What is an asset manager renowned for favouring high growth tech stocks doing investing in Europe – a region dominated by old economy industries in danger of being disrupted by innovation?
“There’s this overall perception, I think, of Europe as this creaking old continent that’s lumbering steadily from one crisis to the next,” says Tom Walsh, co-manager of the Baillie Gifford European fund.
“Most investors approach Europe with a top-down view and the problem with that is a lot of those big picture perceptions are not great ones – issues of national protectionism, bureaucracy, Brexit, Italy.”
Baillie Gifford, the investment house, is renowned for its unashamedly growth-focus, which has seen it become an influential shareholder in big tech names such as Amazon (AMZN), Tesla (TSLA), Tencent (00700) and Alibaba (BABA).
But if people suspended their preconceptions, says Walsh, they would find Europe is equally capable of revolution, particularly in Germany and Scandinavia.
“For a bottom-up investor, Europe remains a fantastic place to find over-looked companies offering tremendously attractive long-term investment returns,” says Walsh. “If you know where to look, you can find fantastically innovative and disruptive businesses operating within Europe.”
Promising Stock Picks
Spotify (SPOT) is a case in point. True, the music streaming service chose to list in New York, but its roots – and headquarters – are very much in Sweden. And it is these firms, alongside some less glamorous “hidden champions” where Walsh is finding opportunities at the moment.
He says: “No, we don’t have a Google equivalent in Europe, but we do have some fantastically innovative businesses, many of which have asset-light operating models that are delivering tremendous growth rates and offer tremendous value over the long term for their shareholders.”
Walsh puts these innovators and disruptors into three sectoral categories and talks us through them below.
Digital Platforms
The aforementioned Spotify is a new holding for a number of Baillie Gifford mandates, with many having bought into the company around a year ago while it was still privately owned. It listed, rather unorthodoxly, at $132 in April and peaked at $196 in August before settling back to $141 today. Still, Baillie Gifford is bullish on the company’s long-term prospects.
“They’ve showed us that you don’t have to be in Silicon Valley in order to build a global giant. But they’re not the only one. They’re emblematic of a culture that is developing and evolving in Europe.”
Others he likes are online pet food retailer Zooplus (ZO1), online fashion retailers Zalando (ZAL) and Yoox Net-A-Porter (YNAP) and Swedish savings platform Avanza Bank (AZA).
“These are all businesses that are benefiting from targeting fairly mature markets, but taking a different approach and have achieved tremendous success already in terms of building positions of strength and dominance,” says Walsh.
“They’ve been delivering sales growth rates of 20%, 30%, 40% for many years. They have often been penalised by the market for not being profitable enough. But we’re very comfortable with them not generating profits in the short term if what they do is build up a position of dominance in the future because profits will come.”
Technology
It’s not just the e-commerce space that excites Walsh though. “Europe also has some fantastic technology businesses.,” he says. In particular, he is looking at chip makers, which he admits is a sector that has “had its fair share of losers in the past two decades”.
“Great swathes of the European semiconductor industry has been lost to the Far East and won’t come back,” Walsh admits. However, those that have remained have “evolved and adapted” and are now at the vanguard of making chips for mobile phones and other electronic implements.
ASML (ASML) is the real shining light here; Infineon (IFX) is another. ASML makes lithography equipment used in the manufacturing of leading-edge semiconductors; Infineon makes the chips themselves.
“Infineon’s seen both sides of the coin. Large parts of their business were killed off in the last decade, but they refocused themselves around power semiconductors and is now the global leader,” he says.
“So, you have businesses in Europe that aren’t just tagging on to trends that are coming from elsewhere. They are actually leading those trends and often driving them forwards.”
Healthcare
Walsh believes the European biotechnology sector is underappreciated and has huge growth potential. The fund owns MorphoSys (MOR), which researches and develops antibodies to improve the lives of patients suffering from serious diseases.
It also owns Sartorius (SRT), which supplies pharmaceutical and laboratory equipment. Many big drugs are made in big batches in stainless steel vats, but this isn’t feasible for more niche drugs, and re-usable equipment often presents issues of cross-contamination if things aren’t cleaned thoroughly.
Sartorius’s single-use equipment helps to avoid this cross-contamination. Its single-use bags, for example, sit within re-usable containers and can be recycled after use. It also reduces drug makers’ capital costs and running costs.
The German company benefits from a double tailwind. One is a move towards biological drugs, which is expected to continue for many more years. Within that, the manufacture of biological drugs is moving away from re-usable equipment to single-use equipment.
“It’s also a consolidated market… and with a lot of biological drugs the exact equipment manufacturer, the exact filter and the exact bag that you have to use are specified in the FDA approval you receive,” says Walsh.
“You can’t simply switch to someone else without having to go through a whole re-approval process. Once you’re in through the door you tend to be very secure and able to grow.”
