苏格兰抵押贷款：在快速变化的世界中投资异类（《信托》杂志，2022年春季刊）

Scottish Mortgage: investing in outliers in a fast-changing world

James Anderson – Investment manager Lawrence Burns – Deputy manager, Scottish Mortgage

How can investment managers imagine the future and adapt to a fast-changing world? James Anderson, joint manager of Scottish Mortgage Investment Trust, shares some parting thoughts with deputy manager Lawrence Burns.

James and Lawrence in the reading room at Panmure House Photography by Robert Ormerod

Please remember that the value of an investment can fall and you may not get back the amount invested. This article originally featured in Baillie Gifford’s Spring 2022 issue of  Trust  magazine.

Panmure House on Edinburgh’s Royal Mile is where Adam Smith lived from 1778 until he died in 1790. It’s in the reading room at Panmure that Smith is thought to have completed the final editions of The Theory of Moral Sentiments and The Wealth of Nations. These books, written at the dawn of the Industrial Revolution, are core to our modern understanding of human behaviour in relation to markets.

In this setting, conducive to the discussion of first principles, Trust brought together James Anderson and Lawrence Burns. James steps down as manager of Scottish Mortgage in April this year. He has been manager of the Trust since 2000 and, since 2015, joint manager with Tom Slater. James has delivered exceptional returns for shareholders during this time and pioneered the Trust’s approach to both transformational growth companies and its investments in private companies. Lawrence joined Scottish Mortgage as deputy manager last year. He has worked closely with James at Baillie Gifford for a decade on a range of international investment portfolios and, given his focus on transformative growth companies, is imbued with Scottish Mortgage’s philosophy.

James and Lawrence sat down to explore ideas on growth investing in an era of technology-led transformation.

James Anderson: What would you say is the topic we’ve discussed most over the years, Lawrence?

Lawrence Burns: I’d say it’s the nature of change and where we need to look for change. How do we make sure we’re fully grasping its potential? I’m always struck that the biggest contributors to Scottish Mortgage’s performance are often the stocks where our calculations of future value based on probability have technically been most wrong because we have underestimated the potential upside. A lot of our discussion has been about making sure we fully grasp the many kinds of potential that companies have.

JAYes, it’s the difficulty of imagining the possibilities inherent in a great company.

LBThat’s the broader investment challenge. How do you grasp something that’s being propelled by exponential forces and will therefore look radically different in the future? The nature of some of the business models emerging over the last 20 years has made it even more difficult to wrap one’s head around that at the early stages of a company’s life.

JAMost of what we’ve been lucky enough to be successful in investing in is the fruit of steady and visible exponential changes. In a chessboard analogy [where one grain of rice is placed on the first square, two on the second, and you keep doubling as you go], we’re buying somewhere around squares four to six on the board. Thinking about how that plays out is, to my mind, lower risk and higher probability than most investments.

If one had just taken Moore’s Law [which predicts that computer processing power doubles every two years] as read in the early 1980s, for the rest of my career and probably the rest of your career as well, you could work out that this would have an impact. Sure, there would be some surprises but there are also some quite obvious investments to make in line with Moore’s Law.

LBI think that’s true. The difficulty we have is imagining that ferocity of change and where it takes you. As fund managers, we want to understand and articulate the ‘how’ rather than just saying: “Well, we don’t know but it’s probably going to be fortuitous.”

Industry problems

JAIs this really neither a problem of the world nor of technologies, but of fund management? That people see it as an analytical rather than an imaginative and creative task?

LBThe roots of that problem lie in evolutionary biology. The way humans are wired doesn’t cope well with the nature of exponential change, uncertainty and wide ranges of outcomes. On top of that, we’ve layered on institutions that, rather than mitigate some of those innate biases, make them worse. If you look at how stock markets work and how as an industry we’ve set ourselves up, it doesn’t match the characteristics of where and how returns arise.

JAThat’s for sure, but you’re indulging fund management too much by blaming human evolution and biology. For much of my career, many of us have adhered to the view that the CFA [Chartered Financial Analyst] Institute and the like made the industry ‘more efficient’, and that the inefficiencies you could exploit are short-term blips. Now, at this stage in my career, I’m allowed to ask whether in the search to make fund management a profession, we haven’t made it deeply inefficient. But that of course leaves the field wide open for those prepared to think differently.

LBIt’s made it very efficient for those who work in fund management, which is what it’s been built around, rather than for outcomes for investors. That’s why it’s been sustained, despite not performing its core role. A lot of the inefficiencies of fund management stem from the industry’s fee structures. We get paid a percentage of assets under management by most clients, no matter what the performance. And so the main aim is to keep the assets. And the way you keep assets is by smoothing out periods of underperformance by not taking big risks, by hugging the index.

And if you do, as we know, outperform by quite a lot, the most common reaction is that clients will often take the money away. You can see why therefore a lot of conservative behaviours exist within fund management.

You have a very high probability of Moore’s Law continuing for a long time with its impact expanding to new areas

JAThis taking away of money when you do well is a big change. It didn’t use to happen, particularly not in the 1990s, when the way to build businesses was actually to do well. These are important issues that we shouldn’t edit away. The agenda is not actually set by the traditional fund management industry but by investment banks and hedge funds whose proclivity to trade and profit from trade is very strong. But the other even darker part that we can’t ignore is the question of how far fund management firms of all types are run as businesses, and by people managing to make those firms big, consistent profit generators, rather than focusing on the craft of fund management. I’m not sure that most fund management firms are really dedicated to producing outsized returns for their clients.

LBTwo reflections: one is that there’s an irony in fund management firms seeking consistency of returns because that has grave consequences for the broader market, company creation and society. The other interesting one is the assumption that as you become more senior in the investment world, you move further away from the companies and the analysis. I’ve always found that bizarre. Presumably, you become senior in a fund management organisation by doing good analysis and good investment. So why take that person away from doing the actual job of company analysis?

A golden period?

JAHow do you feel about the evolution of transformative growth investing? Are we simply in a golden period? Do you think an evolution or even a revolution in methodology will be vital for Scottish Mortgage’s future?

LBIs it a golden period? As research from Professor Hendrik Bessembinder at Arizona State University shows, it’s always been a small number of companies that have produced outsized returns. Looking back at the nature of those companies, we wouldn’t necessarily view them as transformative because we’re so blinkered by what they are today. But they were transformative, just in different ways.

About a decade ago, we had a conversation about what comes after the consumer internet because we realised these businesses were special. And they were special for different reasons. One was that internet technology pushed lots of change. The second was about the economics of how that change played out. This was different and more spectacular. The opportunity sets were also more global or at least went global faster than before.

It also strikes me that we may actually still be early in seeing the impact of these computing technologies. So far, the set of industries upended by this change – retail, advertising and media – is relatively small, but there are larger and more profound areas that change now appears to be spreading to. In particular, I’m thinking about healthcare.

I see a lot of progress in biology as being linked to the outputs of Moore’s Law and computing technology. The energy transition also provides a further large and distinct area to think about over the next 20 years. So, you have a very high probability of Moore’s Law continuing for a long time with its impact expanding to new areas, and at the same time a second engine of growth that isn’t obviously even dependent on that, which is quite meaningful. So things might appear a little bit golden now, but I would hope they will appear less special when we look back at them in 20 years.

JADo you think there will be clues or prompts towards the need to change the investment approach of Scottish Mortgage, however modestly or radically? My observation is that markets tend not to have cycles but very prolonged periods of working and not working. A lot of people make the mistake of thinking that the market will revert to how it was before, which seems profoundly unlikely. How do you make sure that we continue to update our prognosis?

LBIt helps that our response has never been static, it’s always been evolving. That helps set the tone that, whether implicitly or explicitly, there isn’t one answer that works forever. Investing is shaped by what’s happening in the real world and by what other financial market participants are doing, and that ability to evolve can effectively be your edge. I suspect some aspects will, though, prove to be enduring differences. One of the core elements of Scottish Mortgage’s success is being genuinely long term, and I’d be surprised if that changes. I don’t see most investors becoming more long term. In fact, I see them going the opposite way.

The second thing about us is our willingness to be wrong a fair bit. Or to accept that that’s going to happen, which is behaviourally very difficult for people to do. The more interesting question is what else can you do to magnify some of the advantages we think we have. Starting with the view that it can’t just come from us as individuals, how do we get more outside insights into our process?

We’ve got the academic links. We’ve got the relationships with companies. But I still don’t think these relationships are where they could be, and I still think we have further to go in terms of what we could do with academia. I’m not sure what the answer is, but I would be disappointed if in 10 years we were doing exactly the same as we are now.

The role of individuals

JAIsn’t it really our experience, Lawrence, that rather than helping companies, it’s mostly about backing and identifying individuals to follow? Don’t we, therefore, need to help these people invent the companies, rather than investing in their company once it’s already in existence? Isn’t enabling deeply talented individuals and cultures what we’re trying to do?

LBSome are surprisingly dismissive of the role of individuals, perhaps out of wariness of the ‘hero narrative’. But from our experience, individuals have been absolutely and utterly crucial. Even though it existed before Elon Musk, it’s hard to argue that Tesla would have existed in the way that it does now or that the auto industry wouldn’t be 10 years behind where it is now if it wasn’t for that one individual. Sometimes it can be one or two people from an organisation, but it tends to be one.

JAIn terms of turning great ideas into investible companies, it’s individual leadership or small group leadership that’s critically important.

LBYes. With companies, you need to go against the status quo. And doing that can be both physically and emotionally exhausting. Which prompts me to ask: James, how difficult was it for you? I’m assuming there have been some quite hard battles. I’m interested in where you got the conviction necessary to fight those battles because you’ve always been humble and never claimed 100 per cent conviction in anything. Yet we sometimes need to fight quite hard without it being possible to know for sure the direction we are pushing is the right one.

From our experience, individuals have been absolutely and utterly crucial

JAThat is a fair account of how it has been from my perspective, but it’s crucial to find ways to make evolving easier in the future. I suppose I felt that, if given a reasonably long period, the odds were being shifted sufficiently in our favour. But we did enjoy a profound stroke of luck in that most of what we were doing began to work fairly soon, and it became easier as evidence emerged that our approach was working. I feel extremely strongly that what we need most of all is the ability to move on, and that we have to be ourselves. We have to learn and adapt. I think Adam Smith would have approved. I would be as horrified at being locked into what we’re doing now as being stuck with what we were doing in the past. Does that seem reasonable?

LBYes, I think it does.

JASorry, I shouldn’t ask if it seems ‘reasonable’. Being reasonable is an awful thing to be!

Transformational thinking

LBWe’ve talked over the last year or so about the impact that companies have on society. It strikes me that if you look at the biggest holdings in the Scottish Mortgage portfolio, the societal impact of companies such as Moderna, Tesla, Illumina, ASML and Ginkgo Bioworks has been profound. This is different from what has been usual over the last 20 years. Is it because the nature of the companies that we’re choosing to own is a bit different? It feels there’s more correlation in terms of our holdings than in the past. If a company is an outlier in investment terms, it’s increasingly often an outlier in impact terms.

JAIt’s more a reflection of the fact that the revolutions that are happening in the world are moving into areas where these companies have that deeper impact. Were there similar opportunities available 20 years ago? Yes, of course. But I think the broad scale of societal impact in the portfolio now is something to be revelled in. Impact in a societal sense is just as much, if not more, concentrated in a small number of companies. We should be inordinately pleased that we can claim such a beneficial impact. We should be shouting that from the rooftops rather than obsessing over detailed sums, which are anyway often misleading. The margins of error on calculation and on our level of understanding of whether a company is societally good or bad are so great that with the vast majority of companies I don’t think we can ever have confidence as to whether we’re helping or not helping.

LBI suppose what adds a complication beyond our ability to judge is the sheer subjectivity of any judgment.

JAYes, which is dressed up in calculations that are so doubtful when you look at them one by one. Subjective is the word – it’s mock-science, to my mind.

Being reasonable is an awful thing to be!

LBWhat do you feel have been your own biggest leaps in methodology? Are there any commonalities in terms of what sparked them?

JAThat’s an interesting one. I think our efforts to learn from the smartest people in the world, both in academia and in companies, were profoundly important. We absolutely need to keep that external focus. I think there is a whole lot more to do to engage with the world, and we know enough about who to talk to now.

And you need a degree of humility – not a characteristic of the fund management industry – to admit that we are very mediocre in our understanding, and we can learn. It’s also about being humble about our ability to predict the future.

LBWhat are the characteristics of the leaders who have most impressed you? Are there commonalities that they share?

JAI think there absolutely are. The one above all is independence of mind, which is critical for the process of reinvention and the process of company creation. I hope, in our own small way, that that’s what we also demonstrate when we think about whether the nostrums surrounding investment management are really correct. We then test that against what we get back from the likes of academia and other companies.

You’re wanting to see that independence of mind expressed in the nature of the company and the way it conducts itself – the culture of that company. To me, the strongest example of this was Amazon. Because Jeff Bezos, as you well know, is very happy to try to articulate that independence both to the outside world and to the company.

The notion of experimentation has been deeply important at Amazon, hence the ‘two-pizza principle’ [forming teams small enough to be fed by two large pizzas] based on the notion that you shouldn’t have too much communication, that teams should have absolute autonomy and leaders of projects should cover all the aspects. I think everything else follows from that independence of mind and the deep intelligence and the reflection on the world that it stems from. What about you?

LBI think independence of mind and the ability to go against the crowd is one principle. Another is a desire to keep learning from a diverse range of sources. We see that in some of the most inspirational founders that we speak to. They’re permanently trying to be plugged into what other people are doing and what they’re thinking. They don’t want to take those ideas wholesale necessarily, but they do want to see what principles, what trends they can ascertain from that. And I think that’s been quite important to a number of our founders.

JAAnd I think that’s linked, isn’t it, with a permanent state of dissatisfaction. I’m not sure that any of the people that we’re talking to ever say, “Oh, we’ve solved this.” There’s a constant search for more. That’s why many of these people are so disconcerting to the outside world and why they’ll remain so critically important.