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James Anderson: my great fear and hope for the next 10 years

In the second part of our video interview with James Anderson, the co-manager of Scottish Mortgage Trust (SMT) expresses his:

  • regret that the financial world has not improved in the decade since the banking crisis 10 years ago;
  • excitement at the opportunities in the next decade as old, established businesses fall away in ‘a great corporate extinction’
  • fear of the losses investors could face as previously solid investments in energy, transport and healthcare evaporate;
  • expectation that artificial intelligence will replace much of what fund managers do.

You can watch the first part of the interview when Anderson discussed Tesla and its founder Elon Musk.

Can’t watch now? Read the transcript

 

Gavin Lumsden: We’re close to the anniversary of the financial crisis and the collapse of Lehman Brothers threw the financial markets and the economies into a tailspin. Already, there’s quite a lot of commentary, what’s changed? Have things got any better, but to quote your own blog, you’re a resolute optimist and many of the companies you’ve been investing in, many of the changes, the themes that you’ve been identifying have really accelerated in the past ten years. So, your comment on this impending anniversary.

James Anderson: It’s a fairly sour one. Now, I think to be fair to Citywire, you too are very aware of the importance of stressing the positive and where returns come from, but I would hate, it was one of the discussions when we named our blog etcetera, I would hate this to be taken as translating to ‘everything is good’. You know, I can produce a list of things that you and I, I suspect would equally worry about, but to bring it down to the specifics, it does bother me. Here, I will quote another truly great leader and one who so sadly and so suddenly died, Sergio Marchionne of Ferrari and Fiat who you may remember, at the time of 2008, was the senior independent director of UBS, the most afflicted possibly, of any of the major institutions.

GL: Right at the centre of the storm.

JA: We were talking to him, very sadly as it turned out, a few weeks before his death and we got on to this topic and he said, ‘Nothing has changed.’ And I fear, in the financial world that is the reality of the situation. I see no evidence that our financial system is substantially safer. I see no evidence that the prevalence of short-term greed, which is what Sergio was focusing on and that hasn’t changed one iota. So, the fundamental problems seem to be there and I think the underlying issue is that the notion that somehow, sophisticated finance, as it likes to be known, has led to a much more dangerous and consistently more prone to crisis system, than the previous prudential and limited regulations that we had to constrain excessive risk taking, is still a structural problem and I worry about it, yes.

GL: That’s sad to hear, but does that make your job more difficult? I’m going to turn to another question from one of our wealth managers. On the prospects for Scottish Mortgage, Ryan Lightfoot-Brown, an analyst at Chelsea Financial Services, asked, ‘Scottish Mortgage is a high growth trust and the style has been favourable for the past decade. Are you at all worried about the next decade?’

JA: I’m more excited than worried. My worry, and I think Tom [co-manager Tom Slaer] would fully agree with this, my worry is more whether we continue to do our tasks so that we find the great growth companies of the world and then able to invest in them consistently because you have to compound your returns in these stocks than I am structurally. You know, I’ve put this notion of growth versus value in a context of it being far too much thought about as a financial output you know, do you circulate your assets in a different direction? Whereas to me, it’s much more a reflection of what trends there are in the real world and I remember and you possibly remember some of this, although you’re much younger than me, people saying that it was ridiculous that Amazon was valued at a multiple of the market capitalisation of Borders and Barnes & Noble. Now, it’s not so much that that’s been wrong about Amazon that intrigues me, it’s that Barnes & Noble and Borders are not worth anything these days.

GL: And there were people investing their money in them.

JA: That’s right and I have a genuine worry, which I would love to talk about with the questioner in person. I would say that this is a worry, but it’s not a worry for Scottish Mortgage, that there is such a belief in mean reversion in the financial world, generally that we see and we see this with lots of our clients that people are constantly taking money out of growth with a capital G and putting it back in value. Now, my biggest worry about that is that that Barnes & Noble and Borders experience is being generalised. You know this in journalism yourself, that old models have been destroyed. I can scarcely think of an industry and this may take us back to Tesla and those oil companies and car companies and utilities as well, which is not at threat of being destroyed in the same way that Borders or that most traditional journalism and newspapers has been in the last decade and if I believe, as I do, that disruptive growth is spreading out to many different sectors – we haven’t for instance, talked yet about healthcare, then I think the destruction of value, the destruction of what is traditionally thought to be safe investments is what worries me most about the prospect for investors.

GL: You previously talked about ‘a great corporate extinction’. Sixty-nine of the top 100 global companies won’t survive because of the revolutions going on in energy, transport etcetera and healthcare, in drugs. Does that extend to asset management our wealth managers want to know? Fred Mahon at JM Finn for example asked, ‘Will any of the tech giants launch active asset management businesses that could threaten conventional asset managers?’

JA: I think it’s entirely possible and you won’t be surprised that we see this happening more in China at a faster pace than in America.

GL: Ant Financial.

JA: Yes, but then there are also opportunities involved with that. You know, the chances of being able to present our offerings to investors in China we hope at some stage in the next ten years, will happen as well. I think what’s really important though is that we do take these trends seriously and Tom is in charge of a group at Baillie Gifford, looking at the application of man plus machine in these areas.

GL: I was going to ask, could AI, artificial intelligence, replace what you and Tom do? I can see it replacing many fund managers, but what you do, going out finding, meeting these entrepreneurs, meeting these visionaries. Could a robot do that?

JA: Our judgement and the judgement of most of the people who’ve studied past returns is that a considerable part of the task of being able to, not so much identify, but stick with great companies and their outsized returns, is a matter of judgement of management, which your questions have already led us to consider in many ways. Now, I think that it is one of the later elements that will be replaced, but I don’t think one should be complacent about it. You know, I would for instance, encourage your questioner to read Mr Harari’s most recent book setting out just how good it is likely to be that the algorithms of the future are. And for us to be able to outcompete them becomes a more and more challenging task and it therefore, is incumbent on us to keep driving forward with what a human can add to what an algorithm will be increasingly capable of doing, which I think means you have to accentuate your skills and try and keep building them in those areas that the algorithms find most difficult.

GL: Fascinating. 

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