Tom Slater of Scottish Mortgage: growth, the pandemic, and the importance of optimism

Merryn talks to Tom Slater of the Scottish Mortgage Investment Trust about investing in growth, the pandemic and its aftermath, why optimism will always bring better returns than pessimism, and why nothing compares to Tesla.


Merryn: Hello and welcome to the MoneyWeek magazine Podcast. I am Merryn Somerset Webb, editor-in-chief of the magazine, and with me today is Tom Slater.

Lots of you will know exactly who Tom Slater is, but for those of you who don't, he is the joint manager of the Scottish Mortgage Investment Trust, head of US equities at Baillie Gifford. He’s been there since 2000. And you've been co-manager of this trust since 2015, which is one of the important things from our readers' point of view, because readers, listeners, the vast majority of you will hold Scottish Mortgage in your portfolios, partly because it's in the MoneyWeek Investment Trust portfolio, and partly because you will be holding it anyway. And it will have made an awful lot of you an awful lot of money, just quickly, one year return just over 90%, five year return just under 400%. Tom, thank you so much for joining us today.

Tom: Thank you very much for having me.

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Merryn: Definitely a pleasure. Now, as I say most of our readers know this trust very well. And most of them are living much happier lives than they might have were they not holding this trust.

But for those who don't know it, I wonder if we could just start off, if you could just tell us a little bit about the trust, the investment philosophy behind it, and how you manage it, or how you and James Anderson manage it I should say – we'll move on to James in a little while.

Tom: Yes, of course, I think the most important objective that we have is to be patient, long term owners of the world's most exciting growth companies. We strongly believe that stockmarket returns are not driven by the majority of companies being a little bit better than average, but by the impact of real outlier companies, companies that change the way that our economy works, companies that revolutionise the products and services that we as consumers can enjoy.

And so our process is oriented around trying to find companies that have that potential and, where we find them, being really supportive, really long-term owners. In a world where the average holding period of stocks has gone down and down, we own our companies for more than ten years on average. So building those really long-term relationships and actually trying to help those companies in achieving their objectives.

Merryn: OK, interesting. So there was a study that I think you did internally a while ago that suggested to you that pretty much all of the returns from stockmarkets globally has come from about 4% of the companies.

Tom: Yes, that's right. It actually wasn't in an internal piece of work, it was an independent academic, Hendrik Bessembinder at the University of Arizona, who did that work, he looked at 90 years of US stockmarket data. And that showed, as you say, that 4% of companies generated all of the excess wealth. And indeed, it was more concentrated than that, it was less than half a percent of companies that generated half the wealth.

And it speaks to the fact that actually, we continually underestimate as investors just how great great companies can be, and the disproportionate impact that they have on the outcome for individual investors.

We're taught by financial markets theory that stock returns are normally distributed, and that we just choose the level of risk or return that we want and proceed accordingly. But actually, life is much, much more uncertain than that. If you're going to really generate returns over the long run, you have to embrace that uncertainty and go for those companies that that can actually do something really special.

Merryn: Interesting. But if you look at your portfolio – and from what you've said you might look at the Scottish Mortgage portfolio and expect to find it to be hugely concentrated now with a very small number of stocks in it – but from what you've just said, I might look at yours and go, OK, well, they found the best and the greatest companies, so they got a portfolio of only 20. But in fact, there are many, many more holdings in the portfolio, right?

Tom: There are more holdings. But actually, if you look at the top 30 holdings, they account for about 80% of the assets. So it is actually really quite concentrated in the top end of that portfolio. What you see beyond that is a number of the companies where we're building positions over time.

I think one of the dangers if you're in a very concentrated portfolio is that every decision you take as a fund manager becomes a huge decision. And we're wary of that. So what we're trying to do is identify companies, get to know them, build conviction and confidence over time and build the position size with it.

And that's particularly relevant if we're investing in private companies, for example, where you get certain opportunities to invest. It's not like public markets where you can go in any day you want and buy and sell stock. And we like to get to know those management teams to really understand the vision that they're pursuing. And we don't think that happens in in the space of a few weeks or a few days and making a decision.

Merryn: OK, well, we'll come on to the way the trust invests in private companies later. But let's just go back over the last year. If you look at the performance, you might look at this and say, well, the last year has completely vindicated this strategy.

It's been an astonishing performer, and a lot of those stocks that we might have looked at back in, say, February last year, and thought, well they're looking a little pricey, is this strategy going to keep working, the last year has suggested that maybe the answer to that is yes.

Is there anything over the last 12 months that has surprised you, that has made you perhaps look at the way you invest and say, well, maybe this isn't quite right, or that isn't quite right. Or maybe this is so brilliant, we should do more of this – has the last year changed anything or surprised you in any ways?

Tom: The last year has surprised me in a lot of ways. But let me start by saying that we don't think that the outcome in any one year tells you a great deal. We're delighted with the returns that we've delivered for shareholders over the past year, but I think you've got to look at five years or probably ten years, when trying to assess the scale of a manager, the performance of the trust. Over time periods like one year, the market will be volatile – we have very little influence over the outcome on those time horizons.

So, first point, I would encourage listeners to look at much longer timeframes than just one year. If you look at what has happened, what has driven that outcome, it's not because we had any deep insight into what was going to happen in the course of the pandemic, or, indeed, the market reaction through this time of economic stress. Instead, it's that we're investing in the companies and entrepreneurs that are building the future of the economy.

And, as we've been forced to isolate from one another, actually, the tools that these companies provide have been really important in enabling us to socialise, enabling commerce to continue enabling the enterprise workplace to continue. And so that's been really important. But I think I would really characterise that as an acceleration of trends that have been established for some time.

And as we think about moving out of this period of the pandemic – and hopefully we'll see some more positive news on that over over the coming months and year – we won't be going back to the way things were before the pandemic, when we talk about going back to normal. That's not really what I would mean by that.

Instead, I think you should anticipate that our expectations or habits have changed. And therefore, the expectations, the type of products, the type of services that we're going to want in the years ahead will be different from how it was at the start of the pandemic.

Merryn: That's interesting -- different how? I hear a lot about this, how the new normal will be different to the old normal. But when I look around me, the way people are already beginning to behave as the pandemic trails off in the UK, they seem to be going back to the old normal.

I'm seeing people going back into their offices to the extent that they can, people going out in the same way that they used to. I'm in Scotland, I think as you are as well, so obviously, it's not quite the same. You're only allowed to be inside until eight o'clock, you're not allowed to drink, but you get the idea. And I’m seeing people starting to look at booking their summer holidays in the same way they always have, and going to the shops in the same way they always have.

So I'm interested in this whole idea that everything will change as a result of the pandemic, because I look around me and I think, well, it was different for a year. But what I am actually seeing on the ground Is everyone going back to anything in much the same way as they did February 2020. You don't see that?

Tom: Well, I draw a distinction between two things. Fundamental human nature doesn't change. Are we going to want to socialise more? Are we going to want to see our friends? Are we going to want to get away from staring at a screen on our own as our working day? Absolutely. That of course will happen.

But there are lots of things that happened in the world pre-pandemic that were not an intrinsic part of human nature, they were just the product of accumulated accidents.

Take enterprise information technology as an example. The idea that a corporate entity should host all of its own IT systems, that it should have big data centres, that it should employ IT technicians to host those data centres – that model is not something that's fundamental to human nature, it's just how we've grown up.

But because of the pandemic, because workers have been working from home, because you've relied on cloud systems, because I sit here on my computer today and I need all that software to run reliably and securely on a remote basis, that has changed how the world of work will be.

And we're not all going to go back to hosting all of our own systems and data centres, because we've learned that that's completely inflexible. and it hasn't coped with the situation that we've been through. This is a huge market worth more than a trillion dollars that has been fundamentally changed and there's been a total reset in expectations.

I think as consumers we've learned to expect a lot more in terms of what we can get delivered to our door in a convenient, prompt fashion. I quite enjoyed getting pre-prepared food boxes from different restaurants; my expectation was that I could only do that with restaurants that were within a couple of miles of my home. But last week, I had a mailbox sent from a restaurant in London, because that restaurant has learned a whole new set of skills and has found a whole new product line, a whole new way of selling the skills of those chefs and that experience to diners all around the country. And so that's completely changed the model for a business like that.

Merryn: Did you feel guilty about your food miles Tom?

Tom: Well, that's a whole different set of issues. And I would tie that to another one: for years, scientists have been warning about the potential for a pandemic – the scientific basis for what's happened was absolutely clear. But we chose not to pay a great deal of attention or make the necessary preparations in response to those warnings.

Now, maybe one thing that's changed as a result of the pandemic – there's so many parallels to climate change and our failure to react from clear scientific consensus about the potential economic impact of climate change. And so maybe one of the consequences is that, actually, more of that preparation will now begin because people have seen the impact of an externality, the huge impact that it can have on our economy.

Merryn: That's interesting, though, isn't it? Because I wonder if that's not quite an optimistic way to look at it in that the pandemic, of course, is an externality that has affected us all, but immediately, suddenly, and very obviously. And so there's a difference there in human behaviour, it makes sense for the way we react very quickly to immediate threats. But if we can't feel the threat around us, we're quite bad at reacting to a different kind of threat. I like to think it, but I'm not convinced

Tom: That may well be true, but it does pick maybe at another thread that I think is important about the way we do things at Scottish Mortgage, which is that we absolutely, fundamentally are optimists.

So much of what goes on in finance and financial markets is about pessimism. It's about what could go wrong with this company, what's wrong with this idea, proving that I'm smarter than the next person by picking apart what they're saying.

But actually, that mentality, that way of approaching the task is fundamentally at odds with the structure of returns – you can make so many more times your money if you're right about a stock than you will lose if you're wrong about it. And so optimism infuses everything about the way that we approach the task.

And so if I continue with that idea and link it to what we're talking about I think one of the things that's that's changed markedly in financial markets over the past year is attitudes to decarbonisation and the companies that can usher in the era of decarbonisation. Markets have been hugely sceptical of that, but I think Tesla and Elon Musk have forced everybody to reconsider on the back of the huge success that they've had in driving electrification in transport. There's been a real reappraisal of the opportunity that comes along with that, the potential income streams long into the future. And so we've seen a much, much more buoyant funding environment for companies that are seeking to address decarbonisation.

And that becomes to some extent a self fulfilling prophecy. That's the work of Carlota Perez, and the academics at Sussex University tell us that, actually, that easy finance environment is almost a prerequisite for the maelstrom of technological innovation that will be required to address these challenges.

Merryn: I would say one of the conversations at the moment is all about the many conversations going on about capitalism – stakeholder capitalism versus shareholder capitalism; this kind of capitalism, that kind of capitalism; lots of talk about reforming it, changing it, improving it. I have a stack of books on my desk here Impact... Accountable... Investing to save the planet, etc.

But one of the things that you might say about the last year is that it showed capitalism to be a remarkably successful system. In that you could have sat there in March and gone well, this is an absolute disaster. But in fact, the worst thing that happened in the UK in terms of the supply chain was that a few shops were a little short of loo paper for about three days. In fact, the system kicked in and worked amazingly well.

If you had to criticise any part of the democratic system in the West during the pandemic, it'd be much more likely to be the public sector side than the private sector side. So in that sense, there's been a lot of remarkable success shown over the last year.

Tom: Well, I think, the contribution of the private sector, to discovering a way out of this pandemic, has been hugely important. could make the case that it took two of the companies in our portfolio, four days to find the way out of this crisis.

Merryn: Tell me about that.

Tom: So first of all, it was sequencing the DNA of the virus. That was published online by Chinese scientists, using Illumina’s DNA sequencing technology, they were able to get that result out to the world in less than two days.

And then Moderna, the RNA vaccine company that I'm sure many of your listeners will have become familiar with, took two days to come up with their vaccine candidate that is now being injected into patients. So everything else has been about scale up and appropriate levels of testing. But in terms of actually getting to that solution: four days.

That it speaks to the power of technology and innovation and privately funded companies that are pursuing really big ideas that can have a fundamental impact on society.

So it's not really a comment on your broader one of private sector versus public sector, other than to say that I think that government intervention and stimulus has been a really important part of keeping society afloat, keeping the economy afloat, through this.

But I think in terms of actual solutions, it's these innovative companies going after big picture opportunities that have been really important.

Merryn: So let's get back to Tesla briefly. It was at one point, the biggest holding, wasn't it, in the fund, but it's now about 5%?

Tom: Yes, that's correct.

Merryn: And is that a holding that you're still confident in? Because as you say, they've done amazing work pushing this agenda forward. But now, of course, there are loads of other great companies picking it up as well, and offering quite an intense competitive challenge. But you're still holding Tesla as this very large part of the portfolio. Are you looking to wind that down? Or is it staying there?

Tom: It's staying there. We have been owners of Tesla, for what, seven or eight years, so absolutely in line with what you'd expect in terms of being long term owners. And I think they've done a phenomenal job of addressing the many challenges to producing products that customers find really attractive, irrespective of whether they're electric or not, and then producing those products at massive scale. And I think those two things are incredibly difficult for others to do; it's one of the remarkable facets of the Tesla story that there hasn't really been any meaningful competitive response from anyone up to this point.

We have sold about 80% of the shares that we owned in Tesla over the course of the past year. And that's been driven by two things. First, the need to ensure adequate diversification in the portfolio. And second, the more challenging answers to the question about how do we make a lot of money from this starting point, as Tesla has become a much, much more valuable company, the way we frame our approach is how do we make five times our money from here? And it's become harder to answer that question.

So that's led us to bring back the size of the holding, but it still remains one of our largest holdings. Why? Well, firstly, I think that there that the opportunity is much, much larger than their current production. If you have a product which is demonstrably better than the competition in all sorts of ways, from performance to safety to software capabilities, you should expect that it will take share.

And in contrast, the way you put the question I think that it's going to be really, really difficult for others to compete, and certainly not if they don't take this seriously.

Tesla comes from a world of software, it comes from a world of improving the performance for any given price point at this rapid iterative rate. And that's not how the traditional automotive companies are set up, they've outsourced most of the production of their parts, it's very difficult for them to move to an entirely different model. We've seen no examples yet of anybody managing to scale production to compete. Hopefully those things will come, because it's really important in driving us towards a sustainable energy future. But I think even if that happens, it just makes the idea of electric vehicles more mainstream, which will be good for Tesla.

Merryn: So are there other holdings then in the top ten that you look at and you say, this has been amazing, but it's hard to see us making five times our money from here?

You've got there in the top holdings – correct me if I get any of these wrong – Tencent Holdings is in there; Amazon, Alibaba. Moderna is in there as well. Are there any of these other ones that you look at and say, well, we love these companies, they've done a stunningly good job for the portfolio. But can you really see Amazon going up fivefold form here?

Tom: Absolutely. These companies are in our top-ten holdings because we see that sort of potential upside; we see that innovative dynamic that allows them to grow and scale and improve returns, even as they get bigger. And so these holdings are all there for that reason.

The nuance of Tesla is that if we hadn't reduced it, it would be about 30% of the portfolio by now. So it's one of our largest holdings, it's just not that big. And we still see the potential for these types of returns.

Now, you touched on some of the Chinese examples there. Wwe know the big platform companies in the West, we're all familiar with Facebook, or Alphabet, the owners of Google. If you look at their Chinese equivalents, they're much more fundamental to the creation of the consumer economy in China. And we still think that process has much further to run.

You touched on Moderna. Yes, they've produced one RNA-based vaccine that is helping us address this crisis that we're in. But I think in so doing, firstly, they've generated an income stream, which allows them to fund many other projects. And secondly, validated a technology which can be hugely impactful. There are some really big areas where vaccines, or effective vaccines, could save millions of lives. Flu is one example. If they're able to massively increase the effectiveness of the flu vaccine using this technology, that will be a huge positive, and they've got a programme looking at HIV, again, that could impact millions of lives. So I think you've got this validation of the technology plus this new cash flow stream to fund it, that makes us think that the potential in front of that company is absolutely phenomenal.

Merryn: OK, thank you. Shall we go down the size scale quite a lot. One of the things – this is an aside – one of the thingsI will say to my readers about Tesla, or did a few months ago, anyway, was that they used to worry a lot of them about not holding bitcoin, being “no-holders”, but as long as long as they held Scottish Mortgage and had some Tesla, they had some bitcoin exposure.

But now right down the other end of the portfolio, the private bit, you've made an investment in That is a direct dabble into the world of cryptocurrencies, which, of course, our readers are super interested in. I wonder if you could tell us a little bit about that investment?

Tom: Yes, sure. The first point is that we're not investing directly in bitcoin or cryptocurrencies. We're not taking a view on that asset class or that particular asset. But instead, what we observe is that you're continuing to see interest in these areas, that you're seeing more private investment, that you're seeing more institutional investment into these assets. And at the same time, you're just seeing a phenomenal pace of innovation around the products and services that go alongside that.

This technology of a distributed ledger has all sorts of potential applications. So as you continue to see venture funds poured into this area, as you continue to see the entrepreneurship and ideas that go into this, that it is something that as investors we have to take more seriously.

For us as Scottish Mortgage, what interests us are companies. And it's only very recently that you're getting to companies that are involved in these technologies that are of sufficient scale that we can consider them as potential investments.

And we think at Blockchain, you've got that entrepreneurial leadership who've got skin in the game, they've got significant ownership of their own shares, that have that long-term vision to build out the products and services for that crypto economy. And so we're enthusiastic about backing them and seeing where they can get to.

Merryn: OK, so you believe in the infrastructure backing the crypto economy, so you're not taking a view on the cryptocurrencies themselves, but do you have a view on the cryptocurrencies?

Tom: Well, the cryptocurrencies themselves have been extremely volatile. And I think that, as a fundamental investor who looks at companies, who looks at internal rates of return, who looks at cash flow generated by companies, to actually think I could go from that area to something which is a commodity which doesn't generate a profit stream, whose price is simply driven by supply and demand, and think that I have greater insight than anybody else I'm very sceptical of.

Now, what I would observe is that we've been through several cycles of feast and famine with bitcoin and other cryptocurrencies. And yet, underlying that very high degree of volatility, you've just continued to see interest, you've continued to see innovation, and you've continued to see a scaling of that technology.

So, first, it's not about making short term predictions of what's going to happen to these very volatile prices, it's observing the persistence of this ecosystem, and that entrepreneurial spirit within it and we're just really interested to see where that gets us to over the next five or ten years.

Merryn: I think we all are.

Tom, let's talk a little bit about the nature of this. Not about blockchain itself, but about the fact that it's one of the private investments in the portfolio. Now about 16%-17% of the portfolio is in unlisted companies at the moment, which is an interesting dynamic that I know that you and James have been looking at for years, this idea that an awful lot of the growth in the corporate world has been happening before listing of markets, it was really important for anyone wanting to grow wealth, make solid long term returns, to be involved in the private market, as well as the public. Now, that's been a dynamic that has been going for, what how many years now? Quite a while, nearly ten years.

So the question really is, how has it happened? And do you think we might perhaps be reaching something of a turning point in that as we talk more and more about ESG, about sustainability, about the role of the company and the role of the fund manager being more than just profit, etc, we're going to be looking for more in the way of transparency from private companies in the same way that we are as from public companies. And so there'll be more of an equality between the different types of company and we may perhaps see private coming back to public, or is that too optimistic from my side for change?

Tom: Well, what we observed was that the tools that have been built by many of our big holdings were changing some important dynamics in the private markets.

If you set up a new company previously, you would have to go out and buy all your own infrastructure and software which required large amounts of capital. And even if you were an online company ten or 15 years ago, that meant you had an audience of potentially 100 million users. For today's companies they don't have to invest in any of that. They can pay that 5% to Amazon to host all of their infrastructure. You're generally using free tools or open source software. And you can use these gateways at Alphabet or at Apple, or at Tencent or Alibaba, to access an audience that numbers three billion plus.

So breakthrough companies are able to achieve real scale with only very modest capital requirements. And therefore, they didn't have venture capitalists controlling their boardrooms, who are looking for an exit. They can choose whether to stay private, who they want their investors to be, at what point it makes sense for their company to go public.

And now, for us at Scottish Mortgage, what that meant is that if we wanted to continue to access the world's greatest growth companies, we had to be flexible about where we went looking for them.

When we first invested in Alibaba in 2012, that was a $45bn valuation. In any other era that would have been a public company. But we had to go looking in private markets.

And we also saw that this creates a real problem for shareholders: how do you get access to this wealth creation to these companies, because the ownership is quite concentrated? That's the first problem. The second problem is if you do find a fund, or a way into getting access to these companies, you're likely paying management fees of 2%, and then probably a performance fee of 20%, of the returns.

And so we saw no reason why we couldn't do that for our shareholders within our current cost structure. You not only do you provide access, but you do it in a way that actually allows those returns to accrue to our shareholders. We see it as something that's really important.

The place we've got to is that we're pretty agnostic about whether a company is private or public if you go into a company for ten years plus, it doesn't matter that I can buy or sell the shares tomorrow and the day after, and the day after – actually, there's much more value, it forces you to think much more like an owner, if you don't have that temptation.

Sp we will just continue to push on finding the most attractive opportunities, and not worry a great deal about whether these companies are private or public.

Merryn: OK, so let's look down then at the companies that you do hold privately. We'll talk about Are there any other companies that are small holdings at the moment that will – obviously you'll be really excited about all of them – but are there any private companies in the portfolio that you're particularly excited about? That we could hear about?

Tom: Yes, there are lots and and I think it's important to make the point that they're not necessarily small either.

Merryn: OK. Fair enough. Small holdings.

Tom: Yes. I mean, if you look at companies like SpaceX or the payments provider Stripe; Epic Games, the company behind Fortnite; Bytedance, the company behind TikTok; these are companies that are valued at tens, if not hundreds of billions of dollars of valuation.

But one, which I think relates to some of the things we've talked about here, is Northvolt. Now, this is a company that is aiming to build out Europe’s supply of batteries for electric vehicles. It's run by a former engineer from Tesla. And if we're going to have a European car industry that is producing electric vehicles in the requisite volume, we need a massive investment in battery manufacturing. And at the same time, we need an investment in the full lifecycle of batteries. So not only their manufacturing, but the recycling at the end of life. For companies that are prepared to invest behind that, that's a really big opportunity. Northvolt is drawing on engineering talent from all around the world and taking advantage of renewable energy in Scandinavia to fund its initial manufacturing, and do that in a clean way, I think is a really interesting company with a great opportunity in front of it.

Merryn: You said that you're entirely agnostic about whether a company is public or private. Is there any conflict between investing in both in terms of the sort of pipeline of deals or the progress of an investment?

So, for example – this is an entirely random thought, so tell me if it's nonsensical – but if you are constantly on the lookout for small private companies, not small, but private companies, unlisted companies that you would like to invest in, because you see big growth in them. Did those companies look to see how long you hold the company after it's been listed, for example?

Do you ever have any sense that you have to behave differently or be a longer term holder than you might like of the companies that you hold that are listed in order to encourage unlisted companies to allow you to be one of their investors?

Is there any sense of that kind of conflict? Because I sometimes wonder if maybe we should have funds or trusts only invest in listed firms, and trusts that only invest in unlisted because they're different animals and slightly different skill sets, and then maybe there's conflict in that?

Tom: It's almost the opportunity that these worlds have been completely separated. But what that means is that you have venture capitalists investing in private companies, and they have life-limited funds, so that they are forced sellers. They can't take a long term view because they have to return that capital to their underlying clients.

At the same time, certainly, with open ended funds they have to have a liquid portfolio, because their investors can ask for their money back at any time, at any moment. And the problem that creates for companies is that you don't get that continuity of ownership, you get this dislocation at some point in their corporate life where they're transitioning from private to public. And that doesn't happen in a single day. But you have all of these parties with a time horizon, which is not the one that the company has. And that's, I think, the biggest conflict.

And so for us, what we're trying to traverse is that for these really successful companies, they choose their shareholders. There's plenty of capital sloshing around in private markets for these companies to fund themselves. But what they're interested in, is can I find investors that are going to support me, in my life as a public company, that are going to see listing as an opportunity to, as an indicator of success, an indicator of progress and an opportunity to buy more stock, rather than to dump my shares, because I have a life-limited fund?

And they see that we've been holders of Amazon for more than 15 years; they see that we've been owners of Atlas Copco for more than 20 years. And you know that is the type of shareholder that they aspire to get. And that's what gives us the opportunity. We don't have to manufacture that, that is just how we behave in public markets.

A final point on this is that low turnover is not no turnover. We own these companies because they fit with the philosophy of what we're doing; this search for outstanding growth companies. And because every day we have new opportunities. We still own Amazon, because we think it has some of the best risk-adjusted upside of anything we could invest in. But we're testing that assumption every day.

There are plenty of things that we have owned that we've sold, not because they become bad companies, but simply they no longer really fit with our philosophy. And I think as long as you’re clear about what you're trying to do, as long as companies understand what you're trying to do that's not a particularly difficult conversation to have. You're just no longer the right investment for us.

Merryn: Interesting, OK. Now, I know that you're the optimistic one and I'm often the pessimistic one. So I'm going to ask you a question that you won't like at all. Which is: what are you worried about?

When you look out over the next decade, not just in the corporate world, but say, in the political economy world, for example – change of regime in the US and a shift back towards big government and a high tax environment, etc? Possibly something else? Is there anything that you look at and say, well, actually, I'm quite worried about this? Anything that keeps you up at night? Or is that just not the Bailie Gifford way?

Tom: I think that there are always lots of things we ought to be concerned about and also positively trying to influence if we are concerned about. The mistake is to take that big picture concern and then drive it down into the way you think about individual companies.

But I think, for example, inequality is a large and growing problem for many of the companies that we invest in. If you look at the US there is this divergence in life expectancy between red states and blue states. The feeling that the economic prospects of a huge swathe of the population is stagnating is a real problem for society. And ultimately, it becomes a real problem for companies, because where does the incremental demand come from?

And I think that the more isolationist policies, and backtracking from free trade, is also a really worrying trend, because I I think that that integration of the global supply chain has been a really important factor in driving the global economy forward over the past ten or 20 years. It's had this really important impact in terms of driving many billions of people out of poverty in parts of China and Southeast Asia, etc. I think increased nationalism is a real concern for that.

So being optimistic at the company level and driven by that skew of potential investment returns is not the same as saying there aren't things to worry about. Absolutely there are. But it's just being cautious about allowing that to impact your stock picking and having structural optimism, when it comes to looking at companies that I think it's really important.

Merryn: It's interesting, because there are a lot of these social environmental issues becoming increasingly important to companies and increasingly important to the fund managers who invest in those companies. So you're seeing a reasonably new dynamic where the big fund managers, say you or BlackRock, whoever, put a reasonable amount of pressure on companies to behave in certain ways.

One of the things that I'm quite interested in at the moment is the extent to which fund managers in particular should be asking the ordinary investor, the retail investor, how they feel about that.

There's just been – which you might have seen or not – a quite interesting piece out from the UN PRI on how fund managers should really start to think about the preferences of their eventual beneficiaries when they consider their policies on this kind of thing. And Scottish Mortgage being so popular with retail investors, and of course with my readers, I wondered if you had any thoughts about how you might ask your end investors, how they feel about some of these sustainability issues that I know that fund managers at Baillie Gifford feel so strongly about?

Tom: Yes, I think that for long-term investors, strong governance aligns perfectly with the outcomes for shareholders. We expect societal and environmental costs of growth to be financially internalised for any company on that sort of time horizon. So we want to be on the front foot about addressing questions of supply chains, labour practices, environmental impact.

At the same time, we think that the correct governance model for an early stage entrepreneurial growth company is likely to be very different from that for a mature sizable incumbent. It's not a one size fits all, it's not a set of issues that lend themselves to quantitative filtering – the issues tend to be complex. Numerical indicators need to be approached with extreme caution.

But these are issues that are really important to us as long-term investors. One of the mechanisms for addressing this with shareholders is, aside from the regular meetings with our institutional shareholders, going direct to our individual shareholders, whether that's through annual general meetings, through hosting events, which has been, in some ways harder through the pandemic, but equally, actually, using tools like Zoom has allowed us to have a broader audience for those events. And having that dialogue. Because ultimately, we're here to serve our shareholders.

We're very fortunate to have the board to represent their views and to make sure that we as the fund managers are actively engaging with that. What Fiona McBain, our chairman, and the others on the board have done is prompt us with thoughtful questions about how we can improve in these areas. Because we don't think in any way that we're the finished article on any issue, but particularly including this one.

So trying to have that mindset of how do you improve, how do you get better, and ,as you say, how do you listen to your shareholders and make sure you're doing what they expect you to be doing?

Merryn: Valuable things, trust boards, right? And, final question – I must let you go – but at the beginning of our chat, I introduced you as the joint manager of Scottish Mortgage. Obviously, the name that has been so attached to Scottish Mortgage for years now has been that of James Anderson, who has announced that he is going to retire, so in a year James will be gone. And of course, your name is very well known as well. But possibly James's name has been connected with the trust for longer. I wonder, will anything change? Or is the process at Baillie Gifford so dug in now that James's departure will make no difference at all?

Tom: Oh, I started as the deputy manager on Scottish Mortgage in 2009. So 12 years ago, And I guess what's gone on over that period is a continued evolution of our process; always trying to refine what we're doing to get better. What hasn't changed is our desire to invest in the world's most exciting long term growth companies.

Now, having worked with James over such a long period, you would expect that actually there will be very little change in direction when he retires. Yes, we've been doing this together, we've been developing this together for a really long period. What will change is the people doing it. James has been someone who's been fantastic to work with, he challenges me every day, I really enjoy that relationship.

But we've got Lawrence coming – Lawrence has come on board as deputy manager. And so over the next year, until James retires, there'll be the three of us working together. We've worked closely with Lawrence; he works on some of our big international strategies. He is a fascinating growth investor. And so I'm really looking forward to having him as part of that team too.

Merryn: We will look forward to hearing from him.

Tom: So we'll continue to operate within that framework. Having been part of that direction for 12 years, you shouldn't expect that there will be a dramatic change of direction. But we'll just continue to push it, trying to get better. And trying to deliver returns for our shareholders over long periods of time. And of course, we'll miss James because he's been such a big character and a big part of what's been achieved.

Merryn: I'll tell you what, the world's journalists are going to miss him. Always been good for an interesting story or a quote. We've got another year to squeeze those out of them.

Tom: Yes, absolutely.

Merryn: Tom, thank you so much. I've really enjoyed talking to you. And I know the readers will be very grateful indeed, we've heard all these fascinating things from you. Thank you for joining us. And I hope you might join us again sometime.

Tom: Thank you very much for having me. And I absolutely I'd be delighted to

Merryn: Thank you and listeners, thank you very much for joining us. We'll be back again next week.

In the meantime, if you want to hear more from us is our website you can sign up there for our daily newsletter, Money Morning. Please do, John Stepek writes it, he's absolutely brilliant.

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