Tom Slater explains how technological advances underpin Scottish Mortgage’s worldwide investments.
The Scottish Mortgage Investment Trust PLC has been investing in innovative companies around the world since it was set up in 1909. It began by lending to plantations in Sri Lanka and Malaysia before expanding internationally and has retained a global outlook to this day.
This outward-looking, adventurous spirit, combined with an understanding of the age’s dominant themes and forces, has been integral to the approach taken by its managers. For Tom Slater, who manages the trust with James Anderson, there has perhaps never been quite such an exciting time to be an investor as the opportunities for companies created by the present technological revolution open up further interesting possibilities.
Perhaps the most notable manifestation of this is in internet-related technologies. “Fifteen years ago there were around 500 million internet users, around a third of whom were in the US,” Slater says. “Now there are over three billion globally – a much bigger market. The technologies that underpinned the internet revolution over the past 10–15 years are being applied in a much broader range of industries, and starting to change more and more established industries. It’s exploding out into all aspects of the economy – advertising, broadcast media, retail, healthcare, automotive, consumer lending and education.”
Digital connectivity has helped to create new kinds of businesses while mobile communications provide constant access to the internet and data feedback, as well as data analysis.
Many of the largest holdings in Scottish Mortgage’s portfolio have become household names in the last decade on the back of this – Amazon, Facebook, Google, Alibaba, Tencent and Baidu, for instance. Others have used the logistical opportunities created by the internet more effectively than many of their competitors to grow their original businesses, such as Inditex, the parent company of Zara. Yet the development of opportunities created by the web is still in its infancy, as bandwidths increase and people spend more time on the internet through mobile devices, and as e-commerce moves beyond shopping portals to providing a range of services from consumer lending to travel booking.
The vast amounts of data held by companies such as Google and Facebook may eventually become their most valuable commodity; certainly the possibilities in data analysis are opening up rapidly. Companies such as Splunk, which specialises in analysing big data, and Palantir, which analyses data for security implications for governments and large corporations, are among the potential winners in this field, Slater believes.
Elsewhere as part of the current technological revolution, genomic science and gene therapies are taking us closer to the age of personalised medicine. “Illumina, which makes genetic testing kits, has driven down the cost of sequencing the human genome by a thousand-fold in a decade — astonishing,” Slater observes. He adds that the benefits will be seen “in the standard of care in cancer in the next five years, and in broader use in applying testing and treatments, and at a pace we have only seen in the technology sector before”.
Illumina, whose share price increase has helped it to become one of Scottish Mortgage’s largest investments, was first bought in 2011 on the conviction that genomics, and its application, would drive down costs and improve clinical outcomes, and that Illumina would be the likely winner in this field.
Scottish Mortgage’s portfolio includes other companies that are helping to transform medicine – Myriad Genetics, the molecular diagnostic company, Genomic Health, which makes diagnostic tests for cancer, and Bluebird Bio, which develops genetic therapies. “Here is a combination of proven technology, which has driven down the cost of sequencing and is now being used in medical applications to drive the genetics market,” Slater says.
As investors, the emphasis is on helping management to achieve their longer-term goals. When choosing an investment, Slater and Anderson consider where the business is likely to be in the next five years. “We believe in the patient approach and seeing how the company will develop over the next five to 10 years and as shareholders, we consider how we can help the management to achieve their objectives,” Slater explains. Typically, the trust holds stock from five to 10 years, or even longer.
Scottish Mortgage has been a significant investor in the US for much of its history, which has a particular relevance for Slater who now leads the North American investment team. He has spent several months since 2012 on the West Coast of the US, notably in Silicon Valley, an area “where change is a fundamental element of its ethos”, Slater says. “Looking after this team is complementary to my role as co-manager of Scottish Mortgage; I continue to be a global fund manager, putting the US into a global context and joining discussions about companies from outside North America.”
INNOVATIVE THINKING
As an actively managed investment trust, Scottish Mortgage is not limited by index-driven constraints. This is even more important for investors nowadays. An increasing number of fast-growing software-based businesses are choosing to bypass traditional stock markets. Just over 10 per cent of the trust is held in unlisted stocks.
“Twenty years ago, three-quarters of technology funding deals came via initial public offerings [IPOs], but now three-quarters are through private markets,” Slater explains.
Businesses whose strengths lie in their own software and its application need less capital and have a bigger market than 10 years ago – these companies also tend to dislike the short-term nature of today’s stock market investment. Scottish Mortgage typically invests only in these unlisted innovative and disruptive businesses if they are valued at over a billion dollars.
Getting to know entrepreneurs and venture capitalists is critical, whether the company is unlisted or listed. “To us,” Slater says, “an hour with Jeff Bezos [Amazon’s founder and CEO] or with Mark Zuckerberg [co-founder, chairman and CEO of Facebook] is worth far more than 100 hours with an economist.”
After all, the ability to spot emerging talent and support innovation has been integral to Scottish Mortgage over its long history. Indeed, as the trust has shown, this is how reputations are built.
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