苏格兰抵押投资信托 — 经理人回顾，截至2021年3月31日年报（詹姆斯·安德森与汤姆·斯莱特）

Managers’ Review We are focused on the long term. We do not believe that our returns in any given year convey much information about the strength or otherwise of our investment approach. Far longer periods are required to make such an assessment. We would caution against elation after the past twelve months just as we would counsel against misery following unprofitable years. To create long term value, we seek companies pursuing big opportunities and investing in projects with uncertain payoffs. Their shareholders will need to hold their nerve, take the long view and offer thoughtful ongoing support. We aim to be one of those shareholders. It is the accomplishments of the entrepreneurs running our holdings that drive underlying wealth creation. The past twelve months have offered some lessons for the long-term investor. The strength of stock markets in a period of such economic and social hardship highlights the tenuous link between economic predictions and share prices. Even if one believes that the time and effort spent predicting the outputs of a complex system such as the global economy are worthwhile, one ought in any case to be cautious about linking that to the prices for individual securities or for stock markets as a whole. Conversely, there are many quite predictable trends in communications, computation, machine learning, energy generation and storage, gene sequencing and synthetic biology that, as they compound over time, can have a huge impact. The vaccine developments that are allowing us to emerge from this crisis are just one example.

Nuro’s autonomous vehicles should drive down the cost of home delivery.

A small number of big winners have a dramatic impact on investment returns. It is not an anomaly that Tesla has contributed so much to the portfolio this year. It is a predictable consequence of the structure of stock market returns. You no longer need to inhabit the arcane world of investment to understand such results. Another example is all too familiar: the spread of Covid-19. The likelihood that you will suffer from the usual human ailments doesn’t change much from year to year. That is not true for a virus: the more people who have it, the more will get it. It scales in a non-linear way. It can quickly achieve a prevalence that is unfathomable to those outside the world of infectious disease. Most stock prices don’t change much from year to year either but the outliers grow with the same underlying maths as viral spread. Success often begets success and economic advantage accrues highly unequally. Most financial theorists ignore this inconvenient fact, but our approach is designed to capture the outsized impact of such companies. Changes that were already underway in our society have been accelerated by the impact of Covid-19. This makes it an especially challenging time for those that embrace the concept of mean reversion. We hope we can look forward to normality returning in the year ahead, but ‘normality’ does not mean that things will return to the way they were before the pandemic struck. Whilst the basic tenets of human nature are unchanging, the ways in which we work, consume and socialise are not. Lockdown restrictions over the past year have triggered a reappraisal of historical habits and rituals and many will be superseded. This creates opportunities for entrepreneurs; it changes supply chains and drives demand for new products and services. Scientists had been clear about the potential for a global pandemic for some time, but their warnings had not prompted the necessary preparation. The apathetic response to similar scientific warnings about climate change ought now to be questioned. While we hope that lessons will be learned by our institutions and governments, we can also take inspiration from the leadership that the corporate sector has shown in delivering us from Covid. As with vaccines, so with decarbonisation; the value that Tesla has created by addressing the need to decarbonise has forced a hostile investment community to reconsider its position. Tesla has become one of the world’s largest companies as its highly-rated products have continued to improve, along with its ability to manufacture them at scale. Other companies are now following, and history tells us that the more generous funding environment that has ensued is a prerequisite for further progress. Over the course of the year we sold around 80% of our Tesla shares as we strived to maintain appropriate diversification and to focus on the long term return potential. It remains a large holding. The head start it has on competitors leads us to believe that it could enjoy a long period of comparative advantage. If it can realise the potential of its AI capabilities and make its fleet largely autonomous, then this advantage will be greater still. We are focused on finding other companies that will build the post-carbon economy. This year we took a new holding in Northvolt, a company led by a former Tesla engineer, which is aiming to become Europe’s largest supplier of batteries for electric vehicles. It is investing heavily in the face of strong demand. We also took a holding in ChargePoint, which is one of the world’s largest electric vehicle charging networks. The way in which we will charge our electric vehicles will not resemble the model we used for gasoline cars. Instead, parking spaces at home, in the workplace and in parking lots will provide energy. Software will play a critical role in managing this infrastructure. The broader field of transport and logistics is throwing up a number of exciting investments. We have grown accustomed to having more products delivered to us at home. With scale, companies are building out the capabilities to serve us faster and more efficiently with a rapidly growing selection of products and services. Meituan in China and Delivery Hero in South East Asia now have the order frequency and distribution infrastructure to move beyond prepared food and into grocery and convenience offerings. Doordash, is doing something similar in the US. Meanwhile, we have purchased holdings in Ocado and GoPuff. Ocado’s grocery offering is performing strongly and profitably in the UK and there is increasing interest from grocers around the world in implementing its technology. GoPuff is seeking to replicate the traditional convenience store with a delivery offering which has proved popular on US university campuses and is expanding into a more general setting. Within our investment horizon, it is likely that these companies will start transitioning from human to robot delivery. Zipline has refined the performance of its autonomous fixed-wing aircraft while delivering medical supplies in sub-Saharan Africa. It is now launching in the US and delivering a broader range of products. Meanwhile we have taken a new holding in Nuro which is developing ground-based autonomous delivery vehicles for last mile delivery which should help to further reduce the cost of home delivery.

Lilium is developing an electric vertical take-off jet with capacity for six passengers.

From transporting goods to transporting people: in the course of the year both of our flying taxi holdings, Lilium and Joby, took advantage of the buoyant funding environment to embark on a course to the public markets. Substantial capital is required for certification to carry passengers, so large rounds of funding are important. We are sceptical that the accompanying public listing is the right structure to provide long-term support for these companies at this stage of their development. Many of us have marvelled at SpaceX’s achievements as it has increased its pace of reusable rocket launches and sent the first astronauts to orbit in a commercially-built craft. SpaceX has ushered in a new era of dramatically lower launch costs which is spurring innovation and experimentation. Satellite communication will be one of the first applications but many more are likely to follow. We have continued to build up our holding in SpaceX. We have also initiated a new position in a smaller rocket company, Relativity Space, which is aiming to reduce launch costs for smaller payloads using 3D-printed rockets. Back on earth, we think the application of modern technology to healthcare offers some of the most exciting investment opportunities for the next ten years. We took a new holding in Moderna, which develops and produces RNA-based therapies. It became a household name through the success of its RNA vaccine for Covid-19, but the technology’s potential is far wider. Moderna bears resemblance to a software company. It writes RNA code to programme human cells and enjoys an attendant scalability in its business model. Its success with coronavirus helps to de-risk other drugs in its vaccine pipeline. The company is seeking to address a much broader swathe of diseases and its transition from a clinical to a commercial-stage company improves the odds of success.

SpaceX Starship. The company has ushered in a new era of low launch costs which is spurring innovation and experimentation.

Recursion and Tempus are applying the cutting edge of existing IT more directly. Recursion is building a new model for drug discovery driven by machine learning and experimental biology at an unprecedented scale. It has automated the role of the scientist at the laboratory bench and is able to do millions of experiments per week. It is testing a huge library of compounds on many different disease states in human cells and using machine learning to process the output. This is already translating into new therapies. Tempus is sequencing the tumours of cancer patients and matching that genetic information to medical health records, creating a vast repository of accurate healthcare data. It is applying machine learning to this data on behalf of physicians to determine the therapies that are most likely to be successful for patients, based on individual circumstances. This approach has the potential to transform how cancer is treated.

emerging. Less encouragingly, the planned IPO of our private holding in Ant International was pulled as a result of regulatory intervention. Ant and its parent, Alibaba, have a long history of occasionally tumultuous but eventually good relations with regulators and we expect that they will defuse these tensions over the months ahead.

The Trust’s exposure to China grew over the course of the year. Our largest holding, Tencent, has navigated a difficult regulatory backdrop and is executing well in its core business. In addition, its management team ought now to be considered some of the world’s greatest investors. Over the past decade they’ve used their cashflows to build a portfolio of both public and private investments worth close to U$200bn. The pace of innovation at scale in China now exceeds anything we can find in the rest of the world. Pinduoduo was founded in 2015 and has already overtaken Alibaba’s audience size in online commerce with more than 750m users. Meanwhile, the world’s most valuable private startup, ByteDance, dominates China’s online advertising landscape less than a decade after its founding. We added to most of our Chinese positions through the course of the year as well as taking new holdings when we have seen new breakthrough companies

The competition for capital in the portfolio has been, and remains, intense. A process of renewal and change is creating new growth opportunities across a wide range of industries and countries. We have been able to reinvest the proceeds from the big online network businesses into companies that are tackling some of humanity’s biggest challenges in healthcare and decarbonisation. When large and evolving opportunity sets are matched with entrepreneurial companies and a determinedly long-term outlook, the conditions are ripe for exceptional growth businesses to emerge.

We sold out of our holdings in Facebook and Alphabet (the parent company of Google) as well as making reductions to Amazon. These companies generate prodigious cashflows and have grown at a remarkable rate. For us, the questions now are around how they deploy their resources in the future and retain their growth credentials at vast scale. We think Amazon still enjoys the broadest set of opportunities, but we are wary that Jeff Bezos stepping back from the CEO role may reduce the company’s appetite for bold experiments.

Tom Slater

Managers’ Review After many years of anodyne reviews perhaps some bluntness is permissible in this final and twenty second version. There’s much that I have misunderstood and misjudged over the two decades but my ever-growing conviction is that my greatest failing has been to be insufficiently radical. To be blunt: the world of conventional investment management is irretrievably broken. It demands far in excess of the canonical ‘six impossible things before breakfast’ that Alice in Wonderland propounds.

Some Contentions But let me start by trying to set out what I do believe. Hopefully it doesn’t need saying that my successors should be suspicious of continuing to believe in these contentions for the next decades. As the world changes so should we. Indeed this is an appropriate point of departure. The investment world changed profoundly in the mid 1980’s. It resembles that most famously described by Ben Graham, the apostle of value investing, paid homage to by Warren Buffett and perpetually embraced by the media, as little as Alice’s rabbit hole described the reality of the late 19th century. To illustrate the change from the world in which a growth stock was defined by Graham as one able to double earnings in a single decade let’s look at some more recent figures: Year 1997

0.15

1998

0.61

1999

1.6

2000 2001

2.8 3.1

2002

3.9

2003

5.3

2004

6.9

2005

8.5

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

$bn

I’m sure that many of you will recognise these numbers as the annual revenues of Amazon. They rather understate progress as the accounting for third party fulfilment is conservative. But we still have a compound growth rate of 41% per annum for over two decades. For those, like Graham, who prefer the bottom line then 2020 produced $31bn in free cash flow. This pattern of sustained growth at extreme pace and with increasing returns to scale has become more and more evident since the emergence of digital technologies as first exemplified by Microsoft (still growing after 35 years as a public company). It is in these extremes that investing resides. Despite what the CFA foists on the young and innocent you cannot choose a level of risk and return along a classic bell-curve to suit your portfolio because that is neither accepting the deep uncertainty of the world nor acknowledging that the skew of returns is so extreme that it is the search for companies with the characteristics that might enable extreme and compounding success that is central to investing. But distraction through seeking minor opportunities in banal companies over short periods is the perennial temptation. It must be resisted. This requires conviction. The share price drawdowns will be regular and severe. 40% is common. The stock charts that look like remorseless bottom left to top right graphs are never as smooth and easy as they subsequently appear.* So how do we identify these stocks with extraordinary potential? How do we acquire the conviction to allow the compounding to work its magic? As Jeff Bezos steps down as CEO let’s look back at what we spotted, how we endured and what we failed to do for shareholders. The common factors that are most likely to recur in the narratives of great investments are that the company should have open-ended growth opportunities that they should work hard never to define or time, that it has initial leadership that thinks like a founder (and almost always is one) and that has a distinctive philosophy of business – almost always from independently thought through first principles. Now, I think that all these traits were identifiable in Amazon from the start. To read the initial shareholder letter of 1997 was to know that this was the ambitious, patient creation of a very special mind. To be frank our failure to recognise this was because of our own limitations not an absence of clues. We were simply too aware of market movements and too preoccupied with the terrible combination of short-term performance and fear of downside to be able to be committed owners. By 2005–6 we were less bad investors and could recognise some of the potential and endure more of the slings and arrows. Of those there were plenty: the share price fell 46% from peak to trough in 2006. I became used to peers at client conferences declaring Amazon their favourite short. They particularly disliked the costs of two projects – Prime and Amazon Elastic Compute. The latter became AWS. Gradually we learnt and understood. But we should apologise for our willingness to trim Amazon back repeatedly when our holding size approached 10% of assets. That was misguided. Only in recent months has our enthusiasm waned. Amazon is now seen as good value, safe and acceptable. It no longer has a founder CEO. We fear that in his inimitable terms it is no longer Day 1 in Seattle though the road ahead is still long and profitable.

Time Frames, Likelihoods and Radical Uncertainty The litany of reasons to be obsessed with long-term decision making is too long to describe here. But there’s an offshoot of it that seems unusually important yet neglected. It is inherent to the notion of efficient markets that all available information is

• Extreme Stock Market Performers, Part I: Expect Some Drawdowns; 21 July 2020; Professor Hendrik Bessembinder of Arizona State University.

This paper studies the most successful decade-length returns for publicly-listed U.S. common stocks during each of the seven decades since 1950. It shows that even for the most highly-returning companies, share prices experienced significant draw-downs on their path to the top decade returns. For the top 100 companies by their decade returns, the draw-downs lasted an average of 10 months during that decade, with an average loss of 32.5%. For the top 200 companies, the average loss increased to 50%.

incorporated in share prices. Only new information matters. This is used to justify the near pornographic allure of news such as earnings announcements and macroeconomic headlines. In turn this is reinforced by the power of near-term financial incentives. So far this is a standard critique. We share it but there is a twist to come. If you believe that all information is built into the share price and simultaneously that it is near term investment outcomes that matter this leaves a vacuum of thought. There is no apparent rationale for deciphering the future. If this sounds abstract it’s not so. Let’s take a look at Tesla to illustrate the puzzle. When we first invested in the company seven years ago we thought, or rather observed, that the regularity and pace of improvement in battery performance and of learning in building electric vehicles was already clear in practice and well-elucidated in academic study. Since then both the pace of improvement and the level of confidence surrounding the data has risen consistently. This made it as close to inevitable as investing allows that at some point electric vehicles were going to be better and cheaper than the internal combustion engine – quite aside from environmental issues. That’s simply what happens when a 15% plus improvement rate meets a 2–3% snail. Since Tesla was the only substantial Western player our investment decision was hardly demanding. We just had to listen to experts and wait. But most investors do not listen to experts. Instead they listen to brokers and the media, besotted as it is by fear mongering and the many short sellers. The headlines tell them that next quarter will be hard for Tesla and that Elon Musk is outspoken. To us this was a blatant market inefficiency offering an extraordinarily high likelihood of high returns to the patient. All too many investment decisions are marginal judgments. That electric vehicles would win had become intensely likely. We needed no insight, no clever model to spot it – only patience and trust in experts and the company. The uncertainty was elsewhere. It was elsewhere geographically – given the levels of competition in China it was profoundly uncertain that our investment in NIO would flourish or even survive. It was elsewhere in return calculations for Tesla itself. This particularly applies now and to Tesla’s autonomous driving ambitions. This could transform the economics of the company. But try though we do it seems implausible that we can estimate either the likelihood of success in a radically new endeavour nor the precise outcomes in cashflows should success emerge. To us it is bizarre that brokers, hedge fund mavens and commentators can claim to be able to decipher the future and assign a precise numerical target to the value of Tesla. Perhaps they are all geniuses. We are not. We should respect and endure uncertainty, try to identify where extreme upside might occur and observe patiently.

It’s Not Growth versus Value Tesla is but an example, if a crucial one, of the central issue for investing in our times. It isn’t growth versus value, it isn’t the level of markets, it isn’t the economic growth rate in 2021 or the progress of the pandemic but it is understanding change, how it happens, how much happens and its implications. The refusal to embrace this is probably a reflection of the doomed desire for security but it is also emblematic of a broader crisis in economic thought that is preoccupied with the mathematics of equilibrium. But If we switch our attention to studying deep change then there is less temptation to believe that investing has eternal verities that we can default to as a rule book. It’s not ‘this time it’s different’ that is the cry of danger but the refusal to admit that the world, and its reflection that is investing, is ever the same. The only rhyme is that in the long run the value of stocks is the long-run free cash flows they generate but we have but the barest and most nebulous clues as to what these cash flows will turn out to be. But woe betide those who think that a near term price to earnings ratio defines value in an era of deep change.

We need to remain eccentric. In fact we need to become more so and more prepared to be radical. We’ve always claimed to learn from the remarkable leaders we are lucky enough to meet in managing Scottish Mortgage. If I may I’d like to end by quoting two of them. The first is Noubar Afeyan, founder of Flagship health investors but also Chair of Moderna. A year ago I would at this point have needed to detail the purpose of Moderna but that is now delightfully redundant. But the comment I want to quote applies far beyond Moderna and vaccines: “Let me say maybe something stark…which is that we have to be willing to embrace unreasonable propositions and unreasonable people in order to make extraordinary findings because the notion that utterly reasonable people doing utterly reasonable things will produce massive breakthroughs doesn’t compute to me”.

Entrepreneur, inventor, philanthropist and co-founder of the bio-technology company Moderna, Noubar Afeyan.

The Future There will almost certainly be more wrenching, inspiring and dramatic change in the next decade than we have ever seen. I’m very envious of the opportunities and experiences that my successors will enjoy. Even in the last year, amidst the tragedies of the pandemic, there have been hints of what is to come. I don’t mean the surge in digital platforms that helped to navigate the constraints of the pandemic but still more dramatic and important rising forces. From the extraordinary revolution that will transform our societies for the better in renewable energy becoming mainstream to the emerging wonders of synthetic biology to the possibility that healthcare innovation becomes a regular series of beneficial revolutions rather than a complex and frustrating drain of resources the potential is wonderful and the threat to old empires looms. It would have been hard for us to have educated ourselves in these areas of unashamed excitement without our involvement in venture capital. We are forever grateful that we have found our way to interact with the extraordinary minds and energies in the unquoted world. Frankly, five years ago I would have been amazed at the access and opportunities that we have come to take as normal. We are very fortunate. It’s a privilege. Our former Board member, John Kay, taught us many things but one of the most valuable was the role of obliquity. By engaging with visionary minds and their companies we are simply seeking insight into the world of tomorrow. Often we are overwhelmed and puzzled more than comprehending. That’s the plan. The investment outcomes are but the eventual outcomes of the mentality and process.

There is no industry more suspicious of the unconventional than fund management. We need to reinvent from first principles. We need to help create great companies that embrace the extraordinary. Plainly no one has been better at demonstrating and articulating this than Jeff Bezos. His recent, and sadly last, CEO letter concluded with a plea: “We all know that distinctiveness – originality – is valuable…What I’m really asking you to do is to embrace and be realistic about how much energy it takes to maintain that distinctiveness. The world wants you to be typical – in a thousand ways, it pulls at you. Don’t let it happen”. I don’t think Tom and Lawrence need this advice, or would neglect the views of Mr Bezos. But please help Scottish Mortgage become more unreasonable and more distinctive as the pressures of the investment world continue to pull at us. James Anderson

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 113 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 35) and ongoing charges ratio (0.34% as at 31 March 2021) 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 0.34% 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 3% 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 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 seven of our top ten listed holdings have been held for more than five years and four have been held for more than ten.

— Whilst listed equity markets currently remain the principal 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