苏格兰抵押投资信托 — 经理人回顾，截至2019年3月31日年报（詹姆斯·安德森与汤姆·斯莱特）

Managers’ Review It’s been a year ruled by sound and fury. From trade wars to Brexit political arguments were rife and unedifying. By October it was thought that the US economy was overheating and that interest rates would therefore have to rise substantially. But by our March year end bond yields had reversed course and fallen sufficiently to provoke forecasts of imminent recession. Global stock markets have been equally emotional. We’ve moved from the worst December falls in American equity markets since 1931 to their best quarterly performance for a decade. Not to be outdone Chinese stocks have risen by almost a quarter in 2019, yet this leaves the Shanghai market below its level of twelve months ago. It’s far from evident that these levels of volatility signify much of significance. It may be that the last few months have provided a useful reminder that it’s become hard for the western world to generate high and sustained nominal growth, let alone substantial inflation, in an era of technology driven deflation, economic inequality and demographic decay. It may be that signs of a revival in animal spirits in China hints that American antagonism will not reverse the return to Asian leadership that so preoccupies Washington. But these are but reminders of what has long appeared probable.

The Evolution of the Scottish Mortgage Portfolio On the surface there has been little change in Scottish Mortgage’s portfolio in the last twelve months. Of the top thirty holdings last year we still own 28. The two that we have sold, BASF and Svenska Handelsbanken, have been replaced because the opportunities opening up to us in the unquoted realm seem to offer more compelling growth potential rather than out of disappointment at their conduct of affairs. Amongst our top ten quoted stocks, which exert a crucial influence given that they sum to just over half of the assets, the sole change has been the rise of Netflix at the cost of Baidu. The former has been driven by stock outperformance whilst we have reduced Baidu as, for once, we share the market concern that the group is squandering broader opportunities in the Chinese internet in the desire for unduly tight managerial controls.

But beneath the apparent stability there has been a step change in our commitment to venture capital which we believe matters considerably for our future prospects, deeply differentiates Scottish Mortgage from its peers and requires nuanced explanation. Given that the percentage of assets in our unquoted equities has only increased from 15% to 17% and the attention we paid to reporting on these assets at the half-year stage it may appear that we are becoming excessively focussed on this segment but this underestimates its structural importance. Currently 34% of the assets started out as investments in private companies, even if some of those are now public. Up until now we have been reluctant to stress this area too heavily because our own education in venture capital was incomplete. We have now become more convinced in our abilities and advantages in this comparatively new and different area. In fact we’re thrilled with what we have learnt. Our opportunity is greater than we initially perceived. It’s our responsibility to take advantage of this favourable combination of circumstances. The starting point is that we have outstanding access to unquoted companies across the world. This may be illustrated by some of our new purchases in the last twelve months. The only unquoted holding amongst our top ten overall is Ant Financial, which amongst other attributes runs both Alipay, the largest global mobile payments platform and Yu’e Bao, the world’s largest money market fund. Our access came about through our faithful ownership of Ant’s parent Alibaba from the days it too was a private company. Similarly our recent purchase of a holding in Space X would have been unimaginable without our patient, controversial and unashamed backing of Tesla. Perhaps we need to move on from pride in being a rare truly global fund to embarrassment at being so limited in our ambitions. But lest it be thought that our unquoted portfolio is solely a reflection of our committed ownership of public companies it may be worth citing another area where we have substantially increased our exposure in the past year. This is the crossover between genomics and large scale, but individual, data observation in healthcare. Although Flatiron, one of our initial forays in this direction, was purchased by Roche in early 2018 its continued progress illustrates the reality of clinical utility in this area. We’ve added holdings in Tempus and Recursion that are emblematic of accelerated efforts and medical hope through such techniques. Our purpose in unquoted equities goes further than obtaining access to a new universe of opportunity for our shareholders. We are doing so at a cost that is structurally lower than that available elsewhere. We ask no higher fee for incorporating unquoted equities. The overall ongoing charges of 0.37% compares with a still normal level of 2% and 20% carried interest for venture capital funds. This matters to us and we hope to our shareholders.

Netflix has nearly 150m subscribers, with over half of these outside the US.

Our appeal to companies is equally distinctive. Most venture capitalists demand an exit as their funds near the end of their ten year life. In turn many companies seek to go public to satisfy this need for liquidity. We feel no need to encourage companies to move to an Initial Public Offering prematurely. But if an IPO is the eventual outcome then our preference, subject to business progress, is to buy more shares at that stage both for Scottish Mortgage and frequently for other portfolios managed by Baillie Gifford that are unable to make investments until a company is public.

What is critical now is to analyse whether this pattern of the last decade is just a chance occurrence, defying eternal verities, or whether it is the outcome of structural changes in corporate affairs and economic structures that find their natural echo in stock markets. We contend that it is the latter. There were two central reasons why the broad genre of value investing outperformed growth in the past. The first was that for all the vicissitudes of cycles and products over time average companies survived and endured. Now they die. Their demise is usually at the hands of technologically driven business models.

Alipay has 600m monthly active users.

This willingness to own companies regardless of their status as private for the long term, on the verge of an IPO, or as fully fledged public companies is a cornerstone of our policy. We believe it is a damaging narrowing of the necessarily limited opportunity set of potentially great growth stocks to confine ourselves to public companies at a time when the necessity to be quoted is unclear and the pressures of being so all too evident. As owners we are structurally neutral as to the best status whilst listening to the arguments for each unique company in which we invest. Whatever the conclusion we try to bring attitudes more typical of venture capitalism to all our investments. We believe that patient support – especially at the inevitable moments of struggle – is better than hurried exit. We believe that our success in quoted as well as unquoted stocks will continue to be dependent on a small number of extreme winners rather than a parade of the slightly above average.

Growth Investing Whilst we aspire to special, potentially unique, advantages in unquoted equities our approach to all our investing is consistent and in line with our Core Beliefs as set out once again on page 15. Plainly these contentions are based on our convictions around extreme outcomes and the attractions of high growth investing. It has been an investment commonplace for long decades that growth investing is a chimera. Value investing, especially as articulated by Warren Buffett, has risen to the status of the one true faith. Yet over the last decade growth indices have substantially outperformed their value counterparts. Moreover this trend has principally been driven by the shares of a cohort of major internet platforms that have defied all predictions of doom based on the strains of growth from an already large base or assumptions of a short competitive advantage period.

Secondly, growing companies did not scale satisfactorily. Returns tended to decline as complexity and asset bases grew in search of increasingly marginal customers. Compounding growth was therefore both hard and dragged down profitability. But in increasing portions of the modern economy this is no longer true. Instead the pattern of increasing returns to scale is more and more evident. Ultimately this isn’t hard to understand: for a software or internet company the initial product introduction is expensive and success uncertain but at scale each new customer is often close to costless after adoption and profitability surges. Gaining new customers frequently becomes easier as network effects prevail. In retrospect investors ought to have grasped the dawning of a new age as long as thirty years ago. This model was pioneered at ever increasing scale by Microsoft. It’s yet to be destroyed there despite substantial managerial missteps or the extraordinary size of the company. Far from increasing returns to scale being a temporary and limited facet of the economic conditions of today we suspect that such characteristics will persist and subsume ever increasing areas of the global economy. Healthcare and transportation may be the next sectors to be transformed in this manner as their own forms of data and software emerge. Traditional models will find it hard to cope with such revolutions. More and more of the traditional giants of the world economy and the value universe will therefore fail. They will not revert to the mean as has been the assumption.

Future Prospects It’s traditional to end reports such as this with a list of events and conundrums that preoccupy headline writers and then to move on to a prediction as to the market response over the next year. We shouldn’t be tempted by either habit. There will always be difficulties and uncertainties. Mostly they pass. They are then succeeded by others that appear equally worthy of fascinated minute by minute attention. But it is the underlying rhythm of scientific advance, of increased knowledge on a global scale and the associated development of great business models that ultimately powers sustainable increases in the prices of special equities. This process requires decades. In any twelve month period news flow and emotions will contribute to unknowable outcomes. If we are to be of use to our shareholders then we need to concentrate on the beneficial trends of decades not the specifics of the current preoccupations of the moment. James Anderson

A Complexified World

Shanghai is one of the world’s leading mega cities.

There was a media frenzy earlier this year when Amazon CEO Jeff Bezos published details of an attempt to blackmail him with stolen photographs. In a blog post, Bezos suggested that his ownership of the Washington Post was a ‘complexifier’ leading one critic to suggest he should have engaged an editor and that the word ‘complicating’ would have done. It is dangerous to criticise a genius and it seems to me that Bezos’ quixotic use of language was justified. The situation was not complicated. It was complex. I would like to explain the distinction and why it matters. Complex systems are transforming our world and driving a process of accelerating change with big implications for investors. Companies that have relied on established market structures to extract high prices from their customers (for example broadcasters, consumer goods or oil companies) are likely to face great challenges. Those that earn their revenues by facilitating connections and taking a share of the value they create for their customers are in a much stronger position. Complicated problems are hard to solve but often can be addressed with formulae, rules and processes. Many of today’s hierarchical institutions were created to solve complicated problems. However, approaches that work for complicated problems don’t work well with complex problems. Complex problems arise when a system has many connected parts which interact with one another. Our climate is a complex system, as is the human brain or our transportation network. Such systems involve too many unknowns and too many interrelated factors to be reduced to rules and processes. They behave in ways that are hard to predict even when you know a great deal about the individual components. Connections dramatically change the way the individual components of a network behave.

The explosion in the number of connected devices is leading to fundamental change in our society and our economy. This deeper level of connection makes us all part of a complex network. It is changing the way we behave as citizens, as consumers and as workers. Connection creates big new opportunities and we have seen phenomenal growth in social networks, ride-sharing companies and cloud computing. At the same time, it creates threats that our society is ill-equipped to counter from hacking and information theft through to terrorist infrastructure. The shape of our global network is evolving rapidly and there is still much that is unknown but those that understand and can influence this development are likely to possess significant advantage. The networks we interact with on a daily basis accelerate the pace of our lives. In a networked world, having the closest and fastest connections is valuable. This creates a self-reinforcing drive towards ever greater speed. Our machines are always on. Ideas spread almost instantly and new movements grow and evolve in unexpected ways. The friction that has historically slowed our access to information is being removed and we are increasingly intolerant of barriers to speed. Consequently, our political and military institutions are creaking. They are failing to address the implications of vast connected networks for nationalism and geopolitics, inequality of every kind, terrorism or climate change. Many of the large corporate institutions in which billions of pounds of savings are invested face similar threats as they fail to comprehend the rapidly changing expectations of their users and partners.

It is not just humans who are being connected. Billions of sensors are giving our computer networks an innate awareness of what is going on in the world around them. The power of connected computers has ushered in a new era of Artificial Intelligence, allowing machines to turn awareness into actionable insights. The applications of such collective intelligence will have profound effects on our society and we must absorb these changes at ever faster speeds. The next ten years will bring self-driving cars. Drones will take on many roles now carried out by human workers. Computational biology will transform our understanding of disease. We will synthesise biology and use it in our manufacturing processes. More work must be done to understand the consequences of this progress and also to limit the less appealing aspects. An inherent feature of a complex system is that there is no permanent equilibrium. The state of the system is constantly changing. We can no longer expect that market structures will endure indefinitely, that corporate advantages will persist or that consumers will behave in a predictable way. Instead a position of advantage within the network becomes a more important source of competitive edge, as does the institutional ability to adapt quickly to a changing environment. We are often asked about Scottish Mortgage’s exposure to Technology or to Emerging Markets (both unhelpful groupings advanced by the manufacturers of stock market indices). When 1.4bn Chinese consumers and entrepreneurs are milliseconds away it surely makes little sense to segregate the world by geography? Similarly, networks affect every company, not just the subset that are deemed to be ‘Technology Companies’. It is far more relevant to distinguish between those that have understood network power and those that have not.

Launch of one of Zipline’s drones delivering blood supplies in rural Rwanda.

useful services. We think the potential of several such companies is still only dimly perceived and a long way from being reflected in valuations. Regulators across the globe are scrambling to understand but until they grasp the network-centric nature of these companies’ market position they will find it hard to exert influence. There are many other implications of a networked society and we spend much of our time trying to understand the entrepreneurs and businesses that are shaping its development. Our holdings in Airbnb and Lyft are demonstrating the power of this model in reconstructing the accommodation and transportation markets. So too are Delivery Hero, Grubhub and Meituan in the food industry. Transferwise matches buyers and sellers of currency through its network avoiding the need for money to cross borders and incur the associated fees. Most of the new successful businesses we look at are harnessing network effects to create new markets or disrupt existing industries. It isn’t necessary to be a young company to encounter and exploit the opportunities presented by a connected world. When established businesses have leadership and vision the results they can achieve are remarkable. Kering is a fine example. Its Gucci subsidiary has doubled sales in the past two years through careful attention to its brand and the way it uses technology to build deep connections with its customers. Conversely, for those that get it wrong, the consequences are immediate and can be hugely damaging.

Inside Tencent’s WeChat Open Class Conference.

It is obvious that a small handful of internet companies have understood the power of networks. Microsoft, Alphabet and Facebook between them have bought and built twelve products with more than a billion users. Tencent and Alibaba are not far behind. These products become more appealing to each user as the total number of users grows. This makes rival services unlikely. The companies have become more profitable and often grown faster as they have got bigger. They are gatekeepers to networks which allows them to build any number of profitable and

The impact of greater complexity and the power of networks is all around us. Mr Bezos understood this long before most people. As investors, we must simultaneously absorb and understand the implications of accelerating connectedness whilst stepping back from it to seek space for reflection. We can see the malign consequences of ever-faster networks in our stock markets and the shortening time-horizons this inflicts on corporate management teams. Our aim remains patiently to support the companies we think can navigate this complex world over the long term. Tom Slater

Managers’ Core 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. — We are long term in our investment decisions. It is only over periods of at least five years that the competitive advantages and managerial excellence of companies become apparent. It is these characteristics that we want to identify and support. We own companies rather than rent shares. We do not regard ourselves as experts in forecasting the oscillations of economies or the mood swings of markets. Indeed we think that it is hard to excel in such areas as this is where so many market participants focus and where so little of the value of companies lies. Equally Baillie Gifford is more likely to possess competitive advantages for the good of shareholders when it adopts a long-term perspective. We are a 111 year old Scottish partnership. We think about our own business over decades not quarters. Such stability may not be exciting but it does encourage patience in this most impatient of industries. We only judge our investment performance over five year plus time horizons. In truth it takes at least a decade to provide adequate evidence of investment skill. — 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. — 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 visions that are barely noticed by the markets. There is more in the investment world than the Financial Times or Wall Street Journal describe.

— 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 the edges of indices. We think this produces better investment results and it certainly makes us more committed shareholders in companies. We suspect that selecting stocks on the basis of the past (their current market capitalisation) is a policy designed to protect the security of tenure of asset managers rather than to build the wealth of shareholders. Companies that are large and established tend to be internally complacent and inflexible. They are often vulnerable to assault by more ambitious and vibrant newcomers. — We are Growth stock investors. Such has been the preference for Value and the search to arbitrage away minor rating differentials that investors find it very hard to acknowledge the extraordinary growth rates and returns that can be found today. The growth that we are particularly interested in is of an explosive nature and often requires minimal fixed assets or indeed capital. We think of it as ‘Growth at Unreasonable Prices’ rather than the traditional discipline of ‘Growth at a Reasonable Price’. We need to be willing to pay high multiples of immediate earnings because the scale of future potential 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 believe that it is our first duty to shareholders to limit fees. Both the investment management fee (0.30% on the first £4 billion of assets, and 0.25% thereafter – please see page 28) and ongoing charges ratio (0.37% as at 31 March 2019) 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 0.37% 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 4% 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.

Evolution We first set out our Core Beliefs in the Annual Report of 2013 and reviewed the statement of these in 2018 to ensure that it still accurately captured how we approach investment. The original still stands, but inevitably our investment philosophy has evolved and no doubt will continue to do so. We have therefore added the following: — We are optimists. In a world where limiting volatility and avoiding downside is the dominant investor mentality, we focus unashamedly on the drivers and implications of corporate success. Limiting volatility can make sense for an overall investment portfolio but we doubt the benefits of using equities to meet this objective. The asymmetric payoff structure (you can make far more if you’re right about a stock than you can lose if you’re wrong) is the fundamental attraction of investing in equity markets. Whilst we have long believed in the impact of a small number of exceptional companies, even we are surprised by how narrowly returns have been shown to extend within the market. Our own research demonstrates that in the past thirty years approximately five per cent. of stocks have returned at least five-fold in any five-year period. Over longer time horizons, this power law is even more dramatic. Academic work on the past ninety years of US data shows that over half of the excess return from equities came from just 90 companies. Investors enjoy little (if any) reward for taking the risk of owning the median stock in the market. Instead it is the outsized impact of a small number of exceptional companies that dominate the payoff structure.

— In this context we have defined our core task more narrowly: to identify companies that have sufficient opportunity to deliver such outlying returns and to own them for long enough without interference so that the return accrues to our shareholders. We previously noted our investment time horizon to be at least five years. In practice, for businesses where our conviction has remained steadfast and our difference from the market view is clear, we have held the shares for far longer. Today nine of our top ten listed holdings have been held for more than five years and three have been held for more than ten. — Whilst listed equity markets currently remain the principle focus of our investments, the nature of capital markets has changed and our search for outliers has moved with it. Some of our most successful investee companies have benefited from (and indeed created) new growth models with dramatically lower financing requirements than has been the case historically. Access to online distribution has grown the addressable market for breakthrough businesses by an order of magnitude. The ability to harness third party infrastructure has drastically reduced the capital intensity of growth. This has made new companies less dependent on external financing. As a consequence, their boardrooms are not dominated by early financial investors looking to realise their gains and these companies are remaining private longer. They are being selective about their shareholders and they are reluctant to accept the burdens that accompany public status. — We are determined to own the most promising Growth companies in the world. To maintain our opportunity set we have expanded our operations in private markets. This has little impact on our investment process. Access to fluctuating daily quotations for our holdings is more often a distraction than an advantage for a fund with permanent capital. We are preoccupied with company fundamentals and increasingly indifferent to a company’s private or public status. As access to the most promising private companies is dependent on relationships and reputation our task becomes more important, as it is much harder for our shareholders to invest directly. Our scale and commitment to low costs allows us to do this without changing our fee structure. — As we make these investments we are providing more primary capital to businesses and directly funding investment in future economic growth. The role of public equity markets in providing such investment capital has diminished. Declining holding periods and frenzied speculation around newsflow is the norm. More insidiously, the demand for immediate returns pressures companies to pay out their cashflows to shareholders rather than investing in their future. Professional management teams incentivised to maximise share prices have been happy to oblige, resulting in a declining proportion of cash flow being devoted to research and development or capital expenditure across the market. Such investments are needed more than ever in a world that is experiencing rapid change. Our holdings in public markets are heavily focused on companies whose ownership or management structure allows them to ignore such demands.

— Whilst we expressed our scepticism of the value of routine information in our original document, we didn’t articulate where more useful counsel might lie or suggest that we ought to play our part in ensuring its existence. Some of you may have attended the book festivals we sponsor or read some of the shortlisted titles for the Baillie Gifford Prize for Non-Fiction. We have invested in supporting interesting authors and sought to enhance our investment thinking with their insight. We have built relationships with academics and universities. We are funding research which we hope will inform our long run thinking on companies. At the same time, our time horizon is facilitating a different type of relationship with the management teams with whom we invest. They find little of value or interest in the endless cycle of quarterly updates. They delight in having less frequent and more in-depth discussion about the longer-term development of their business. Getting to listen to the entrepreneurs and visionaries that have built some of these outstandingly successful franchises is a hugely valuable input to our investment approach. — In turn, this is challenging us to re-evaluate our long-held belief that there is no opportunity for informational advantage in markets. Such inputs seem largely neglected in a world where ‘colour on the quarter’s numbers’ is the main preoccupation of so-called investors. For instance, we first invested in Alibaba back in 2012 as a private company. Through our patient ownership and ongoing support, we have earned the opportunity to speak with the company’s senior management. We believe the growth of the Chinese consumer economy is a transformational force in the global economy and there is no one better placed to help us understand its implications. — Dialogue with management is a valuable input but the relationship extends in both directions. The investment management industry has ceded much of its role in the governance of companies to the vested interests of activist investors. We must do better. Ensuring strong governance and engaging with our holdings on matters of substance is our responsibility. More than that, it is essential if we are to be seen as attractive shareholders by our investee companies and if we are to maximise the returns we can generate on your behalf. Tom Slater and James Anderson Joint Portfolio Managers