You rarely hear a fund manager say: ‘I’m a really short-term investor.’

The vast majority say they buy companies for the long run. And that’s great – except many also have to balance the demands of their bosses and their employers’ shareholders, who often measure progress in quarters. Not to mention the way they are rewarded with bonuses.

But a corporate structure that rewards long-termism is something Baillie Gifford’s elite equity fund managers, Tom Coutts and Lawrence Burns, credit with their consistent run of outperformance. The pair co-manage the Vanguard International Growth fund with Schroders’ Simon Webber (see our interview with him here) and James Gautrey. The fund is currently ranked 40th of 407 funds in Citywire’s Global ex-US sector over three years, with a 6.7% return.

Baillie Gifford’s rare partnership structure was just one of the topics Amplify discussed with Citywire A-rated Coutts and AA-rated Burns recently in a conversation that also covered the nuts and bolts of picking (hopefully) great stocks and the ones that got away.

Under the Vanguard mandate, Baillie Gifford oversees 70% of the assets and you have been given kudos for the fund’s good performance. Why is that?

Coutts: We think of ourselves as long-term owners of exceptional growth companies. We’re bottom-up stock pickers looking for companies that have got a big growth, opportunity and competitive advantage and high-quality management who can adapt and evolve and allow the company to grow. Our structure at Baillie Gifford and our investment philosophy are centred around holding those companies for long enough to make the compounding of growth work for our clients.

That’s the secret sauce in a way. And I think the more difficult part is the psychological aspect of it. It’s easy to say [you are investing for] the long term – everyone says that – but I think our partnership structure, the firm structure allows us genuinely to be long-term.

And that goes back to the fact that I’ve been here 23 years now, and Lawrence has been here for 14 years. [When] people tend to stay for a long time, you build relationships of trust, you’re not worried about your job, you’re not worried that we’ve had a bad three months or a bad month or a bad week or a bad day. It’s a very long-term burden. And you can only be as good an investor as your clients and a firm structure allows you to be.

Burns: The other one is being comfortable with uncertainty and being willing to invest in companies that can sometimes have quite wide-ranging outcomes. A lot of people tend to come from good academic [finance] backgrounds, but they’ve been successful because they’re right all the time, and they’ve got high scores. But as you go into investment, it’s not about being right every single time that gives you the best outcome. It’s about how much money you make when you’re right.

And so sometimes it’s about investing in companies where, OK, maybe there’s only a 5% chance this works out. But if that’s a 10-times return, that’s attractive. And it goes back to what Tom was saying about some of the career risks that you can have in some institutional environments that you need to be able to accept that you’re going to get some things wrong. If you’re terrified of getting individual holdings wrong, you’ll gravitate towards things that are less likely to make your clients lots of money over the long run.

You recently bought shares in Mobileye, which popped after the IPO. Was that unexpected? Or did you have an inclination that it was going to do well?

Coutts: It was unexpected. But also, in a sense – I don’t mean this flippantly – it’s irrelevant what one has done over three weeks or whatever.

The interesting thing is that, with Mobileye, we used to hold it for clients before it was acquired by Intel. And to that point of institutional memory and longevity, we should recognise the contribution of a client of ours on the portfolio construction group, Brian Blum; he built a relationship with Mobileye a decade ago and when it was listing again, got back in touch.

So that continuity of relationship has been important. And in some ways, it’s been a nice example where our clients have – at least in the short term – benefited.

I’m more interested in the structural stuff around our relationship with the management, which has been consistent and the help with consistency of analytical input internally, and the process around that. And that analytical processes are far more important to me than what the shares have done. It’s just a blip on the 10-year share price chart for Mobileye but it’s a nice start. [The shares have since pulled back a little.]

• Read further analysis from Citywire Fix the Future on Coutts and Burns’ purchase of Mobileye here.

Having a good stock in the portfolio is nice – do you spend enough time researching and analysing the good stocks as you do the bad ones?

Coutts: To be honest, if anything, we focus more on the ones that are doing well, because back to the asymmetry of returns – if something’s not doing well, it’s so very easy, psychologically, to get caught up in that and start blaming yourself. But one of the things we do, I think quite well as a group, is that we support each other, so there’s collective ownership of all the stocks in the portfolio, there isn’t finger-pointing. If something’s not working out, as a fund manager, you know viscerally if something you’ve recommended isn’t working, you don’t need to be told that. And you think about it quite a lot anyway.

Let’s say in a year’s time Mobileye shares doubled. The business is doing well, that’s super interesting to us. ‘Is that a sign that we should add further shares?’ That’s the sort of debate we should be having, rather than ‘something’s gone down 50%, isn’t [this] the right time to sell it or to top up?’

You shouldn’t water your weeds and cut your flowers – you don’t spend too long on stuff that’s not working out, you should spend more time just proportionately on the stuff that’s working well, because that tells you something really interesting about the world.

Burns: What hurts clients the most are not the sins of commission, it’s not the things that we get wrong. It’s the things that we don’t own that we should have owned, because the asymmetry is missing out on something. So that’s more what we focus on as much as anything else as well as making sure we have the best exceptional growth companies that we can have within the portfolio.

If you were to summarise your approach, how would you source a good stock?

Coutts: The first thing is having clarity of investment philosophy – and you’ve got filters you’re applying to the universe. You can give me a list of the 100 largest companies in Europe and I can go through it and say: ‘That’s not good.’ Because you have a sense, you have a clear idea of the growth value [and] you’re looking for the quality barrier, and the management barrier, in a sense.

The other aspect to say is that you’re not starting from scratch: there is a cumulative experience within the team or within the firm, so that experience and cumulative knowledge shared among colleagues is important. And the third element is big thinking about the world and thinking about the long-term growth drivers.

We’ve touched briefly on Mobileye. But autonomous driving is a key growth driver over the next five, 10 or 20 years. The intersection of technology and biology, the clean energy transition, the re-emergence of China, digitisation of industries; all these are structural trends that we believe are obvious that will play out over many years to come.

When you put together [all of these elements] that narrows down the investable universe quite sharply. And then our challenge is to make sure as we’re turning over rocks, looking at companies that fit into those growth themes that are aligned with our growth philosophy.

And we try to make sure that the barrier to owning those is relatively low in terms of taking an initial holding, because when you take a new holding in a company, it is inevitably uncertain – we want it to be uncertain. So we want to make sure that we are not putting the barriers to owning something at a small size too high.

Burns: I always find it difficult to draw a straight line between a conversation you have with someone and therefore we went and bought this. It doesn’t work that way, but people who are doing interesting things in the world can [help you answer]: ‘Where is interesting change happening? Where should you be looking? What kind of people should you be talking to? What should you be thinking about?’ And when you end up with three or four people saying all the same kind of thing, that’s really helpful.

Tom and I were in Latin America in the summer, where we met the management of MercadoLibre in three different countries. We also met the co-founder, who left about 10 years ago but now runs one of the most successful venture capital firms out in Latin America and asked him, in some ways, some of the questions you’ve been asking us, which is: ‘How do you invest? What’s your process?’

Because we can always improve our own. Sometimes [these visits] are about learning more about an ecosystem, but sometimes that might evolve into an idea. A lot of the time, it’s about making sure that you’re looking in the right places and talking to the right people to sort of build an idea of where there is interesting change.

What has been the most important investment decision that you have made?

Coutts: I think the most important investment decision, deeply supported by Vanguard almost 20 years ago, is moving to a more high-conviction approach, and backing our judgement in terms of the types of companies we own, the length of time and size in which we own them. That sharpening of our investment philosophy has been critical. The second thing is appreciating the impact that technological change has in driving stock market returns and in disrupting incumbents.

Burns: We invested in MercadoLibre about 10 years ago, and now it’s one of the largest holdings in the sleeve that we manage. It’s gone up roughly tenfold since then, even with the tech selloff.

And I suppose the reason I mentioned that is just the asymmetry of it. You can afford to take some of those small bets in interesting companies and have them not work out or work out as you hoped, if you’re able to get a few companies that can offer a tenfold or more return within the portfolio.

But it’s only over a five- or 10-year period that you know how well an investment has worked out, because that’s how long it takes to seize those kinds of market opportunities to demonstrate competitive advantage and make structural changes within society. That is where ultimately the value is created.

And any investment regrets?

Coutts: In terms of regrets, it’s definitely sins of omission – if you don’t buy something that goes up fivefold that hurts clients even if it’s not visible. So, great growth companies that we in some way knew about but failed to buy early enough, that irritates me all the more: I feel like I missed out.

A more recent one would be China, where I think we’ve probably applied too much of an Anglo-Saxon mindset to the possibility of companies being allowed to be really big. And that has proved not to be the case. I think we’ve got our own mental models wrong and that’d be another investment regret.

Burns: It really is the sins of omission rather than sins of commission because of the asymmetry. So to give my own example, I remember eight to 10 years ago, someone coming up and talking to me about Shopify, saying this is a really interesting business model. And at the time I had investments in Amazon and MercadoLibre so this idea of this e-commerce platform, and the idea that Shopify was almost the anti-Amazon – I was quite enamoured with that model.

But I was less open than I should have been to [investing]. To me, there are a couple of different mistakes. One is not being open to sort of learning more and taking a small hole in something interesting. And the takeaway is to never be too dismissive of an idea that, if it works, could be 10 or 15 times its current size.

Shopify has had a very difficult time coming out of the pandemic and financial markets, and we’ve seen a massive decline in the share price graph. But if you go back to eight or 10 years ago, it’s probably still up tenfold since then. That’s something I see as a bigger mistake than going through the list of companies that weren’t successful investments and we lost a bit of money. But all you do with each of these is learn.