Investors whose strategy is not evolving with the changing world risk stagnating “or even going backwards”, according to Tom Slater, co-manager of the Scottish Mortgage Investment Trust.
Slater has managed Scottish Mortgage alongside James Anderson since August 2009. He saw early success, making 161.08 per cent in his first five years, more than double the gains of the trust’s IT Global sector and FTSE All World benchmark. However, this outperformance has accelerated more recently, with the trust up 313.28 per cent over the past five years, more than triple the gains of its sector and benchmark.
Performance of trust vs sector and index under manager's 1st 5yrs
Source: FE Analytics
While these strong gains can be partly explained by the high exposure to tech stocks, which have benefited from the coronavirus pandemic and economic lockdown, Slater also attributed them to the evolution of his process.
“We have become much more convinced of the impact of a small number of big winners,” he began.
“That is partly learning from examples like Amazon, which have taught us a huge amount about what can be achieved with the right approach, as we've entered the age of globalisation and online distribution.
“And it’s forced us to rethink just how large a company can be and how great a company can be. And I think we’ve had more courage in expressing that in the portfolio.”
Slater has also adapted to a changing financing environment. As companies have become less capital intensive, they have waited for far longer before listing, which has resulted in a declining delineation between private and public companies. Scottish Mortgage increased its maximum permitted exposure to unlisted companies to 30 per cent this year.
In addition, the manager pointed to Baillie Gifford’s increased focus on China, with the group opening a dedicated office in Shanghai last year.
“We have a market where there are much fewer cultural language overlaps than we have had with America, for example, over the past 50 years,” he explained.
“We have to do more to localise what we’re doing and to really understand the big changes that are happening there.”
Aside from the outbreak of the coronavirus pandemic in Wuhan, many recent headlines about China have centred on the crackdown on pro-democracy protests in Hong Kong and the friction between the regulator and digital giants such as Tencent and Alibaba.
But although Slater does not wish to play down concerns over the government’s behaviour, he said this is far from the biggest story in China.
“What’s exciting to us is the level of entrepreneurship, the ability of people to grow new businesses of real scale,” he continued.
“This is the one place outside the west coast of the US where we really see this developing, and actually developing beyond what’s happening in the US.
“There’s the pace of change in the way people have been forced to adopt new products and services that we’ve had a taste of here with Covid, but in China, that’s the constant pace of change as that new consumer emerges.”
Looking to the future, Slater expects to focus more heavily on investing in what he refers to as “deep transitions”. Much of this is based on work by professor Carlota Perez of the University of Sussex, who studies the socio-economic impact of technical change and the historical context of growth and development.
While Scottish Mortgage is famed for its long-term approach, Slater said the sort of timeframes Perez focuses on “puts the trust to shame”.
“She tries to look at the world in terms of centuries, not decades,” he explained. “Her view is that the first deep transition has been industrialisation: the age of modernity as we know it is creating great wealth.
“But with it comes new complex problems. Most notably, industrial consumption and production, leading to growing inequality and the consequences of unprecedented climate change.
“The main contention is that starting in the 1970s, the second deep transition began. That's the realisation that future industrial progress has to be sustainable.
“And we see lots of pointers to the idea that we're on the cusp of a multi-decade transition in our model of energy generation and consumption.”
Slater eschews concrete predictions on this sort of subject, preferring instead to partner with the entrepreneurs that are driving these changes. This helps to explain Scottish Mortgage’s long-term position in Tesla, which has delivered spectacular returns over the past year.
Performance of stock since IPO
Source: Google Finance
Despite talk of Tesla being in a bubble, Slater said the company is at a relatively early stage in its development, with its energy business expected to double revenues next year and again in 2022, for example.
Although Anderson has spoken before about the lack of opportunities outside of Tesla in the theme of renewable energy, Slater said this is now beginning to change.
“We also made a commitment to ChargePoint, which is the world’s largest electric vehicle charging network,” he added.
“We think such networks will completely change the way we think about fuelling our vehicles as work and home become the dominant locations.
“And the idea of the fuelling station when you get to the end of the range of your vehicle becomes something of an anachronism.
“So this area of finding companies which we think have a sustainable edge, and will benefit from this long-run-transition, will be one of the important areas of focus for our research agenda in the years ahead.”
Data from FE Analytics shows Scottish Mortgage has made 1,243.63 per cent Slater joined in July 2009, compared with gains of 281.73 per cent from the IT Global sector and 259.9 per cent from the FTSE World index.
Performance of trust vs sector and index under manager
Source: FE Analytics
The trust has ongoing charges of 0.36 per cent. It is trading at a discount to NAV (net asset value) of 1.13 per cent, compared with an average premium of 0.12 and 1.21 over one and three years. It is 6 per cent geared.