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Scottish Mortgage taps into Robotic future

Scottish Mortgage manager James Anderson says machine learning and artificial intelligence will topple traditional companies in all sectors
January 26, 2017

The US and UK governments are damaging the chances of companies "with ambition" via policies akin to "self-immolation", according to James Anderson, manager of Scottish Mortgage Investment Trust (SMT). The manager of the £4.5bn trust also likened Mrs May's comments at Davos to the words of Hitler, in a damning indictment of the impact of UK and US policies on the types of innovative company he wants to invest in.

"Theresa May's "incantation at Davos that we should be worried about the cult of the individual surely could have come out of the mouth of Stalin or Hitler rather than any democratic leader", he said. "Investors should be very nervous about the insouciance of markets about what the great global powers are doing."

Scottish Mortgage Investment Trust has long backed some of the most innovative and successful technology-themed giants, including Amazon (US:AMZN), Facebook (US:FB) and Chinese internet giant Baidu (BIDU:NSQ). The investment trust has returned 286.8 per cent over 10 years compared to FTSE All World index's 146.8 per cent, in part by investing for the long term in companies that often start out in the private markets and are working on areas such as driverless cars, gene sequencing and robotics.

"The real axis of the global economy doesn't rest between Moscow and Washington," says Mr Anderson, "but between San Francisco and Shenzhen."

But backing themes such as artificial intelligence, driverless cars and machine learning does not make Scottish Mortgage a "technology fund", say its managers. Rather these are the themes that will disrupt all traditional industries and sectors, and which Mr Anderson and co-manager Tom Slater think are undervalued.

"By far the worst performing stock in 2016 in terms of impact [on the portfolio]" was Illumina (US:ILMN)," says Mr Anderson. Illumina was referred to by Wired magazine as the Google (GOOGL:NSQ) of genetic testing last year. The San Diego-based biotech company generates 90 per cent of all DNA sequence data, but its shares plunged last year after missing a revenue target.

However Mr Anderson says sticking by companies they feel are important is key to the ethos of Scottish Mortgage: "Illumina is going to take the price of sequencing down from $1,000 to $100. That revolutionises many areas of medicine. It wasn't fun last year owning that, but we think it is much more important to stick with our beliefs."

The managers decided last year to change their approach to investing. They will spend more time working closely with companies to nurture and challenge them as long-term holders of stock.

That means sticking with companies such as Tesla (US:TSLA), which Mr Slater has been working closely with on its acquisition of clean energy company SolarCity for the past six months. In 2016, says Mr Anderson, he received 15 emails a day from hedge fund managers wanting to short the stock. But he believes Tesla could "completely change the world's automotive industry" through its work on mass-market driverless cars and the application of artificial intelligence into vehicles. "The challenge to Tesla will come from Alphabet (US:GOOGL) or Apple (AAPL:NSQ) rather than other car manufacturers, he says.

He points out that Tesla already has tens of thousands of cars on the road collecting data to operate autonomously, something other car manufacturers do not have. And all of Tesla's new cars are fitted with the hardware to drive themselves, putting it at the head of the race alongside Google.

Machine learning and artificial intelligence are no longer futuristic concepts, but the forces that will topple traditional companies in all sectors.

"Amazon [the trust's largest holding, accounting for 10.4 per cent of assets] is now the fourth-largest retailer of apparel in the US," says Mr Slater. "Machine learning and artificial intelligence will soon be able to promote suggestions and do merchandising in a way that makes traditional shopping impossible."

Alibaba (US:BABA), which accounts for 4.5 per cent of assets, is already proving that point. Mr Anderson says 90 per cent of the orders it took on Singles Day in China on 11 November 2016 were answered by AI rather than human operators.

Amazon, meanwhile, has brought robots into our homes with internet-connected device Echo and voice-operated personal assistant Alexa, rival to Google Home. Alexa and Echo can order pizza at your command, buy more dishwasher tablets or dim the lights in your home.

"What's been happening with Echo and Alexa is really building out the operating system for the development of artificial intelligence and voice recognition," says Mr Anderson. "Amazon Web Services has moved from being an interesting business to one that's probably the greatest growth opportunity in the world."

Airbnb is another of the manager's favoured companies and an example of one of the growing group of private companies they invest in. In July last year Scottish Mortgage's board approved plans to invest up to 25 per cent of its assets in unlisted companies, to benefit from the increasing pool of companies refraining from listing on public markets in favour of racking up billion-dollar valuations in private markets. In October 2016 13.1 per cent of the portfolio was invested in unlisted companies, including Dropbox, HelloFresh and Home24.

 

Scottish Mortgage Investment Trust (SMT)
PRICE:340.5pGEARING:9%
AIC SECTOR: GlobalNAV:331.35
FUND TYPE:Investment trust PRICE PREMIUM TO NAV:2.45%
MARKET CAP:£4.52bnYIELD:0.88%
ONGOING CHARGE:0.45%MORE DETAILS:www.bailliegifford.com
SET-UP DATE:1.01.1909

Source: Morningstar, as at 24.01.17

 

Performance (cumulative total share price returns)

1m3m6m1yr3yr5yr10yr
Scottish Mortgage Investment Trust6.10.116.032.262.8177.4282.5
FTSE All World index 1.43.512.039.955.597.3147.7
AIC Global sector average 2.05.414.931.239.483.6102.5

Source: FE Analytics, as at 24.01.17

 

Top 10 holdings as at 31.12.16

Amazon.com10.4
Inditex6
Tesla Motors6
Illumina5.7
Tencent5.7
Baidu4.9
Alibaba4.5
Facebook 4.5
Alphabet 4
Ferrari 2.5

 

Geographic allocation

North America 46.4
Europe30.3
Africa and Middle East 0.4
China18.1
India1.8
Other Asia 0.4
Fixed interest 0.5
Net liquid assets 2.1

Source: Scottish Mortgage, as at 31.12.16