1. SCOTTISH MORTGAGE ANNUAL GENERAL MEETING

    June 2017 – Meeting Summary
  2. The Scottish Mortgage Investment Trust AGM took place in Edinburgh on 29 June. The meeting was the last to be chaired by John Scott before he handed over to Fiona McBain.

    All 15 resolutions on the agenda were carried and the meeting progressed to the second stage which featured presentations by the trust’s managers, James Anderson and Tom Slater.
  3. JAMES ANDERSON

    JOINT MANAGER,
    SCOTTISH MORTGAGE INVESTMENT TRUST

      

    James spoke of the importance and benefits of being different from most other fund managers. He also underlined the futility of attempting to predict future outcomes in markets and politics.

  4. Listen here
  5. James illustrated his point by highlighting that when John Scott joined the Scottish Mortgage Board 16 years ago, only two of the trust’s top ten holdings were quoted companies. The mood in markets over the intervening years has been generally negative, yet investing in these companies has generated exceptional returns. James noted Tom’s work on the distribution of long-term returns for companies and also mentioned that of an American academic, Professor Hendrik Bessembinder, whose recent output suggests that, since 1926, more than half of the wealth created within the US stock market has come from around just 80 companies and that all of the wealth has been generated by 1,000 of the 26,000 companies in existence. James took great delight in pointing out that this work also shows that most stocks have underperformed treasury bills, a statistic that counters academic theories over the mechanics of stock markets and the Capital Asset Pricing Model in particular. James explained the implications of this approach for long-term investors.

  6. Listen here
  7. He explained the process of looking for suitable investments, including, but not exclusively, those with low capital requirements as well as those with substantial potential for market growth and a long-term focus. He noted that these characteristics are more likely to be features of companies being run by founders and families rather than management hired to produce returns over short periods.

    He referred to the need to ignore the louder voices in the investment community and heed some of the more thoughtful individuals. In this regard, James specifically highlighted the approach of Jeff Bezos of Amazon as being particularly valuable in terms of how one might approach long-term investing.

  8. Listen here
  9. James spoke of the negativity that pervades the investment industry in general before referring to one aspect of the Scottish Mortgage Investment Trust that has provoked a generally positive reaction and has contributed substantially to the recent strong performance, that of the private company investments.

  10. Listen here
  11. He highlighted the benefits that have accrued from the greater exposure to unlisted companies and the importance of having access to those businesses. He also commented that this is where the managers are finding a considerable number of the most interesting new investment ideas.

  12. Listen here
  13. An additional benefit of being supportive long-term shareholders is the access to key management figures that it facilitates, both in being able to speak to management teams at major companies and also opening doors at unlisted companies which are keen to have reliable investors as their business partners. James offered the experience of investing in Illumina as an example of this, saying that as a result, Scottish Mortgage has been able to invest in two really interesting early stage private healthcare companies, Grail (developing genomics based cancer detection and screening) and Denali (working towards developing a treatment for Alzheimer’s among other neurodegenerative diseases).

  14. Listen Here
  15. The managers believe the flexibility to invest in such opportunities is very important to generating returns for shareholders in the long term from here.

    James concluded by stressing the importance of avoiding the market noise and the biases of the financial community in London and New York, arguing that it is now possible to gain an informational advantage through building relationships with the leaders in industry and working with universities instead.   

    Tom then disclosed aspects of his thinking on developments that will come over the next few years and will have an impact on some of the companies in which the trust has invested.

    Referring specifically to prospects for Tesla, the trust’s second largest holding, Tom explained that this will be the critical year for the company, when we find out whether it can scale its production up to the level of its ambitions.

  16. Listen here
  17. TOM SLATER

    JOINT MANAGER,
    SCOTTISH MORTGAGE INVESTMENT TRUST

    The challenges for the other big portfolio holdings will be different. Tom explained that the dominance of some of the portfolio’s larger internet holdings and the absence of competition in several of their markets is surprising. He spoke about how the internet has increased in scale dramatically and changed in the past ten years. He offered the example of US online retail, which is dominated by Amazon, a company that is not facing any significant challenge from others investing in their own cross-border infrastructure.

  18. Listen here
  19. The dominance of the established digital giants is even more extreme if you think about it in the context of advertising. He illustrated this view with reference to Alphabet and Facebook which are sweeping aside all of the potential challengers. Tom highlighted that for every incremental dollar spent on online advertising last year in the US, 100 out of every 100 cents of it went to one of these two companies. However, while that fact underlines why those companies have performed particularly well in share price terms, he is more excited by other aspects of the Alphabet and Facebook businesses when looking to the future. This is driven by the core skills which these companies have had to develop to manage the huge data sets which they now generate on a daily basis. Most notably, this revolves around the developing skills in machine learning, which has many potential new applications, including driverless cars and online personalised merchandising.

  20. Listen here
  21. Moving away from the US, Tom contrasted the position of these big US businesses with those in the Chinese market. Here we see the dominance of just a few large companies to an even greater extent, notably e-commerce platform Alibaba. The scale of this business dwarfs that of even Amazon.

  22. Listen here
  23. Tom concluded the presentations by reiterating a point made earlier by James – that it is important to think more broadly about how to acquire research knowledge that differentiates the team from other investment managers. This can incorporate various aspects, including access to key business figures, the use of experts with in-depth local knowledge and, increasingly, relationships with academic organisations around the world.

    James and Tom then responded to questions from the audience before the meeting concluded with a vote of thanks on behalf of the shareholders from Max Ward, a former Scottish Mortgage manager, who paid tribute to the efforts of his successors, to the board for its support of the investment managers, and in particular to the retiring chairman for his strong and stable leadership during a 16-year tenure which has helped to steer Scottish Mortgage to where it is today.

     

    Standardised Past Performance (%) to 30 June each year

    Performance source: Morningstar and relevant underlying index provider(s), share price total return.

    Past performance is not a guide to future returns.

  24. IMPORTANT INFORMATION AND RISK FACTORS

    The views expressed are those of the speakers and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

    This communication was produced and approved on the stated date and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

    This extract contains information on investments which does not constitute independent investment research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned. Investment markets and conditions can change rapidly and as such your capital may be at risk.

    You should be aware of the following risk factors:

    • The investment trusts managed by Baillie Gifford & Co Limited are listed on the London Stock Exchange and are not authorised or regulated by the Financial Conduct Authority. The value of their shares, and any income from them, can fall as well as rise and investors may not get back the amount invested.
    • The trust invests in overseas securities. Changes in the rates of exchange may also cause the value of your investment (and any income it may pay) to go down or up.
    • The trust's risk could be increased by its investment in unlisted investments. These assets may be more difficult to buy or sell, so changes in their prices may be greater.
    • The trust invests in emerging markets where difficulties in dealing, settlement and custody could arise, resulting in a negative impact on the value of your investment.
    • The trust can borrow money to make further investments (sometimes known as “gearing” or “leverage”). The risk is that when this money is repaid by the trust, the value of the investments may not be enough to cover the borrowing and interest costs, and the trust will make a loss. If the trust’s investments fall in value, any invested borrowings will increase the amount of this loss.
    • The trust can buy back its own shares. The risks from borrowing, referred to above, are increased when a trust buys back its own shares.
    • Market values for securities which have become difficult to trade may not be readily available and there can be no assurance that any value assigned to such securities will accurately reflect the price the trust might receive upon their sale.
    • The trust can make use of derivatives which may impact on its performance.
    • The trust charges 100% of the investment management fee and borrowing costs to capital which reduces the capital value.
    • The information and opinions contained within this extract are subject to change without notice by Baillie Gifford & Co Limited, who are the managers and secretaries of this investment trust and are authorised and regulated by the Financial Conduct Authority.

    All information is sourced from Baillie Gifford & Co and is correct as at June 2017 unless otherwise stated.

    The images used in this article are for illustrative purposes only.

     

    LEGAL NOTICE – FTSE

    Source: FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and / or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and / or FTSE ratings or underlying data and no party may rely on any FTSE indices, ratings and / or data underlying data contained in this communication. No further distribution of FTSE Data is permitted without FTSE’s express written consent. FTSE does not promote, sponsor or endorse the content of this communication.

     

    For a Key Information Document, please visit our literature library.

     

    Ref : 33239 IND WE 0789