James Anderson and Tom Slater manage the Scottish Mortgage Investment Trust (LSE:SMT, Financial), which has returned 22.8% annualized over the last ten years. Anderson has been managing the trust since 2000, in which time he has generated cumulative returns of 1,700% for investors in the fund.
The trust, which is a Closed Ended Investment Company, is listed on the London Stock Exchange and was the best performing share in the FTSE 100 during 2020.
Over the last two decades, Anderson has led the transformation of the Trust from a largely UK-focused trust to one that is now global, long term and index indifferent. He also pioneered Scottish Mortgage's investments in private companies, one of its most important strategic initiatives to date. The global nature of the fund sees the majority of its investments domiciled in the U.S., Europe and China.
What brought Anderson to my attention in recent years has been two things: first he has been (until recently) Tesla's (TSLA, Financial) largest shareholder. Second, he has been a frequent critic of value investing in the UK financial press and has stated that investors would understand more by reading Jeff Bezos's annual shareholder letters than those written by Warren Buffett (Trades, Portfolio). This is an interesting notion, and understanding Bezos better is certainly a very valid idea in my view. I plan to read all of Amazon's (AMZN, Financial) shareholder letters at some point.
I also found that Anderson has been heavily influenced by George Soros (Trades, Portfolio)'s thinking, even though he is a stock picker, not a global macro fund manager. Anderson freely puts forward the contention that the future is inherently uncertain and financial markets are inherently unpredictable. This doesn't mean the market is efficient and we should all just buy index funds, however. Soros's theory of reflexivity, where markets create a reality of their own, is something Anderson has thought about in some of his more aggressive investments, such as Tesla.
We'll take a more nuanced look at Anderson's thoughts on value vs. growth later in this series, as I found that Anderson greatly respects Charlie Munger (Trades, Portfolio) and Ben Graham, but it's clear his own investment process doesn't incorporate any reliance on "mean-reverting" valuations. Anderson is more focused on trying to find paradigm shifts, of which he believes there are many as we enter a period of great transition and great extinction.
Scottish Mortgage likes to use the FTSE All-World index as its benchmark because the fund is globally unconstrained. So officially in this sense, it is not a growth fund, although Anderson himself calls his style of investing "hyper-growth". Given its massive tilt towards growth and technology stocks it has easily beaten its diversified benchmark. So, it would be easy to say that Anderson's last ten-year track record was just a function of his large bets in technology and related stocks. However, if we look at the PowerShares QQQ Trust Ser 1 (QQQ) ETF, which tracks the Nasdaq-100 Index, we see that this ETF achieved a 10-year annualized return of 18.7%. Looking at his returns in this way shows over 4% of alpha achieved annually by Anderson.
'I don't know' are the three most important words in investing
In recent interviews, I was impressed with many of the things Anderson said. One thing I agree with is that the concept of intrinsic value for a stock is problematic because the future is uncertain. Ultimately then, there is no "correct" intrinsic value, and we can only have our own opinions which are highly uncertain.
Anderson looks at a range of scenarios and tries to assign a probability to each scenario – with the understanding that this is also uncertain and therefore probably wrong – with the resulting weighted average value acting as a guide on valuation. Anderson likes to talk about his willingness to pay up for growth at an unreasonable price and the fact he takes a portfolio approach, much like venture capital, whereby he does not necessarily expect every stock to do well, but by having exposure to a range of stocks in areas that he expects to do well, then the winners should compensate for any duds. Anderson likes to use the expression "Margin of Upside" meaning his investments should have the possibility of massive upside to compensate for the change they could also go down 80%, even 100%.
In terms of his investment process, Anderson leans heavily on the research that shows that stock market returns are driven by a small group of big winners, so his objective is to try to find these exceptional investment opportunities rather than be constrained to match the risk factors of any given benchmark. As he said on a recent webcast, his task is not a really an academic question of growth vs. value, it's about trying to build an underlying competitive advantage as an investor.
For his fund, he's talking about the ability, scale and resources to build a competitive advantage. Anderson does this through long-term engagement with portfolio companies and using somewhat idiosyncratic research methods, heavily influenced by Philip Fisher's "Scuttlebutt" method. The investing competitive advantage is built up though developing a broad research expertise in partnership with academics and scientists to gain useful insight.
Anderson's future
Given the fact that Anderson recently announced he will be stepping down and leaving Baillie Gifford (Trades, Portfolio) (the privately held asset management company behind Scottish Mortgage) on April 30, 2022, I thought it was a good time to read his "Resolute Optimism" notes and highlight the investment takeaways.
Anderson is not retiring from the investment industry, he is moving to become chairman of the board at Kinnevik (OSTO:KINVA, Financial), a listed Swedish investment fund. While it seems that Scottish Mortgage is a relatively unconstrained fund, apparently Kinnevik is even less constrained, which suits Anderson's idiosyncratic approach to stock picking and portfolio construction.
Given his reputation for being outspoken about the investment industry and his excellent track record, plus all the access he has had to some of the most successful entrepreneurs over the years, I believe analyzing Anderson's writings and investment process is a worthwhile endeavour, and I hope you will join me on my analysis.
Disclosure: I do not own shares in any of the companies listed.
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