How to Stock Pick Long Term Winners in Europe

Baillie Gifford's Moritz Sitte explains the importance of manager alignment with shareholders - and how family run businesses do it right

Emma Wall 16 March, 2018 | 10:34AM
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Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Moritz Sitte, manager of the Baillie Gifford European Fund.

Hi, Moritz.

Moritz Sitte: Hi, Emma.

Wall: So, I wanted today to talk about your process, because there's an interesting element to the way that you select stocks and that is to do with the alignment between shareholders and management, in particular, where there is a family element at play. Perhaps you could explain why this is a benefit when you are looking for a compelling stock idea.

Sitte: Absolutely. So, this idea of focusing on alignment quite a lot has really come from having made some mistakes earlier and having come to the realisation that the longer your holding period is, the more management and alignment with management matters. And because we are trying to be long-term owners of businesses, of growth businesses, that matters a lot. So, we pay a lot of attention to that.

And what we found through investing in families and founders is that these often are companies or management teams that are very well aligned not just with our clients, with the long-term owners of the business, but they also create an alignment with other stakeholders in the business. And if you can align all these stakeholders, that can really create a powerful advantage and good things happen to you as a long-term owner of a business like that.

Wall: I suppose it's not enough just to look for family-owned business though, is it? Because especially in emerging markets you do hear about these sorts of mega conglomerates where the family doesn't necessarily have the business nous in order to make a successful business. So, it's that combination of having that long-term alignment but also presumably fantastic management skills.

Sitte: Yes. Yes. I mean, it is one aspect, but we do ask ourselves not just whether the management is aligned with us at first sight, but we also want the management team that is able and that's why we look into the track record of a management team and the culture of a company. And as I said, just because at first sight it seems aligned, doesn't mean it's actually aligned.

So, we spend a lot of time thinking about how is management remunerated, what has the treatment been of minority shareholders in the past. That can tell you quite a lot about how the family or the founder thinks about not just running the business but also treating co-owners.

Wall: And are there any particular countries within Europe where you see this sort of management and ownership structure more prevalent than others?

Sitte: I would particularly mention Sweden, because we think we see – we have found quite a few companies in Sweden that are run by families where the family is not just aligned with us, but are just great managers of these businesses and therefore, I think, that has – one of the outputs of that has been that we have quite a few Swedish names in our portfolio.

Not because we have a macro view on Sweden being the growth country of Europe but because we find Sweden as a fertile hunting ground for investing in businesses with great management teams.

Wall: And it's the second highest allocation within your portfolio on a regional level, isn't it? And does that go somewhere to explain perhaps why you have less exposure to Italy and Spain, for example, where I think there's only a couple of percent?

Sitte: I think so. I mean, we are always on the lookout for great businesses. It doesn't really matter where we find them, be it in Italy, Spain, France, Sweden, Germany, doesn't matter. But I think it's just a function that in Italy and Spain we probably have arguably struggled more with finding the sorts of management teams with the sorts of alignment that we look for.

Wall: And of course, they have to be listed businesses as well, because there are plenty of family-owned businesses throughout Europe, but they are not available to private investors?

Sitte: Absolutely right. I mean, I am from Germany myself. So, I know there's plenty of fantastic private companies in Germany, but unfortunately, we can't invest in them where management is very well-aligned because they are founders and families who have a generational view of building a business.

Wall: Moritz, thank you very much.

Sitte: You're welcome.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Baillie Gifford European B Acc2,553.16 GBP-3.40Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar