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Tom Slater on Growth Investing (Podcast) · Masters in Business

0:02
Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg
0:06
Speaker 1: Radio this weekend. On the podcast, I have an extra
0:09
Speaker 1: special guest. His name is Tom Slater. He's the head
0:12
Speaker 1: of the US equities team at UK firm Bailey Gifford,
0:17
Speaker 1: headquartered in Edinburgh. The firm has been around since They
0:22
Speaker 1: manage pick a number, almost three hundred billion dollars in assets.
0:27
Speaker 1: They've had explosive growth and they are not your typical
0:31
Speaker 1: growth manager. They run concentrated portfolios. He referred to one
0:37
Speaker 1: of the funds they run as growth at an unreasonable price,
0:41
Speaker 1: but it's worked out really well. That fund is up
0:44
Speaker 1: a hundred and twelve percent, almost a percent more than
0:48
Speaker 1: the S and P five hundred and Really this conversation
0:52
Speaker 1: is very much along the lines of what happens when
0:56
Speaker 1: you rethink the investment process over long, long periods of
1:01
Speaker 1: time and make well thought out, intelligent adjustments to how
1:06
Speaker 1: you go about selecting companies, constructing portfolios, making cell decisions,
1:13
Speaker 1: which Tom points out is where so many investors go awry.
1:18
Speaker 1: You know, your downside in anyone's stock is limited pretty
1:22
Speaker 1: much to but your upside is far far greater, and
1:26
Speaker 1: as he points out, four percent or so of the
1:30
Speaker 1: total US equity stocks are what has driven all of
1:35
Speaker 1: the gains over the past century, and so it becomes
1:38
Speaker 1: very important not to sell a stock that has potential
1:42
Speaker 1: to keep growing. And if you look at their portfolio
1:45
Speaker 1: grow substantially. They own things like Tesla and Netflix and
1:50
Speaker 1: Alphabet etcetera. This was really a fascinating conversation if you
1:54
Speaker 1: were at all interested in growth investing, if you want
1:57
Speaker 1: to know why having a large to share and not
2:00
Speaker 1: being a closet indexer is important as an active manager. Well,
2:05
Speaker 1: this is going to be the interview few so, with
2:07
Speaker 1: no further ado, my conversation with Tom Slater of Bailey Gifford.
2:14
Speaker 1: This is Master's in Business with Barry Ridholts on Bloomberg Radio.
2:19
Speaker 1: My special guest today is Tom Slater. He is the
2:22
Speaker 1: head of the US equities team for Bailey Gifford, where
2:25
Speaker 1: he has been a partner since two thousand and twelve.
2:28
Speaker 1: He runs the long term Global Growth portfolios, which are
2:32
Speaker 1: focused on growth companies that are both listed and private.
2:37
Speaker 1: Tom Slater, Welcome to Bloomberg. Hi Berry, Thank you very
2:42
Speaker 1: much for having me. So let's start a little bit
2:44
Speaker 1: with your background. How did you find your way into
2:48
Speaker 1: the investment management business. I know you have an experience
2:52
Speaker 1: in computer science and mathematics. Yeah, that was that was
2:55
Speaker 1: my background. I I studied mass and computer science University UM.
3:01
Speaker 1: I was thinking probably about about doing something in in academia.
3:06
Speaker 1: It was quite an interesting and exciting time in in
3:09
Speaker 1: the computer science world ninety six to two thousands when
3:13
Speaker 1: I was at university. But I had a very good
3:15
Speaker 1: friend that that I studied Mass with and and she
3:19
Speaker 1: went and worked in in the city of London during
3:24
Speaker 1: our final sort university UM. She she came back Frans
3:28
Speaker 1: of Franz Anderson, the name was she came. She came
3:30
Speaker 1: back and she said to me that this this is that,
3:33
Speaker 1: this is the direction we want to be looking at UM.
3:36
Speaker 1: And that's what that was really the first time I
3:38
Speaker 1: encountered the world of investment management UM. Probably the summer
3:44
Speaker 1: really that that was a heck of a time in
3:46
Speaker 1: terms of the end of that last big stock cycle.
3:51
Speaker 1: Was that your formative experience the dot com boom and bust? Yes,
3:57
Speaker 1: in a lot of ways it was. I started working
4:01
Speaker 1: at Baiby Gifford in in September of two thousand, so
4:05
Speaker 1: just after the peak of the boom, and and then
4:09
Speaker 1: for the for the next three years, of the first
4:11
Speaker 1: three years of my career, watch markets decline substantially. I
4:15
Speaker 1: think there's this slight danger in quing it formative. And
4:18
Speaker 1: of course there had been a lot of speculative excess
4:22
Speaker 1: in that period, but some some amazing things have come
4:25
Speaker 1: out of it as well. Subsequently, we've had a lot
4:29
Speaker 1: of time for the work of Colota Perez at Sussex
4:32
Speaker 1: University in this in this regard and and the link
4:35
Speaker 1: between financial mania and subsequent technological innovation quite interesting. So
4:41
Speaker 1: let's switch gears. You're an active manager and you are
4:44
Speaker 1: both selecting stocks and determining how long to hold them.
4:48
Speaker 1: And I want to ask you about a quote of
4:51
Speaker 1: yours that I read where you you had written quote
4:55
Speaker 1: the active management industry has done a poor job of
4:59
Speaker 1: making the as for its own existence. Discuss that. I
5:03
Speaker 1: think it's a really interesting area. By the the start
5:08
Speaker 1: of it was was looking at this polarization between active
5:13
Speaker 1: management and passive management and thinking through, well, what is
5:18
Speaker 1: the what are we really trying to say about about
5:21
Speaker 1: the case here? And it struck me that both both
5:27
Speaker 1: passive and active had become terms that had become quite corrupted.
5:33
Speaker 1: So in the in the case of the active management industry,
5:36
Speaker 1: you see so many funds that label themselves as active,
5:41
Speaker 1: that charge fees for active management, but have huge overlap
5:46
Speaker 1: with the index or low active share as it's known.
5:50
Speaker 1: And so what those companies are really focused on is
5:53
Speaker 1: business risk and not producing an outcome that diverges too
5:57
Speaker 1: much from the market, because of course, diverging too much
5:59
Speaker 1: from the market is what leads you to your your
6:03
Speaker 1: clients to fire. And so I think when you hear
6:08
Speaker 1: those sort of hours from the act of management industry
6:11
Speaker 1: about losing assets to passive management, in some ways the
6:16
Speaker 1: industry has has been the architect of its own demands
6:20
Speaker 1: by providing sufficient value to save us. And that leads
6:25
Speaker 1: to these sort of remarkable results from the likes of
6:29
Speaker 1: Cramers and Petagist so that show that there being a
6:33
Speaker 1: correlation between active share and performance. So you have this
6:38
Speaker 1: remarkable idea that you don't even need to know what
6:41
Speaker 1: bets your fund manager is taking, simply that the fact
6:44
Speaker 1: they are taking bets is likely to lead to a
6:48
Speaker 1: better outcome, just because the aggregate statistics are dragged down
6:53
Speaker 1: by those who aren't actually offering a genuine act of experience.
6:58
Speaker 1: At the same time, though, you you the passive management industry,
7:02
Speaker 1: I think has been guilty of coming up with so
7:06
Speaker 1: many induicries against which to manage assets passively that you
7:11
Speaker 1: can't help but concluded it is a little more than
7:14
Speaker 1: a than an asset gathering exercise. There are more indseased
7:19
Speaker 1: than than there are stocks to invest in, which was
7:23
Speaker 1: which was a threshold that was crossed two or three
7:25
Speaker 1: years ago. And so I think both both sides of
7:28
Speaker 1: this argument have become quite polarized, that they've become at
7:31
Speaker 1: times quite disingenuous. And that's what's what's taking bairy g
7:35
Speaker 1: effort towards this idea of of categorizing ourselves as actual investors,
7:40
Speaker 1: by which we mean that we aim to be long term, supportive,
7:45
Speaker 1: engaged shareholders and companies, which is which is is nothing
7:50
Speaker 1: to do with taking positions relative to an index. So
7:53
Speaker 1: let's talk about one of the funds you're affiliated with,
7:56
Speaker 1: the US Equity Growth Funds. It's up over a hundred
7:59
Speaker 1: and twelve percent year to date. I have to assume
8:03
Speaker 1: that has a substantial active share given the SMP is
8:08
Speaker 1: up only year to date. Yes, we do not look
8:14
Speaker 1: at the index when we construct portfolios. I think indices
8:19
Speaker 1: are a good way to evaluate the performance of a
8:22
Speaker 1: fund manager, so long as you do it over a
8:24
Speaker 1: time scale which which is commensurate with the way that
8:27
Speaker 1: which the fund is managed. But I think it's an
8:30
Speaker 1: extremely dangerous way to start constructing a portfolio. So our
8:35
Speaker 1: portfolios are constructed simply of the stocks that we think
8:39
Speaker 1: offer the most exciting possibility is the greatest chance of
8:44
Speaker 1: being exceptional companies, by which we mean addressing large opportunities,
8:49
Speaker 1: having some form of sustainable edge and something special about
8:52
Speaker 1: the culture and the way in which they go about
8:54
Speaker 1: the task. So I discourage people from looking at the
8:58
Speaker 1: one year numbers because I think one year numbers are
9:02
Speaker 1: filled with noise, and actually extending the time frame looking
9:06
Speaker 1: at three years, looking at five years is much more
9:09
Speaker 1: likely to give investors evidence or otherwise of the skill
9:14
Speaker 1: of the manager. So you use a benchmark that is
9:18
Speaker 1: the S and P five plus one point five. I
9:23
Speaker 1: have to ask where that benchmark came from. If you
9:26
Speaker 1: were in British I would accuse you of showing off.
9:31
Speaker 1: I think that is actually an artifact of of MIFED
9:36
Speaker 1: regulations that we have to um have to declare our
9:41
Speaker 1: performance objective, not just a benchmark, but a performance objective
9:45
Speaker 1: for the fund. Um. I think if I have to
9:49
Speaker 1: link that to a characteristic of Bailey Gifford, we have
9:53
Speaker 1: an extremely strong compliance culture. Um. You if you go
9:58
Speaker 1: way back in time, you know, um, after after the
10:01
Speaker 1: Maxwell scandal and the raid on the pension fund, who
10:06
Speaker 1: is that pension fund given to to manage? It was
10:08
Speaker 1: daily gifted because the firm has a reputation of being
10:14
Speaker 1: white and white when it comes to all of all
10:16
Speaker 1: of these compliance um and management traits. And that's that's
10:21
Speaker 1: really a function of the fact that the firm is
10:23
Speaker 1: an unlimited liability partnership, which I think is a is
10:27
Speaker 1: a very rare structure these days if you look at
10:29
Speaker 1: the front management industry. But the forty yard partners who
10:34
Speaker 1: work directly in the firm are personally liable for the
10:37
Speaker 1: film's liabilities. And so when it comes to things like
10:42
Speaker 1: MITHID regulations, we tend to follow the absolute letter of
10:45
Speaker 1: the law and declare our performance relative to the one
10:49
Speaker 1: and a half percent above the benchmark, you know, perhaps
10:53
Speaker 1: a slightly more enthusiastic way than than many of our
10:57
Speaker 1: peers might quite fascinating. So Tom, let me ask you,
11:01
Speaker 1: how do you think about both assets under management and
11:05
Speaker 1: how quickly the firm is growing when you're out looking
11:09
Speaker 1: at companies or starts to buy. Yes, it's a really
11:12
Speaker 1: interesting question. Um. The film was actually founded in so
11:17
Speaker 1: if you look at the full sweep of its existency,
11:20
Speaker 1: the growth hasn't been that explosive. But certainly our assets
11:23
Speaker 1: and the management have have grown reasonably sharply of late.
11:29
Speaker 1: But if you actually look at the flows of our clients, um,
11:32
Speaker 1: there's there's significant flows both in and out, and the
11:36
Speaker 1: net of those two numbers is just about zero. UM.
11:40
Speaker 1: So the growth and assets has been much more to
11:43
Speaker 1: do with investment performance and alpha generated for our clients
11:48
Speaker 1: than it has from from an exercise around asset gathering.
11:52
Speaker 1: And the reason for those two way flows is a
11:54
Speaker 1: mixture of both the our core base of pension fund
11:59
Speaker 1: clients gradually reducing their exposure to equities over time, and
12:03
Speaker 1: then also clients rebalancing their portfolios. But in terms of
12:09
Speaker 1: how I think about it, if you if you ask
12:12
Speaker 1: me the question today what is bailic efforts assets and
12:16
Speaker 1: the management, I wouldn't be able to tell you the
12:19
Speaker 1: answer It's a statistic that at one stage in our
12:23
Speaker 1: life used to be available on our Internet, but we
12:26
Speaker 1: purposefully removed it. And the reason we did so is
12:29
Speaker 1: that our objective is not to grow assets under management
12:33
Speaker 1: in and of itself. UM. What we believe is that
12:37
Speaker 1: if we do a good job from an investment standpoint
12:40
Speaker 1: for our clients, if we provide a really high level
12:43
Speaker 1: of service, that the assets and the management figure will
12:47
Speaker 1: take care of itself. Um. One of the directors of
12:52
Speaker 1: the investment trust that I managed, Scottish Mortgod Investment Trust,
12:56
Speaker 1: wrote a book called Obliquity and talking about how those
13:00
Speaker 1: things that had the greatest success often did that because
13:03
Speaker 1: they pursued a different goal around delivering an excellent product
13:08
Speaker 1: or service for their customers, and the success followed from
13:12
Speaker 1: that they didn't target those financial objectives. Quite quite interesting. Well, well,
13:17
Speaker 1: let's stick with the concept of both active share and
13:21
Speaker 1: active management. You know, it's been the decade has really
13:25
Speaker 1: been defined as the rise of passive and indexing. And
13:29
Speaker 1: when we see firms like Vanguard at that six trillion
13:33
Speaker 1: or Black Rocket eight trillion, that they've become the eight
13:36
Speaker 1: hundred pound guerrillas, what should investors know about active strategies,
13:43
Speaker 1: what types of strategies can work beyond simple passive indexing. Well,
13:50
Speaker 1: I think passive indexing can be a great product for
13:54
Speaker 1: and service. I think UM Vanguard does a fabulous job
14:01
Speaker 1: of producing a really great value for money product for
14:05
Speaker 1: savers UM and doing it with with real integrity. They
14:09
Speaker 1: also have a very significant active management business, and again
14:14
Speaker 1: they bring that that high quality attitude towards the way
14:19
Speaker 1: they approached the task. I think that in an era
14:23
Speaker 1: where there is so much change going on, where there
14:28
Speaker 1: are companies using new business models, often underpinned by technology,
14:35
Speaker 1: to bring transformational change in industries that have really historically
14:41
Speaker 1: seen very little progress, UM that it creates pockets of growth,
14:47
Speaker 1: creation of value that if you can tap into as
14:50
Speaker 1: an act of manager, can be hugely valuable to your
14:53
Speaker 1: underlying clients. UM. Now, it's it's it's important that you
14:58
Speaker 1: have clarity around philosophy, process, what you're actually trying to do,
15:04
Speaker 1: and it's it's centrally important that your fees are reasonable
15:09
Speaker 1: and don't detract from that underlying experience at the end investor.
15:13
Speaker 1: But I think subject to those qualifications, active management has
15:17
Speaker 1: it has a huge amount to offer offer savers So
15:20
Speaker 1: let's talk a little bit about active management. This era
15:24
Speaker 1: is known, especially the past couple of years, for the
15:28
Speaker 1: high valuations we've seen for for multiple growth companies. How
15:32
Speaker 1: should investors think about valuations? The best stocks never look cheap,
15:38
Speaker 1: but names that have looked historically expensive have done excellently
15:42
Speaker 1: well this year. One of the ways we would characterize
15:47
Speaker 1: our approach to investment would be the idea of growth
15:51
Speaker 1: at an unreasonable price. And what what what it means
15:58
Speaker 1: when I say that is that we're looking for companies
16:03
Speaker 1: that address really big opportunities and where that opportunity is
16:09
Speaker 1: often dynamic, it's often changing, and you have a hypothesis
16:14
Speaker 1: about why this company might be the one to to
16:18
Speaker 1: benefit from that change, but we don't know. But if
16:23
Speaker 1: if the opportunity is big enough, if they if the
16:26
Speaker 1: edge of the company is great enough, if there's something
16:28
Speaker 1: special about the way it goes about that task, then
16:30
Speaker 1: it can generate a huge amount of value. So if
16:36
Speaker 1: you look at a company like Alphabet or Amazon, you
16:41
Speaker 1: know these these companies have been vastly underestimated for most
16:46
Speaker 1: of their life cycle. UM. I think it was Michael
16:50
Speaker 1: Morrits Sequoia who said, why do we persistently underestimate just
16:55
Speaker 1: how great a great company can be, and so we
17:01
Speaker 1: we don't really look at multiples of near term earnings
17:04
Speaker 1: or near term sales. We look at what might this
17:07
Speaker 1: company achieve? Where could it be five years from now?
17:10
Speaker 1: And I think over that time you can only think probabilistically.
17:13
Speaker 1: There isn't an answer to that question. But if you
17:16
Speaker 1: if you can identify one of those small number of
17:19
Speaker 1: companies that are big winners in markets, um, then they
17:23
Speaker 1: can justify paying what what may appear to be optically
17:28
Speaker 1: high short term multiples because some of the growth opportunities
17:32
Speaker 1: that are bound today are so open ended, and you
17:34
Speaker 1: see a lot of when it takes all or when
17:36
Speaker 1: it takes most economics. So I'm looking at the Bailey
17:39
Speaker 1: Gifford US equity growth funds. The top ten holdings are
17:43
Speaker 1: fairly concentrated. It's about fift the portfolio with a lot
17:49
Speaker 1: of names that I think a lot of people would
17:51
Speaker 1: recognize Tesla, Amazon, Shopify, Wayfair, Netflix, Alphabet, MasterCard. I have
17:58
Speaker 1: to ask about check and Trade Desk, two companies I
18:03
Speaker 1: am not all that familiar with. Yeah, if you look
18:08
Speaker 1: at those two companies checkers and Education Platform, I think
18:13
Speaker 1: there are. There are a lot of challenges faced by
18:16
Speaker 1: the education system. And what CHECK has done is through
18:21
Speaker 1: a director consumer model based around questions and answers products
18:27
Speaker 1: um it. It is helping students to get measurably better
18:33
Speaker 1: outcomes in in in their examinations, but around that and
18:38
Speaker 1: on top of that it can build um all sorts
18:42
Speaker 1: of products associated with student access and and in an
18:47
Speaker 1: environment where college education is so expensive and inflation is
18:53
Speaker 1: so high, actually providing a cost effective solution that demonstrates
18:57
Speaker 1: value for money for students is something that I think
19:01
Speaker 1: has a huge potential runway. UM You you've talked a
19:06
Speaker 1: little bit about this year and the unusual traits of
19:08
Speaker 1: this year. You know, I think what this year has
19:11
Speaker 1: shown a spotlight on is um the challenges the education
19:16
Speaker 1: sector has faced in embracing digital tools, digital methods of delivery.
19:21
Speaker 1: Here in the fur management industry, here I am working
19:25
Speaker 1: from home using a whole array of cloud based services.
19:28
Speaker 1: It's it's probably made me more productive, not less productive.
19:32
Speaker 1: But if I look at my children and their educational experience,
19:35
Speaker 1: you know, as these UM state at home orders have
19:38
Speaker 1: come through, you know, it's really shown a spotlight on
19:41
Speaker 1: on how slow the education sector has been to embrace
19:44
Speaker 1: some of these tools. Now check is a company that
19:48
Speaker 1: it's run by its founder, a significant amount of equity
19:53
Speaker 1: tied up in of their own wealth, tied up in
19:57
Speaker 1: the equity of the business. It's run with a very
19:59
Speaker 1: long time horizon, exactly the type of characteristics that we're
20:03
Speaker 1: looking for in the in the long term growth businesses
20:05
Speaker 1: that we invest in. I would say, and you know
20:07
Speaker 1: if you when you when you talk to you talked
20:09
Speaker 1: a bit about some of those UM top holdings, and
20:13
Speaker 1: you know, if I was to pull out at difference
20:16
Speaker 1: perhaps in the way we approached the task versus versus
20:20
Speaker 1: some of our peers, it would be in the in
20:23
Speaker 1: the longevity of the holdings. So you know, um, Amazon,
20:29
Speaker 1: we bought in two thousand and five, so the holding
20:32
Speaker 1: period as far as been fifteen years, and you know
20:36
Speaker 1: has two thousand and thirteen, it's been seven years. So
20:39
Speaker 1: it's the time horizon, not not the recent growth that
20:42
Speaker 1: I think is the is a really important and defining characteristic.
20:46
Speaker 1: Quite interesting. So Tom, let's talk a little bit about Passive.
20:50
Speaker 1: You've talked about why Active doesn't do such a good
20:56
Speaker 1: job of explaining their own existence. Kind of left the
21:00
Speaker 1: field all alone to passive. But I want to come
21:03
Speaker 1: back to another statement you made, quote the average active
21:07
Speaker 1: manager will underperform the market. Unfortunately, this statement is mathematically inevitable.
21:15
Speaker 1: Isn't that essentially the underlying argument in favor of passive Yeah,
21:21
Speaker 1: I mean, I guess what what I is getting up is.
21:25
Speaker 1: You know, if you if you say the market is
21:28
Speaker 1: is made up of active and passive approaches to investment,
21:33
Speaker 1: then after fees, you are guaranteed to see those brooches
21:38
Speaker 1: underperform whatever the benchmark is. And since the fees on
21:41
Speaker 1: active management are higher and see some passive management, you
21:45
Speaker 1: would expect that that in some day or to as
21:48
Speaker 1: a group underperform unerformed by a greater amount. But I
21:53
Speaker 1: think you you know you You have to come back
21:55
Speaker 1: to some of the challenges around what is active management.
22:00
Speaker 1: And there are some some rules of of um not
22:04
Speaker 1: even rules of fun. But there are some some interesting
22:07
Speaker 1: academic results in this area. One we've touched on is
22:12
Speaker 1: that simply having a higher active share chorities positively with
22:16
Speaker 1: performance outcomes. But I think in the subsequent academic results
22:20
Speaker 1: have shown that time horizon is also important in this
22:26
Speaker 1: and as as you extend the time horizon. The academic
22:29
Speaker 1: evidence is also supportive of better outcomes for for active management.
22:36
Speaker 1: So I don't know, I don't think the averages matter
22:40
Speaker 1: a great deal. It's much more about can you can
22:45
Speaker 1: you find investment manager with the philosophy and process that
22:47
Speaker 1: you believe in? Do they keep their fees to a
22:50
Speaker 1: minimum so that you as an individual have to have
22:53
Speaker 1: the best chance of our performing because the fees are
22:57
Speaker 1: the one part that we do have sitt and t about.
23:01
Speaker 1: And then it's you know, when you when you when
23:03
Speaker 1: you believe you have found the manager that meets this
23:05
Speaker 1: great area. If little changes, then stick with them through
23:09
Speaker 1: inevitable performance cycles. You know, the the oldest client I
23:14
Speaker 1: manage money for a betting g EFFITS is Scottish Mortgage
23:17
Speaker 1: Investment Trust. We've we've managed that that fund for a
23:20
Speaker 1: hundred and twelve years through the Great Depression and two
23:24
Speaker 1: World Wars and unfortunately the performance numbers that come out
23:27
Speaker 1: of that are not gifts compliant. But over that hundred
23:32
Speaker 1: and twelve year period, you know, it is has been
23:34
Speaker 1: a phenomenally attractive thing for investors to be invested in
23:40
Speaker 1: an in an actively managed fund, quite interesting for Americans
23:44
Speaker 1: who may not be familiar with what the Scottish Mortgage
23:48
Speaker 1: Trust investment trust is. Can you explain a little bit
23:51
Speaker 1: exactly what that entity is. I can't. Yes, it's it's
23:56
Speaker 1: a closed ended investment vehicle listed on the London Stock Exchange.
24:01
Speaker 1: It's capitalized around twenty five billion dollars. It's a member
24:05
Speaker 1: of the foot See Index UM. But it's really a
24:09
Speaker 1: collective investment vehicle UM that was raised in originally in
24:15
Speaker 1: in in the fund structures that invested in that time.
24:19
Speaker 1: But it's an incredibly flexible structure UM. It has an
24:24
Speaker 1: independent board of directors who are who are of extremely
24:28
Speaker 1: valuable source of council and advice for us as the
24:32
Speaker 1: managers who do a great job of protecting the interests
24:36
Speaker 1: of the tens of thousands of independent shareholders in the trust.
24:42
Speaker 1: And it's a very flexible structure being being closed ended
24:46
Speaker 1: in a permanent pool of capital, allowing us to invest
24:49
Speaker 1: in both public and private companies really on the basis
24:53
Speaker 1: of where we find the most exceptional opportunities with without
24:57
Speaker 1: worrying about a company's public or private status, and in
25:01
Speaker 1: an environment where many companies are able to grow very
25:05
Speaker 1: rapidly with very modest capital requirements, often staying private for longer.
25:10
Speaker 1: It's a structure that allows us to many maintain the
25:13
Speaker 1: opportunity set of investing in the world's greatest growth companies.
25:17
Speaker 1: So let's stick with the idea of private. Generally speaking,
25:21
Speaker 1: we're seeing companies staying private for longer. As you mentioned,
25:24
Speaker 1: they're they're not I P O in as often, and
25:28
Speaker 1: there's clearly no passive, comparable sort of fund for pre
25:32
Speaker 1: public companies. How different is making the stock selection decision
25:39
Speaker 1: about private companies compared to what we see for publicly
25:43
Speaker 1: traded firms. We have to be clear about what we're
25:46
Speaker 1: trying to do here. We're investing in growth companies and
25:51
Speaker 1: companies that we aren't venture couplists. We're not going in
25:55
Speaker 1: and funding two people in a garage, um where where.
26:00
Speaker 1: But we are investing in companies that have chosen to
26:03
Speaker 1: stay private, possibly because you know, in in today's world,
26:06
Speaker 1: where your addressable market is, there's three billion people globally
26:11
Speaker 1: that have a smartphone where you can address that market
26:15
Speaker 1: without investing in significant couple capital. You know you can
26:19
Speaker 1: pay five percent of revenue to an Amazon Web services,
26:23
Speaker 1: pay thirty percent to an app store, and then suddenly
26:26
Speaker 1: you know that that three billion people is an addressable audience.
26:30
Speaker 1: And as a result, with very modest capitals and investors,
26:34
Speaker 1: you can see that the most successful companies really growed
26:38
Speaker 1: to phenomenal size very rapidly. And so our observation was
26:43
Speaker 1: that these are companies in another era that we you know,
26:48
Speaker 1: we've we may well have been investing in any way
26:52
Speaker 1: because because they would have come to public markets at
26:54
Speaker 1: a much earlier stage. So I think in terms of
26:57
Speaker 1: the decisions about investment, there's there's very little different. There
27:00
Speaker 1: are some technical differences around the leagal negotiations around the
27:04
Speaker 1: type of shares to you, but but I think that's
27:07
Speaker 1: sort of slightly tangential to the to the core task
27:09
Speaker 1: of picking the picking the investments. I think the other
27:13
Speaker 1: thing to to to to comment on is you know
27:17
Speaker 1: the costs at which this can be done. You know,
27:19
Speaker 1: the the ongoing charges of Scottish mortgage investment trusts is
27:23
Speaker 1: around thirty six basis points or just over a third
27:26
Speaker 1: or one percent, And think for our shoolders to get
27:29
Speaker 1: access to some of the world um most promising private
27:34
Speaker 1: companies within that type of cost structure is game changing,
27:39
Speaker 1: quite quite fascinating. So the equity markets in the US
27:44
Speaker 1: have been dominated by the fang stocks or the phantom stocks.
27:48
Speaker 1: If we throw in Microsoft, Facebook, Apple, Alphabet, Amazon, Netflix, Google,
27:55
Speaker 1: I guess, I guess we could add even another Egg
27:57
Speaker 1: if we change Google to Alphabet. These are the companies
28:01
Speaker 1: dominating today, but they weren't the dominant companies twenty years ago.
28:06
Speaker 1: Are these going to be the dominant companies twenty years
28:10
Speaker 1: from now? Well, I think the first thing we ought
28:13
Speaker 1: to be careful of is how we talk about these companies.
28:17
Speaker 1: I try to ban the use of the term fang internally,
28:22
Speaker 1: and the reason is that it creates this idea of
28:26
Speaker 1: equivalence that this is, you know, these groups, these group
28:30
Speaker 1: of companies driven by the same growth drivers, but also
28:33
Speaker 1: affected by the same risk practice. You know, if you
28:37
Speaker 1: if you go back and in fifteen years we were
28:39
Speaker 1: all talking about the bricks. She was like, I think
28:42
Speaker 1: an acronym coined by Jim O'Neill. But it was it
28:46
Speaker 1: was an emerjoring markets Brazil, Russia, India, China. Now, if
28:50
Speaker 1: you if you actually look at what's happened since that
28:54
Speaker 1: brick acronym was coined, China has created an economy a
29:00
Speaker 1: new economy two times the size of the other three combined.
29:05
Speaker 1: So so they were really never that alike as as
29:07
Speaker 1: economies in the first place. And so we try to
29:12
Speaker 1: think about these these companies separately from one another. Amazon
29:16
Speaker 1: remains one of our largest holdings, and you know, I
29:20
Speaker 1: think there we see a runway to to a much
29:23
Speaker 1: bigger business as you as you look at some of
29:25
Speaker 1: the different components there, from from the general merchandise business
29:30
Speaker 1: to it's it's moving to grocery in the retail space,
29:33
Speaker 1: to it's so it's move into new geographies such as India,
29:37
Speaker 1: but also it's it's in this this sort of intangible
29:41
Speaker 1: quality of being able to move into areas that there
29:45
Speaker 1: are somewhat adjacent to where they are, but where it's
29:48
Speaker 1: very hard for people to to to imagine their progress. So,
29:52
Speaker 1: you know, I strongly believe Amazon Web Services is just
29:55
Speaker 1: about the most important business that exists in the world today.
29:58
Speaker 1: Now Wall Street is very good at value doing you know,
30:01
Speaker 1: today's products, today's markets, it's very bad anticipating or valuing
30:07
Speaker 1: imagination and ambition, and that has been such an important
30:11
Speaker 1: driver of value growth at Amazon. So I think these companies,
30:14
Speaker 1: you know, over the past decade when everybody's been searching
30:18
Speaker 1: for who is the next Alphabet, who is the next Facebook,
30:21
Speaker 1: who is the next Amazon? You know, what we've we've
30:23
Speaker 1: seen is actually those companies have reinvented themselves. They've got
30:27
Speaker 1: stronger as they've they've got bigger that they've sucked it
30:29
Speaker 1: in economic activity from across the Internet and also from
30:33
Speaker 1: the real economy. I think it's you know, it's a
30:36
Speaker 1: it's a much more nuanced question for for some of
30:40
Speaker 1: those companies as you when you start out, you know,
30:42
Speaker 1: trillion dollars of capitalization. So what excites me is that
30:48
Speaker 1: you see some of them, the technologies that have driven
30:53
Speaker 1: this transformation in retail, this transformation in media media over
30:56
Speaker 1: the past twenty years, being applied to areas which have
31:00
Speaker 1: us see nothing like that piece of change. And I
31:03
Speaker 1: think that creates a whole new raft of opportunities, you know,
31:07
Speaker 1: in in areas from I know, from insurance to to
31:12
Speaker 1: real estate to um the automotive industry and and you know,
31:19
Speaker 1: I think sort of one of the things that's so
31:22
Speaker 1: exciting for a growth investor at the current time is
31:26
Speaker 1: just how we're seeing the broadening of the impact of
31:30
Speaker 1: More's law of ubiquitous mobile communications of advanced software across
31:35
Speaker 1: huge suites of the economy. M So let's stick with
31:40
Speaker 1: the concept of a WS and some of their competitors. Obviously,
31:45
Speaker 1: Microsoft is a key competitor. A recent I p O
31:49
Speaker 1: Snowflake is a company that won public and they seem
31:53
Speaker 1: to be in a similar space and they quickly scaled
31:56
Speaker 1: up to like a hundred billion dollar market gap. How
31:59
Speaker 1: do you look at motes that these various companies create.
32:04
Speaker 1: Is Amazon now just a behemoth that can never be
32:10
Speaker 1: taken down? Or will anyone ever managed to penetrate the
32:14
Speaker 1: motes that they've built? I mean, I think ever is
32:18
Speaker 1: a long time. But some of the things we do
32:22
Speaker 1: know about about Amazon web services businesses. Firstly that the
32:26
Speaker 1: addressable opportunity is very very large, trillion dollar plus market
32:33
Speaker 1: for for I infrastructure. We know it has a very
32:36
Speaker 1: strong first move of advantage that it's got to a
32:39
Speaker 1: scale long before others. If you if you listen to
32:44
Speaker 1: Jeff Bezos the Amazon CEO talk, you know he was
32:47
Speaker 1: saying was he was amazed at the at the head
32:50
Speaker 1: start he was able to get in this business. I think, um,
32:54
Speaker 1: I think few people appreciated just just how fantastic the
32:59
Speaker 1: economics that could be. And I think scale is a
33:02
Speaker 1: self reinforcing advantage here. You know that it it allows
33:06
Speaker 1: you to invest in infrastructure and better service and the
33:09
Speaker 1: bigger data sets means better machine learning, which means better
33:12
Speaker 1: outcomes for companies, which means you attract more companies. So
33:15
Speaker 1: so I think it is it is in infrastructure, it's
33:17
Speaker 1: in a very powerful position, you know. I think Microsoft
33:21
Speaker 1: has has been has done very well at using its
33:24
Speaker 1: distribution um into the enterprise space to to really get
33:28
Speaker 1: itself back into the game. And I think, you know,
33:31
Speaker 1: it remains to be to be seen how how Google
33:34
Speaker 1: is offering under the leadership of Thomas Curion competes from here,
33:38
Speaker 1: because it's obviously a company with phenomenal technological pross. But
33:43
Speaker 1: this shift in enterprise from on premise to the cloud
33:48
Speaker 1: is one which I think plays out over the next
33:51
Speaker 1: ten or twenty years and is of enormously large size.
33:55
Speaker 1: So I think they know the capitalizations that you mentioned
33:59
Speaker 1: sort of attached to things such as Snowflake reflect the
34:01
Speaker 1: fact that investors are starting to incorporate that just just
34:04
Speaker 1: a longevity of the shift into their thinking. So we're
34:07
Speaker 1: talking about some pretty gigantic industries and companies, But when
34:13
Speaker 1: we think about growth going forward, all these companies today,
34:18
Speaker 1: they didn't many of them anyway, didn't really exist five, ten, fifteen,
34:23
Speaker 1: twenty years ago. So that leads me to the question,
34:26
Speaker 1: where are the big opportunities out there that aren't already
34:31
Speaker 1: dominated by these behemoth firms. Yeah. I think one of
34:37
Speaker 1: the interesting dynamics that we're seeing in the market today
34:42
Speaker 1: is around the companies that are providing scale as a service.
34:49
Speaker 1: And what I mean by that is that the biggest
34:52
Speaker 1: online players have had phenomenal resources at the disposal, which
34:57
Speaker 1: has been very hard to compute. But if you look
35:00
Speaker 1: at something like a Shopify, what that company has all
35:05
Speaker 1: as created is a platform for merchants to compete on
35:10
Speaker 1: a more equal footing with the likes of Amazon and
35:12
Speaker 1: or Mart, by providing them with the tools to create
35:17
Speaker 1: their online store, the same sort of browsing experience for
35:20
Speaker 1: their customers, the access to a payments gateway, increasing the
35:23
Speaker 1: access to two day fulfillment. And so they've created that
35:28
Speaker 1: scale themselves, and then as they've got as as they've
35:32
Speaker 1: as they've attracted more and more merchants, they can then
35:34
Speaker 1: negotiate better and better terms with their suppliers and pass
35:37
Speaker 1: that on to the smaller merchants. So they're they're really
35:40
Speaker 1: selling scales to those underlying customers. Now Shopify doing that
35:44
Speaker 1: in the retail area. But if you take a company
35:47
Speaker 1: like Strip in payments, you know they're navigating the payments infrastructure.
35:53
Speaker 1: Is it is a phenomenally challenging thing because there's different regulations,
35:58
Speaker 1: there's different banks in every geography that you go to,
36:00
Speaker 1: different business practices. You almost impossible for small businesses to
36:05
Speaker 1: incorporate payments on a global scale into what they're doing. Um.
36:09
Speaker 1: But but what Strype has done is navigate that incredibly
36:13
Speaker 1: complex world and then make it extremely simple for for
36:18
Speaker 1: individual companies to then incorporate that capability into their app,
36:22
Speaker 1: into into their their website. And you know, I could
36:26
Speaker 1: go on with this. You know, companies like Trilio doing
36:29
Speaker 1: exactly the same thing in communications and providing a gateway
36:32
Speaker 1: into this these incredibly complex communication networks. So I think
36:37
Speaker 1: there's one really interesting angle is around those this set
36:41
Speaker 1: of companies selling selling scale as a service into into
36:45
Speaker 1: small emergence. I think the other angle I would go
36:49
Speaker 1: at it from would be about about those companies that
36:54
Speaker 1: can harness this this new world that we live in,
36:57
Speaker 1: this this technology lead world to to to use new
37:02
Speaker 1: business models in in in established industries. UM. So you know,
37:08
Speaker 1: insurance is an interesting one. You know, we invest in
37:11
Speaker 1: Lemonade the iPod recently. UM. You know, I think, what
37:14
Speaker 1: what what they've done in creating a completely digital experience
37:19
Speaker 1: for their for their customers, UM in terms of accessing
37:23
Speaker 1: their insurance products, in terms of making claims UM just
37:27
Speaker 1: is is really challenging for business models that are based
37:31
Speaker 1: on mainframe computing and expensive expensive distribution. UM. That I
37:37
Speaker 1: could go on in redfin in real estate as as
37:39
Speaker 1: another example of that. You know, if you if you
37:42
Speaker 1: can create, if you if you can tap into a
37:45
Speaker 1: direct relationship with the consumers through your website, if you
37:48
Speaker 1: can have an agent directly employed agent force, but give
37:51
Speaker 1: them all the the digital tools to make them more
37:54
Speaker 1: effective in their jobs, then I think that gives you
37:56
Speaker 1: a big competitive advantage over over traditional income bunch. Quite
38:01
Speaker 1: quite interesting. So I have to ask about the impact
38:05
Speaker 1: of the COVID nineteen pandemic. How has that affected your
38:11
Speaker 1: thought process about the companies you want to have in
38:14
Speaker 1: your portfolio? How much of what you own has really
38:18
Speaker 1: been in the right space to deal with a work
38:21
Speaker 1: from home shelter in place pandemic. And what happens to
38:27
Speaker 1: those companies sometime next year once we see widespread distribution
38:32
Speaker 1: of the various vaccines that have been developed. Yeah, this
38:36
Speaker 1: is a really interesting area. And UM I think for
38:41
Speaker 1: sure a lot of the companies that we own have
38:44
Speaker 1: been beneficiaries of the circumstances we find ourselves. And we
38:49
Speaker 1: own Zoom, the video communications platform, which we we bought
38:54
Speaker 1: in early two thousand and nineteen. But if you stick
38:57
Speaker 1: with that one for a for a moment and maybe
38:59
Speaker 1: explore from the shoes, you know, the the the insight
39:02
Speaker 1: that we had when we we we participated in the
39:05
Speaker 1: I p O of Zoom was that video communications in
39:10
Speaker 1: the enterprise UM was massively under penetrated. You know, if
39:16
Speaker 1: we were having this conversation, you know, a couple of
39:19
Speaker 1: years ago via video conference. Sorry, what what I think
39:22
Speaker 1: we would have done is that that your I T
39:25
Speaker 1: team and my I T team would have arranged a
39:27
Speaker 1: meeting they have. They'd have gone into a know, a
39:30
Speaker 1: room that's somewhere in our offices that's only used for
39:32
Speaker 1: video conferencing and and spent about half an hour trying
39:35
Speaker 1: to set up the call and then being on hand
39:37
Speaker 1: when we actually tried to do it in person the
39:39
Speaker 1: next day. UM. But so so, the constraints on much
39:44
Speaker 1: broader use of video conferencing was that it was a
39:46
Speaker 1: dreadful product. And as you created a much more engaging
39:52
Speaker 1: user experience, as you as you made it possible for
39:54
Speaker 1: people to just do video conferencing, you know that that
39:58
Speaker 1: you would see an explosion in the scale of the
40:01
Speaker 1: market and also a viral selling dynamics that if if
40:05
Speaker 1: if I phoned you via zoom and you had a
40:07
Speaker 1: good experience, you would say, what's this product? I'm going
40:09
Speaker 1: to use it? And I think you know that that
40:12
Speaker 1: was that that dynamic was unfolding through two susand nineteen.
40:16
Speaker 1: But but in with the impact of the virus, usage
40:20
Speaker 1: has has exploded. UM. And I think now they talked
40:23
Speaker 1: about maybe three million users of this service. UM. I
40:27
Speaker 1: think the last number I saw was that they had
40:29
Speaker 1: eleven million paying customers. So what what happens going forward? Well,
40:35
Speaker 1: you know, if if the vaccines are as effective as
40:37
Speaker 1: we hope, then then I think we'll all be having
40:40
Speaker 1: a lot more in person meetings. Um, you know, because
40:43
Speaker 1: everybody is set up of being cooped up at home,
40:45
Speaker 1: you know, they want to get out. So so the
40:48
Speaker 1: unprecedented level of demand that we have today, of course
40:51
Speaker 1: the clients. But then the question is, you know, everybody
40:56
Speaker 1: knows what zoom is. And I'm not talking about you know,
40:58
Speaker 1: people in the in the I. T. Departments of the enterprises.
41:02
Speaker 1: You know, it's it's it's become a verb. Um. You know,
41:05
Speaker 1: millions of sales people and marketing people and people in
41:10
Speaker 1: education understand this product now. And so of the billion
41:14
Speaker 1: knowledge workers that are on the planet, how how much
41:18
Speaker 1: of that is addressable for this company that starts with
41:20
Speaker 1: eleven million licenses? And I think those are the really
41:23
Speaker 1: challenging questions. You know, it's not will demand decline, of course,
41:26
Speaker 1: of course it will decline as as as we come
41:28
Speaker 1: out of blockdown. And I think if you, you know,
41:32
Speaker 1: you expand that more broadly. One of the frameworks that
41:35
Speaker 1: I've I've found really helpful and it's worked on with
41:39
Speaker 1: by by one of my colleagues, Dave Putschnowski is a
41:42
Speaker 1: fascinating analyst, but he's drawing on an idea of accumulated accidents.
41:50
Speaker 1: So this idea that what were the structures UM that
41:55
Speaker 1: were the norm before COVID hit. There weren't the sort
41:59
Speaker 1: of local maximum or the perfect way that something should
42:02
Speaker 1: be done, but instead just the product of accumulated accidents
42:06
Speaker 1: over time. Because I think those are the things that
42:08
Speaker 1: are UM were unlikely to go back to UM as
42:13
Speaker 1: as COVID starts to unwind UM. And and you know,
42:18
Speaker 1: let me talk about as an example. You know, in advertising,
42:22
Speaker 1: you know, a great deal of television advertising is sold
42:26
Speaker 1: at the upfronts in New York each each spring, and
42:31
Speaker 1: and and it's where the advertisers will go and bet
42:35
Speaker 1: on the content slate of of of the broadcasters and
42:40
Speaker 1: and and spend sense significant chunks of their marketing budget
42:43
Speaker 1: for the year. Now, in a world where you know,
42:46
Speaker 1: we have connected television a huge amount of data about
42:52
Speaker 1: about the audience that content has been broadcast too, particularly
42:56
Speaker 1: connected television platform site rock, who does a ceremony like
43:01
Speaker 1: like that persist or do you do the much more
43:04
Speaker 1: effective data driven advertising products of the of the digital
43:09
Speaker 1: age now start to make significant inroads into into that market.
43:14
Speaker 1: And so I think it's that's that's a really helpful
43:16
Speaker 1: framework to us and trying to think about and what
43:19
Speaker 1: the what the post COVID world looks like. So let's
43:22
Speaker 1: stick with that theme of data analytics and how much
43:26
Speaker 1: more information both clients and investors get. You know, we
43:32
Speaker 1: mentioned earlier you graduated from Edinburgh with a degree in
43:36
Speaker 1: computer science with mathematics. How much quant do you use
43:41
Speaker 1: in your investing process? Or or s differently, how important
43:45
Speaker 1: are all the metrics that are available today to be
43:48
Speaker 1: crunched versus twenty years ago to your process? And answer
43:54
Speaker 1: that in two ways if I may, I think the
43:57
Speaker 1: fist is that our process is very qualitative. Um what
44:05
Speaker 1: what we're trying to think about? What are the big drivers?
44:08
Speaker 1: You know, where could the revenues of this company be
44:10
Speaker 1: five or ten years from now? Um? What? What? What
44:14
Speaker 1: are the competitive advantages? You know? Which is really getting
44:18
Speaker 1: into questions about about profitability and margins? Um? But but
44:23
Speaker 1: what is the corporate culture? What is it about makes
44:26
Speaker 1: that makes this business special? Why can't somebody else did?
44:31
Speaker 1: And we think if we can answer some of those
44:32
Speaker 1: more qualitative questions, I think it gets you. It gets
44:36
Speaker 1: you to to to broadly correct answers. You know, the
44:40
Speaker 1: left of the decimal point if you will and and
44:43
Speaker 1: I see much more value in that for us than
44:46
Speaker 1: then this what we see in in markets, which is
44:50
Speaker 1: this this constant attempt to predict what a company will
44:54
Speaker 1: learn this quarter or next quarter more accurately than everybody else. Um,
44:59
Speaker 1: which is a game. Think firstly that we have no
45:01
Speaker 1: advantage in and it's so important for an investor to
45:05
Speaker 1: be able to articulate what they think their own advantages.
45:08
Speaker 1: We spend so much time asking it of companies, but
45:10
Speaker 1: so little time asking it of ourselves. But we have
45:14
Speaker 1: no advantage in that that more precise estimation of of
45:18
Speaker 1: short term learning than anybody else. But what we do have,
45:22
Speaker 1: you know, being in Edinburgh having a bit of a
45:24
Speaker 1: distance and perspective on what's happening in financial markets, is
45:28
Speaker 1: maybe that ability to be patient in the in this
45:31
Speaker 1: most impatient of industries, and we think that's more likely
45:35
Speaker 1: to to add value for our clients over time. UM.
45:41
Speaker 1: Another take on it would be, UM that if I
45:45
Speaker 1: as observing what's been happening in our companies over over
45:50
Speaker 1: the past five years, maybe a little longer, is just
45:54
Speaker 1: seeing the impact of machine learning and artificial intelligence and
46:00
Speaker 1: what this these technologies are capable of and it's that
46:03
Speaker 1: ability to ingest huge amounts of quantitative data and spot
46:08
Speaker 1: patterns in a in a way that a human just
46:11
Speaker 1: isn't capable of. UM. And so we've we've we've been
46:16
Speaker 1: having an experiment within beating iff it, looking at you know,
46:20
Speaker 1: could we apply these same technologies to recreate the human
46:24
Speaker 1: investors that we have UM and so so are systematic
46:29
Speaker 1: investment strategy which we wear. We started incubating in the
46:33
Speaker 1: past couple of months. UM we're after after after three
46:37
Speaker 1: years of investment in the team and the technology and
46:40
Speaker 1: the algorithms, is our own experiment to try and disrupt
46:45
Speaker 1: ourselves in going about the task of investment. Quite interesting.
46:49
Speaker 1: I have to ask you a question about a little
46:51
Speaker 1: bit about some of your background relative to being a
46:56
Speaker 1: US and a global investor. You worked on a Developed
47:00
Speaker 1: Asia team at Daily Gifford, and you also worked on
47:03
Speaker 1: the UK equity teams. What was the takeaway from that
47:07
Speaker 1: experience when you're either looking at US investing or global
47:13
Speaker 1: investing and how different UM is investing in those areas
47:18
Speaker 1: versus let's say the US. I think for most of
47:23
Speaker 1: of my career, UM, the the emergence of China as
47:30
Speaker 1: a global economic superpower has has been an absolutely central
47:35
Speaker 1: phenomenon in the world of investing, and not only it's
47:40
Speaker 1: it's economic rise, but the emergence of companies on on
47:45
Speaker 1: the East coast of China with with the innovative capacity
47:50
Speaker 1: and entrepreneurship to match some of those that you have
47:53
Speaker 1: on the west coast of the US. UM. And so
47:57
Speaker 1: I suppose UM, the one of the things I take
48:02
Speaker 1: take away from from my experiences is is just an
48:06
Speaker 1: appreciation of that phenomenon, UM helped by some of my
48:11
Speaker 1: Chinese colleagues, Helped by the fact that and we've now
48:15
Speaker 1: opened an investment office in Shanghai, UM where one of
48:21
Speaker 1: one of my partners has moved out from from Edinburgh.
48:24
Speaker 1: UM that some of some of my Chinese colleagues have
48:26
Speaker 1: moved back to China as part of that effort. And
48:29
Speaker 1: and a really important part of understanding what's going on
48:34
Speaker 1: in the world is understanding some of those developments. UM.
48:39
Speaker 1: I think and looking at the US with an international
48:43
Speaker 1: perspective can can yield insights that others aren't looking for. UM.
48:49
Speaker 1: So you know, I and I link it to to
48:55
Speaker 1: Netflix because I think there's there's there's a few few
48:58
Speaker 1: few points in there that are irrelevant to our process.
49:02
Speaker 1: And what we're trying to do is look for big
49:05
Speaker 1: winners on the sort of time horizon that we have.
49:08
Speaker 1: So ten years UM you see this this um um
49:15
Speaker 1: power or distribution in stock market returns, you see a
49:18
Speaker 1: very small number of big winners. And so you know,
49:21
Speaker 1: what we're trying to do is identify companies with that
49:24
Speaker 1: sort of potential and then where we find them, aim
49:26
Speaker 1: to be very patient and long term owners, accepting that
49:29
Speaker 1: at times we will look very out of favor with
49:32
Speaker 1: the market UM. And one consequence of that approach is
49:37
Speaker 1: that actually the biggest mistakes that you make are UM,
49:42
Speaker 1: not stocks that you own which go down, which are inevitable.
49:45
Speaker 1: You know and make lots of mistakes UM, but it's
49:48
Speaker 1: it's the ones that you you you look at, your
49:51
Speaker 1: do the analysts on and you don't buy UM that
49:54
Speaker 1: then turned out to be big winners. And I put
49:57
Speaker 1: Netflix into that category for us UM. We were looking
50:01
Speaker 1: at it back in I think it was two thousand
50:03
Speaker 1: and twelve, around about the time they split. They they
50:07
Speaker 1: announced the plan to split the streaming and the DVD
50:11
Speaker 1: business UM and which which which was taken very badly
50:15
Speaker 1: by both their customers and stock markets, and we we didn't.
50:20
Speaker 1: We didn't take the plunge and buy the stock at
50:23
Speaker 1: that point, which is which I see is as as
50:25
Speaker 1: one of my biggest mistakes over the past ten years. UM.
50:29
Speaker 1: But then so look looking at the stock maybe three
50:32
Speaker 1: years later, UM, and it was up a lot at
50:35
Speaker 1: that point, and of course it's it's very difficult to
50:39
Speaker 1: to buy a stock that's that's gone up several folds
50:42
Speaker 1: since you last looked at it. But but what stands
50:45
Speaker 1: out for me and what allowed us to make that
50:47
Speaker 1: purchase despite the stock price having increased, UM, was looking
50:52
Speaker 1: at the progress of the international business. UM. You know,
50:56
Speaker 1: the the US investor base in Netflix at that time
51:00
Speaker 1: was almost singularly focused on the U S subscriber editions
51:05
Speaker 1: and any single quarter and because the international business wasn't
51:09
Speaker 1: wasn't making much money at that time. And I think
51:11
Speaker 1: our insight was that, you know, it had seemed for
51:14
Speaker 1: a long time that that Netflix wouldn't get away with
51:16
Speaker 1: what it had managed to achieve in the US in
51:18
Speaker 1: other markets because the incumbents would see what had happened
51:21
Speaker 1: and they wouldn't let wouldn't let it happen. And our
51:23
Speaker 1: insight was that there's you know, they might to turn
51:26
Speaker 1: on all these markets in one sweep, and that the
51:29
Speaker 1: traction that they were getting would ultimately lead to an
51:33
Speaker 1: extremely profitable business. And so it was that that x
51:37
Speaker 1: US piece, when everybody else was focused on the U
51:39
Speaker 1: S subscriber base, that that I think was our insights
51:41
Speaker 1: at that point. So let me raise an interesting question
51:45
Speaker 1: about this. You mentioned a number of different companies, a
51:49
Speaker 1: number of different stocks. How did they fit into managing
51:53
Speaker 1: a portfolio? It's obviously the analysis of a single stock
51:58
Speaker 1: or any stock is so only very different than constructing
52:02
Speaker 1: a portfolio. How do you think about weight portfolio weights?
52:06
Speaker 1: How do you think about different positions? You run a
52:10
Speaker 1: fairly concentrated portfolio, so there aren't a whole lot of
52:14
Speaker 1: openings for any one given company. Yeah. The way that
52:21
Speaker 1: I think about this is UM. It comes back to this,
52:25
Speaker 1: this asymmetry of returns for the concentration of returns in
52:29
Speaker 1: a small number of companies UM. So I was doing
52:33
Speaker 1: some work on this back in two thousand and twelve,
52:36
Speaker 1: two thousand and thirteen, and the starting point for me
52:40
Speaker 1: was actually trying to think about UM about outcomes for
52:44
Speaker 1: individual companies. UM you know, and how if you know,
52:47
Speaker 1: if I was looking at Amazon and said I had
52:49
Speaker 1: a hundred percent upside and somebody else is looking at
52:52
Speaker 1: Alphabet and said it two upside, how could we think
52:55
Speaker 1: about those different outcomes and how would you attach probabilities
52:58
Speaker 1: to them? And the the the way I looked at
53:02
Speaker 1: it was was actually inspired by purnaments, but looking thinking
53:06
Speaker 1: about base rates. So so let's look at the past
53:09
Speaker 1: thirty years of the SMP five what can you say
53:12
Speaker 1: about stock ritins? And there was one rule which emerged
53:15
Speaker 1: which is actually quite consistent of two time, which was
53:18
Speaker 1: that in any five year period, about five percent of
53:22
Speaker 1: stocks go up fivefold, at least fivefold. And and so
53:28
Speaker 1: one of the things we we we focused on is
53:31
Speaker 1: has this company got the potential to go up at
53:34
Speaker 1: least fivefold? And why is it more likely for this
53:36
Speaker 1: company than than a stock picks a random um. And
53:41
Speaker 1: you know, the the implication of that for portfolios is
53:44
Speaker 1: quite interesting because you know, what you're saying is that
53:48
Speaker 1: if you have a buy a whole portfolio, you know
53:51
Speaker 1: a huge proportion of the return is going to be
53:54
Speaker 1: concentrated in the top two or three successful holdings. So
54:00
Speaker 1: come back to come back to this point about what
54:02
Speaker 1: is a mistake. People rightly focused on cell discipline and
54:07
Speaker 1: you know what caused you to sell a stock. But
54:10
Speaker 1: actually the biggest danger for a long term by an
54:14
Speaker 1: old investor is that you sell a stock prematurely um
54:18
Speaker 1: and that you don't capture that outsized impacts of that
54:22
Speaker 1: that small number of companies. UM. There's a there's a
54:27
Speaker 1: really interesting piece of work UM done by an academic
54:31
Speaker 1: Arizona State University very recently, Professor Bessembender, and he looked
54:37
Speaker 1: at ninety years of US stock market data and what
54:42
Speaker 1: what that showed is of the twenty six thousand companies
54:46
Speaker 1: that you could have invested in over that period, UM,
54:50
Speaker 1: all of the return came from from just four percent
54:54
Speaker 1: of the companies. But in fact it was even more
54:57
Speaker 1: concentrated that than that. So there was about I think
55:01
Speaker 1: I think his numbers where there was about thirty two
55:03
Speaker 1: trillion dollars of excess value created by the US equity
55:06
Speaker 1: market over that ninety year period, and of that half
55:11
Speaker 1: of the excess value creation came from just ninety companies.
55:14
Speaker 1: So so stock markets are driven by a really small
55:19
Speaker 1: number of exceptional companies. And so what we mustn't do
55:23
Speaker 1: as long term investors is truncate the impact of those
55:27
Speaker 1: big winners. So so go back to to you know,
55:30
Speaker 1: talking about it in UM. You know, through specific examples.
55:35
Speaker 1: Since since buying Tesla in in seven years ago, I
55:40
Speaker 1: don't know how many times I've been told to sell it.
55:43
Speaker 1: You know, it's it's a hard seven or eight drawdowns
55:46
Speaker 1: of at least thirty in that period um, you know,
55:50
Speaker 1: and and every time it goes up, you know, the
55:53
Speaker 1: people know when are you're going when when when you're
55:55
Speaker 1: going to sell UM. It's it's actually not unusual to
56:00
Speaker 1: see a big winner like tess or if you look
56:02
Speaker 1: over that time frame, you know, that's been the case
56:04
Speaker 1: of Amazon over the past fifteen years, That's been the
56:07
Speaker 1: case for us with ten Cent, the Chinese gaming company
56:09
Speaker 1: over the past twelve years. Maybe with not quite the
56:12
Speaker 1: same attraction of headlines that that Tesla has had, but
56:17
Speaker 1: the structure of returns is clear. It's that small number
56:19
Speaker 1: of big winners. And so you know, we go to
56:22
Speaker 1: directly answer your question about about the structure of the portfolio.
56:26
Speaker 1: We where we still see a past a significant upside,
56:29
Speaker 1: where we see an involving opportunity we're very loath to
56:33
Speaker 1: um sell stocks that we think are capitalizing on the
56:37
Speaker 1: opportunity in front of them, and we allow them to
56:39
Speaker 1: become a big part of the portfolio. Quite fascinating. I
56:43
Speaker 1: know I only have you for a limited amount of time,
56:45
Speaker 1: So let's jump to our favorite questions that we ask
56:50
Speaker 1: all of our guests. And since we were just talking
56:52
Speaker 1: about Netflix and Amazon, let's start with that. Tell us
56:56
Speaker 1: what you're streaming these days? What are you watching? What
56:59
Speaker 1: are you listening to do while we're all stuck sheltering
57:02
Speaker 1: at home. Yeah, so, I think like most people, I'm
57:09
Speaker 1: I'm enjoying the fourth series of The Crown on Netflix
57:13
Speaker 1: at the moment um, addressing a really interesting period in
57:18
Speaker 1: in in the British monarchy. I've also been enjoying Ted
57:23
Speaker 1: Lasso on Apple tv UM and just a great a
57:28
Speaker 1: great commentary on the power of positive thinking. I think
57:32
Speaker 1: there's there, you know. I think we're just in a
57:34
Speaker 1: fortunate position that there's so much great content out there
57:37
Speaker 1: at the moment. I think what the piece that I, um,
57:43
Speaker 1: I'm really looking forward to that's been delayed by the
57:45
Speaker 1: coronavirus is Dennis Fielder's adaptation of June which I think
57:50
Speaker 1: is coming next year, but one of one of my
57:52
Speaker 1: favorite science fiction books. And we were in Jordan a
57:56
Speaker 1: couple of years ago and what we run where where
57:58
Speaker 1: the film is set. So I think that that's going
57:59
Speaker 1: to be an absoluties and spectac in a movie. Yeah,
58:02
Speaker 1: I believe that's tied up for HBO max if I
58:05
Speaker 1: if I recall what I what I heard about it
58:08
Speaker 1: most recently, and I loved the first book, had a
58:11
Speaker 1: hard time getting through some of the latter books, but
58:15
Speaker 1: it has defied an outstanding film version. Hopefully this is
58:21
Speaker 1: the one that will break that unlucky streak. So let's
58:25
Speaker 1: talk about mentors. Who are some of the people who
58:28
Speaker 1: helped shape your career? Well, you mentioned I started to
58:33
Speaker 1: to fistival I like most of the the investment partners
58:39
Speaker 1: at Batting, I said, I've I've spent my whole career
58:41
Speaker 1: at the same UM and UM starting back in the
58:46
Speaker 1: UK department with with imccombie and and Jared Callaghan, Charles Plowden,
58:52
Speaker 1: who I think our UK team back at that point
58:57
Speaker 1: was just a powerhouse in the UK equity market and
59:01
Speaker 1: embraced the tools of free cash, fill yields, etcetera. That
59:05
Speaker 1: was so effective through through the two thousand's and I
59:10
Speaker 1: think I learned a lot about them the morality of
59:13
Speaker 1: investing from the UM. I think I think UM becoming
59:19
Speaker 1: a becoming the deputy manager and then co manager of
59:21
Speaker 1: the Scottish Mortgage Investment Trust, and I'm working with with
59:25
Speaker 1: James Anderson, who's who's been at Badger for for thirty
59:28
Speaker 1: six years, UM and just just what I've learned from
59:33
Speaker 1: him about UM both UM retaining just absolute curiosity and
59:42
Speaker 1: focus on companies, UM focus on process and and differentiating
59:50
Speaker 1: process and and and and having ambition in what we're
59:55
Speaker 1: trying to do. Such an important mental for me. UM
1:00:00
Speaker 1: as as as well as in fact Max Ward, who
1:00:03
Speaker 1: was the manager of Scottish Mortgage before James and again
1:00:07
Speaker 1: exemplified the power of positive thinking and an optimism which
1:00:13
Speaker 1: I think is so crucial to to generating long run investment.
1:00:16
Speaker 1: Retains quite interesting. Let's talk about everybody's favorite question. Tell
1:00:20
Speaker 1: us about your favorite books. What do you like to recommend?
1:00:24
Speaker 1: What are you reading right now? But I think when
1:00:26
Speaker 1: it when it comes to investment, I believe some of
1:00:30
Speaker 1: the best books about investing aren't aren't written about investment
1:00:35
Speaker 1: at all. It's it's you know, getting to read about
1:00:38
Speaker 1: people interacting with complex systems and lots of other settings.
1:00:43
Speaker 1: Um so The Psychologry and the Psychology of Military and
1:00:47
Speaker 1: Competence by Norman Dixon, or Deep Survival by Lawrence Gonzalez,
1:00:52
Speaker 1: or or some of our old Granda's books on medicine. UM.
1:00:55
Speaker 1: You know, I think there's there's lots of interesting tips
1:00:59
Speaker 1: in there for for an interested investor. But it's just
1:01:05
Speaker 1: one crucial point to remember, which is that in in
1:01:09
Speaker 1: investment the upside is unbounded and the downside is constrained.
1:01:14
Speaker 1: Whereas then I think all of these other settings, you know,
1:01:17
Speaker 1: the downside is catastrophic. You know, you kill the patient,
1:01:21
Speaker 1: you you die in a survival situation, you lose the war.
1:01:25
Speaker 1: Um So, so long as you can make that mentally.
1:01:28
Speaker 1: But I think that's some of the most interesting, um
1:01:32
Speaker 1: um interesting literature on on an investment. In terms of
1:01:37
Speaker 1: what I'm currently currently reading through UM just finished readas
1:01:42
Speaker 1: Things book on on the culture of Netflix. Um some
1:01:46
Speaker 1: fascinating observations in there. UM. I'm reading Linked at the moment,
1:01:52
Speaker 1: which is about the impacts of complex networks and in
1:01:57
Speaker 1: so many fields of endeavor, but all all of those
1:02:00
Speaker 1: I listened to on audible when I'm when I'm outrunning.
1:02:03
Speaker 1: That's become my reading time these days. Quite interesting. What
1:02:07
Speaker 1: sort of advice would you give to a recent university
1:02:10
Speaker 1: grad who was considering a career in either finance or
1:02:14
Speaker 1: growth investing. I worry about graduates who are considering a
1:02:19
Speaker 1: career in in finance or growth investing. I think being
1:02:24
Speaker 1: interested in financial markets is not likely to be a
1:02:30
Speaker 1: good indicator that that somebody is going to be a
1:02:32
Speaker 1: good investor, right. I think a much better indicator is
1:02:35
Speaker 1: whether they're interested in in companies, whether they have that
1:02:38
Speaker 1: curiosity about business models, what makes the company work fascinating entrepreneurs.
1:02:45
Speaker 1: I think all of the piece around interacting with financial
1:02:48
Speaker 1: markets there's a sort of you know, there's a there's
1:02:50
Speaker 1: a skills that you can teach somewhere, but but financial
1:02:54
Speaker 1: markets are not interesting, intrinsically interesting in and of themselves.
1:02:58
Speaker 1: What's much more interesting at the the lying companies and
1:03:01
Speaker 1: if you can, if you can make good judgments about
1:03:03
Speaker 1: those things. I think the finance piece looks after it's
1:03:06
Speaker 1: after itself. When I used to I used to run
1:03:10
Speaker 1: the run the graduate requiitment for investors at Bata Gifford,
1:03:14
Speaker 1: and one of the things we tried very hard to
1:03:16
Speaker 1: get away from was um business business studies or economics
1:03:22
Speaker 1: graduates and try to get much more into the liberal
1:03:25
Speaker 1: arts um where you know, I think you could get
1:03:27
Speaker 1: people with curiosity, but that that went consumed with that,
1:03:31
Speaker 1: that ambition to work in finance quite quite interesting. And
1:03:35
Speaker 1: our final question, what do you know about the worlds
1:03:38
Speaker 1: of growth investing today that you wish you knew twenty
1:03:42
Speaker 1: or so years ago when you were first getting started.
1:03:45
Speaker 1: I think it would be the extent to what the
1:03:48
Speaker 1: what you do influences your fuse. You know, it's it's
1:03:52
Speaker 1: you know, it's a it's the wrong way around to
1:03:54
Speaker 1: think you can you can sit and then think about
1:03:56
Speaker 1: things and then natural influence what you do. Instead, it's
1:04:00
Speaker 1: you know, you've got to You've got to You don't
1:04:02
Speaker 1: sit behind your desk and pontificate. You've got to get
1:04:04
Speaker 1: out into the world. There are so many interesting sources
1:04:08
Speaker 1: of information. You know. Some management is is it gets
1:04:12
Speaker 1: most of its information from a very small number of people.
1:04:15
Speaker 1: It's situated mainly in London and New York, but there's
1:04:18
Speaker 1: a whole world out there. I've moved my family out
1:04:20
Speaker 1: to Secon Valley on three different occasions, and don't extended
1:04:24
Speaker 1: trips and the you know, the people that you meet,
1:04:27
Speaker 1: the entrepreneurs, the investors, you know they they they can
1:04:33
Speaker 1: shape the way you view the world. Um in a way.
1:04:37
Speaker 1: That's that's that's extremely helpful. Um to to the job.
1:04:43
Speaker 1: So get out and do things and meet people. Quite interesting.
1:04:48
Speaker 1: We have been speaking with Tom Slater. He is the
1:04:51
Speaker 1: head of US Equity Growth Investing at Bailey Gifford. If
1:04:55
Speaker 1: you enjoyed this conversation, well be sure and check out
1:04:58
Speaker 1: any of our prior nearly four hundred such discussions. You
1:05:03
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1:05:20
Speaker 1: check out my daily reads at Rid Haltz dot com.
1:05:23
Speaker 1: Check out my weekly column on Bloomberg dot com slash Opinion.
1:05:28
Speaker 1: Follow me on Twitter at Rid halts. I would be
1:05:31
Speaker 1: remiss if I did not think of the crack team
1:05:33
Speaker 1: that helps put together this conversation every week. Maroufle is
1:05:37
Speaker 1: my audio engineer. Michael Boyle is my producer Altico Valdrun
1:05:42
Speaker 1: is our project manager. Michael Batnick is my head of research.
1:05:47
Speaker 1: I'm Barry Ridults. You've been listening to Master's Business on
1:05:51
Speaker 1: Bloomberg Radio.