called
PayPal. On the back of e-commerce, globally, PayPal had a huge opportu-
nity. So we bought shares in it at 12 times earnings. Since then the earn-
ings quality has improved; management has improved; the quantity of
earnings has improved; and the valuation has approximately doubled. So
the stock price has risen fourfold in that four-year period since purchase.
If you are patient, and have quality and growth, the market about
once every 10 years gives you these fantastic opportunities. If you want
to buy bargains, you don’t go where everyone else is going, you go
where everyone else is leaving. You have to be a bit contrarian.
For a global manager you don’t spend a lot of time with boots on
the ground and you don’t have offices around the globe.
No. The danger if you have offices is you have very good information,
but you can’t use that information so easily. The decision makers are
the guys that need the information, and the decision makers typically
need to be together so that they can, you know, look at each other’s
eyes and resolve differences and make a decision. You can’t make deci-
sions across four different parts of the world or time zones. So we do
huge amounts of traveling, and companies from all around the world
will come to Edinburgh if they are coming to Europe. We think that
Baillie Gifford meets with over 2,000 companies each year.
The most recent round of chang-
es in April was twofold: First, Total
International Stock was trimmed to
establish a 4.8% position in
Emerging
Markets Stock
. Second,
Intermediate-
Term Investment-Grade
was sold
with the proceeds being added to the
position in Total Bond Market. In short,
these moves increase emerging markets
risk while also adding more interest-
rate risk.
The move to overweight Emerging
Markets Stock isn’t one I’m about to
make, but it is one that I can under-
stand. After lagging developed market
peers over the past three years or so,
emerging market stocks look relative-
ly more attractive. So, if you’re going
with a contrarian bet, this is a trade
you might make.
But the trade out of the corpo-
rate bond-heavy Intermediate-Term
Investment-Grade into Total Bond
Market is a head-scratcher.
Selling out of Intermediate-Term
Investment-Grade essentially closes
the trade first made into the fund in
July 2012. That trade has been posi-
tive, once again, for shareholders, with
Intermediate-Term Investment-Grade up
4.0% from July 2012 through the end of
April 2014. Over the same period, Total
Bond Market only gained 0.6%.
What leaves me perplexed is that
with interest rates near six-month lows,
this move increases exposure to the
most interest-rate-sensitive bonds out
there: Treasury bonds. I have cautioned
for some time that Treasurys and
other government-backed bonds make
up nearly two-thirds of Total Bond
Market’s portfolio. This means the fund
has more risk in it than most investors
recognize, as it is especially susceptible
to rising interest rates. You may recall
from last month’s letter that Jack Bogle
and I are on the same page on this one.
Where does that leave investors?
For all the correct moves that Ameriks
and company have made, the fact
remains that the old Managed Payout
funds failed to deliver on their original
objectives. Additionally, over the past
year, on a total return basis, Managed
Payout’s 13.0% gain has failed to keep
pace with other similarly allocated bal-
anced funds, with
STAR
up 14.1% and
Wellington
up 14.0%.
So while the bar has been lowered
for Managed Payout, I remain skeptical
that it will be able to clear this hurdle.
I definitely wouldn’t buy this reconfig-
ured amalgam.
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