Podcast | Baillie Gifford | 8 Mins Read | by AG Latto
Baillie Gifford has been one of the most successful investment managers of the last decade. Scottish Mortgage is one of the top-performing funds.
Understanding how Baillie Gifford invests isn't easy. Each of the Baillie Gifford's funds has a subtly different investment approach.
But Scottish Mortgage is one of BG's most interesting funds. See: Scottish Mortgage - The Flagship (Premium)
Recent podcasts highlight how Scottish Mortgage's approach has changed since 2000.
A notable podcast is with the recently retired non-executive director of Scottish Mortgage, Professor John Kay. It explains why SMT has performed so well over the last decade.
Podcasts
1) 31 Dec 2020 - Money Makers - Professor John Kay: Why SMT has prospered
2) 30 Dec 2020 - IC - James Anderson: "Tesla's rise is a symbol of a revolution in energy"
3) 18 Dec 2020 - Barry Ritholtz - MiB: Tom Slater, Baillie Gifford
4) 21 Feb 2020 - AJ Bell: Scottish Mortgage fund manager on Tesla and Amazon (15 minutes in)
5) Starts from Jan 2019 - Baillie Gifford - Long Term Thinking podcasts
Videos
1) Jan 2021 - Money Week/BG - Charles Plowden and Merryn Somerset Webb
2) Dec 2020 - Master Investor - Steward Heggie - Scottish Mortgage
3) Feb 2021 - This is Money - Tom Slater Interview (30 minutes)
4) Feb 2021 - Reg Hoare of MHP speaks to Charles Plowden (16 minutes)
1) 31 Dec 2020 Professor John Kay: Why SMT has prospered
Professor John Kay has been a non-executive of Scottish Mortgage since 2008 and retired in mid-2020. His twelve years with SMT makes him a good person to explain its recent successes. Kay was described as the 'professor of doom' by the FT in mid-2013.
Key points include:
- Scottish Mortgage shouldn't be the only fund that people own. This implies that it is an above-average risk fund.
- Scottish Mortgage started to change its approach in 2000 when James Anderson took over. (Baillie Gifford may have started to change at the same time).
- There are far too many funds available in the UK out there and in the active space, there is little price (fee) competition.
- Fund management is more like an estate agency than brain surgery due to low barriers to entry.
- The role of equity markets has changed. 20th-century growth companies were capital intensive but this is not the case in the 21st century.
- The best returns may be found by funding the losses of scalable businesses while they are private. Hence SMT's focus on unlisted companies.
- The best fund managers are often private institutions - e.g. Fidelity, Capital and Baillie Gifford - rather than listed public companies.
- Kay earned more in his life through investing than 'hard work.' This highlights the power of compounding.
Fund Hunter comment
The last point illustrates the importance of investing. People put a huge amount of time and investment into their working lives. But many do not to put any time into the investment side of things.
Imagine your salary was £40,000 a year over your lifetime but investing returns earn you £50,000 a year. Like Kay, you are earning more from investing than from your salary. Given this backdrop, investing merits serious consideration.
Investing is much less time-intensive than our main job if we are investing through funds. It can therefore be thought of as a higher paying second job that doesn't require much work.
2) 30 Dec 2020 - IC - James Anderson: "Tesla's rise is a symbol of a revolution in energy"
This podcast features James Anderson and Tom Slater, the joint managers of SMT. It highlights how they identify new opportunities.
Key points include:
- Tom Slater stated that they seek the few stocks that drive markets. The challenge is to find the 'ingredients that are common in these stocks.'
- These ingredients include a large opportunity and a unique culture/advantage that is hard for others to replicate.
- James Anderson doesn't believe every investment can be a success nor should it be. This contrasts to quality investors like Fundsmith.
- The valuation methodology considers different scenarios and then probability-weights them. As opposed to having one financial model.
- Tom Slater stated that Tesla is not demand constrained. It is constrained by its ability to produce its cars.
- 'I don't know' is described as the three most important words to use when it comes to investing.
- SMT looks for long-term change drivers like Moore's law and the declining cost of solar power (20% a year) and batteries (16% as capacity doubles).
- The challenge is to determine the implications of change at the company level. But solar power plus battery storage is now the cheapest source of energy.
- SMT has in the past been wrong by being too early. This has included solar companies ten years ago and 3D printing companies.
3) 18 Dec 2020 - Barry Ritholtz - MiB: Tom Slater, Baillie Gifford
This podcast features Tom Slater. It provides an interesting look at his career, which started in September 2000.
Key points include:
- Slater believes that investors should be business analysts rather than financial analysts.
- Slater recommends non-investment books in order to better understand the investing world. These include books by business founders.
- Slater notes that the best companies are product/service focus rather than profit/size focused.
- Baillie Gifford, for example, removed the assets under management data for the firm from its intranet in order to be results focused.
- Slater highlights the Apple TV+ series, Ted Lasso, as illustrating 'the power of positive thinking.'
4) 21 Feb 2020 - AJ Bell: Scottish Mortgage fund manager on Tesla and Amazon (15 minutes in)
This podcast features James Anderson. Key points include:
- Tesla is 'profoundly misunderstood.' It has attracted an immense amount of hostility.
- Society, media and investors prefer to obsess about failure rather than celebrate success on a vast scale.
- Every stock in SMT's portfolio has a probability-adjusted upside and they are ranked accordingly.
- SMT needs to be careful about cutting back on winners due to the relatively few stocks that drive the market.
- 10% positions in individual stocks are acceptable but this isn't a commitment to cut back on winners.
- SMT bought Amazon in 2004/2005 when people were worried about its financial sustainability.
- Moore's law has increased Amazon's opportunity set. Progress on battery technology and solar increased Tesla's opportunity set.
- SMT is interested in investing with inspirational company leaders and visionaries. Examples include Jeff Bezos and Elon Musk.
- SMT's is principally focused on companies that are enabled by technologies rather than pure tech companies i.e. it is not just a tech fund.
- There are very few hard technology companies in SMT's portfolio. But one of them is the lithography printers that enable Moore's law, ASML.
The devil's advocate view
An alternative view would be that Baillie Gifford-run funds have done well by taking more risk. This has come off in spades in 2020 but could have gone wrong.
The premise that it is necessary to invest in loss-making and/or unlisted companies to do well can be questioned. The biggest winners are often proven businesses.
Domino's Pizza Inc was a long-term winner for the Fundsmith Equity Fund. It has a proven business model and had become cheap through a lack of product focus.
Microsoft has been another long-term winner for the Fundsmith Equity Fund. It also highlights that you don't need to invest in new companies for high returns.
The trouble with early-stage investing is that you need big winners to offset the inevitable losers. This can make it a challenging endeavour with more downside risk.
Summary
Under the first decade of James Anderson's leadership, Scottish Mortgage investment trust didn't deliver a differentiated return. But the second decade has been remarkable.
The question is whether the coming decades will resemble SMT from 2000-2010 or SMT from 2010-2020. Has the investment vehicle become a permanently better performer?
One thing is clear. Scottish Mortgage highlights the power of positive thinking when it comes to investing.
Baillie Gifford is one of the best growth investors and Scottish Mortgage is one of its best performing funds. It is available for an ongoing charge of only 0.36%.
Additional material
1) 15 December 2020 - Investors Chronicle - Exponential Change
An interesting article looking at how Baillie Gifford invests.
2) A tale of two decades
Scottish Mortgage saw major drawdowns in James Anderson's first decade of leadership. The overall return from 2000 to the start of 2010 was modest.
A quality-focused fund would most likely have delivered a much better return from 2000 to 2010. In other words, a fund like Fundsmith had it been around then.
But from 2010 onwards SMT has been on a tear. The groundwork was laid in the 2000s, with investments in companies like Alibaba in 2012 and Amazon in 2004.
SMT first invested in Amazon in 2004 when the shares were trading at US$40 versus US$3,256 today. Alibaba was a private investment in 2012 and went public in 2014.
Scottish Mortgage in the noughties
The lesson from these two charts appears to be that it pays to look beneath the surface. The groundwork for SMT's outperformance was set long before 2010.
The shift towards higher-return growth stocks could have been identified with the initial investment in Amazon in 2004.
Scottish Mortgage from 2010
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