Fund management ‘irretrievably broken’, says star investor

James Anderson of Baillie Gifford criticises ‘near pornographic allure’ of earnings reports and headlines

The star technology investor James Anderson has taken a parting shot at fellow fund managers addicted to the “near pornographic allure” of earnings reports and macroeconomic headlines, as he claimed the industry was “irretrievably broken”.

The outgoing co-manager of the FTSE 100-listed Scottish Mortgage Investment Trust said his own “greatest failing has been to be insufficiently radical” over the past two decades.

Anderson, who is stepping down in a year’s time, has generated returns of 1,700% for investors in Baillie Gifford’s flagship fund by giving early backing to technology companies such as Tesla, Amazon and China’s Tencent and Alibaba.

Scottish Mortgage reported an 111% increase in net asset value for the year to 31 March, its “strongest ever” return. It was the best performing share in the FTSE 100 during 2020.

However, it has now sold 80% of its Tesla shares and offloaded its holdings in Facebook and the Google owner, Alphabet, to focus on finding other companies that will help build the post-carbon economy.

New investments include Northvolt, a Swedish battery maker for electric vehicles that is led by a former Tesla engineer, and the Covid-19 vaccine maker Moderna, which Anderson likened to a software company, as it writes RNA code to program human cells to develop new therapies.

The Moderna share price has jumped from $65 a year ago to $153. The fund has also added to most of its Chinese holdings and taken new Chinese investments.

Anderson said he and his co-manager, Tom Slater, who will become lead manager of Scottish Mortgage next year, needed to “remain eccentric” and become more radical.

In his fund manager report in the £16bn fund’s full-year results, the last before his departure, the 61-year-old wrote: “To be blunt, the world of conventional investment management is irretrievably broken. It demands far in excess of the canonical ‘six impossible things before breakfast’ that Alice in Wonderland propounds.”

Anderson criticised the value investing philosophy of the veterans Benjamin Graham and Warren Buffett, and the short-termism of many conventional fund managers.

“Distraction through seeking minor opportunities in banal companies over short periods is the perennial temptation,” he said. “It must be resisted. This requires conviction.”

He continued his attack, saying: “It is inherent to the notion of efficient markets that all available information is incorporated in share prices. Only new information matters.

“This is used to justify the near pornographic allure of news such as earnings announcements and macroeconomic headlines. In turn this is reinforced by the power of near-term financial incentives.”

He said the secret to successful investing was “understanding change, how it happens, how much happens and its implications” over the long term, and stressed the importance of listening to scientists and other experts.

For example, when the trust invested in Tesla seven years ago “that electric vehicles would win had become intensely likely”, he said – but others chose to focus on negative headlines about Tesla and its chief executive, Elon Musk. Since then, Tesla shares have soared from about $6 to $590.

“Most investors do not listen to experts. Instead they listen to brokers and the media, besotted as it is by fearmongering and the many short sellers,” he said.

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Anderson joined Baillie Gifford in 1983 and has managed its flagship fund since 2000. After his departure, he will become chairman of the Swedish investment firm Kinnevik, which manages the fortune of Sweden’s Stenbeck family and others.

Anderson has been similarly outspoken in interviews. He warned in March that investment management firms risked becoming too big and bureaucratic, taking aim at his employer, which he said had more compliance officers now than it had total staff when he started.

He had previously taken a swipe at Buffett, who runs the US investment firm Berkshire Hathaway and is revered as the “Oracle of Omaha”.

In an interview with Investment Trust Insider in 2018, Anderson described himself as a “more Charlie Munger person than a Warren Buffett”, saying that Munger, Berkshire Hathaway’s vice-chairman, was “much less prone to American folklore”.


Julia Kollewe

The GuardianTramp

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