This might be one of the most successful investment records you’ve never heard of. More than 1500% cumulative returns since 2000. Some big big winners along the way.
James Anderson, the star stock picker and joint manager of Baillie Gifford & Co, recently decided he would leave the firm after spending nearly two decades running the firms one of the most famous investment vehicle – the Scottish Mortgage Investment Trust.
He’s not the outgoing, braggadocios hedge fund manager you read about in the Wall Street Journal. A history graduate from Oxford, he joined the firm in 1983. He became a partner four years later, and went on to chair the firm’s international global growth portfolio construction group in 2003.
The firm is quite historical itself. It was started as a Scottish partnership 113 years ago to finance rubber plantations in the most remote corners of the world. It has delivered impressive returns in its existence but SMT has by far caught the most attention maybe because it flourished in the internet era or because of the stocks that allowed SMT to achieve what it did (the good old FAANG stocks were all in the top 10 holdings).
But for Anderson, it wasn’t as simple as that. Here’s a subset of his principles that guided his decision making:
His belief that exponential improvements in technology will drive innovation:
Anderson met Jeff Bezos in 2013 at a conference where he took away Bezos’s belief that processing power, bandwidth and disk space were becoming exponentially cheap. SMT has held a considerable position in AMZN since 2004, the time when believers were scant and we were fresh out of a dotcom crash.
A vast majority of returns in your portfolio are attributed to a tiny fraction of your investments (the non-linear outliers):
A large proportion of Anderson’s performance can be attributed to a fraction of the stocks he invested in at an early stage of the growth cycle. This was influenced a study which said that over many decades only 4 percent of the stocks led to almost all of wealth creation. SMT has held a relatively concentrated portfolio with 40-50% of capital allocated to 8-10 stocks.
A relentless optimism about the future:
According to Douglas McDougall, a former senior partner at Baillie & Gifford who hired Anderson almost 40 years ago,
James saw the likely extent of the technological change in the early years of the 21st century and backed it wholeheartedly
Anderson’s optimism about the tech-driven future led him to amass positions in Tencent, Alibaba, Tesla and a host of names that went on to disrupt their space and multiplied their shareholders’ wealth multi-fold.
Exponential technology improvements is the underlying driver of everything you’ve witnessed over the last decade in the markets. From tech leading the charge in portfolio returns, to tech coming to dominate major indices in the U.S and the U.S extending its lead (in terms of returns and market cap) over the rest of the world.
And if you are not optimistic about the future, you’d have probably kicked yourself (like the loudmouth perma-bears you see around you) sitting out the most incredible bull run in the short history of these markets.
Some other principles that I found quite interesting:
“Actual investors think in decades. Not quarters”
A sign that hangs over the door at the firms headquarters in Edinburgh. He changed the firms investment horizon from two to three years to five to ten year periods. As we all know, time is mostly the real difference maker.
Going global and index agnostic
The firm went on to become a global, index agnostic investor, investing in its best high conviction ideas. It pivoted to investing in Chinese tech companies like Tencent and Meituan (the biggest food delivery in the country) after he met Wang Xing, the founder of Meituan.
But another reason why Anderson wanted to not be limited to the region where the firm is domiciled, something I’ve also wondered why the U.S has taken such an astounding lead in global markets.
Anderson thinks the FTSE 100 index looks like a 19th century index, the one from old economy. The lack of home-grown entrepreneurs in the UK led to scarcity of innovative companies in the region (something that I believe is now changing). He followed wherever groundbreaking technological innovation was taking place and invested in entrepreneurs who were creating great businesses. The firm shifted its focus to China, to other areas of Europe (ASML and Delivery Hero) . And over the years, its holdings in FAANG’s have come down as it has upped his stakes in other ideas the firm believes in.
And here’s how SMT’s current holdings look like:
SMT has been a consistent compounder for its shareholders – 18.5% a year from 2010 – 2019 and over 25% a year if you include 2020 and YTD 2021.
I’ll be on the lookout for where SMT goes in its post-Anderson phase, but as far as the principles go, they ar truly timeless.
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Until next time,
The Atomic Investor