IC Interview: Tesla's Rise Is a Symbol of a Revolution in Energy

James Anderson & Tom Slater — Investors Chronicle interview with Mary McDougal, December 2020

Context. The most comprehensive joint interview of the Anderson-Slater partnership, recorded at the end of Scottish Mortgage's annus mirabilis. GAUP (growth at an unreasonable price), "I don't know" as the three most important words in investing, selling Apple too early, China (Alibaba, Meituan, NIO, Ant Financial), private companies as shadow-board advisors, ARM and the UK problem, and their picks for the next decade: healthcare (Illumina + Grail) and transport (Zipline, Lilium, Joby, SpaceX).

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MARY McDOUGAL (IC): You're all listening to the IC interviews. I'm Mary McDougal and I'm very excited to be joined by James Anderson and Tom Slater, co-managers of Scottish Mortgage Investment Trust. Over the last decade, Scottish Mortgage has had one of the best runs of success that any investment trust has ever had, and in 2020 alone its assets have more than doubled to over £18 billion. The trust is now several multiples bigger than its largest rival — a remarkable achievement. James, Tom, thank you for joining me. Your success has owed much to your early commitment to a clutch of companies in the technology sector which have become household names. You say in your recent interim report that your views on the giant platform companies have become less differentiated, and you have sold out of Facebook and reduced Amazon. You've also reduced Tesla, though perhaps for different reasons. What themes and innovations are you most excited about currently, and do you think a generational shift of companies might be starting to come through?

"An era that can only be paralleled by the Industrial Revolution"

JAMES ANDERSON: This is one which is absolutely important for both of us to give you some thoughts back in your audience, but I may start. Yeah, I think this is what's incredibly exciting. You referred to the last decade and our combination of good fortune and skill over that period, but I'd put it in the broader context. I think there is more exciting exponential change beginning to hit globally and in a way that's beginning to impact our economies than at any point I can remember in my near 40 years of career and tracing back in historical terms. I think we're into an era that can only be paralleled by the industrial revolution. Some of this is a continuation of the last 10 years.

A lot of what's happened, a lot of the companies that we've owned have been powered by progress in Moore's law. We think that progress in Moore's law is underwritten for at least the next 10 to 15 years. A lot of our insights come from ASML, which is in itself a large holding, but that will end up in giving us something like a 60-fold increase in computing power. If you get that, then it's natural that more sectors will be impacted, that we haven't even started thinking about as yet in terms of most commentaries on the world. Hopefully we've started thinking about it. One big area of that which you may want to come back to later but just in the last really three or four months we've seen the first concrete evidence that healthcare is beginning to be transformed by big data. I think that's critically important, but I'll come back to one more before handing over to Tom. I think one element that we can't underestimate and why I make the comparison only with the industrial revolution is that I think the rise of Tesla is but a symbol of a revolution in energy. Now it's basically the ability to use energy in large forms without malign consequences, a very low cost that underwrites economic progress. We've had such revolutions only three or four times in human history.

We're having one at the moment. It's driven by economics, I'm pleased to say, even more than by needs of climate change and the like because we're now in a position where solar power plus storage is cheaper than any other of energy provision. That's a fantastic transformation and I think it will be really exciting over the next 10-15 years because I don't think the consequences of that will change our society utterly.

MARY: Yeah and as part of that the electrification of transportations, a significant theme mentioned Tesla, maybe a question for Tom. Tesla is obviously a huge holding but you're also invested in NIO, Chinese company. Do you think Tesla will continue to dominate the electric vehicle market or will Chinese competitors and traditional car companies start to catch up?

TOM SLATER: I'll start with Tesla and then give you a couple of thoughts on the first point you mentioned. The point to understand about Tesla is that it's not demand constrained and there's very little likelihood of it being demand constrained for the foreseeable future. It delivered about half a million cars last year in a new car market of maybe 100 million units, so about half a percent market share. The constraint on growth is its ability to add new capacity. So I think for let's say within our investment timeframe of 10 years I think the broader adoption of electric vehicles will be a positive thing for Tesla and serve to fuel demand which far exceeds what they're able to meet at this point. Now as a follow-on to that, what Tesla is building is not just about electric vehicles. If you look at some of their other efforts around autonomy, software, generation plus storage, robo taxis and the like, I don't think there is anyone else that is close to challenging that position.

ANDERSON: I just want to pick up on a point on the way you framed your first question which may be semantic but it's quite important. You talked about successful investments in the technology sector and I think an important if not crucial part of the progress we've made is that we haven't thought of it as a technology sector. We don't think there is a set of common drivers there or even more importantly a set of common risk factors. We've been fortunate to see significant success in advertising through the likes of Alphabet and Facebook in the retail industry through what's been achieved at Alibaba and Amazon and the reason for making the distinction is because a lot of the opportunities over the next 10 years come from the application of Moore's law ubiquitous mobile communications advanced software to other sectors whether that's logistics, real estate, insurance. It's about the application of technology but it's really the technological enablement of new business models in areas of business that are not used to change which I think is what we're really excited about. I completely agree with what Tom's saying there. I think one of the difficulties that people have is that they do think in these very narrow sectoral terms and they consider they're waiting to these different sectors and I think that that is precisely why so many people have found themselves constrained. I was having a chat with John Kay last week and what we were talking about is that this is the power of applying Moore's law to industries which we previously thought were protected from it and I think that means they everything.

MARY: Yeah that's interesting. Another theme in the portfolio which is quite eye catching is you have quite a few delivery stocks with Meituan, Dianping, Delivery Hero, Hello Fresh. You've invested in both Wayfair and Ocado fairly recently. What characteristics has attracted you to this area of the market?

ANDERSON: Well we should start by saying our connection with those companies was extremely early on Mary. We own Meituan as an unquoted company. We were investors in Delivery Hero from day one of his existence as a public company. I think what attracts us is that these industries are effectively being newly created by the existence again, the existence of technological workings and what we've seen is that you get not national but very strong local somewhere between oligopoly and monopoly. So if you can identify early on which companies are likely to win in those areas then the prospects for future growth are immense. So you know it's been remarkable how Meituan has beaten out effectively Alibaba's subsidiary in this area and how the leadership of Delivery Hero has managed to make it operate in markets that are much more dynamic than its original local ones and spot are moving onwards. The need for not just delivery services provided by yourself but increasingly are moving in to much broader food delivery and the like. So you know I think these are classic entities where in a sense the identification of local advantage is very possible and because people are put off by the apparent lack of profitability at early stages when there's heavy investment we think people are underestimating it and at the same time where inspired leadership makes a huge difference. So we build relationships with these companies in a way that we're pretty proud of and that's something that I want to come back to at some point. An awful lot of this is who we talk to how we build relationships of trust through long-term support rather than simple looking at an investment opportunity in the traditional methodology of economics.

MARY: Yeah that's interesting. So moving on to your investment process, what are the key metrics that you look for in companies when trying to source this?

SLATER: I would link this to what we really believe in about the structure of long-term equity returns, which is that returns are extremely concentrated in a small number of companies. If you look at the very long run numbers, it really is a tiny fraction of the market that has created the vast majority of the value, and that's how we would frame our task. Can you find the companies that address an opportunity that is big enough for them to be one of these real outliers? Is there something about the company that can give an edge in exploiting that opportunity? Is there something about the culture of the organization that's very hard for others to replicate or might give it a unique advantage in trying to pursue this opportunity? So it's not about focusing on one metric or number — it's more, can you identify some of the ingredients which we think have driven these really great companies of the past and that can drive that long-run growth?

MARY: Yeah it's interesting you talk about growth at an unreasonable price in your annual reports when you're finding these. Given your long-term outlook and the inherent uncertainty of the future how do you approach valuing companies and then and then adjusting this as growth is realized?

"Growth at an unreasonable price"

ANDERSON: Yeah so firstly you alluded to growth at an unreasonable price. I think this is very important because you know we do not believe that we can or we should try to be successful with all our investments and what I was trying to capture with that phrase is that optically can look at though these companies that Tom's described very well there are very expensive on a major metrics but where we are right they've come absurdly cheap on their long-term estimates and it also pulls in the psychological fact. If I say a GARP investor growth at a reasonable price everybody will think that's very well reasonable. You have to do things that people psychologically are comfortable with and a lot of that goes into what you're asking. We have to win to accept uncertainty you know I think that's one of the things that we feel very strongly about and we're almost as far as saying I don't know is the most important three words in investments because no one ever knows there is such a pretence of certainty about the future that people apply to have and you know while we're thinking about valuation to go on to that part of it we apply that to that. We do not believe that it is possible that even in the simplest part of the company to have one secure long-run estimation of the value of that company. The world is much more complex than that and you think of many of these companies from newspapers onwards that people believed would always be there it doesn't happen so we have multiple different scenarios and we attempt to likelihood adjust them and very often the advantage in doing that is because it's something you say there about the long term we do not know when many of the big transitions and transformations that we're talking about at either the corporate level or the societal level will happen but we are very very often they will happen at some point so being able to have a time frame that enables us not to worry about the when is very important but I get incredibly irritated when people say we do not have a valuation discipline. I think we have a much better valuation discipline if I may be so arrogant than most people because we don't believe that we can be certain. We don't believe a spot PE is the estimate of the long-term cash flows of a company and we accept that we may well not imagine everything that can happen so you know I think we are absolutely looking at likelihood adjusted long-term values but we're accepting there's a great deal of doubt about this. A lot of investors spend time making sophisticated and inverted commerce estimates of things that are impossible to predict. What will the level of the stock market be at the end of next year? I don't know. What will interest what will interest rates be at that point? I don't know. If you told me everything that was going to happen this year in advance would I have predicted what the stock market's done? No and that in turn feeds into the way people think about valuations and estimates of earnings and so forth. But there are some things that I would argue are much more important to valuation or to assessing a company's opportunity that are almost utterly predictable.

SLATER: So the cost of generating energy from solar panels has fallen 20% per annum for the past 10 years. It's an almost perfectly exponential decline. The cost of storing energy in a battery has fallen 16% with every doubling of global battery capacity so if you tie that in with what James was saying about we don't know when some of these things will happen I absolutely agree. But what you can see is that the drivers of that change are really quite clear. So as a long-term growth investor you're in a really fortunate position to be able to forecast some of these things quite accurately. It's simply a matter of thinking through the consequences for individual companies.

MARY: Yeah that makes sense and just developing that on the other side how do you decide when it's time to sell a company? Now you'd be able to talk about any examples of where the long-term investment thesis just has to slide itself.

Selling — and selling too early

ANDERSON: And I like talking about failures Mary so I'll start on that one. One of the biggest mistakes and I think it's got an interesting junction with what Tom's just been saying is where we've definitively been too early. Now for instance we owned several solar power producers 10 years ago. Now at that point yes we had these deep underlying trends on our side but I think what was very difficult to estimate was whether companies had competitive advantage and you know I think this happens a lot in our industries. So what you have is a period of absolute chaos as the technologies get developed and leadership almost occurs by chance you know just as it did with Microsoft in the 1980s in these new areas and I think from solar power to 3D printing we've had a tendency to make investments too early which we've had to guard against in recent years. Sometimes of course your company has simply reached maturity and trying to estimate that is incredibly hard so another genuine mistake in terms of outcomes so whether it was in process I don't know. We sold Apple in financial terms way too early because what we're looking for as Tom's saying is these extreme outcomes that dominate equity returns and we could no longer see how Apple would grow revenues, products, business, sufficient growths, innovation sufficiently to meet those trends. Now it's turned out to be the extraordinary levels of profitability of Apple have kept it going onwards but you know I think it's really important that we keep those disciplines so it was both absolutely a mistake in terms of the financial consequences for shareholders but I think process wise we got it absolutely right that we were trying to see how it could be in the top 5% of outcomes for the next 5 and 10 years and we couldn't see it at that point.

MARY: Yeah and you have a just moving on to China you have a significant allocation to China and you cite the shift of the global economy from west to east. Why is the east such an exciting market for you and do you still see America as the primary tech engine in 10 years time or do you think it will be China?

China — "a reversion to the norm of human history"

ANDERSON: So people talk in investment a lot about reversion to the mean which we don't actually think applies at the company level but it may well apply at the national level. What we're seeing is a reversion to the norm of human history in the re-ascendance of China and you know I don't think one should be surprised by it. Now we I should stress Mary you know although we believe that that is again likely to happen we would not be doing this unless we had companies that fitted the template we've already been discussing and you know I would stress that from Alibaba to Meituan to Tencent to ByteDance that we've been delighted at the reception we've had the conversations we have the ability to have a long-run relationship of trust with these companies so you know we have a very different take on that than elsewhere. We think those are outstanding companies in their areas of technology to go back to what you were saying earlier. There is ample evidence that China will become the dominating force and the electrification of the global economy so you know owning NIO and the like is important to us as well on on that score. I will start an argument on the American one you know when people say we have a lot of exposure to America we don't and I think you've grasped this we have a lot of exposure to California and Washington states we have very little elsewhere in America and we think there is a form of capitalism on the West Coast that is distinctly different from that practiced in New York and Washington DC but I think there is a complication here I think we feel there is less evidence now of real innovation you know if you take the the commerce world or the social media world you know perfectly well that the companies that are dominant now the companies that were dominant five years ago that is completely different from the Chinese part of it and I do worry that societally you've got such strong advantages for the dominant companies in America that it starts to undermine the exercise of truly entrepreneurial capitalism now Tom is one of his many roles as head of our American department so he might like to have a response to that.

SLATER: I just want to pick up on the notion that China might at some point overtake the US in terms of technological leadership and just give you an anecdote on that front we're lucky enough to invest in Shopify which is a platform that allows merchants to have access to many of the same tools that the giant online platforms have whether that is around payment around merchandising shipping it's really the tool by which small merchants have been fighting back against the likes of Walmart and Amazon online and one of the things that's interesting about Shopify is that it's based in Ottawa in Canada I was lucky enough to be chatting to the founder CEO Tobi Lütke and I'd seen an interview with him online and there he talked about the idea that he would go down to Silicon Valley every two or three months and talked about charging his optimism battery giving him new ideas and feeding that creative instinct so I picked this up with him and we were in Silicon Valley at the time and I asked him whether he was doing one of these trips looking for inspiration and he laughed and said no no I stopped coming to

MARY: Silicon Valley years ago if I want inspiration I head to the east coast of China and I think what he was speaking to is the fact that the scope of what is happening in China in some of these technologies the the scale of what is happening the importance of what's happening to economic development is now on a completely different level from what we see happening in the US that's interesting how do you address the challenges of investing in China just to go into that so and it seems that the pulling of Ant Financial which is a significant holding of yours was the timely reminder that no one's bigger than the state in China and some people worry about the expansion of credit and for reporting qualities how do you how do you plan to the difficulties of investing in the east

ANDERSON: what we've had to do is try and build up deep local knowledge to put in on top of the global perspective so we now have a fully fledged office in Shanghai and we have people there who are both loyal to our ways of investing and incredibly well connected in China and you know I'll give a huge shout out to Linda Lin who worked with us in Edinburgh along term global growth for several years and has gone back to China and you know she forges incredible relationships with these people and the ability to navigate through it but you know on the whole Mary when people say there are structural problems in investing whether it be in the company level with the Tesla's or Amazon this world where you know there was huge amounts of criticism of the both the investments and the business model but also on a macro level we tend to be suspicious of those consensus views and think they're constraining investment as I said the individual company level we feel the access the information we get is very high quality and to be honest you know I think if you analyze it company by company you have about the same number of structural problems in China as you do in America or Britain you know we did have the Royal Bank of Scotland we did have a various corrupt collapses in America that are too many to list you know I think this sort of name coming on a national basis is is is unhelpful we've always accepted beneath that though that what you say is absolutely right that there will be pressures to conform to a national system that are very clear now I think they exist in most countries but in the less if you like blatant manner and I think you need to think about those as individual examples we have had a certain amount of nervousness in the case of Alibaba and hence in and the Jack Ma is such a larger than life character so influential so admired that the Chinese Communist Party is particularly nervous in relationship to him I don't think to be frank though that we will know fully what happened with and and the consequences of that for several months more we're beginning to have conversations we're beginning to learn material but I think it is remarkably bold to come out with some grand pronunciations about it at the moment so you know we work through this in detail but trying to get to a position where we have a much deeper understanding of China through that office there through our interest is important to us we couldn't do it without that

Private companies — "shadow board advisors"

MARY: yeah that makes sense and moving on to the unquoted portion of your portfolio which you've substantially increased since you first made your foray into

SLATER: Alibaba in 2012 in the last two years 18 out of the 24 new holdings have been in private companies and in the previous three years 33 out of 37 new purchases were unquoted and 14 of those have subsequently been listed which presumably indicates a high rate of success how do you select and monitor the unquoted portion of your portfolio I've spoken to other managers Ben Rogoff and Walter the technology trust and they say it's just too difficult so how do you manage to do it the first point to make is that we don't see from an analytical standpoint that there are huge differences in investing in the types of private companies we invest in versus some of our investments in public markets you mentioned the example of Alibaba now that was valued at 40 billion at the time we invested in it it was not a startup and the toolkit we've had to acquire in terms of the practicalities um analyzing the instruments the legal capabilities valuing the the unlisted holdings none of those things is especially challenging I think what is challenging in private companies is that management teams have ready access to a very deep pool of capital and therefore they're very careful about who they choose to be their shareholders who they choose to be their partners as they think about the long run financing of their business so simply having dollars available to spend does not help you what does help you what is important goes back to relationships forging deep links with these entrepreneurs who are trying to build something over decades and then partnering with them being trusted as a partner over that sort of time period and how do you get into that position well for us I think a really important factor is how we have behaved in public markets it matters that we've been a top 10 holder of amazon for more than 15 years it matters that we've stuck with tesla as the largest outside shareholder through the challenges that that business has faced and so as we meet these private company entrepreneurs not our reputation but what we've demonstrated through action about how we behave as a proper partner to them over the next decade regardless of whether they're private or public is what's important that's the foundation of getting access to some of these businesses it's not about owning them as private companies it's about owning them through their life cycle as they grow regardless of whether they're private public and that's how you get access to some of the most attractive growth companies in the world yeah how much engagement do you have with these companies pretty considerable

ANDERSON: I mean again analogously to China we've set up a private equity team that is able to do this beyond just Tom and I though obviously we're deeply involved we've tended to take the attitude that we're happy of being shadow board advisors rather than formally part of the board but we will negotiate that so pretty regular but you know I would just echo what Tom's saying but put it in a slightly different context in trying to answer your question to me the single most refreshing part of being an investor in private companies rather than public ones is that they will be much more open about the real problems that they face you know that they can't do that in public markets because otherwise the next day Goldman Sachs will write a sell recommendation and the short community will come in it's incredibly rewarding and incredibly helps your understanding of what these companies what these industries can bring if you can have that conversation about what's the hard stuff and you know that's the conversation you know to answer your question of engagement that we are persistently tried to have and I feel we're sort of living up to this because when it comes to companies going public we tend to get very good allocations in that which is helpful because you know I think it's a proof statement about what's going on but I'll also turn it around you know I think I hope Tom would agree with this perhaps it's just that you know me being older I'm more surprised you know I would not have believed when we started on this eight years ago and I remember sitting at the next desk to Tom when he was having long conversations with Alibaba about his taking that deal at that point I would not have believed that a comparatively small investment house in Edinburgh concentrated on public markets could get such remarkable access globally and you know I think it is globally we've talked about America and China but you know another very good example close to home that's mattered to us has been the Spotify you know I think we built a relationship there as private companies that you know had huge implications for how we think and what we see just an anecdote but I remember shortly after we invested in Thumbtack which is a platform for local services companies painters decorators DJs party organisers and connecting them with customers seeking jobs seeking seeking people to do their jobs and just after we invested

SLATER: I got sent the the board papers and the first slide of the board deck was split in half on one side it said what went well and on the other side it said what's gone badly now I challenge you to to find an earnings presentation for a public company which which starts out by breaking out what's gone well and what's gone badly it was actually quite a shock the first time I saw that

MARY: yeah that's a great example and just quickly about some specific companies right Amazon which you have reduced but it's still a significant fall thing and there's a lot going on at Amazon you've got AWS and then the e-commerce platform with Amazon Flex Prime for Amazon what areas of the company do you think are most exciting and do you think if it were broken up with the antitrust proceedings do you think that would change the investment case and

Amazon, AWS and "Day Two"

ANDERSON: Mary again I'd like to put in the context of everything we've been discussing in the origins you know we regard Jeff Bezos as absolutely critical to our thinking not just in terms of earning Amazon but of course really he's provided the best anti-warren buffet philosophy about how you ought to think about the opportunities and to go back to where we started on Moore's Law it was precisely him who at the origins of Amazon said we've got this one weirdness about our business that everything doubles in capacity or halves in price every year and then Bezos said I don't know that I won't take us but it will be very exciting and I think that don't know again is critically important in this so you know did we really see very early on that AWS was going to become what it was I'm not sure that we did but we knew Amazon was thinking in those terms and that's for now where to bring that up today you know I think in terms of the economics of it AWS is currently the dominant factor and this actually is one of the critical reasons why we've nudged down our holdings and that's all it is we think that the entry of Alphabet into being a serious competitor and maybe the cloud in America and Europe into a three-party player rather the two-party player and with serious willingness to cut prices matches quite a lot for the economics of it but also we don't quite see what the next transformative element is so you know in terms of underlying economic philosophy we've gone from a world of sort of Brian Arthur type exponential returns to scale to his colleague at Santa Fe of Jeffrey West talking about how you have to make ever quicker links leaps once you have that sort of scale once you become dominant in the world and we think the growth process for Amazon are slightly more constrained I'd also say that I think Jeff Bezos is fast becoming at least as interested in spaces in Amazon and with Jeff Wilkie leaving as well that does bother us somewhat you know these I don't want to build them up into it's the end of Amazon and you know I'm not saying you would be you know plenty of journalists would do this but what we're saying is that the process maturity of if in their terms are moving on to day two is getting rather closer and even may be there but again I'd like to see whether Tom wants to add anything.

SLATER: It's possible that Amazon web services might be the single most important company in the world. James will probably argue that that's ASML but in terms of what AWS has facilitated the way it has relaxed capital requirements for new companies it's allowed an explosion of innovation it sits there quietly in the background as infrastructure but I think it's hugely important as being hugely important as a facilitator of what's happened over the last 10 years.

ANDERSON: We get some agreement Mary for saying because I'm conscious we didn't answer this if AWS were spun off I suspect it would be a multiple more valuable by the ratings of most cloud entities AWS is very lowly rated by application.

MARY: Yeah and for streaming services you own Netflix and Spotify some people are concerned about slowdown next year following a bump a year. How can they differentiate themselves especially when they're dealing with competitors like Amazon and Apple with

SLATER: Deep Pocket. I would start with a broader comment on this year and demand. There have been lots of areas where the constraints that we've had in 2020 and the impact of COVID has led to a surge in demand and it's not rocket science to suggest that as the situation moves on as we're allowed back out of our homes and back out into the world again that the exceptional period we have been through and the changes that it's brought will recede. It's what's not obvious to me though is that you go back to the way things were before that the way things were before is somehow normal. What has happened will have consequences and it's going to change the way people behave it changes habits and the longer things go on like this the more entrenched that will become and you need to differentiate between cases where demand for companies has been just pulled forward where structural change will result or where the scale of the opportunity for that company has changed. So to give you a trivial example once we are able to go out and socialize again in person I think people will be delighted to do that there will be a surge in socializing that is normal that that is is part of the human condition. On the other hand in pre-COVID it was normal to host all as an enterprise to host all of your software and services in-house. Now that wasn't a normal in the sense that it was the natural state of the world it was a product of accumulated accidents that we got to the computing model that we've had but that model has been brought severely into question by what we've seen working from home. So we won't revert back to on-premise software for enterprises in the future and so that's the context for when you think about companies like Netflix or Spotify. Yes it could well be a period given the exceptional growth we've seen in the past 12 months that these companies could see their user base grow more slowly. I don't think that will be a surprise and I don't think it's relevant to the investment case if you look out over the next decade. I think what you can say about a company like Netflix is that their content budget is on a scale that's absolutely unprecedented. It is many multiples of what its nearest competitors can spend on content and keep in mind that when we talk about nearest competitors we're talking about behemoths like Disney. We're not talking about small companies here. The structural advantage that Netflix has in terms of the scale of its distribution and its ability to attract talent to spend on content puts it in a very powerful position going forward and if you want to tie that into structural changes as we exit this period post-COVID and what is the future of the cinema industry?

ANDERSON: How does the best cinematic content get distributed? I don't know the answer to that but I think it will definitely be permanently changed by what's happened in the past year. Mary could I just very quickly add a couple of things on that because we didn't review Spotify and make a general point. So if Spotify analogy to Tom's thing produces figures in the middle of next year that says that user growth has slowed down or gone negative we would see it as an opportunity to buy more. What we're interested in is that process of transformation of the industry which is only a quarter way over and it's much more about Spotify relative to the labels and their absurd take to the management and those sort of take in terms of managers of performers and about radio and podcasts than it is by you know any one year's oscillation but the general point I wanted to make is just as Tom was doing earlier with the Shopify. We think that what's happening at the moment does give smaller specialized companies an edge over their giant competitors and not just the Shopify example but Zalando or Wayfair that you mentioned earlier. We think they can do a better job in their areas than say Amazon can or Apple can with Spotify so you know I think there is a real transformation of opportunity set going on here.

NVIDIA and ARM

MARY: Yeah and just one more company I want to talk about

SLATER: US chip maker NVIDIA has had phenomenal growth this year. Can you talk about your outlook for the company and also how important you think the takeover of ARM is for NVIDIA's growth story. What's really interesting about NVIDIA and in a way that's analogous to ASML is just how centrally important it has been in facilitating a lot of progress that is happening elsewhere. Whether that's in machine learning or computer vision, self-driving cars, data center technology just how much of that progress has been driven by NVIDIA's unique strengths in producing GPUs graphical processing units and I think the fact that they're in that position speaks to some of the cultural advantages that they have. It's the fact that you've had a founder manager influencing the direction of the company over a couple of decades pursuing a vision over that time frame that has seen the competition fall by the wayside. Again it's one of those situations where you say what happens if the power and capacity of these GPU chips doubles and doubles and doubles again. What sort of world do you have at that point? One of the distinctions between NVIDIA and ARM is that NVIDIA has been very successful of monetizing its position in the value chain, getting paid for the skills and processes and products that it creates. That comes from the fact that it has unique technology. The fact that it's such a powerful enabler of huge value creation elsewhere, it means that it's been able to take a proportion of that value for NVIDIA shareholders and I think that is the area that ARM has struggled in. There's little question that it's been a crucial facilitator of the mobile era but if you look at the valuation in these companies, it was comparable if you go back three or four years but you get to this point and NVIDIA is 10 times the size and that reflects the ability to crystallize that value for shareholders and the hope would be that under NVIDIA's ownership ARM can achieve that sort of commercial success, sharing in that value creation in a way that's commensurate with the technical success that it's had.

MARY: Just one question about the UK. The UK has got lots of great universities but companies tend to get bought quite quickly by international players. ARM being the example, Illumina, another big holding of yours. Now you're looking more early stage companies, could you see more opportunities arriving in the UK?

The UK problem and the Kay Review

ANDERSON: You know, I was very disappointed at what happened to ARM when it was sold to Softbank. We tried because we were the largest shareholder, they didn't get for the large to try and see whether there was another way they didn't appear to be but I think it was very upsetting and symbolizes the problems that you do need those 25 years of hard work and vision that Tom was talking about there and I think that we have a serious problem in Britain in making companies grow from those great scientific roads into having the determination, the vision, the long-term finance to get there and I don't think the cheap sloganeering Downing Street helps at all with this so we would love it if we could identify some companies there's an opportunity to work with for decades to turn them into global scale but we need to see evidence that there are those that have the skill set and the deep ambition to do that and I think it's a much more serious problem than people tend to take it and I think the temptation of taking the money that the city and linguistic collections with America offers is all too great and all too easy so I'm not personally very confident that it's going to be solved very easily

MARY: yeah and I think possibly tangentially related to that James you were on the advisory panel of the Kay Review in 2012 which assessed equity markets and long-term decision making and a number of problems were identified such as short-termism and opacity around charging and Scottish mortgage should definitely be praised for how you've passed on the benefits of scale to your customers but more broadly I wondered if you might comment on the asset management industry and how much if any progress you think has been made since the review well in narrow terms I think that there was material that came out of it leading to the investor forum that has helped and I do think there are some serious you know investigations and commitments there to looking at many of the bigger quoted companies um but I think you know in a sense it's run against what we've just been talking about Mary that most innovation is happening at the unquoted company level and we haven't solved that at all though I might argue that John might argue there was beyond the remit of what we were asked to do there but it was absolutely in John's mind that you know because capital markets aren't really producing the finance for long-run growth and ambition that that was likely to migrate into the private capital world and in that I'm you know I don't think the scale of the finance the patience is really there yet so I'm ambivalent you know I see some signs you know I'm perfectly happy to be quoted on words of praise for a peer you know I think Schroders for instance have become a lot more interested in this how do you create great companies and getting away from fund management as simply being a source of income but no I think our industry is self-referential internally looking and obsessed by metrics that don't really make much sense in terms of creating great entrepreneurial companies so no I'm still pretty worried about the the financial services industry just one final question to finish on Tesla's done really well and made you loads of money what do you think the next company is James you start

The next decade: healthcare and transport

ANDERSON: uh well it can always be a surprise with which actual company but I am incredibly excited by what I was saying right at the start about the application of data to healthcare so I would go for the the newly merging entity of Illumina plus Grail and I think they symbolize an awful lot of what we were talking about and you know it's fascinating how it plays into your having having spun out of something that was originally literally invented in a pub i

MARY: n Cambridge to do where they are now so I'll get into Grail if there's something over give me them particularly give me the next 10 years thank you and Tom

SLATER: I was speaking to Keller Rinaudo the founder or founder CEO of Zipline last night that's a drone delivery company that we own and we were talking about the whole things that that we have in transport you know the future of the transportation industry and he shared the view that he thought we we had possibly the most exciting portfolio of transport companies in the world so whether that is is Zipline in drone delivery or Lilium and Joby in flying cars full truck alliance and convoy in freight freight scheduling space X relativity space in space rockets it's a lot more than than just one company but I think it speaks to the fact that there is potential for enormous change in the transport industry over the next 10 or 20 years and I honestly don't know which one of this collection is going to be the one but that's the nature of things you can't predict but there's just so much potential in this area that I think it's the one I would single out

MARY: Thank you — healthcare from James and transport from Tom. Thank you so much for your time.