Baillie Gifford's extraordinary success has made many of its rivals envious, while those who have missed out on the stellar returns desperately want their scepticism vindicated.
No fund in the Baillie Gifford stable represents their growth-focused style better than its £7.5bn flagship investment trust, Scottish Mortgage (LSE: SMT), and its supremely self-confident co-manager, James Anderson.
SMT is no Woodford
As exposure to unlisted equities has been built up to 17% of the portfolio, within sight of the 25% maximum, the initial public offering (IPO) market has disappointed, with Pinterest, Lyft and Uber all falling from their issue price. Has SMT been overpaying for its investments? And, of course, Neil Woodford, also an advocate of private equity (PE) investment, has hit a brick wall, illustrating the risks of investing in illiquid shares. Simon Gaunt, a director at BG, bristles at such analogies. The firm, he points out, invests in established businesses with scale, not the early stage start-ups favoured by Woodford. This does not mean "venture" investing is doomed, just that Woodford has been poor at it unlike life-sciences investment trust Syncona, for example.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
SMT is invested in Lyft, but not in Uber or Pinterest. The route to profitability for ride-hailing companies is not clear at present, but few doubt it will emerge and that ride-hailing is here to stay. In 2012, the share price of Facebook halved after an over-hyped IPO, but then soared after doubts about its potential on mobile platforms and the monetisation of its services were resolved.
The volatility of the tech sector has been masked by its long-term performance, but early investors in Netflix regularly saw their share price halve. Share prices, as last year, are prone to get ahead of events, but fast growth means that valuations soon catch up. In short, scepticism about prospects and valuations have been a regular feature of tech's long bull market.
Anderson argues that "growth investing is widely denigrated and value investing regarded as the one true faith". Yet, "the world changed in the late 1980s when Microsoft listed. The marginal cost of its software licences was zero, bringing in an era of increasing returns to scale and market opportunities unrestricted by production constraints". Investors have yet to adapt to a world in which business models are not built on the existing economic infrastructure but bypass them, making nothing safe. For example, Anderson thinks that progress in solar and battery technology, with efficiency improving 20% each year, could bankrupt the fossil fuel industry in ten years.
Don't cut yourself off
"The future will be very different from how the average fund manager sees it," says Anderson. The implied message is to be wary of "cheap" shares that will not necessarily bounce back as the business cycle matures and invest in "reassuringly expensive" companies that are better positioned for change. SMT shares, at a small premium to net asset value, are worth buying.
-
Is it OK to buy Scottish Mortgage investment trust again?Tips Scottish Mortgage investment was hit hard by the tech-stock crash, and it is still being buffeted by headwinds. Should new investors wait for those to ease before buying in?
-
Is Scottish Mortgage the next big success story?Despite facing setbacks, the Trust bounces back, making it a top fund pick for investors.
-
Buy these two funds to profit from private companiesFeatures Don’t be put off by Neil Woodford’s disaster. These two funds have done well with unlisted firms.
-
Six investment trusts for your IsaFeatures Looking for ideas on what to put in your Isa this year? MoneyWeek’s model investment trust portfolio might be a good place to start – and for those who are already invested, now might be a good time to rebalance
-
A successful first half for fans of investment trustsFeatures The broader equity market made little progress in the first half of 2018, but those who followed our investment trust recommendations have reason to be pleased, says Max King.
-
Scottish Mortgage Investment Trust: why sell out of a winning proposition?Features James Anderson of the Scottish Mortgage Investment Trust takes Merryn Somerset Webb to task for advising MoneyWeek readers to sell some shares in his fund.
