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Oil & gas stocks could be worthless within 5 years, says Scottish Mortgage’s Anderson

15 January 2020

The Baillie Gifford manager says that in every area of the world, it will soon be cheaper to build renewable energy farms and the associated storage than to carry on operating oil or gas facilities.

By Anthony Luzio,

Editor, Trustnet Magazine

Oil & gas stocks could be worthless in as little as five years, according to James Anderson, manager of the Scottish Mortgage Investment Trust, who warns many of the industries and companies that investors are backing to benefit from a ‘value’ resurgence are more likely to be “physically destroyed”.

In a recent presentation, BMO investment manager Scott Spencer noted that Baillie Gifford – which runs Scottish Mortgage – has been the dominant fund house over the past decade, with its bias to the growth style of investing pushing it to the top of the charts in a variety of sectors.

However, he then pointed out that “the fund everyone was buying 10 years ago” – M&G Recovery – has been the worst performer in the IA UK All Companies sector in the past decade, returning 49.31 per cent.

Spencer said that just as M&G Recovery’s once successful strategy eventually fell out of favour, so Baillie Gifford’s growth bias is now due a fallow period, which is why his team has switched to a value bias across its multi-manager range.

Anderson’s co-manager Tom Slater argued this idea of mean reversion relies on a mis-reading of why growth investing has done so well.

“If you connect 5 billion people to a global network, if you see the innovation that is driving that and the new business models that have been putting a real squeeze on existing industries,” he said, “I think this is a far more enduring and powerful force than people believe.”

“Growth really comes from one of two sources: either an increase in demand or an increase in supply. But actually, the trend we have been seeing is that supply has been more effectively able to meet consumer demand as a result of innovation.

“It’s not the swings between growth and value that we’ve seen in the past economic cycle. It’s driven by an underlying trend which is likely to continue for some time.”

Anderson said he is far more dogmatic than his co-manager in his belief of growth’s supremacy as an investment style, claiming that rather than coming to the end of a successful run, “I don’t I think we have seen anything yet”.

For example, he noted that while value has underperformed over the past decade, it has not done too badly in absolute terms. However, he warned this could be as good as it gets for this strategy, saying: “It seems to me that there is every prospect over the next 10 years that many of the companies that people are looking to for this much-vaunted mean reversion are going to be physically destroyed.”

Performance of indices over 10yrs

Source: FE Analytics

Anderson said this statement does not just apply to the obvious areas such as retail, but also sectors that many professional investors regard as defensive, such as oil & gas. And, despite efforts by environmentalists to put pressure on fossil fuel producers through protests and divestment campaigns, the manager said the biggest threat to the sector is cold, hard capitalism.

“The whole nexus of solar and wind power, batteries, battery storage, everything we see both in relationships with companies and from academics, is that there is going to be a continued, almost inevitable – with a 90 per cent+ probability level – 15 to 25 per cent decline every single year in these prices,” he explained.

“Now that means that within the next five years, just about everywhere in the world, for every single different energy source, it will be cheaper to build solar or wind plus storage than to just carry on operating even gas facilities, let alone oil.”

Anderson pointed out that by this point, taking this trend to its natural conclusion, energy will become so cheap it is effectively free.

“That means that you will have a complete set of stranded assets in many of these areas that people believe are going to revert to being ‘value’,” he added, “and the prices of the shares will fall in absolute terms rather than just underperforming. So I think it’s going to get more dramatic.”

In light of this view, it is unsurprising that Anderson counts automotive and energy company Tesla as one of the largest stocks in his portfolio.

What may raise eyebrows, however, is the identity of another one of his top-10 holdings, luxury sports car manufacturer Ferrari. Despite this company’s historic relationship with the internal combustion engine and fossil fuels, Anderson said discussions with its management team suggest it has come to the same conclusion as he has about the future of energy.

“One of the most interesting parts for me has been seeing how the great rivals of these [disruptive] companies are trying to evolve,” he added.

“We continue to be very grateful to the extent to which the people at Ferrari and particularly John Elkann [chairman of Ferrari and Fiat Chrysler Automobiles] talk us through an awful lot of things. And one of the resonant points from my perspective is that he is absolutely upfront in saying, the brand, the luxury, the demand does not protect Ferrari in the long run.

“Unless you can be at the cutting edge of transport engineering, it won’t last. And that cutting edge is now electric. So, I think that we are seeing whole sets of industries being transformed.”

Data from FE Analytics shows Scottish Mortgage has made 531.9 per cent over the past decade, compared with gains of 198.75 per cent from its IT Global sector and 187.07 per cent from its FTSE All World benchmark.

Performance of trust vs sector and index over 10yrs

Source: FE Analytics

It is trading at a premium of 2.37 per cent to net asset value (NAV) higher than the one- and three-year averages of 0.83 and 1.77 per cent, according to data from the Association of Investment Companies (AIC).

The trust is 8 per cent geared and has ongoing charges of 0.37 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.