1. SCOTTISH MORTGAGE

    ANNUAL GENERAL MEETING

    June 2018 – Meeting Summary
  2. The Scottish Mortgage Investment Trust Annual General Meeting (AGM) took place in Edinburgh on 28 June. It was the first to be chaired by Fiona McBain.

    All 15 of the resolutions put forward to shareholders were carried with more than 95% of the vote. The meeting then progressed to the second stage which featured presentations by the Scottish Mortgage’s joint managers, James Anderson and Tom Slater.
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    Fiona McBain, Chairman, Scottish Mortgage Investment Trust
  4. James began by commenting on the fact that the trust had enjoyed a fantastic year, with the share price up 22 per cent against a world index rise of 3 per cent; he cautioned shareholders that this strong showing did not alter the fact that long-term investors must accept bad years too. 

    James highlighted that there was a widening gap between how the consensus invests and how the trust’s managers think about investing. He stressed that what really mattered was how they approach their task, rather than what they think, at any given time.

    The gap between the perceptions of market participants in general and the extraordinary opportunities being created by exponentially advancing technologies within companies, gives grounds for real hope that the trust’s progress will continue.

    James went on to remind shareholders that Baillie Gifford is currently in partnership with Hendrik Bessembinder, of Arizona State University, to build on the professor’s findings (cited at last year’s meeting) that between 1926 and 2016 just 90 out of a total of more than 25,000 companies, have generated half the returns from the US stock market (above investing in US Government securities). James suggested that this pattern was likely to become more pronounced, with digitalisation and globalisation. He stressed that this meant that the managers’ job was to identify those leaders as early as possible and then to own them consistently.

    Those companies’ creators, James said, did not predict the future, they did not believe in overly prescriptive plans or forecasts, or in fretting about quarterly earnings. They embraced the risks and the uncertainties in their businesses. And he argued, would-be investors must do the same.

    All of the portfolio’s star performers had experienced awful years in share price performance over the last decade or so, James recalled. He said the lesson for long-term investors was that they must have, what he called, a ‘willingness to suffer’.

    James noted that Professor Bessembinder was now turning his attention to identifying the common attributes underlying these extraordinary growth companies, the attributes needed by their investors, and whether his early results regarding the US market were echoed internationally.

    James concluded by talking about some of the trust’s stars. He highlighted ASML, the Dutch semiconductor group. Their next generation technology should enable rate of progress in computing, as set out in the famous ‘Moore’s Law,’ which says computing power doubles every two years, to continue well into the future. The stock market finds it difficult to focus on the importance of such underlying technologies. Yet the rapid advances in areas such as solar and battery power could similarly create extraordinary amounts of opportunity for investors in the coming years, James said.

    James Anderson, Joint Manager, Scottish Mortgage Investment Trust
  5. Tom took the stand to give shareholders a fascinating perspective on China. During the term of current president, Xi Jinping, it is predicted that China will soon overtake the US as the world’s largest economy. Tom highlighted that this will have huge implications for investors globally.

    Tom highlighted that China was already at the forefront of innovation in platform technology, and that its companies were now the world leaders in this field, and best placed to deliver innovation at scale. Ant Financial, for instance, launched as China’s digital payment platform. The nearest comparison would be PayPal over here but Ant has already reached three times its size, after only five years, and has handled peak transaction volumes four times those of Visa.

    Ant, which is an affiliate of Alibaba, is now moving into insurance and wealth management. Its $160 billion money market fund is already the world’s largest. Tom noted that it took Baillie Gifford over 100 years to get to $100 billion. He highlighted that the Edinburgh Investment Partnership was the only UK institution invited to participate in Ant Financial’s attractive recent private fundraising round.

    Meanwhile, the world was poised to make dramatic progress in healthcare, as cheaper genome sequencing opened the way to personalised treatment plans for cancer, said Tom. Baillie Gifford was again the only UK investor in a major US fundraising, this time by the biotech company Grail, which has pioneered a blood test for cancer. Significantly, co-investors in Grail included the likes of platform giants Amazon and Tencent.

    Tom noted that potentially dominant companies were staying private for longer, which provided an opportunity for credible long-term investors to gain a competitive edge. For instance, the Ant invitation had been extended because the managers had kept faith with Alibaba, the Chinese e-commerce titan, in a hostile market climate, since it had first invested in Alibaba as a private company, six years ago. 

    Scottish Mortgage’s reputation has enabled it much greater access to the big private companies than the managers had guessed would be possible, when they embarked on this strategy, Tom said. The trust’s increased scale meant it could still do this type of investment and drive down costs. 

    Tom suggested that more visionary CEOs were tired of the market’s short-term obsessions, they preferred dialogue with committed shareholders over long-term strategy, and many were geniuses. The Scottish Mortgage managers (with apologies to James, Tom said) were not geniuses but could listen to what the creators of the future were saying and translate it into investment.

    Tom Slater, Joint Manager, Scottish Mortgage Investment Trust
  6. QUESTIONS FROM SHAREHOLDERS
  7. Shareholders welcomed the opportunity for questions, and James took on the controversy about Amazon’s treatment of its distribution warehouse workers. He said the managers had engaged with founder Jeff Bezos and Amazon board members on HR issues, and had been taken seriously. This is the benefit of long term relationships. The company appeared to pay above-average aggregate salaries for the warehouse industry, and to be making gradual improvements.

    On shareholder engagement more generally for the holdings themselves, James said the managers would always vote, but they focused their energy on the relatively small number of companies where they could help tackle deep issues. At private companies, where they would be long-term and significant shareholders, they could have real influence.

    Tom responded on the risks of state regulation of dominant companies, suggesting that, taking history as a guide, much regulation had actually only served to strengthen the positions of the dominant companies.

    Independent director Professor John Kay offered a further historical perspective, noting that apparently invulnerable sector giants such as IBM and Microsoft had been eclipsed over time, because most sectors were in fact competitive and not natural monopolies, despite the emergence of dominant players for periods.

    On a question from one shareholder over the increases in fees for the chairman and directors, the Chair noted that the fees had not increased for three years prior to this, and that they reflected a considerable increase in the workload in the scrutiny of unlisted investments over that period for the board. Fiona also highlighted that they were also still very cost-competitive for the investment trust sector.

    After a 95-minute meeting, on the hottest day of the year in Edinburgh, directors and shareholders adjourned to continue the discussions more informally. 

     

    Discrete Performance (%)

     

    31/03/13 – 31/03/14

    31/03/14 – 31/03/15

    31/03/15 – 31/03/16

    31/03/16 – 31/03/17

    31/03/17 – 31/03/18

    Share Price

    28.9

    29.6

    -0.7

    40.9

    21.6

    Index*

    6.8

    19.2

    -0.5

    33.1

    2.9


    Performance Source: Morningstar, FTSE, total return.
    * FTSE All-World Index. 

    All data as at 31 May 2018 and source Baillie Gifford & Co Limited unless otherwise stated. Past performance is not a guide to future returns

  8. 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 2018 unless otherwise stated.

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

     

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