JAMES Anderson, who manages the £8 billion Scottish Mortgage Investment Trust, has warned rapid technological change could make life even more difficult for already-constrained British companies.
And he has declared that, in spite of what Conservative Party leadership hopeful Boris Johnson and arch-Brexiter and Tory MP Jacob Rees-Mogg might say, he cannot see Brexit leading to a “sudden effervescence of British capitalism”.
Amid heightened tensions between the US and China following a move by the Trump administration which is viewed as effectively blocking Huawei products from being used in US networks, Mr Anderson declared: “I suppose we have regarded the relationship between China and America as likely to be one of the major underlying issues of the next 10 to 15 years at the very least.”
Mr Anderson added: “We would think it was much more likely that this is a major mistake for America, rather than America can bust China.”
He meanwhile highlighted the ever-increasing degree to which, in a global context, “all the real risk-taking, all the real innovation” was being undertaken by private companies, as opposed to businesses listed on stock markets.
Mr Anderson, who co-manages Scottish Mortgage with fellow Baillie Gifford partner Tom Slater and has produced returns that have trounced those of the fund’s benchmark, the FTSE All-World Index in sterling terms, has in recent years shown relatively little appetite for UK-listed companies.
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Fiona McBain, who chairs Scottish Mortgage, last week highlighted the fact there were at March 31 only five UK companies in the trust’s portfolio, accounting for around 3% of overall assets, “most of which are global rather than purely domestically focused businesses”.
Asked whether this low exposure to the UK was likely to change, in an interview with The Herald, Mr Anderson replied: “I don’t think it is. I don’t really see any reason to change my view. I don’t really see there is any major reason for thinking the major British companies can break out of their constraints."
He added: “I think the challenges get greater for them, rather than less.”
Mr Anderson cited major technological developments over the last 30 to 35 years, citing the implications of genomics for healthcare, portfolio holding Tesla Inc’s advances in solar energy, and electric vehicles becoming “better” than internal combustion engine cars.
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And he observed: “If I go through the British [stock] index one by one this isn’t a very good environment for them [these companies].”
Mr Anderson added: “We are not saying we won’t look at anything in Britain. We don’t see much about…that is particularly striking or of global scale.
“I can’t really see how Brexit helps on that. Despite…[what] Jacob and Boris [say] I can’t see that this is going to lead to a sudden effervescence of British capitalism.”
Looking back to the Margaret Thatcher government, Mr Anderson said: “This seems to be one of the hidden questions in British politics, that you are not allowed to talk about.
"We had a government that was in favour of entrepreneurial capitalism but [we] don’t seem to have any entrepreneurial capitalists.”
He cited money transfer company Transferwise, which has its head office in London and was founded by Estonians Taavet Hinrikus and Kristo Käärmann , as one UK-based company that had impressed Scottish Mortgage.
Mr Anderson said: “The best one for us in the UK recently has been Transferwise. Beyond thinking it is a great help from when I am abroad, I think they have shown signs of ambition about where they want to go to, rather than just foreign exchange. In a sense, it is half an Estonian company.”
Scottish Mortgage is a significant investor in Tesla, which was co-founded and is run by high-profile technology entrepreneur Elon Musk. The investment trust’s £428 million stake in Tesla accounted for 5.3% of Scottish Mortgage’s total assets at March 31.
Asked about Tesla, Mr Anderson said: “I would put it that we are supportive but we are not denying in any sense there are frustrations. We are in active conversations with them about some of the frustrations.
“The underlying opportunity, in terms of the length and breadth of the competitive advantage relative to the industry…we have got more confident about. We have got considerably more confident about…the whole direction of cost for battery-driven cars. [It] is improving quicker and more dramatically and arguably should be more consistent than we considered originally.”
However, he declared that Scottish Mortgage found it a “very odd decision” by Tesla to “raise capital recently when they haven’t done it at a higher [share] price before”.
And, noting Mr Musk’s recent pledge to deliver one million fully autonomous robocars by 2020, Mr Anderson added: “We are frustrated by Mr Musk’s continued giving of short-term targets.”
Mr Anderson, while emphasising Scottish Mortgage’s “deep support” of Tesla, warned that the setting of short-term targets could leave Tesla a “hostage to fortune”.
His message to Mr Musk is: “Just keep enjoying you are ahead and working on it, rather than saying it will be by x date and…this amount.”
Meanwhile, Mr Anderson highlighted the importance of unquoted companies to Scottish Mortgage and its performance.
He highlighted the fact that one-third of the portfolio comprised companies that are currently privately owned, rather than stock market-listed, or were when Scottish Mortgage bought into them. Mr Anderson cited Chinese online retailer Alibaba and music-streaming group Spotify as examples of companies that the trust had acquired stakes in when they were private.
Scottish Mortgage has between 40 and 45 unquoted companies in its portfolio.
Mr Anderson said: “Compared with where we thought we would go five years ago…where unquoted goes and its importance to us is really top of our agenda.
“On the one hand, our access to unquoted companies around the world has far exceeded our hopes even five years ago. On the other hand, I think this is becoming a real structural issue because more and more all the real risk-taking, all the real innovation is being done by companies that, far more than in history, are private companies.”
He added: “Running forward 10 years…is there really going to be anything other than recycling of cash flows being done in public markets? Will everything of interest be more in private markets? For us, that is a huge issue.”
Scottish Mortgage has set a maximum for its unquoted company holdings, of 25% of total assets. This limit applies at the time the next unquoted company stake is purchased.
Mr Anderson, who declared the level of access to private company investment opportunities that Scottish Mortgage had got was a “pleasant surprise”, said: “We have no intention at the moment of going back to shareholders and asking them to put that up.”
The trust noted that, over the last few years, such holdings have accounted for a “mid-teens” percentage of total assets.
Mr Anderson gave his view, in the context of America-China relations amid the Huawei controversy, that the US attitude “is being driven by [the] east coast military, intelligence establishment”.
He contrasted this with “the rich deep connections” between the west coast of the US and China.
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