Small and young firms in the healthcare, energy and transportation industries provide some of the most compelling growth stories for the next five years, according to James Anderson, who has recently overhauled the macro themes guiding his top-performing but volatile Scottish Mortgage investment trust.
A concentrated exposure to companies heavily geared into the economic rise of China and disruptive information technology more broadly have been a driver of huge success for the trust in recent years.
The £3bn trust is consistently one of the most searched for ITs amongst our readers, in no small part down to its stellar long-term growth since Anderson took over the portfolio in 2000, and particularly in recent years.
According to FE Analytics, the trust has returned 394.92 per cent since 2000 while the average trust in the IT Global sector returned 189.9 per cent. The FTSE All World index gained 132.53 per cent.
Performance of trust, sector and index since 2000
Source: FE Analytics
Anderson has used a highly thematic approach for stock selection for most of his tenure as manager of Scottish Mortgage and it has clearly been successful, particularly his backing of ‘disruption’ and the emergence of China as an economic powerhouse which have been the two most dominant themes in the portfolio in recent years.
Despite the success, Anderson says it is time for a new approach to reflect a shift in the underlying value of the themes compared to 15 years.
“We thought that a market scarred by the memory of the apparent bubble of the late 1990s was structurally unable to grasp the power of technological change. We believed that China was transforming the global economy (and increasingly that it was profoundly different from other emerging markets). We feared that the flaws of the Western financial system threatened much that was encouraging in the global economy and markets,” he said.
“We were disconcerted by quite how right this anxiety turned out to be in 2008–09. So these themes have served us well. Yet we are concerned that we need to renew our thinking. It seems to us that all three themes have been sufficiently important that they have in turn altered the investment world.”
“Our original contentions surrounding the attractions of technology investing are close to exhaustion. Most of those who vowed never again to invest in technology have retired or forgotten their promises. We can only conclude that we need to abandon our previous themes. We would suggest that three new sets of issues will be crucial in the next five years.”
However, while he says these may continue to play out, there are three main ways he and co-manager Tom Slater will be playing the “emergent themes of the future”.
Keiran Drake, analyst at Winterflood, says Anderson’s approach and past performance bodes well for a shake-up.
“We like Scottish Mortgage. We think that the thematic approach works very by focusing on companies that are moving forward with innovation. It has done very well for the trust in recent years. Also it is a liquid trust, which is very good for investors,” he said.
“They have also demonstrated that they are wiling to buy back shares when it moves to a discount so it gives you a bit of confidence that discount volatility is going to be very low. James Anderson and Tom Slater as pair work well.”
“Anderson’s view of the world has been key determinant of its success. It has been very tech heavy but he has made the point it was not a tech fund – it’s just that is where he sees the best opportunities.”
Anderson thinks vital and accelerating enhancements in core technologies will lead to huge progress in healthcare, energy and transportation in the medium term equivalent to those made in information technology in recent years.
“Will secular stagnation and limited productivity gains dominate? These questions are already inherent in our thoughts above. Our current answers are markedly more optimistic than those espoused by most practitioners and commentators,” Anderson said.
“Which companies will prove to have the greatest profitability resilience and longevity? There has long been a presumption in markets that some industries are the epitome of steady earnings and cash flow growth whilst also offering the prospect of enduring as businesses for decades if not centuries. “
“The allure of such stocks has been particularly great since 2008–09 as investors have sought low volatility so determinedly. There has been an equal and opposite horror of companies that historically and industrially have been perceived to be volatile, cyclical or subject to competitive boom and bust.”
He says, however, a key marker will be a investment landscape favouring the smaller, more agile company in terms of both value and growth and more so in the unquoted space.
“As aggressive unquoted enterprises and founder-run competitors with less pressure to generate immediate earnings become ever more prominent, the complacent incumbents will be under serious pressure,” the manager said.
“Our hypothesis is that the years ahead may prove to be very different. It seems to us that several industries, such as healthcare, oil majors and utilities, which have been havens of stability may face dramatic change.”
“Global brands may follow national grocers into a margin storm. At the same time all too many traditional quoted companies have failed to reinvest in their businesses in order to produce earnings to the satisfaction of the financial industry.”
Ewan Lovett-Turner, investment company analyst at Numis Securities, says Anderson’s views are founded on a long-term outlook and they are continually evolving, so it is no surprise the trust is tilting.
“Over the long term, the fund has an exceptional track … over the last 10 years. However, it has occasionally been a bumpy ride,” he said.