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Scottish Mortgage’s Anderson: The stock that makes me feel most bullish for the next decade

07 May 2016

The long-term manager of the highly successful global portfolio reveals to FE Trustnet the single stock he thinks will make the most money in the next 10 years.

By Daniel Lanyon,

Senior reporter, FE Trustnet

US-listed gene sequencing firm Illumina stands to be the best performer of any stock in the highly successful growth portfolio of the Scottish Mortgage investment trust over the next decade, according to Baillie Gifford’s James Anderson (pictured), manager of the trust.

The manager has a successful record of investing in high growth stocks such as Amazon, Alphabet (Google) Tesla and Facebook.

While these all still feature in his top 10, it is the second largest position in the £3.7bn portfolio (after Amazon) that makes him most bullish over the next decade with 7.4 per cent of his assets in the stock.

“Over the next 10 years, I think the company has the greatest possible opportunity to change the world and make the most money for you is Illumina,” Anderson said.

“The fact that it is deeply out of favour at the moment has not put me of from saying that.”

The company is one of the world leaders in gene sequencing, which it and many scientists believe will revolutionise the treatment of disease in the next decade particularly for conditions such as cancer, dementia and diabetes.

Experts are expecting a generation-long wave of drugs to come through off the back of more and more breakthroughs in gene sequencing, 13 years after the first human genome was sequenced.

An individual DNA data can be now processed in a few hours, thanks to a huge increase in computing power.

Illumina has performed very strongly since its initial public offering in 2000, particularly in the past five years or so.

Performance of stock since IPO

 

Source: Google


A key driver of the market’s bullishness towards the firm is its apparent success in bringing down the costs of sequencing a human genome, which Anderson likens to Moore’s Law.


This, broadly speaking, is the pattern observed in the 1960s by Gordon Moore of Intel that computer chips were seeing the number of transistors per square inch on integrated circuits doubling every year with the trend expected to continue for decades. Which they have done ever since.

Anderson believes a similar pattern is observable in the costs of gene-sequencing, which will make it more and more ubiquitous to healthcare professionals in the coming decades.

However, more recently the stock has come under pressure falling more than 40 per cent since its last high in July last year.

Performance of stock over 1yr

 

Source: Google

Anderson also favours the stock for the work done by its latest subsidiary with the similarly auspicious name Grail.

This company is in the early phases of developing a biopsy product that could act as a pan-cancer screening process powered by Illumina’s own gene sequencing technology.

The nature of these two companies is very in-keeping with Anderson’s favoured investments of recent years. Firstly it is US based, where the manager feels most of the best opportunities for growth stocks lie.

Secondly, Grail is also an unquoted company, another area the manager is bullish on due to his belief that most new firms need less capital to grow than in previous years and so do not approach public markets until they are substantially bigger.

“Some of most core technology of Illumina's gene sequencing was literally in the most parodic manner of all, invented in a pub in Cambridge and they couldn't make it work mostly commercially as well as technically,” he said.

“Do we possess the people with the real, real determination and obsessiveness that goes into this? Also the commercialisation skills and internationalisation skills. It has been a long time since there was a truly great British company.”


Anderson has headed up Scottish Mortgage since 2000, since which the trust has gained 248.66 per cent, according to our data, vastly more than its sector average and benchmark. It is also top decile in the IT Global sector over three, five and 10 years.

Performance of trust, sector and index since April 2000

 

Source: FE Analytics

His early investments were in some of the more exotic oil majors such as Petrobras and Gazprom, having sold legacy positons in Shell and BP. However, more recently he has been looking to increase unquoted exposure with shareholders voting to allow a 25 per cent cap on such holdings.

Anderson was joined on Scottish Mortgage by Tom Slater in 2009, who is now co-manager. The two mangers use a largely thematic approach to their portfolio.

The portfolio has seen greater volatility than both the index and its peers over recent periods and suffered from a greater fall than the average portfolio in the sector. The portfolio is down 7.48 per cent year to date, almost triple the fall of the index.

Scottish Mortgage has ongoing charges of 0.48 per cent, is 13 per cent geared and is currently on a premium of 1.3 per cent.

Daniel Lanyon was recently a guest of Baillie Gifford in Edinburgh.

 

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