How to Find Long-Term Growth Stock Winners: Baillie Gifford Manager

  • Paulina McPadden’s fund has won a Lipper Award as the best in the world for the past three years.
  • She leads a highly focused international growth strategy for Scottish law firm Baillie Gifford.
  • McPadden likes “transformational” businesses, knowing that a few will exceed his expectations.

Scottish investment firm Ballie Gifford has become one of the best in the world at picking stocks that offer explosive returns. But even among the firm’s talented investors, Paulina McPadden is beginning to stand out.

McPadden is an analyst for the firm and one of the managers of the International Concentrated Growth Equities Fund. Refinitiv Lipper just named the four-year-old fund the best international large-cap growth equity fund over the past three years.

Morningstar agrees it’s an outstanding fund, crediting the fund with annual returns of 23% over the three-year period that ended Friday. According to Morningstar, the typical large-cap growth fund has returned 9.8% annually over the same period.

McPadden told Insider that she puts potential investments through a 12-part assessment process to learn about their growth opportunities, competitive advantage, culture, financials and valuations, as well as sources of investment. external business information.

But what McPadden is really looking for is actions that stand out from the crowd.

“Most companies in the market don’t matter,” she said. “We try to find those truly transformational companies, those that have the potential to be extraordinary, that drive or significantly benefit from deep structural changes in the economy.”

She cites research by Professor Hendrik Bessembinder of Arizona State University’s WP Carey School of Business, which shows that half of all wealth created in the US stock market throughout its history as of 2019 – some 47 $000 billion more than the returns generated by a benchmark treasury bill. — came from about 80 companies.

Bessembinder also concluded that just over half of the 26,000 stocks that traded on public markets during the same period actually destroyed wealth relative to its benchmark.

McPadden and his co-managers James Anderson, Lawrence Burns and Spencer Adair own 20 to 35 companies at a time, investing only in stocks they believe could become historic winners.

“One of the ways I like to talk to clients about this strategy is that we’re trying to be what the index will be in 10 years,” she said. “We try to retain disruptors who are winning in each industry as much as possible.”

This means that McPadden’s portfolio includes substantial bets on e-commerce and on companies in the healthcare and fintech sectors that benefit from changing markets and growing computing power. These investing themes are becoming familiar, but for McPadden, the most important thing is to identify companies that could have transformative success.

His bet is that most of his investments will succeed, and some will dramatically exceed his expectations. She doesn’t have to get it right every time.

“By its very definition, a straight tail result is not very likely,” she said, referring to a chart result that was far more positive than the norm. “We will probably be wrong. But the important thing is to be right in general about the potential and direction of change that is possible.”

McPadden also noted that about 80% of the companies she invests in are run by their founders, who have the kind of long-term focus she wants to see.

She told Insider about a few prominent portfolio positions that she believes have particularly big opportunities ahead of them.

(1) Ocado

UK-based Ocado is the headliner of a group of delivery companies in McPadden’s portfolio. Other names in this space include HelloFresh, Delivery Hero, and Meituan Dianping. But she sees Ocado as a star because there are so many untapped opportunities in

online grocery store

including delivery.

“The market opportunity is absolutely vast. It’s a multi-trillion dollar global market. Online penetration is only about 5%,” she said. “It will potentially be cheaper to buy online than to go to a store. And the grocery store that partners with Ocado could outperform its peers by being able to offer products at lower prices or to make margins higher.”

(2) Adyen

McPadden is also very bullish on Dutch payment processor Adyen, which she says is growing in the US at a faster rate than she had expected but – like many growth stocks – has recently lost significantly. of its value.

“There has been a proliferation of different payment methods over time,” she said. In other words, people all over the world can buy goods through Adyen’s system with any of a wide variety of currencies.

“Adyen has created a unique platform to do this. It has grown organically in most countries around the world,” she said. “They are much more efficient and cost structurally less than their competitors. And they are growing extremely quickly.”

(3) MercadoLibre

The Argentinian e-commerce company has at times been a popular choice for investors, but lately it has been deteriorating on the stock and shares have fallen 40% in the past six months. McPadden says MercadoLibre still has huge opportunities in its core business and in newer areas like fintech.

“Our level of belief in both the management team and the strength of their advantage over Amazon, for example, has increased since they built their logistics infrastructure and really strengthened their competitive advantage.”

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