Join our community of smart investors

The themes underpinning a truly global portfolio

INTERVIEW: Tom Slater tells Maike Currie why you can't be bottom-up without having a view of the world.
June 7, 2011

There are two things the Scottish Mortgage Investment Trust, flagship fund of asset manager Baillie Gifford, prides itself on. One: being a truly global fund and two: its low total expense ratio.

"Our portfolio has no reference to benchmark indices or market cap or anything like that," says deputy fund manager, Tom Slater. "We are explicitly trying to find companies which can grow their businesses. We believe that in the long run share prices follow growth and if we can identify long-run growth opportunities we will make money for our shareholders. But if our shareholders are to benefit from these opportunities - we have to keep fees to a minimum."

The total expense ratio (TER) of Scottish Mortgage is just 0.56 per cent making it one of the cheapest funds in the investment trust sector and significantly cheaper than the average 1.70 per cent plus charged by most open-ended global funds.

Low charges give the fund an inherent competitive advantage and Scottish Mortgage has comfortably outperformed most of its open-ended rivals over the long-term.

"What is absolutely key is the after fees returns to investors - 70 per cent of managers don't add value after fees so if you can identify one that can add value and hold that manager for a long enough period of time, you will reap the benefits," says Mr Slater.

Tom Slater

Beyond its global approach and low fees, the other important philosophy underpinning the fund's investment process is its long-term investment horizon. "We invest on a five-year time horizon, forcing ourselves to think and to act like owners of the businesses we invest in. It's about being investors not speculators," says Mr Slater. "The corollary of this is that the fund should be judged on long-term performance with the outcome in any one year down to little more than chance."

To illustrate this he points to 2008, a time when the fund suffered a dismal performance not helped by its gearing, and then to 2009, a strong year for the fund - the divergence despite the portfolio not changing substantially over the two years. "You have to look at five-year periods to get any evidence of whether we are good or bad at what we do," he says.

And looking over five years, it seems Mr Slater and lead manager, James Anderson do seem to know what they're doing. Over this time frame the fund's net asset value (NAV) is up more than 55 per cent versus the FTSE All-Share performance of 35 per cent, making it one of the best performing investment trusts in the global growth sector. "We suspect to diverge substantially from the index over the time, we don’t replicate the index and expect to be volatile relative to the index," says Mr Slater.

Looking over the very long term record - the past 20 years - Scottish Mortgage has returned around 2 per cent per year more than the market, which adds up to 190 per cent more relative to the index return.

In terms of delivering income the fund has also not disappointed - increasing its dividend by 6.2 per cent on last year and recording its 29th successive dividend increase above the prevailing rate of inflation.

TOM SLATER CV

Tom graduated from the University of Edinburgh with a BSc in Computer Science with Mathematics in 2000. He joined Baillie Gifford in 2000 and is an investment manager in the long-term global growth team. Mr Slater became a CFA charterholder in 2003 and was appointed deputy manager of Scottish Mortgage in August 2009.

While the fund is well diversified with more than 80 holdings and a geographic split which sees one third of its assets invested in the US, one third invested in emerging markets and 20 per cent invested in Europe, Mr Slater says the fund's investments are not led by concentrations in certain countries or sectors. Rather investments are built around themes based on "what we see going on in the world".

The emergence of China as dominant economic power is one of the prevailing themes underpinning investment decisions. "China's growth is likely to have a transformational effect on the corporate landscape wherever your business is located. Obviously there are other areas of the world where we are seeing very important changes from Brazil, Eastern Europe to Turkey but China is central because of its scale. It is a fundamental force behind what's going on in the global economy not only because of its immense growth but also because it is becoming a more innovative economy which is creating an abundance of interesting long-term investment opportunities." One of these is Baidu, the Chinese version of Google and the biggest holding in the fund's portfolio.

Other thematic drivers include a sceptical view on whether there has indeed been any reform in the financial sector, a focus on the rapidly growing, mainly urban and consumption-driven middle class globally, and probably the most significant: the pace of technological innovation and discovery, which the fund's managers believe is likely to be felt beyond the traditionally defined technology sector. The fund's mix of new era technology stocks represent a range of themes including healthcare, biotech, robotics, artificial intelligence, agriculture and alternative energy.

With 20 per cent of the fund's portfolio invested in technology shares, its hardly surprising that Mr Slater dismisses talk of a bubble forming in tech. "The fact that everyone is screaming it's a bubble should be enough to tell you it's not - there were not many people screaming it's a bubble in March 2000. There is a lot of interest in the markets because the potential growth is huge. The important thing is to think about each business individually. Yes, there is a lot of hype, as was the case with LinkedIn's initial public offering (IPO) but extrapolating from this is slightly dangerous.

"You just need to look at the longevity of the big technology companies - Microsoft which has sustained 25 per cent plus returns on its equity base for one of the longest time frames of any business. It's not the only example - IBM, HP, Oracle, Dell - people seem to be writing off a lot of these companies but actually the longevity of these franchises has been huge."

Mr Slater adds that it is also important to look at how profitable the business is. "A lot of the dot-com businesses weren't making money but if you look at newer technology companies in Scottish Mortgage portfolio - Baidu, Tencent, Amazon, Google - these businesses are very, very profitable and have strong balance sheets."