Scottish Mortgage's James Anderson: how I am profiting from fund management pitfalls
The Scottish Mortgage investment trust has seen it all over the decades: the great depression, two world wars, the 'flash crash' of 1962 during the presidency of John F Kennedy, followed a decade later by the oil and energy supply glut.
Other notorious events more fresh in the memory include Black Monday in 1987, the bursting of the tech bubble in the late-1990s and the global financial crisis of 2007-09.
Each of these events caused mayhem in financial markets, and all have gone down in the history books as full-blown crises. But despite all the drama, Scottish Mortgage has stuck to its knitting.
In 1909 the trust was established on a simple premise - to buy global shares - and today it is still following its original brief - although North American railways is no longer the trust's dominant theme.
STRONG TECHNOLOGICAL BIAS
Instead, the portfolio - which boasts assets of £5 billion - has over the past decade or so undergone a realignment under the management of James Anderson and his co-manager Tom Slater.
Anderson first starting buying businesses built on cutting-edge technology around 15 years ago, a couple of years after the tech bubble burst.
'The fact that you get a bubble first is not unusual historically,' he points out. 'In fact I think we all need to do a complete reassessment of the tech bubble of that period.
'For sure, it was a bubble in telecommunication companies and media, but if you look at the claims related to what technology was going to do, they have come true.'
Amazon was one of the first tech names to appear in the portfolio. That stock and many others in the portfolio today fit the remit of embracing disruptive technologies that will eat into the market share of the old guard.
Other examples of stocks backed by Scottish Mortgage at an early stage that have succeeded include Alphabet (Google), Facebook and Alibaba, China's biggest online retailer. Each has established both dominance and scale in its field.
Anderson has acquired greater confidence over the years when it comes to analysing the competitive advantage of tech-heavy businesses.
He differs from Warren Buffett in this respect, who famously said that he does not generally invest in technology businesses because he doesn't understand them.
Anderson says: 'We believe these companies can be analysed in the classic way in order to gauge future growth rates and returns.
'We have become more and more confident that a set of companies is going to last a long time. The basic underpinnings of the technological revolution are getting stronger rather than weaker.'
Spotting tomorrow's tech giants requires a trained eye, as many bright ideas fail to see the light of day, while promising innovators see their star shine brightly but fade fast.
As an aide to help find winners, Anderson has a set of 10 questions he asks company management teams before he decides to invest.
He stresses, however, that the most important attributes he looks for in a company are a genuine competitive advantage, and high-calibre and ambitious founders, while the opportunity has to be sufficiently large.
He says: 'More often than not, we are making a judgement about people. The difference [between success and failure] lies in the ambition and intelligence of those who can construct a business model.'
GENUINELY LONG-TERM PHILOSOPHY
Healthcare is an area Anderson is currently devoting plenty of time and mental energy to. For some time he has owned Illumina, a firm that makes machines used for treating various diseases.
A recent new addition to the portfolio is Grail, an unlisted company with ambitious plans to detect cancer in asymptomatic patients through a blood test.
Grail was formed out of Illumina, which retains a majority stake in the company. Anderson says: 'It will take time and money. It is not as easy as building a digital business. We think there are some incredibly exciting things happening and that it matters a lot for humanity.'
Another area that excites Anderson is 'the combination of electric and battery technologies plus renewable energy'. He says: 'That's why we have been completely dedicated to our ownership of Tesla.'
By the end of the year Anderson will find out whether the US maker of electric cars will crack the mass market when it unveils the cheapest Tesla yet, which is expected to cost around £30,000.
Anderson's investment philosophy is genuinely long term, which allows him to build up meaningful positions in unlisted companies. These currently account for around 12 per cent of the trust.
He names Denali Therapeutics, a firm that is trying to cure Alzheimer's, as a stock that could one day hit the headlines for the right reasons. He is also impressed by the progress Airbnb, a website that facilitates short-term house rentals, continues to make.
Unlike Anderson, financial markets are fickle: the average holding period for listed equities has been estimated to be months rather than years.
Moreover, the fund management industry is full of churn: the average fund manager stays the course for just under six years before either being poached by a rival or shown the door.
Anderson, who started out as an analyst at Baillie Gifford in 1983 before assuming management of Scottish Mortgage in April 2000, pulls no punches when it comes to pointing out the flaws in the fund management industry.
He says: 'In philosophical terms, we start out by thinking that it is important to understand why the market is inefficient, and we then weigh up how we might be in a position to exploit that.
'I find it really strange when I hear other managers talk and then appear to have not answered that question at all.'
Obsessing over short-term performance numbers leads fund managers down the road of not taking enough risks, according to Anderson, which is why so many funds masquerading as active funds are really just tracker funds with premium fees.
Anderson says: 'There's a huge amount of career risk involved, and a lot of explaining to do, to both colleagues and investors, when mistakes are made. Fund managers are incentivised to think that a loss is 10 times worse than a gain is enjoyable.'
Anderson adds that, in his view, no industry has dealt with the explosion of information in our daily lives as badly as fund management.
He points out that too much time and effort is wasted in obsessing about GDP figures, even though they have very little meaning, as there's no concrete correlation between stock market returns and GDP.
At a company level, he adds, there's an unhealthy craze over quarterly earnings. Anderson reveals that Scottish Mortgage is making strides to try to look less like a traditional fund manager in terms of the information and inputs used on a daily basis.
He has plans over coming years to move further away from news sources and brokers. He says: 'It is much more important to build relations and gain knowledge from brilliant people.'
Short-termism gives Anderson an opportunity to add value. Many unlisted shares today are being bought on their future potential. If this potential is fulfilled, Scottish Mortgage will be in the money, having got in on the ground floor.
In a parting shot at the fund management industry, Anderson says: 'The great problem is that somehow, by fund management becoming such a profession in itself and there being so much money in it, we have lost our sense of an external or social purpose.
'To me, we would be much better off if we thought about what we should be doing to build great companies, rather than obsessing about our performance compared with other fund managers.
'I really worry that's one reason why there are problems in the world economy. There is so much money going into and cycling around in companies that don't need money or are not building anything. I think that is a big, big problem.'
Over the years Anderson has proved himself an astute long-term investor and enhanced the trust's desirability. Scottish Mortgage will now have even wider appeal, having recently joined the FTSE 100 index.
JAMES ANDERSON IN SIX
My best investment is...
Amazon, which I have owned since 2004.
My worst investment decision and lesson learnt is...
Not buying Apple until 2009. The lesson here is the sin of omission.
My alternative career would have been...
Journalism. It was a career I considered while I was doing my history degree at Oxford University. Clichés aside, it's really important for an investor to have a curiosity about the world. I think journalism would have fed my hunger to learn new things every day.
In my spare time I like to...
Read incessantly and travel.
The one thing I would like to see change in financial services is...
For fund managers to develop a sense of social purpose.
Do you invest in the fund?
Of course, it is my only investment.