苏格兰抵押投资信托 — 经理人回顾，截至2017年3月31日年报（詹姆斯·安德森与汤姆·斯莱特）

Managers’ Review Our Aims Every year we describe our investment process and portfolio. But we have rarely addressed our underlying objectives and purpose. This is an attempt to rectify this omission. It may seem self-evident that our objective is to provide an attractive total return after costs for our investors. But this is far less a strategy than a desirable outcome. We have an investment process (described on page 17). Yet this is more about the method than the objective. Ultimately we endeavour to generate returns for savers and shareholders by helping to build and sustain excellent businesses over long periods. We prefer to focus on this task than on the daily gyrations of markets. We aim to support companies that contribute to productive innovation and that will eventually prove to possess deep competitive moats. Very often this means that the companies we back are addressing hard problems. We welcome this. It is in solving deep challenges that the greatest opportunities and rewards lie. Naturally this requires determination and unusual skills on the part of these companies. But over the course of time – often measured in decades – such unusual enterprises can generate abnormal profits and unusually high shareholder returns. So our objective is to help in the creation and improvement of such useful enterprises. This may seem an oblique approach to generating shareholder returns. But so be it. Indeed the more that we can contribute to business stewardship, the better returns for shareholders are likely to be and the more we can play a constructive role in the economic system. If, in contrast, we merely see investment management as speculating – or rather guessing – which stock, sector or geography will give the best returns over the next year then we neither deserve high returns nor are likely to obtain them over anything other than carefully defined short periods. Capital allocation is too serious a matter to be hostage to the bonuses and impatience of fund managers.

Risk In turn, our purpose translates into a quite different definition of and attitude to risk than that inculcated by modern finance theory. Its precepts have been taken up with alacrity by those who run the great majority of today’s investment management companies as businesses in themselves. We do not accept that risk resides in owning a portfolio that is different from the index or more volatile than the index. Risk is the permanent destruction of capital. The threat of such destruction is less predictable than formulas allow and is frequently unrelated to volatility. It may be that volatility is an essential safety valve. Certainly companies which are run to produce the regular pay-outs that tend to produce low share price volatility frequently endanger their long-term prospects. This means that volatility is not simply a bad synonym for risk but that low volatility frequently translates into high business risk. Or put simply that low volatility is a warning sign. Yet a still more important issue lurks. We believe that we do nothing more important than taking and embracing risk even when we thereby expose ourselves to the possibility of permanent loss of capital. If we join the multitude and merely place our funds in assets that are already proven and currently solidly profitable, let alone in government bonds with minimal or negative yields, it is hard to see how our shareholders can expect to profit beyond the norm or – at the risk of pomposity – how our economy and

Mike George, Vice President of Alexa, Echo and Appstore. Amazon is developing wider applications for Alexa, its intelligent personal assistant technology. The Alexa Voice Service adds intelligent voice control to any connected product that has a microphone and speaker.

society will move forward. The current obsession with pursuing safety, matching liabilities and targeting guaranteed returns is a profound systemic ill. It undermines entrepreneurial wealth creation.

Portfolio Concentration We are often told that Scottish Mortgage is unduly concentrated. We disagree. We think that the shape of the portfolio is a rational response to the potential upside of a limited number of stocks, to an unhealthy preoccupation with individual stock performance and to an excessive preference for diversification in institutional portfolios. It is the results of the overall portfolio that accrue to the owners. In this viewpoint we follow Jeff Bezos. Our long-standing ownership of Amazon has been good for investors but also comes with investing lessons that we need to assimilate. One of the best and bluntest pieces of advice comes from the 2015 Letter to Shareholders which stressed the virtues of risk-taking: ‘Given a ten percent chance of a 100 times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten.’ Naturally, we try to tilt the odds further in our favour (as with more prowess does Mr Bezos). But the central point remains that we quibble with the conventional wisdom that losing money in individual stocks is our prime foe. Instead we question the prevalence of truncated return assumptions and believe it makes sense to consider diversification at the strategic portfolio level. Losing money – failing as it is conventionally known – in individual stocks is a necessary and important part of educated risk-taking. This allows us to maximise our returns by owning stocks with the possibility of almost unlimited returns. For sure we have a reasonably concentrated portfolio by most standards. This is driven by two additional but complementary perspectives. The first is that we are acutely aware that there are few if any investors who are solely exposed to Scottish Mortgage’s fortunes. We hope that we bring certain attributes to the aggregate investment portfolios of individuals and their intermediaries but few have the concentrated exposure to Scottish Mortgage that the Managers themselves enjoy. What is often seen by commentators as heavy exposure to individual companies through the lens of Scottish Mortgage alone therefore looks more like the bare minimum to allow these same stocks to have an impact on the overall returns experienced by diversified investors. We think over-diversification is a far more prevalent and insidious threat than excessive concentration in today’s investment world. Secondly, we do not believe that there are many stocks that offer the possibility of truly superior long-term returns. Long-term equity performance has a much more skewed distribution than is commonly perceived. It is not normally distributed. Therefore our prime task lies in giving our shareholders the best possible opportunity to capture the extreme winners. For example 33% of the wealth created in the US equity markets between 1926–2015 came from just 30 companies out of a total of 26,000 quoted stocks. This return pattern is true for most successful investors too: however they invest, wherever they invest, whether they embrace it or not, results are highly asymmetric and top-heavy. Moreover we believe that this pattern of returns reflects company characteristics more than random chance (though the latter

Rolls-Royce Trent 900 turbofan engine fitted to the Airbus A380, the world’s largest passenger airliner.

should not be dismissed). Currently exponential growth, huge addressable markets, frequently low capital requirements and, as ever, an enduring competitive moat are the decisive ingredients that give the opportunity for dramatic returns. Not many companies possess this combination.

Unquoted Companies Given the relative paucity of outstanding companies, we have to do our best to widen the funnel of opportunity. We increasingly see unquoted companies as an essential part of this process. To put it bluntly: we fear that equity markets are failing in their primary responsibility of encouraging and enabling future entrepreneurial success. The reasons for this are many, well-known and hard to rank but all sad. What we can observe is that companies are finding it easier to build their businesses, raise capital and invest without excessive fear away from early exposure to capital markets. We are finding that the bulk of our emergent opportunities lie in unquoted companies and expect this to remain so for the foreseeable future.

Whilst the companies themselves enjoy a degree of isolation from the detrimental short term focused pressures of the public markets, as investors holding such assets as part of our portfolio, we are not so immune. We would caution that the accepted conventions for pricing unquoted equities frequently fail to capture underlying potential value creation. They tend to stress potentially misleading comparisons with their public competitors and emphasise the general financial market mood of the moment, over the specifics of corporate progress. Moreover any spot price underplays the uncertainties inherent in such investments. In combination, these characteristics can lead to either undue pessimism or excessive euphoria. We will try to indicate our perceptions of such emotions when they seem extreme. At present we would confine ourselves to saying that we do not regard unquoted valuations as generous in absolute terms or full, relative to quoted companies.

Supporting Companies and Entrepreneurs But the problematic nature of quoted life requires us to do more than navigate around public markets. Although it is well-beyond our abilities and significance to reform the system, we sincerely believe that we can have an important role in supporting and strengthening the ability of companies in which we invest to withstand the pressures of capital markets. We should be plain that in many cases we are merely willing accomplices of founder owners who need little from us in the way of capital, advice or patience. But at times, particularly critical times, we can be of help. The usually large scale and long-term nature of our holdings matters in this context. These aren’t postures. But we don’t always succeed. Sadly the UK offers all too many occasions when constructive activism is required. We have worked closely but quietly with the new management at Rolls-Royce to support their determined efforts at corporate renewal. Progress is encouraging but will require many years. In contrast, we deeply regret that we had to sell our shares in ARM to SoftBank and only wish that ARM’s Board, management and shareholders could have summoned the ambition, optimism and patience required to nurture Britain’s best – perhaps only – chance of building a global technology giant. We should be clear that be in the UK or internationally we see corporate stewardship as not just a rightful component of our task but as perhaps the essential reinforcing link in our investment philosophy. If we can prove in harsh times that we support teams trying to build great businesses and battling the forces of quarterly fund manager capitalism then these companies will hopefully be strengthened. They will almost certainly want us as shareholders and in turn help us with their time and insights. In turn other companies, quoted or unquoted, appear to want to talk to us rather more than is the norm. Reputation matters. James Anderson

Portfolio Update The Growing Power of the Platforms In recent times we have observed the increasing power and dominance of a small number of companies from the west coast of the United States and the east coast of China. This success has important implications for the companies involved but also for the multitudes that compete with and rely upon the services they offer. We believe this is a foretaste of what is to come and our holdings in the companies involved continue to represent a significant proportion of our assets. The importance of scale, mobile distribution and machine learning is increasing. There are five and a half billion people over the age of 14 alive today. There are five billion mobile handsets in circulation. This level of usage has created an addressable market far larger than anything that has gone before. The past few years have been about the build out of the mobile ecosystem but that phase is finishing. There is no longer much discussion of wars between the platforms, the technology is increasingly commoditised and the big winners are clear. The companies are now experimenting with what they can build. As they have refined their data gathering and machine learning capabilities through search, or social curation or cloud hosting or retail, they have been building the capability to redefine most other areas of economic endeavour. In last year’s report we questioned whether the major and accelerating improvements in core technologies would lead to progress in healthcare, energy and transportation. A year on, the strongest prospects for delivering such an outcome are with the big network companies themselves rather than established incumbents developing or adopting the relevant skills. In the automotive industry, the past twelve months have seen Tesla make encouraging progress in its bid to electrify passenger cars, but it is the technologies underlying vehicle autonomy that appear to have made the most dramatic gains. If Tesla, Google and Baidu use their data and machine learning capabilities to push the market into full autonomy, the ramifications for the traditional automotive companies are apparent. However, it is the second order implications that are truly enormous. Whither oil demand? What happens to ownership of the vehicle fleet? How would it be insured? What would happen to congestion? How would this affect the geography of our cities and the value of the real estate? What will happen to the logistics industry? These questions arise from just one application of Artificial Intelligence.

Zalando’s compelling online platform has been successful in attracting brands.

The big network companies are not restricting the deployment of their technology to the auto industry. Amazon and Netflix will provide 16% of professional US television production budgets this year. The ‘Internet’ is the third largest source of high budget television content. Online networks are taking over what we have historically conceived of as offline industries and they are providing the associated products in a way that is more personalised and convenient for the consumer. The conception of Amazon as a retailer is increasingly out-dated. Its devices wake us in the morning providing music and sharing news and weather information, its web services underpin many of the online systems we use at work and home, its delivery services provide our general goods and increasingly our groceries and its Kindle devices and streaming services provide our evening entertainment. Its reach is expanding rapidly and there remains a paucity of coherent competitive offerings.

Inditex has used its supply chain expertise to build a strong competitive advantage.

Beyond the big networks and aspirants to similarly widespread dominance (Tesla or Illumina), it is those businesses that have understood the implications of the new order and refined their offer accordingly that seem most likely to thrive. Rather than competing directly for incremental e-commerce transactions or online advertisements, they offer customers and suppliers something different. Online retailer, Zalando offers brands the opportunity to tell their story in a way that isn’t possible on other platforms. Inditex is using its supply chain expertise and store network to provide a degree of convenience and differentiation that is hard for others to replicate. Similarly Ctrip in travel and Spotify in music streaming. We think acknowledgement and adaptation is a far more promising path to value creation than incumbents labouring to minimise the impact of the changing competitive landscape.

Since October 2016, all cars manufactured by Tesla have been equipped with the hardware to support full autonomous driving capability.

As the network companies have become a larger part of the portfolio, we have continued to revisit their investment cases and ask whether future potential has been more fully reflected in share prices. Thus far, we have been able to answer this question with an emphatic ‘no’. Our top ten holdings are largely unchanged but we are cognisant that corporate success will bring its own challenges. There have not been many instances where investors have made significant returns in companies with the market capitalisations that this group has now achieved. If we are to make money from here it will be on the basis of redefining what it means to be a ‘large’ company. Given their scale and influence, it is important that these companies are good corporate citizens. The technologies they are deploying may lead to significant dislocation in the labour market over the coming years and they must avoid being seen as the villains in a period of turbulence and change.

Particularly in China Whilst the position of the American platform companies looks entrenched, the Chinese companies have a more fundamental role in the development of their domestic economy. Alibaba is the consumer economy in China and its fortunes are a proxy for the health of small and mid sized business. Singles Day is China’s equivalent of Cyber Monday, the biggest online shopping event of the year. On that day in 2016, Alibaba took over $18bn of orders through its website. On Cyber Monday 2016, all US websites combined took a total of $3bn of orders. China rules the e-commerce world by a wide margin.

But there is something else going on here. Alibaba is one of the largest online media platforms in China. It owns Weibo, one of the largest social networking sites. It owns Youku Tudou which is one of the largest online video sites. It delivers ‘top of the funnel’ advertising and promotion. It can analyse consumer behaviour to predict demand. It is also expanding rapidly beyond traditional e-commerce. Its finance platform has 450 million customers and processes 300 million daily transactions. It is using its reputation and reach to grow the business in areas such as wealth management and insurance. This is a real example of where a ‘fintech’ company might plausibly bypass an existing financial system by improving both the customer experience and the product. Combining social, advertising, transaction, payment, delivery and banking data, Alibaba has a data set which is the envy of the online world. This allows it to study and train its machine learning algorithms on consumer behaviour right through from demand generation to completed transactions based on real identity. It operates in a regulatory regime which allows it to use this data to great effect. Credit scoring and therefore bank lending look to be far more accurate than can be achieved in the West.

Progress in Healthcare Over the next decade, healthcare may turn out to be the most important example of the online platforms’ participation in the broader economy. A local example of this comes from the NHS’s partnership with Google’s parent, Alphabet. This venture is applying machine learning to data from a million patients’ eye scans with the aim of achieving earlier detection and treatment of common eye diseases. Over the past ten years we have witnessed remarkable progress in the field of immuno-oncology (therapies that harness the body’s immune system to fight cancer). New drugs have been developed, for example in the treatment of melanoma, which currently appear to be a functional cure for some of the patients that take them. That such treatments work for some patients and not others is driving a move away from a single ‘standard of care’ to a more tailored treatment approach based on an individual’s genetic profile. This has been facilitated by the rapidly declining cost of gene sequencing, driven by the progress at Illumina.

Grail epitomises some of the themes mentioned earlier with regard to unlisted companies; it is building its business, accessing a large pool of capital and investing against a long-term opportunity away from the gaze of public market investors. Having its management and finances scrutinised every quarter by those trying to predict short-term share price movements would likely be a serious distraction and an impediment to underlying progress. Access to a large pool of patient long-term capital ought to provide the company with a competitive advantage. Over the past few years we have allocated more of the Trust’s assets to therapeutic healthcare companies. We continued this year. New holdings included Unity Biotechnology (diseases of ageing), Intarcia Therapeutics (diabetes) and Denali Therapeutics (neurodegeneration). We do not expect these companies to operate the capital light business models we’ve seen amongst the large online networks. Instead, they are attempting the difficult and expensive task of researching novel therapies for big disease categories. The traditional funding model for such companies is to offer only as much capital as is required to meet the next development milestone for a new drug. Whilst this approach encourages a disciplined and frugal approach to business development it has the significant drawback of orienting a company towards prioritising short-term landmarks ahead of long-term development. We are interested to find out whether more substantive funding for these companies at an earlier stage of their existence will extend time horizons and increase the chances of success.

Concluding Comments

Installing a flow cell on an Illumina cluster station. Progress at Illumina has driven the rapidly declining cost of gene sequencing.

Illumina’s subsidiary, Grail, recently raised close to a billion dollars in a private round in which Scottish Mortgage participated. Grail is aiming to build a screening test for early stage cancer in asymptomatic individuals. To do this it will need to sequence the DNA of hundreds of thousands of people and learn from that information. This can only be done with access to data storage capability on a scale that few companies globally can provide. Human analysts cannot extract useful information from such datasets; advanced machine learning expertise is required. In this context, it is perhaps unsurprising that the CEO of Grail was formerly an engineer at Google. Nor was it a surprise to see that our co-investors included the likes of Amazon and Tencent.

The drive and vision of the founder-owners running many of our top holdings continually challenge us to reassess the scope of what they can achieve. As these network companies have grown large we have not become less demanding in our return expectations for them. We believe that they will have big new opportunities over the next decade. The enduring competitive moats that they have created seem to us to be under-appreciated in stock market and valuation terms. The entrepreneurs running newer businesses in healthcare and beyond must navigate this competitive landscape. It is exciting that we continue to find new holdings with leaders that are prepared to invest and take on the challenges this presents. The vagaries of stock markets will drive our returns over shorter time periods but it will be the success (or otherwise) of these individuals and the companies they are creating that determines the longer run outcome. For us, this is a source of great optimism. Tom Slater

The Managers’ Core Investment Beliefs Whilst fund managers claim to spend much of their careers assessing the competitive advantage of companies they are notoriously reluctant to perform any such analysis on themselves. The tendency is to cite recent performance as evidence of skill despite the luck, randomness and mean-reverting characteristics of most such data. If this does not suffice then attention turns to a discussion of the high educational qualifications, hard work and exotic remuneration packages that the fund manager enjoys. Sometimes the procedural details of the investment process are outlined with heavy emphasis on risk controls. Little attention is given to either the distinctiveness of the approach or the strategic advantages the manager might enjoy in order to make imitation improbable. We think we should try to do better than this.

visions that are barely noticed by the markets. There is more in the investment world than the Financial Times or Wall Street Journal describe.

— The investment management industry is ill-equipped to deal with the behavioural and emotional challenges inherent in today’s capital markets. Our time frame and ownership structure help us to fight these dangers. We are besieged by news, data and opinion. The bulk of this information is of little significance but it implores you to rapid and usually futile action. This can be particularly damaging at times of stress. Academic research argues that most individuals dislike financial losses twice as much as they take pleasure in gains. We fear that for fund managers this relationship is close to tenfold. Internal and external pressures make the avoidance of loss dominant. This is damaging in a portfolio context. We need to be willing to accept loss if there is an equal or greater chance of (almost) unlimited gain.

and returns can be so dramatic. On the stocks that flourish the valuation will have turned out to be derisorily low. On the others we will lose money.

— We are global in stock selection, asset allocation and attribution. We are active not passive – or far worse – index plus in stock selection. Holding sizes reflect the potential upside and its probability (or otherwise) rather than the combination of the market capitalisation and geographical location of the company and its headquarters. We do not have sufficient confidence in our top-down asset allocation skills to wish to override stock selection. We do not have enough confidence in our market timing abilities to wish to add or remove gearing at frequent intervals. We do, however, have strong conviction that our portfolio should be comparatively concentrated, and that it is of little use to shareholders to tinker around — We are long term in our investment the edges of indices. We think this produces decisions. It is only over periods of at better investment results and it certainly least five years that the competitive makes us more committed shareholders in advantages and managerial excellence companies. We suspect that selecting of companies become apparent. It stocks on the basis of the past (their current is these characteristics that we want market capitalisation) is a policy designed to to identify and support. We own protect the security of tenure of asset companies rather than rent shares. managers rather than to build the wealth of We do not regard ourselves as experts shareholders. Companies that are large and in forecasting the oscillations of established tend to be internally complacent economies or the mood swings of and inflexible. They are often vulnerable to markets. Indeed we think that it is hard We are growth investors. assault by more ambitious and vibrant to excel in such areas as this is where newcomers. so many market participants focus and where so little of the value of companies lies. Equally Baillie — We are Growth stock investors. Such has been the preference Gifford is more likely to possess competitive advantages for for Value and the search to arbitrage away minor rating the good of shareholders when it adopts a long term differentials that investors find it very hard to acknowledge the perspective. We are a 100 year old Scottish partnership. We extraordinary growth rates and returns that can be found think about our own business over decades not quarters. today. The growth that we are particularly interested in is of an Such stability may not be exciting but it does encourage explosive nature and often requires minimal fixed assets or patience in this most impatient of industries. We only judge indeed capital. We think of it as ‘Growth at Unreasonable our investment performance over five year plus time horizons. Prices’ rather than the traditional discipline of ‘Growth at a In truth it takes at least a decade to provide adequate Reasonable Price’. We need to be willing to pay high multiples evidence of investment skill. of immediate earnings because the scale of future potential

— We are very dubious about the value of routine information. We have little confidence in quarterly earnings and none in the views of investment banks. We try to screen out rather than incorporate their noise. In contrast we think that the world offers joyous opportunities to hear views, perspectives and

— We believe that it is our first duty to shareholders to limit fees. Both the investment management fee (0.30%, and with effect from 1 April 2017, 0.30% on the first £4 billion of assets, and 0.25% thereafter – please see page 27) and ongoing charges ratio (0.44% as at 31 March 2017) are low by comparative standards but at least adequate in absolute terms. We think that the malign impact of high fees is frequently underestimated. The difference between an ongoing charges ratio of 0.44% and one of 1.5% may not appear great but if the perspective is altered to think of costs as a percentage of expected annual returns then the contrast becomes obvious. If annual returns average 10% then this is the difference between removing approximately 5% or 15% of your returns each year. Nor do we believe in a performance fee. Usually it undermines investment performance. It increases pressure and narrows perspective.