Baillie Gifford, the 111-year-old Scottish investment firm, spent its early years financing rubber plantations in what was then British Malaya. Today it backs the digital drivers of Asia’s economy—companies such as China’s Alibaba Group Holding and Tencent Holdings —and other new-economy stars, such as Amazon.com and Tesla . James Anderson, the Oxford-educated head of the firm’s global equities business, is a big reason for that strategy: He believes that a cadre of founder-led companies “of the utmost ambition” has the potential “for greatness at an extreme scale.”
Anderson’s brief at Baillie Gifford, which he joined in 1983, is expansive. He’s a partner at the firm and also jointly manages, with Tom Slater, the $10.5 billion Scottish Mortgage Investment Trust (STMZF), the London-traded closed-end fund first launched to finance the rubber plantations. Scottish Mortgage, whose top holdings as of March 31 included Amazon (AMZN), Illumina (ILMN), a maker of gene-sequencing systems, Alibaba (BABA), and Tencent (TCEHY), has returned more than 700% in the past 10 years, against the 261% return of its benchmark, the FTSE All World index.
Anderson, 59, also oversees about half of the $37 billion Vanguard International Growth fund (VWIGX), alongside Baillie Gifford’s Tom Coutts and a team from Schroders. In a recent interview, Anderson discussed his investment philosophy, the power of exponential technologies, and his views on China’s tech giants, Amazon’s ambitions, and Tesla’s CEO, Elon Musk.
Q: How did you become such a passionate believer in growth stocks?
A: James Anderson: About 15 years ago we moved from measuring our performance on a short-term basis to being genuinely long-term investors. We also shifted from organizing our investment research around regionally based teams to creating globally focused ones. But something changed in the world that was more important: After Microsoft (MSFT) went public [in 1986], a generation of companies proved they could grow at huge scale in a digital and global world. Brian Arthur, an economist at the Santa Fe Institute, was one of the first to talk about increasing returns to scale—that companies or technologies that gain an advantage gain further advantages. We have done a lot of work with him over the past few years. He understood that, in a knowledge-driven economy, the structure of both competitive advantage and returns to scale change acutely.
Q: You have written about several ‘exponential technologies’ that meet the requirements for profound investment significance. What are they, and how did you identify them?
A: To find great companies and technologies, you have to think about what the outsize opportunities are. How long they can compound? As the venture capitalists who backed Google said at the time, the most difficult thing to imagine is how great a great company can be. Moore’s Law is central to this; technology has been dominated for the past 25 years by Moore’s Law [Intel co-founder Gordon Moore’s contention that the number of transistors and processing power in a computer chip doubles about every two years]. Looking back in history, only the gradual invention of writing and printing had similar exponential characteristics. Around the time that Amazon went public [in 1997], Jeffrey Bezos said there was a weirdness about what the company worked with—that everything Amazon used got better and cheaper, usually by 50% a year. Jeff himself said, ‘I don’t know where that takes us, but it’s very exciting.’
ASML Holding (ASML), a dominant maker of lithography-related semiconductor manufacturing equipment and a holding of ours, is confident that Moore’s law will continue. They think they have overcome the main challenges to it. I was amused by how they put it: ‘The next 10 years will be easy.’ That type of information seems significant and long-lasting, and isn’t really captured in the stock market.
Q: Are other concepts, equal in significance to Moore’s Law, on the horizon?
A: We are just beginning to understand biology as a result of the evolution of genomics. Our understanding is about where semiconductor technology was in the early 1990s. The price declines in gene-sequencing technology have been well in excess of the price declines in semiconductors. Most medical discoveries until now were made almost by accident. They haven’t been able to cure underlying conditions. That could happen in the future.
Another potentially transformative development is the declining cost of renewable energy, and associated improvements in the performance of battery technologies. This could be deeply disruptive to the industrialized world. For all the power of Moore’s Law to create huge companies, the implications of advances in genomics and renewable energy could be even greater.
Q: How can you possibly identify the long-term winners in new technologies?
A: Early on, we should be prepared to have exposure to a broad number of companies. Increasingly, I believe you have to wait until the market shows signs of becoming at least 1% penetrated before you can confidently pick the leader. A dozen years ago, we had a large holding in eBay (EBAY) and owned Amazon. We weren’t certain whether Amazon or eBay would win in e-commerce. The stock market was more interested in eBay; the business was easier to grasp, and it made money. It became obvious only over time that Amazon would play the core e-commerce role in North America and elsewhere. That said a lot about the leadership of Amazon. Founders who embrace risk-taking and open-ended opportunity are likely to make the biggest contributions in a time of technology-driven change.
Q: What’s the optimal time horizon for your type of investing?
A: We thought in 10-year periods. What intrigues me is that the natural progression of our process is taking us well beyond 10 years. For example, Microsoft’s growth since the mid-1980s is remarkable and shows that we need to think in 20-to- 25-year chunks.
Q: What prompts you to sell a stock?
A: Sometimes, a company becomes so successful that it exhausts its opportunities. We used to be fairly large owners of Apple (AAPL). We sold it a few years ago as we couldn’t see the growth opportunity scaling any more. Apple isn’t a bad investment, but it isn’t up there with the great growth opportunities of the future.
Sometimes, we sell a company because it fails to succeed in the way we expected. There is nothing wrong with owning eBay, but the industry’s competitive dynamic was such that it turned out not to be the winner.
Q: You trimmed your Facebook position in Scottish Mortgage about two years ago. Why?
A: We were concerned that Facebook (FB) was becoming too obsessed with monetizing purely through advertising. That might sound surprising, but it wasn’t clear when we bought the stock at the time of the IPO. Advertising is a comparatively limited market. Also, although we had no idea what would happen later with Cambridge Analytica and the Russians, we thought advertising made for a grubbier business model than some. We are large shareholders of Tencent Holdings, and felt the extraordinary restraint that Tencent showed, and shows, in becoming not purely an advertising company was a more appealing model.
Q: In that case, why do you still own Facebook?
A: We discuss it internally. I feel comfortable with it, as the engagement metrics for Instagram and WhatsApp, and the dominance of Facebook, are holding up well. Also, while people might say we’re naive, we believe the leaders of Facebook genuinely accept that they made mistakes in ethical areas and need to do better. They are trying to do better.
Q: You’re the largest outside holder of Tesla (TSLA). In March, you told Barron’s you’d be OK with Elon Musk stepping aside as CEO and taking another role at the company. Do you still feel that way?
A: I still feel that way, but it seems less likely to happen now than when we talked. After speaking with Barron’s, I went to see Tesla and met with the new chair [Robyn Denholm]. You can imagine we discussed this. It was plain to me that Tesla needed to strengthen some of the other voices on the board, and encourage a greater degree of understanding on the part of Mr. Musk about his responsibilities. The new chairman made it clear she regards him as a good chief executive. There is also a stronger team now. Sanjay Shah, who came from Amazon, understands what needs to be done on the batteries and energy front. I like the chief financial officer [Zach Kirkhorn], who, although young, has the kind of relationship with Musk that allows him to tell Musk things. I would still say it is conceivable that Musk wouldn’t remain CEO, and it might not be a bad thing if it happened, but I hope I wasn’t definitive in saying he had to go.
Q: Given Tesla’s challenges, including its latest quarterly loss, Musk’s controversial statements, and his tendency to make promises the company can’t keep, how do you know you have backed the likely winner in electric-vehicle technology?
A: Tesla’s recent earnings numbers were worse than expected, and it was unfortunate that Musk made a point of saying there would be a million Tesla robo-taxis on the road in a year. You can convey great and justified excitement about the company’s comparative advances in autonomous vehicles without providing a timetable. We were also puzzled by the company’s change of tone on raising capital. We have said in discussions with Tesla that, if they decided to raise capital, we would understand it and be prepared to back it, which remains the case. Ideally, we prefer companies to raise capital when confidence and share prices are high; otherwise they have to issue more shares to raise the same amount of capital. Obviously, Tesla’s share price today is considerably lower than it was eight or nine months ago [the stock has fallen 37% since early August, to $237], but we remain supportive shareholders.
Although we have reservations about some things at Tesla, we are upbeat about the company’s leadership in its industry. Tesla is six to seven years ahead of the competition in the product and battery technology. Clayton Christensen [a Harvard Business School professor known for his theory of disruptive innovation] was basically right in noting that it is profoundly difficult for traditional companies to change. The decline in the fortunes of the traditional auto makers, particularly luxury-car companies, has been happening faster and more seriously than we would have expected five or six years ago. We feel more confident about Tesla’s underlying position than we did 12 months ago.
Q: What are Amazon’s key opportunities and challenges?
A: I don’t think I’ve found a task more difficult, interesting, or rewarding than trying to work out what is in Jeff Bezos’ mind. When Amazon Prime and AWS [the company’s cloud computing business] were launched, we had no idea what they would become. Food is another area that Amazon could disrupt. We don’t know yet what the model will be. Health care is a huge area where the company could become more active. Health care accounts for 20% of GDP and is grossly inefficient.
On the constraints side, it has become obvious that Amazon hasn’t won in China. We’ll see what happens in India. Chinese and American companies are carving up the world somewhat differently geographically than we expected. They aren’t clashing in each other’s houses. Alibaba, which we also own, isn’t making inroads in America.
Q: Is there a case to make for breaking up Amazon, given the size and diversity of its businesses?
A: That idea reflects a narrow, reasonably short-term, shareholder-driven attitude. If Amazon put out a statement this evening that AWS is going to be split off, the share price probably would go up, not down. One of the company’s most extraordinary achievements has been its ability to stay agile and innovate at extraordinary scale. That gradually becomes more difficult. I am not philosophically opposed to a breakup, or worried about it happening, but would stress that Amazon’s ability to innovate at scale is amazing.
Q: You have written that in the next 20 years Chinese companies will create the most value in the world. Why such optimism, when many others see China slowing?
A: China has the essential building blocks, starting with the caliber of human capital. There are four times as many science and technology graduates in China as in America. Chinese universities have moved relentlessly up the ranks of research providers. Over the course of human history, it is human capital development that really mattered.
There is also physical capital. China’s interlocking of hundreds of big cities is profoundly important and constitutes a reprimand to many Western countries, in which a few cities make great progress, but many smaller cities are locked out of economic development. In China, this owes not only to extraordinary infrastructure developments, but a surge in data usage.
I welcome the fact that many people have a much more pessimistic view of China. Investing isn’t much use if you’re simply ratifying what everyone else already thinks.
Q: Are Tencent and Alibaba the best way for investors to bet on China?
A: They are even more important than their U.S. equivalents. Their tentacles are spread farther. Their ambition is to be involved in every sector of China’s economy. They reinvest their cash, which is a big part of it. Alibaba CEO Daniel Zhang recently apologized to one of my colleagues for reinvesting only 90% of the company’s cash flow. Apple and Facebook don’t reinvest like this.
Q: If the U.S. and China reinvent the world, where does that leave Europe?
A: We try to back European companies that are likely to grow at more than the median rate. I spoke with Barron’s about our investment in Spotify Technology (SPOT). Co-founder Daniel Ek’s ambition is to prove that you can grow a great global technology company from a European base.
Delivery Hero (DLVHF), a German online food-delivery platform, is better than its American peer. We have also enjoyed success with more traditional European companies, such as Kering (PPRUY). Sales of Gucci, its flagship brand, have been growing by 40%-plus for the past three years. Founder François-Henri Pinault has done a terrific job. Ferrari (RACE) has been another fantastic investment. We have owned it since it was spun out of Fiat Chrysler Automobiles (FCAU) in 2016.
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