Fund Manager Beating Almost Everyone Says Get Out of London, NYC

(Bloomberg) -- To fly from Scotland to Silicon Valley takes 14 hours. Money manager Tom Slater, whose fund is loaded with west-coast tech giants, makes a round-trip from Edinburgh about six times a year. He mostly skips the stops in London and New York.

Five thousand miles is nothing for a Baillie Gifford & Co. partner and fund manager. His American Fund has outperformed at least 97 percent of competitors over the past five years and most intervals in between.

The secret? Slater eschews Wall Street numerology and buys companies he thinks have the best odds of expanding in the long term. Amazon.com Inc., Tesla Inc. and Netflix Inc. are among the fund’s top five holdings. At all costs, he tunes out big-city salesmen.

“You have a lot of people in the financial services industry whose motivation is to get you to take action: buy, hedge, borrow,” Slater said by phone from Edinburgh. “What’s most important for us is to be away from the noise of the financial market hubs represented by New York or London. I think if you’re going to do something different from an investment standpoint, you have to have a different set of inputs.”

Slater’s $2.5 billion American Fund is up 21 percent in the past 12 months, compared with a 1.5 percent gain in the S&P 500 Index, data compiled by Bloomberg show. The fund has returned 30 percent in the past three years, beating just about everyone.

Fund Manager Beating Almost Everyone Says Get Out of London, NYC

Slater owns relatively few stocks, just around 40 in his American Fund, betting big on some of the best-known names in the technology, consumer and communication services industries. He wants companies that make structural changes in their industries through creation of products and business models nobody knows exist. It’s a taste that led him to Amazon, Facebook and Netflix, whose gains are many multiples of the S&P 500 over the last decade.

He’s hung on through the panic that occasionally surfaces about stretched valuations. Headline P/E isn’t something he pays a lot of attention to when making an investment decision, focusing instead on revenue growth, margins and capital reinvestment.

“Trying to get down that part is more valuable than saying the stock trades at 20 times and it should be 21 times earnings,” he said. “In any five-year period about 20 percent of stocks go up at least 2.5 times in value. Our question is, what would have to happen if we want to make at least 2.5 times our money over the next five years?”

Amazon

Amazon, the fund’s biggest position, is up a lot more than that, more than quadrupling in value over the past five years. Slater, who generally hangs on to stocks for five to 10 years and keeps the fund’s turnover in the low teens, is willing to wait out storms like the one that knocked Jeff Bezos’s online superstore down 34 percent between Labor Day and Christmas.

Fund Manager Beating Almost Everyone Says Get Out of London, NYC

“Amazon’s Alexa -- what would have to happen for that product to be much more important in three or five years’ time?” Slater said. “It’s probably not dependent on interest rates, it’s not dependent on health of the U.S. consumer, it’s not really dependent on any political issues It’s more about just the basics of the engineering. And I think if you can find opportunities like that -- when the companies are in control of their destiny and building new markets -- then you can be fairly confident holding them through the inevitable economic and financial market cycles.”

Facebook

Facebook had an eventful 2018, twice falling more than 10 percent in a month as regulatory and growth concerns bore down. Now, after surging 27 percent in January, it’s within about $10 of erasing the full-year loss. About 3.8 percent of the American Fund is invested in the stock, data compiled by Bloomberg show.

Fund Manager Beating Almost Everyone Says Get Out of London, NYC

“Facebook has a massive, growing and highly engaged audience,” Slater said. “It is getting ever more sophisticated at understanding that audience and providing ways to connect advertisers to the people they want to reach. Whilst the Facebook product has faced some challenges over the past 18 months, the high degree of inside ownership and long-term attitude of the management team has allowed them to forgo short-term profitability and address the issues that have been raised.”

Wayfair

The bedroom furniture maker has a 4.2 percent weighting in the American Fund, the ninth biggest. The stock gained 22 percent in January and has tripled since the end of 2016 even after posting its worst quarterly decline on record in the last three months of 2018.

“The market tends to be quite divided on that company -- some people focus on the lack of short-term profitability and others focus on the economics and growing lifetime value of customers,” Slater said. “When you get a period of weakness, that’s exactly the type of stock that we think is an attractive opportunity to add.”

Fund Manager Beating Almost Everyone Says Get Out of London, NYC

GrubHub

Baillie Gifford is the second-biggest holder of the Chicago-based platform for ordering and delivering take-out food, and about 5.3 percent of the American Fund is invested in the firm. The stock has tripled since its 2014 debut, and the average of 30 analysts covering it see it rallying another 38 percent in the next 12 months.

Fund Manager Beating Almost Everyone Says Get Out of London, NYC

GrubHub “has over 50 percent share of the rapidly growing market for online ordering and we think its position should be sustainable given the natural network effects in the business model,” Slater said. “Online takeaway penetration is low at 5 percent. Over time we expect penetration to increase significantly, providing an attractive long-term growth opportunity for GrubHub.”

Trade Desk

The $6.7 billion company that provides a platform that helps manages mobile and video advertising campaigns advanced 154 percent last year after rallying 65 percent in the first year of its public trading. Baillie Gifford held about 1.6 percent of the company as of late September, data compiled by Bloomberg show.

Fund Manager Beating Almost Everyone Says Get Out of London, NYC

“Trade Desk -- a business which helps companies to buy advertising inventory across the Internet and across connected television. We think there’s a big structural growth story, and again when the market tends to get frightened and stock tends to selloff, it can be an opportunity to build a position.”

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