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.
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.
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.
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.
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.
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).
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.
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.
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.
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.
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.
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