"We're not normal people, we're weird people." This is how James Anderson, the manager behind asset manager Baillie Gifford's flagship fund, the Scottish Mortgage Investment Trust, describes fund managers. Well, he said it. What investors will probably find even weirder is Mr Anderson's upbeat view on the state of the global economy and the investment universe generally. "I cannot understand why everybody is so miserable," he says. "We live in a country that is miserable and it's not just the weather. It is because of where we are perceived to be from a macroeconomic perspective. The media tells us the world is ending and it's all Europe's fault. The whole agenda is about miserabilism. But I quarrel with this pessimism."
There are two dominant reasons why Mr Anderson, unlike many in the investment world, is unapologetically bullish: 1) Apple and 2) China. More broadly put: he believes the extraordinary pace of technological change coupled with the incredible economic change going on in China "and I mean China, not emerging markets in general" will produce unimaginable profit and unimaginable change – "it will be exponential". This is why he is holding firm to his view that the world economy has never been so dynamic, and rarely - if ever - have there been such great investment opportunities. "It is all about getting exposure to these exponential winners early because the speed of change is so quick," says Mr Anderson, adding that the extraordinary levels of pessimism offers great opportunities for the discerning investor.
Ranking the two themes driving his investment thesis, Mr Anderson believes technology is the more important of the two. "The returns in these companies are profoundly different to historical returns – whether I am talking about Apple, Baidu (the Chinese 'Google'), Amazon, Google or Tencent (a Chinese internet service portal).
"Apple has no book value. Amazon works off our capital. Google's problem is too much cash. These companies have a global reach, too much cash and very little capital requirements – so how do you value them? It defies all the capital theory you have ever been taught and endangers everything else - from book shops to music stores to newspapers. Technology is very, very important. We don't nearly grasp the pace of technological change."
As for China, Mr Anderson's view is that "it used to be more important - although it is still important." He explains: "The country is not like most emerging markets. It is built on the notion that you educate people and you increase life expectancy. It's about moving up. It is incredibly impressive how the economy has moved over the past three years from the exporter of low-cost goods to being almost wholly reliant on its own domestic consumption. This has been done effectively and quicker than anywhere in the world. We are a long way from grasping the sheer power of what is going in human capital terms in China."
James Anderson
So how does he reflect these strong macro thematic views in his stock selection? The basis of the Baillie Gifford investment approach is, after all, very much focused on bottom-up stock selection. Well, he likes Apple, although he admits that he does not own as much of the stock as he should. He also likes healthcare companies tied to the process of technological change and uses the example of Intuitive Surgical (one of his top 10 holdings), which produces 90 per cent of the world's robotically assisted minimally invasive surgery. Another favourite is Illumina, a company that develops, manufactures and markets integrated systems for the analysis of DNA. Given the chance, he will also buy Facebook: "It has no power structure or bureaucracy - companies die because of too much bureaucracy."
But finding the right opportunities is not always easy and while he believes that investors need to take more risk, he admits getting it wrong at times, saying "we made a hash of investing in alternative energy".
"Owning the winners is what matters - even if you own some of the losers," continues Mr Anderson. To do this successfully you need a disciplined process, and you need to come back to basics, he says.
As such, his investment methodology boils down to 10 questions he uses to analyse companies. These questions are based around factors such as the strength of management, competitive position, customer perspective, prospects for sales and markets, financial strength, management attitudes and valuations.
| JAMES ANDERSON CV |
|---|
| James Anderson graduated with a BA in Modern History from Oxford university and, after postgraduate study in Italy and Canada, he gained an MA in International Affairs in 1982. He joined Baillie Gifford in 1983, becoming a partner in 1987. Mr Anderson headed the European Equity Team until July 2003 when he became head of Baillie Gifford's long-term global growth team. He is a member of the Investment Advisory Group. Mr Anderson stepped down as chief investment officer in May 2011. |
This process leaves the fund with a portfolio of around 80 investments chosen from around the world for their long-term potential. The portfolio bears little resemblance to the benchmark index, the FTSE All World index, which is only used for a performance measurement over a five-year rolling period.
While Mr Anderson's investment onslaught certainly differs from your run-of-the-mill fund manager's stance, to date it has served investors in the fund well. Scottish Mortgage is one of the top performers in the AIC's global growth sector, ranking among the top 10 funds over both three and five years, delivering consistent price and net asset value performance. Equally attractive is the fund's low total expense ratio of 0.51 per cent (according to Lipper figures) which makes it one of the cheapest funds in the investment trust space and significantly lower cost than its open-ended global growth peers.
But things haven't always been rosy for Mr Anderson and his co-manager, Tom Slater. In 2008, the fund suffered a dismal drop in performance, which was not helped by its gearing. However, in 2009 it bounced back significantly - despite the portfolio not changing substantially between the two years. This, argues the managers, is testament to the long-term investment approach that lies at the crux of the investment process. As Mr Anderson puts it: "Please don't own Scottish Mortgage shares if you cannot afford a five-year time horizon or want high correlation to the market. Otherwise we are very excited by the opportunities available. If we fail, it is our own fault."
