If there is one message that has been consistently delivered over the past two decades from the UK’s most popular investment trust (Scottish Mortgage), it’s the need to focus on the long term and to give companies the support they need as they mature. As manager Tom Slater told my colleague Mary McDougall, “when we meet private company entrepreneurs they recognise that we behave as a proper partner for a decade, regardless of whether they are private or public”.
This week joint SMT manager James Anderson, who is stepping down from the fund, expressed to the FT his frustration over the “deep sickness in UK capital markets” that has stifled the growth of homegrown innovative tech stars, something he blames on the UK’s focus on the short term and managers’ fear of getting it wrong if they take a risk.
The evidence that a slow-burn investing approach works lies in the strong performance of SMT in the past 20 years since Anderson first steered it into unlisted waters. Several of these holdings have delivered returns in the thousands of per cents, not just because they were inspired investments but because the trust stayed a loyal partner along the journey for years, even decades afterwards.
Is the UK’s short-term addiction one reason behind its distinct lack of world-beating tech companies? Why do the US and China produce so many great tech innovators? Is it down to their stronger entrepreneurial attitude and approval of business ambition? Is there a driving hunger among their citizens to create their own wealth and a willingness to take risks with their own money? Is it because it is easier to raise money from long-term family supporters? Does having more role models mean that success inspires success? Is it the size of the market they operate in that means growth comes more quickly? Or an education system that encourages innovative thinking and tech skills?
Is there too much regulation in the UK? An overreliance on property wealth? An uncomfortable relationship with naked capitalism?
The answer probably lies in a mix of factors. But one thing stands out as an issue and that’s access to funding – supportive unpressured funding. Many exciting UK tech and other types of start-ups get snapped up early on simply because often that’s easier than going it alone, which has a lot to do with the availability of funding. Or they turn to the markets instead, where they will come under pressure to deliver profits growth instead of investing in their own future, and be punished for mistakes.
The government is encouraging pension funds to invest more than they currently do in venture and private equity, but they are also under pressure to deliver to their own stakeholders.
Of all investors, private investors are the most likely to adopt a patient approach. But be especially cautious around new listings, often the first opportunity for a small investor to buy in. Just remember you are basically at the end of the queue and although big gains can be made from this point on, you can never overdo your research. Understand not just the numbers but also the drivers behind future performance. SMT didn’t buy into Tesla because it made nice cars, it has backed the company for years because it is benefiting from a revolution in energy.
