Merryn Talks to James Anderson (MoneyWeek, February 2021)

James Anderson — MoneyWeek Talks podcast with Merryn Somerset Webb, February 2021

Context. Recorded two months before the retirement announcement, weeks after Scottish Mortgage's all-time high. The widest-ranging Anderson interview after the MiB: the ad valorem fee model ("where are the customers' superyachts?"), fund managers becoming businesses, the 2004–2006 Baillie Gifford reformation, why exponential opportunity is intact, inflation as "a peculiarly short-term bias", the China mea culpa, nuclear scepticism, Musk, crypto, and his desert-island stock: Ginkgo Bioworks.

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Context. Recorded two months before the retirement announcement, weeks after Scottish Mortgage's all-time high. The widest-ranging Anderson interview after the MiB: the ad valorem fee model ("where are the customers' superyachts?"), fund managers becoming businesses, the 2004–2006 Baillie Gifford reformation, why exponential opportunity is intact (Moore's law to 1900: "one to nine million trillion"), inflation as "a peculiarly short-term bias", the China mea culpa (Pompeo and Schumer), nuclear scepticism, Musk ("my admiration way outweighs my concerns"), crypto ("not remotely akin to the internet"), and his desert-island stock: Ginkgo Bioworks.

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MERRYN SOMERSET WEBB: Hello, and welcome to the MoneyWeek Magazine podcast. I am Merryn Somsett, Web Editor-in-Chief of the magazine. And with me today, I have possibly the greatest treat I've had for you in the last year, and you've had some great names on. Today, we have James Anderson of Baillie Gifford, the man behind the phenomenal success of the Scottish Mortgage Investment Trust over the last, what, James? 20 years. How long have you been in Scottish Mortgage Investment Trust? Yeah, 2,000 from one period of angst to another, yes. So, a long time. Now, if you've been holding that trust, and you probably have, because it's in the MoneyWeek Investment Trust portfolio, if you've been holding it from the very beginning, you would have made, what, James, 1,500% or so by now, and outperformed any global index you might care to mention by 3 or 4 times plus. Obviously, the last few months haven't been so good, and we will get on to that later. But we are going to talk about everything from the specific SOC portfolio to James' career to James' views. I hope we will start with James' views on the fund management industry as a whole, which I suspect we will find interesting. Anyway, James, welcome. Thank you so much for joining us today. That's always a pleasure to be with you. I would love it if we could start by talking about the industry as a whole. You and I both have a huge interest in how the industry works, what it does for society, what it does for finance, what it does for all of us. And so, I wonder if we could talk a little bit about how it's changed in the period that you've been a Baillie Gifford and that you've been managing so much money.

"Where are the customers' superyachts?" — the fund management industry

JAMES ANDERSON: I think, Merryn, the biggest shock to me, and this has occurred at intervals throughout the last 40 years, has been that I always assumed that in aggregate, the returns to fund managers would fall and the returns to savers would hopefully, in compensation, go up. But we've gone from questioning where are the customers' yachts to where are the customers' super yachts over this period of time. And I think I'm right in saying that nearly half the top 100 wealthiest people in America are hedge fund managers. And I think that actually carries most of the explanation that the extraordinary returns for not usually much performance, there are exceptions obviously, in the hedge fund industry have colored the whole picture. And so, despite the impact of people like yourself trying to publicize the nature of costs and the hit performance to our friends at Vanguard doing something in a practical sense, I think it's very troubling. But I also, possibly even to a greater degree, find the militalities around it, deeply troubling, because I think we've changed the role of finance from being something that is important in itself, sorry, to something that is being important in itself, rather than for its role in aiding the developments of companies and societies. And you and I have talked in the past about the origins of financial markets, and particularly the heydays of the 19th century when we were instrumental in building. And to me, what we can do to help building companies is the key to the task. It's not how much wealth we make, or even directly what we do for shareholders. As you know, I've been hugely influenced by the work of John Kay over the years, and we were chatting about this last night. I think that we are in a really bad position where finance is not about creating industry, and that is problematic.

MERRYN SOMERSET WEBB: Okay, interesting. Let's go back to that, but let's start with the first thing you were mentioning on costs and how the returns are occurring to the industry as opposed to the saver. And I accept that a lot of that is the hedge fund management industry. But nonetheless, when you look at the margins of ordinary fund management companies, you're still seeing some of the highest margins in any sector, you know, looking at the 40% or so, and that's the same in whether you look at fund managers, whether you look at platforms, wherever you look, in fact, the financial industry, you see the same. And you know, it's all to the fair to say that partners at Baillie Gifford have made what the rest of us would consider to be absolutely vast fortunes over the last decade or so. So, you know, this is not specific to the hedge fund industry. This is a basic function of the Advalorum model in the fund management industry if you take a percentage of assets under management and assets under management keep going up and up and up and up and up as, of course, in the UK they will continue to do even if markets full because of pension or to enrollment. The amount of money accruing to fund managers is also going to continue to rise exponentially, not exponentially, but hugely.

JAMES ANDERSON: Oh, Merryn, I apologize to the listeners and above all to you if I was any way perceived as trying to escape from that issue. Really by my focus on the hedge fund industry, I was trying to explain what I think has happened to cover up the fundamental issue you are talking about there. And I hope you will not consider this unreasonable. I think the Advalorum message is wrong, fundamentally wrong and misguided as a methodology. My own view is you should firstly consider it as a percentage of the profits or profits over the market generated and then, of course, the figures become even more intimidating in what you're thinking. You're giving away 10% of your return rather than 10% of the assets under management. But, you know, how should one respond to that? And I hope I would always welcome, but I'd particularly welcome at this stage of my career being able to discuss this openly. My view has been that my, the board's primary responsibility is to make sure the fees we charge for Scottish mortgage are in some form rational in a greater form, hopefully earned rather than anything else. And particularly by putting a cap on the fees above assets under management lead directly to lower fees in the way that it is structured for Scottish mortgage. We think that we're both the absolute fee, but also in terms of giving the benefits of the scale back to the shareholders. We think we're doing a reasonable job. And I would also, and I hope this is the last moment when I'm going to sound defensive rather than doing a little bit of a rant about the situation, I would also say that, to my mind, we have been honourable in that as we ever more invested, which we will probably come onto into venture capital, whereas you know, the fees are very much higher. We are doing this for basically total total expense ratio of under 0.4 and a consistent basis and often considerably lower than that. Now that to my mind is a pretty decent bargain for giving people exposure to the biggest unquoted opportunities in the world as we hope to do over the course of time. And to a certain extent, I think we can claim to do the wealth that I will talk just generically about Baillie Gifford or whatever. I'll be personal about this.

JAMES ANDERSON: Now, I've always seen fit that once you eat one's own cooking, the vast majority of my own wealth, just as shares in Scottish mortgage, I'm currently engaged, tried to find out at what price and how can I bought them to satisfy the revenue that I show you, they've been there for most of that 20 year period. And I think, you know, this is an element of which I would agree with Buffett, as you know, there are certain things that I don't at all. But I think you should absolutely have that commitment for it to be vital to you, the fortunes. And, you know, absolutely, whether a downturns was trying to do them, but it hurts. Now, the broader wealth, I would hope, and you please tell me, guide me on this, that if we provided well above market returns, not consistently because that's the wrong word. And as you know, we've always been willing to take periods of pain in order to get long run returns. But if over the decades, we've managed to create those sort of returns, I think some form of wealth is justified. You know, I'm an avid, you should be rewarded if you do a good job. You shouldn't be rewarded if you're doing a bad job. But I find that...

MERRYN SOMERSET WEBB: But therein lies the problem, right? Therein lies the problem, which is that with the current model, if you get a percent of the assets under management, regardless, you know, some, I don't want to spend hours talking about fees, but I do think it is relevant to a degree. I mean, lots of our listeners will now be saying, well, you know what, I've lost 30% over the last six months or whatever, but Baillie Gifford are still getting their 0.4% of the assets under management, whatever it is. And so where's the punishment for failure as opposed to the reward for success? And obviously, this is such a short time period, we're not really talking about that in this context. But in the context of the industry as a whole, you can create mediocre performance for years and years and years and still make absolute fortunes. And Baillie Gifford could now, let's say, for example, that everything we're going to go on to talk about over the next half hour is, is nonsense. And Baillie Gifford has got it completely wrong as to how the, how long-term good returns should be made. Nonetheless, your business now has so much under management that fortunes could continue to be made for many decades to come on mildly disappointing performance.

JAMES ANDERSON: Yeah, I know. And that's the kind of thing that I find slightly distressing. I didn't want to escape that issue. I was trying to give you a personal account of my own position, which I hope, you know, it's clear and I hope is honorable. It's for others to judge plainly. I think what you're talking about at the industry now. Yeah, that's what I'm trying to get. Well, I also do the Baillie Gifford one. You know, I think you'll be the point you raise is a very real one. But at the industry level, I think this is a huge shock or a problem. I remember having a very provocative discussion with Jason Zweig, editor of Ben Graham and columnist in the Wall Street Journal and the like about this. And he put it a slightly different way here. And I think a complementary one, which this is the only industry in the world where you can be a fourth level player producing bad results and you will still make these level of returns for yourself and your company. And I totally agree with that, which is why I was trying to suggest that I personally would genuinely feel very embarrassed if I talk to them over long term. I do reject your, you know, since Scottish mortgage was it's all time high last November. And you know, I think the time frames are important in this. I would hope that if we had, if I had been, and I hope that Tom and Lawrence, my successors, my very good successors would take a similar attitude if we had a period of rolling five year underperformance that we would propose that we cut our fees. Now there, I'm giving you an answer about Scottish mortgage or what we might negotiations with Vanguard. It's, as you say, that is a institutional problem there. And I think that is a very serious problem for all forthcoming generations. So 20 years ago, we did a renegotiation of how the profits were between retiring partners and their subsequent now you don't want people living off. It's what they did 10 years ago either. So it was quite a short time period. But you know, I in some ways I think it would have been an even more intractable problem if what we were doing was still at an all time high and the rewards were going to a generation who hadn't in all cases been behind the performance that generated it. Yeah, that's right. Yeah. Okay, but let's not bore ourselves with too much more if he's my dreams. Can I just say I absolutely agree with your attitudes and campaigns on this. And the last thing I want to sound is so I'm picking hold of it because fundamentally I'm with you. It's just there are some nuances of difference.

"Fund managers have become businesses" — finance as an end in itself

MERRYN SOMERSET WEBB: And my dreams of flat fees across the industry are going to stay dreams. I think for many decades to come. But that doesn't mean I'm going to stop writing about them. So let's move on to the second and probably possibly the bigger problem with the industry that you mentioned earlier, which is that it doesn't seem to work as a supporter of growing companies anymore. It seems to work just as a sort of we don't know layers upon layers and layers of fee taking and financial fiddling as opposed to to the other. And I know you've complained as well about the UK market being a dividend producer rather than a growth producer, although I think I would slightly disagree with you on that. I'm I'm all for dividend producers because, you know, some of us need dividend income to retire. But so let's talk about that way. You think it's more general return of capital, which actually applies even in America. So where does industry has gone wrong on its on its focus?

JAMES ANDERSON: I so in line with my promise this stage to be very open, I think a very good example of it is in the book that Richard Burns wrote about Baillie Gifford, which has a chapter entitled becoming a business. And I think it is primarily the fund managers themselves have become businesses and are seeing that light rather than as services to the broader industrial societal issues that we have got involved. I think in turn, if I may add, and I'm again not trying to distract, I see it as an associated problem. I think that leads inside most fund managers to a culture of the business being managed rather than a focus on the investment and that all too often it therefore turns into a wrongly led organization. And I think that is terribly, terribly problematic. I think there are, as you well know, and you've interviewed many of them are fund managers who are absolutely driven by both the task and that greater all mission. I think that gets eroded by many fund managers themselves being quoted businesses, for instance, you know, some of them cope quite well, T. Rowe Price being an example. But I think it is catastrophic. And I think even for other organizations, unquoted ones, partnerships like Baillie Gifford, it is a real danger that it's seen as an asset generating money, which fits your earlier comments rather than something one should be deeply proud of trying to help with and be good at. Okay. So do you think that that's a change over the last decade, a decade ago, 15 years ago, 20 years ago, where fund managers are different breed, were they more imaginative, more creative, more interested in business itself as opposed to being a business? Has that been a change? So is fund management now more of a technical spreadsheet kind of business than a thinking business? Is that what you're getting at? Yeah. I mean, I personally would take it back further than that. After all the time I joined, Baillie Gifford was barely profit making. And again, I'm talking about the individual examples, but there weren't many fortunes out there being made about in fund management. And, you know, some of the great businesses to do with that chain of either value or lack of value had not yet be created. And I think it's been a fairly ineluctable process mirroring over the past 30 years where it has got greater and greater as a pressure. Now, when did that, I'm not sure that that necessarily has to be connected with when it became less imaginative, less creative, but I think it probably has been. So I'm not going to push that too far. I think a lot of that has become part of the other side of professionalization. There is thought to be a way to go about this. So to try and try and explain what I mean, I had an intriguing conversation with myself and Bill Miller, who I deeply, deeply admire. We happen to be fellow members of Johns Hopkins Investment Committee. So I know recently well from that and other aspects with, I don't really remember Charlie Ellis, who was both the leader of the CFA, a trustee of many of the big organizations that we're talking about here, an advocate of efficient markets. And what he was trying to say and has written many, many times was that you cannot outperformance because the markets have become professionalized. What Bill and I, him with more, a more predictable access to myself, we're trying to say is that it's precisely the flaws in the professionalization of the industry that give you the chance of doing this. This is for most of my family are doctors. And on the whole, if a doctor tells you something that's pretty good odds that they are right, and there is a commonality to it in the fund manager, if you do the same as everybody, then you're almost certainly going to be wrong as you know. And I think this has been redoubled by both the internal professionalization. And if I may take a real go at it, the whole notion of the CFA, which teaches you things that are demonstrably wrong about the world. And so I think there is a culpability as well as a professionalization, which was meant to lead here. So I absolutely would agree that a way I've appointed the last 30 years was the critical tipping point we are in a world where it's much, much more difficult to be creative nowadays. Okay, so that rather suggests the majority of the industry is broken to agree.

What changed: the 2004–2006 reformation, Bessembinder and Brian Arthur

MERRYN SOMERSET WEBB: But that leaves huge opportunities for creative and contrarian thinkers. Exactly. It's such as yourself. So if you look back at the success of Scottish Mortgage, you see the real-life performance happening through 2010, 2012, 2013, etc. And then you see the lines start to really, really sore. What was it that, I mean, you obviously have been with Scottish Mortgage much longer than that, with Baillie Gifford much longer than that. What changed? What sparked this massive outperformance? Because is that when your strategy started to work or is that when you began to formulate your ideas more intensely?

JAMES ANDERSON: There are two different parts of this. And please, Mary and I, I'd be very comfortable if you want to cut out the first internal part. But it's important to me. And I think it's important to understanding Scottish Mortgage, if I can put it that way. So around 2004 to 2006, we decided that under the pressure of just what we've been talking about, much of our Baillie Gifford's process and philosophy was broken. Although we said we were long-term, we were not. There were endless discussions of quarterly performance. We were built on geographical building blocks. Some of them, like what Sarah did in the Japanese department, fantastic. But intrinsically, it limited knowledge, it limited the ability to make bets in the right way. So we tried to become truly global, truly long-term. And that was philosophically a big change. Now, some of the good investments, for instance, Amazon, dupe back to exactly that period of time. But I think it was in particularly concentrated post-2008, 2009, partly where some of the old models just didn't work anymore, partly because I think the combination of what I might call the Bessembinder Arthur hypothesis about the world came to be dominant in what was happening in the real economy and not just in stock markets. So it became evident that stock market performance wasn't, again, as the CFA would take you, a perfect bell curve of distribution. It was dominated by the right-ended streams. You know, I know this could be rather caricatured these days, but it is a profound truth about what's going on. And Brian Arthur and colleagues, particularly around Santa Fe, explained why that was so, because you had increasing returns to scale. And I think that under the influence of people like them, a much greater brains than our own, we began to see companies in that light, and that did lead on. So it was both a period where those companies were doing incredibly well. But I also think we had a different philosophical understanding of why that should be so.

MERRYN SOMERSET WEBB: Okay. Now, that phenomenal success. Can it now be repeated in that what you did initially was very thoughtful, different to other people, reflected a philosophy that other managers didn't have, but the ideas that you've just talked about are now fairly mainstream. Thanks in large part to you. The idea that you should be in private companies as well as public, that you should constantly seek out growth, that the market behaves in the way you just described, is no longer an outlier view. So is it possible for Scottish mortgage businesses like that, funds like that, to have the same level of success that they've had under you?

JAMES ANDERSON: And the second part of that question, of course, will be in this very different environment of inflation, interest rates, etc. But let's take the first parts. Yeah, absolutely, because I think they are different ones. And I was expressing this as a client before this meeting, client in career, which shows how far the sense of the ideas have spread as you say. I think, Merryn, there was a period when the heat rate was too high, and hence it did attract what you're talking about. And I think, you know, in a certain sense, that is what we are working through at the moment. But for two reasons, I reject the notion that this is all over. So the first one is that I think that there was, if you like, a gathering rush to imitate this style of approach for the year or so after the pandemic first started, I think we can understand the reasons whether we agree with them or not. So that I think there were quite worrying signs and, you know, I don't know, we'll have time, but I'm more than happy to talk through, you know, what I think we got wrong or what we got right in responding to that. I think there were too many people trying to play this at the beginning of last year. You saw all these facts and all the free means for new companies and the like of that classic symptoms of over exaggeration. But I don't think that beyond a very small number of investors, that there is much evidence that people are having the strength to endure. And, you know, to be frank, and please don't take this as not feeling sorry for the fact that we recently lost people with money in any way at all. It was always inherent to my set of beliefs, and I absolutely believed Tom and Lawrence's as well, that one of the virtues of this is enduring. And, you know, it was like this in 2008, 2009, for heaven's sake, as well. And, you know, I think very often these periods actually turn up huge opportunities. You know, I think I talked to you this about before, you know, we ended up buying Apple on three to four times what, 18 months out earnings. And sometimes you get extraordinary opportunities and, you know, in a world where people are worried in short-term time horizons happen, they get covered up. So that's one set of reasons. I don't believe that fundamentally it has addressed. To be honest, I think the media reflects that as well. You know, it's all back to value above it. No, no, we're likely. But the second part, which is what absolutely intrigues me, and what, you know, I would very much like to make the case to shareholders that there is no opportunity for Scottish mortgage to build on in the future. And so I think the number of areas where you have the opportunity for exceptional growth and progress is expanding. I mean, if you think about this over the last few, let's do 30 years again. I was having a chat with Dennis Lynch, a fund manager, I much admire in America about this. And we ended up talking about how if we just know that Moore's law would continue for the next 30 years, really, it was quite easy. You still have to get to the right companies, but the bulk of it was covered. Now, I think whether it be what Moore's law extends to, or whether putting genomics, synthetic biology, energy transition on top of this, the number of areas of opportunity for that extraordinary sets of returns, of course, there'll be many companies that fail within that. You know, we'll have to make the right decisions. My colleagues will have to make the right decisions, as I mentioned. But I think the hypothesis that backs the notion of exponential growth as an opportunity to set an exponential turns to the companies that benefit from that and exploit that fully is absolutely intact. And, you know, we can talk about the shorter-term obstacles, but on a 10 or 20-year view, I think the case is stronger rather than weaker. Okay. So anyone who thinks that this is over is just suffering from what you've previously called the difficulty of imagining. The difficulty of imagining. Yeah. Yeah. No, thank you. And I don't know. I mean, some of the psychological studies around difficulty of imagining and difficulty of thinking about exponentials recently been debunked. But, you know, to put it in context, and I trust I'm going to give you the right figure here. So just to describe what you have to imagine and the impact of this part. So SML traced back Moore's law of a doubling of semiconductor power in two years, not to when Gordon Moore first wrote the article in the 1960s, but they say they could trace it back to 1900. Now, what, you know, given one has to look forward at least five years from here. So you have 128 years of doubling and progress. Now, what does that compound into? It takes you from one to nine million trillion. Now, that's difficult enough number to imagine as well as all the consequences of it and applying that to human biology and the like is the extraordinary task. You know, we currently have all which I'll be going back to after this. A forum on long term thinking the one gentlemen there talking to us is Noubar Afeyan, both chair of Moderna and flagship pioneering healthcare company. And here's constant phraseology about this, which I find incredibly challenging. But really important is that she'd almost goes beyond imagining because anything else that may not go quite as far needs to be excluded because it is effectively discounted any imminent innovation does not matter. And as you would say, this means you're going a very different direction from the point of view of the cultures and teams you need, because you endlessly and rightly says you cannot expect ordinary people to attain extraordinary tasks and to expect them to behave as ordinary people in trying to do this is also misguided. So, you know, I think it is imaginings and I think, you know, having green spreadsheet out working out ratios is not going to help you greatly about that, to be honest.

Inflation, discount rates — "this debate has a peculiarly short-term bias"

MERRYN SOMERSET WEBB: Yeah. Let's talk a little bit about the shorter term dynamic much conversation about how the great growth boom of the last decade has been driven by super low interest rates by very easy money and by very low inflation. That means that the discount rate is different and suggests that profits in the future are worth significantly more than they would be under a different monetary regime. Now, the generally accepted view is that rising inflation and hence your expectation of continually rising interest rates have changed the dynamic of how you value growth. And that is the explanation for the fall off in Scottish mortgage and any other growth related trustal funds over the last six to eight months. Is that a short term dynamic? I suspect you're going to say yes, or is it a fundamental change in the way that we value growth?

JAMES ANDERSON: Well, you know, I nearly said it in light of the previous question. Yeah. I hate the undue certainty that people tend to have about all this. It applies both to the top down and to the bottom up, you know, just as much as I hate people sending me a diagram of precisely what Tesla should be valued at when there are so many unknowns out there. So I don't think it's right to be too dogmatic about this. But let me try a few comments about this. Firstly, I don't think it's really consistent with everything that's been happening in the markets. So I mentioned a couple of minutes ago, Moderna. Now, there is no company at which the extreme of current profitability is higher. It's trading on approximately five times earnings if we take the shortcut of near-term earnings. Huge cash flows positions, yet its share price has fallen from 490 to 140. So, you know, I think there's something odd going here. I might also extend that. Does that make it practically a value stock at this point? Well, I should ask you that question. You're far more trained in the management, but I find it absolutely intriguing.

JAMES ANDERSON: You know, I don't think anything. I don't actually think the prospects of whether or not RNA revolutionized medicine have changed a great deal in one direction or the other over the last 12 months. Equally, I'm not sure that most of the Bayer months, actually their near-term profits are both high. And I think here we enter a more conceptual framework, but I think an important one. You know, I think the companies that suffer most under inflation are those who do not have the strength of business to have a pricing power. I think it's quite unlikely that applies to most of these companies. I think it also, and you know, I don't want to get into the weeds of this, but I think we will mostly argue that it's real interest rates that matter, and you could make the argument that those are at all time highs on certain metrics at the moment. But I don't know. I don't think it's my role to say how long inflation will be, whether you define it as transitory. What I can say is, I think this debate has a peculiarly short-term bias and a peculiarly American, or perhaps Anglo-American bias in what's going on. I've found it be puzzling for a long period of time, that's even before we got it to accelerated Fed and perhaps other central banks tightening to think that this isn't all going to turn into a severe recession at some point. And I think that changes very strongly what you think is likely. You know, I think it is quite conceivable that by the end of this year, we're worrying about recession, we're all worrying about inflation, and that we have, which is troubling in certain ways, actually... Well, my fear is we'll be worrying about both things at the same time. Yeah, I don't know. I personally would be part of the belief that particularly rising energy crisis usually harbors recession, and that's been the great problem of the last 40 years rather than anything else. But I think the squeeze on consumption is very much there. And of course, that affects some technology companies, Netflix, the current example du jour. So you know, I think we're going to be, it's at least likely, I'm not going to be dogmatic, that we're talking about collapsing activity and collapsing interest rates at some point out there in the future. That's not what the philosophy is built on, but that is how I would see it. I think if you look around the globe, we already see this happening. You know, there are plainly, I'd love to talk about it, but we probably won't have time on this, major least transitional problems in the Chinese economy. They made me more structural ones. I think it's pretty unlikely you won't have a recession in Europe for the obvious geopolitical reasons and knock-ons at the moment. I think we both know squeeze-on incomes in the UK is pretty intense. So, you know, I think the global picture suggests that actually we're dealing with weakening and that the dialogue may be dominating people's mentality by your fed pronouncements every day in the like-n-n headlines. But I'm not sure that that's where we're heading, but you know, please, the contentions around Scottish mortgage rest much more on what I was saying about the structural than they do about these. But I am peculiarly tempted at the moment to be sort of slightly questioning of the narrative on the background.

China: "a real mea culpa — but possibly not the one you expected"

MERRYN SOMERSET WEBB: Let me ask you briefly about China then, given that you've mentioned it. There are transition problems inside the Chinese economy. And obviously, right now, there are horrendous short-term problems with the lockdowns causing supply chaos everywhere. If I'm right, poor colleagues in our Shanghai office now. Yeah, your poor colleagues in Shanghai office exactly. And this is a strange, but it also, it highlights perhaps one of the criticisms of your Chinese investments, which is that you don't necessarily consider political risk enough.

JAMES ANDERSON: So, I would agree with that, Merryn, but from a different perspective, and you know, you're going to get a real mayor culpa, but it's possibly not going to be the one you expected. I don't expect anything when I'm talking to you, James. My mind is open. So, I do not feel that we were naive in general, in what we do with China. I can assure you, there are many, many conversations both within direct Scottish more Christian and more broadly with people who are more like Richard Seller than departed about these attitudes. And your wise one will always have a position on these matters. We absolutely believe that ultimately one was always going to be at the mercy of the Chinese Communist Party. I think that Baillie Gifford, if I may be specific and including one or two mandates for which I had some responsibility, were wrong to own the education stocks because I think, you know, everything from Chinese literature to the published accounts of how Xi Jinping and others thought about this area would have guided you away from that. But I don't think we were profoundly wrong for the tensions out of our bars, even Meituan's of the world in which we're talking about. I think there's a relevant conversation about how far the complete upside that is usually known is important to us matters there. But what I really feel guilty about and I had every opportunity and that's an eye even more than a way was to misinterpret the signals coming out of America around China. And I have many, perhaps all too many connections in one way or another with the American foreign security establishments. And you know, the moment I ought to have taken more seriously was in particular when hearing as represented at the Trumpian world, Mike Pompeo talk, and in the audience was Chuck Schumer, who said, Secretary, you are getting this completely wrong. We are not complaining from the democratic perspective that you're being too tough on China. We're complaining that you're not being tough enough. And I think the vigor with which that has been pursued, I'm not making adjustments to whether right or wrong, but that hence you in debt, not just a lower possible share price, which was the Chinese regular action, but that this could go to naught as the whole Russian crisis has had, is something that I should have reflected on more early. And I feel guilty about because as we've talked about both in this discussion and before, I think there are certain elements of unpredictability, which you simply have to acknowledge you can't make judgments about. I think I was in a relatively privileged position to make a judgment about this. I got it wrong. And that it highlights the GN and ESG to a degree, and that maybe we should think not just about corporate governance, but about the governments of why we invest. Possibly when we talk about ESG, GN is not quite mentioned enough. And that may well be right. And it may also be talking, I think, rightly about quite a lot of 30 and 40 years trends. I've lived all my career until recently in an era where globalization was increasing, which inevitably de-emphasizes what you're talking about here. And I think it's certainly a very valid question as to whether that was continuing. And if that is a domineering part of what goes on, then yeah, that's right. I mean, up until recently, I suppose I thought these tensions had merely resulted in a change from there eventually being a fight, say, between Amazon and Alibaba for global dominance to you each dominate your whole entire world. But if it's now that you can even destroy your franchise in your own markets, then it becomes a lot more complicated. I agree with you

MERRYN SOMERSET WEBB: . Yeah. Well, it's interesting, isn't it? I mean, the retreat of globalization surely must make a huge difference to how you manage a global fund. Yes.

JAMES ANDERSON: Now, here I get quite questioning and please, it must be one of those issues from which I shouldn't try and govern from the grave. It's got to be up for by successors to decide where Scottish mortgage goes. And I'm sure they will take it extremely seriously. I think there are certain forms of globalization that are retreating. And I think we are directly in the hair of this because it is about financials, financial integration, that primarily this is happening. I'm not sure, Mary, that it is completely going on in two other ways. Firstly, and we've been quite influenced here by talking to Brian (from our Shanghai research) about the process that labor markets are getting more integrated because you can do it distance. This isn't an argument about the value of Zoom or anything else at this juncture. It is simply, it is physically possible to not have to go to Silicon Valley. You can be in India or whatever to do this. But I don't see any evidence of that is doing other than progressing. I think Franklin is absolutely right about that. The second part of it, and this is a real, I don't really see much evidence that actually commercial value chains and supply chains are retreating for globalization. Just to give you one figure that happened to go out today, which I haven't examined in detail but with the struck me as strange, China has announced its first quarter figures on inward investment, and it's up 25%. That's not really a retreat, is it? I find that a very surprising number. Yeah. But if you think about what some of the big companies are doing, and this is what I get, you know, they're intriguing when the narrative doesn't fit with what's going on in the markets. After all, the two biggest American presences in China and deeply integrated in both companies would be Apple and Tesla. I don't think in either of those cases is there a plan to retreat from that perspective. So, you know, I absolutely agree. And I don't want to dismiss in any way what you're saying. I think it may be a big problem for financial investors

Opportunities now: correlations, delivery, and "some will be worth the entire portfolio"

MERRYN SOMERSET WEBB: . I'm not sure it describes wholly perfectly what's going on in the global economy away from finance. Interesting. Can we go back a little bit to we were talking earlier about the huge opportunities thrown up in 2008. And you said that, you know, as possibly the wrong narratives take hold in the market, that one being an obvious one. Are there opportunities right now that are very obvious to you, be it the stock specific or sector specific, which may not be obvious to everyone else?

JAMES ANDERSON: Actually, so I will try two different hypotheses very quickly. The first one is, I hope George Soros of regard, this is entirely predictable, the reflexes of what's going on in markets. And I think in many cases, the inability to raise finance to back projects that are 10 years away from profitability at the moment is actually tugging forward profitability. And I think one of the major areas where that is happening is in the whole delivery spectrum, where even 12 months ago, you know, 50 minutes deliveries will be funded all over the place and extreme rations. I think now even in the food delivery era, profitability is going to be earlier. And structurally, we'll find out who the leaders are earlier. So that's an area that intrigues me. More generally, though, I think my answer would actually be cautious in a different way from 2008, 2009. You know, I think back then, you could see that the Googles and apples and Amazons were actually doing very well as businesses and they were simply their share prices were simply demonstrations of people having to raise cash. And so there was a very obvious effect. I think now what we've got is terribly complicated, really important for how we think about the world and whether we will be successful in the future, which is that I think the correlations, particularly in new companies and smaller companies and innovative companies and nonprofit companies you like, become so strong that some of the eventual they will be worth the entire portfolio in 10 years companies Down 80 90% now I think trying to work out which specific ones is the moment is both our task and extremely difficult but you know, I'm pretty sure that there will be some and I could give you candidates from a Ginkgo to reversion recursion, sorry Which which I think we have to think believe they're a greater than greater than normal chances of them being in that distribution But I think I'm less certain about Knowing what it is. It's going to provide that real long-term return structure than I think was the case in 2008-9 where I think there was a batch of very established very

Private and public in one portfolio — and the valuation discipline question

MERRYN SOMERSET WEBB: Fast-rising dominant companies more obvious Can I I want to ask you some of the questions that I'll read of as sent in for you before that I want to ask you about the Conflict or possibility of conflict between the private investments and public investments in a portfolio So most of the Bailey give funds now hold a mixture of listed investments and non listed investments I'm one of the things I wonder when I look at that is in particular at Bailey give it because you have these Incredibly close relationships with private companies and you're known to be a great and incredibly supportive investor in non-listed companies Then of course they they become listed Do you ever feel that perhaps having both of these types of company inside one fund Leads you into a type of conflict whereby you are obliged to continue to hold the shares after they've been listed for the long term on the basis that New private companies looking for money are going to want to see that long-term commitment to private investments And that may lead you to a point where possibly you're holding large-shakes in companies for longer than you might otherwise

JAMES ANDERSON: Every policy is bound to have its complications I'm not sure that I'm going to go too far as to say drawbacks for complications For sure. Can I just say before the weeds of it? I've always felt uneasy and I hope my colleague says That I should in any way try and impose views Mentalities on better gift at large, you know, I I deeply treasure the fact that there shouldn't be One mindset that dominates everything and you know, I Worries me when people try to dominate. So, you know, I I will speak absolutely for Scottish walking Absolutely So, yeah, the relationships are very Incredibly important and valuable to us. And you know, if we have been able to do worthwhile investments I think a lot of it is to do with that combination of corporate and academic relationship So I I'm not walking away from them. I do not believe that The transition is fundamentally something that is a drawback To Baillie Gifford indeed. I would claim it is an advantage over many of the other investment management firms who tries to straddle it in that Because it is the same people the understanding is there already the knowledge base their Relationships are there rather than you having and a curved group of people who may not sympathize may have a different investment policy But whilst I'm saying that is it possible Sometimes our mentalities are in the direction you wouldn't yeah, I just theoretically a possible I don't mean theoretically in the condemnatory sense I think that but I hope I was being open to this I think that people like you asking us tough questions on these lines matters so that we can keep trying to factor in This matter to all the conversations my own experience and if you want, you know This is something that may or may not be directed to the question But something really on my mind as you know approach leaving actually Most of my mistakes have been the other way around that I have not whether it be in public or private companies Actually endured enough So, you know, why did I sell Apple? I? Know what I wrote at the time and it was me and I'm not trying to cause play of anywhere else It was on wrong Decision why have I ever sold a share in Tesla? You know, I I think if anything I would argue for even greater loyalty to our companies Even though that would never be include some mistakes because I think you're giving up on the extraordinary upside potential And

MERRYN SOMERSET WEBB: I have one or two more questions that I want to ask you from me But I think we do that if you don't mind words. I've got my pen We'll just ask some of the readers questions. I'm not sure we want to go politicals Number one, does he really think breaking up the UK is a good idea? We'll come back to that if we have time, perhaps Will there be any significant changes to our funds holdings and or strategy in light of recent performance macroeconomic shifts Now we've slightly covered that haven't we and there's anything else you want to add

JAMES ANDERSON: I think I'll just answer for you. No, probably not But we need to be absolutely open minded and honest sometimes we will be wrong and if the world has changed we have to

MERRYN SOMERSET WEBB: Okay, but this is quite interesting actually of the several on China, but we've covered that Color on the valuation basis Methodology of Scottish mortgage private investments. How is that done? I mean several people asked me before and by the way I know the answer to this because as I'm sure listeners know I sit on the board of another daily give and trust So I I know how this is done, but I think it might be useful for For readers to understand the difference in valuation methodology there

JAMES ANDERSON: when We I first committed to private investing We made it absolutely clear that The central feature of I think the central feature was that we could still apply the same investment process and indeed valuation philosophy And I think you know whether it be about private companies or more general There are a few things to be honest that have irritated me more in the years that the idea that we don't take valuation seriously We don't think valuation is short-term PE's and we cannot be dogmatic about the value of company But in the same way as with public companies, we have different scenarios and we try and focus on the likelihood adjusted returns From those scenarios and that will go usually go from not to a very high figure And you try and be honest about it goes back to the previous question You try and be honest about what is happening in the world in the direction of those companies towards the different scenarios

Netflix: "the operating conditions are worse than we thought"

MERRYN SOMERSET WEBB: And Netflix Yes, it's come quite a few questions on that Share price fall does that mean that you'll build on the position or the fact this was crippling is going down makes you nervous about his future

JAMES ANDERSON: I mean, it's not a big holding in the portfolio. It's a one-half something like that But I do think it's a very Interesting one and this is not and you know it's past the time when I commit us to a certain policy anyhow Or a certain action and anyhow, but I think it's a really interesting one Merryn in that I think it is One of the earliest Examples at scale you might say Facebook better as well, but I'm not sure that's really what's going on there where actually The operating conditions are worse than we would have thought three years ago Um It may to some extent to be with the pandemic But I think it is much more to do with level of competition that has happened there And I think the likelihood that they are going to be dominant and they will wipe other people out is surely altered according to this but equally The valuation of those prospects change very quickly as well

Energy, uranium, and Tesla vs the incumbents

MERRYN SOMERSET WEBB: Okay, um energy crisis quite a bit on this Yes, but not so much about the energy transition as you might expect But about the mining sector any thoughts on nuclear energy effort at the beginning of a huge bill run for say uranium Is that somewhere where you can see — not on your watch, I know, but you might be able to see Scottish Mortgage investing?

JAMES ANDERSON: Yeah. Whilst there are never precautions in anything that can be defined as commodity, that doesn't mean that there are commodity cycles within this it can be last quite a long time There is no rule that Scottish mortgage doesn't invest and you will remember back at the time 2006 say where we had quite substantial exposures the nuclear one specifically I have always been skeptical about because you know Based on some more work fundamentally it's mostly been done at Santa Fe Institute the best guide To the price of different energy technologies is what has happened in the past now We all know and there are many many reasons behind this that the price of nuclear energy has not got cheaper over the past Therefore, I am much more comfortable with those technologies such as solar and wind where those price declines Have been radical and look for all the complications of the commodities to remain over the course of time It is very reliable and we might be prepared to pay a premium for that. Well, gosh — there are many very different arguments about this, but I think the models that say that a combination of solar plus wind plus batteries is actually pretty resilient are quite convincing. But I don't want to come across as, you know, in discussions of politics, having the answer.

MERRYN SOMERSET WEBB: Fair enough Okay cars everyone's talking about cars Do you think that it is likely that Tesla will be overtaken by some of the incumbents over the next decade or so? So VW in particular working in this area Aren't the old car brands gonna clean back their shares as they build up their technology? I

JAMES ANDERSON: Think that is Doubtful And I also think is in the sense the wrong questions endlessly had commentary from our friends at Tesla that People should worry less about market share Within the EV sector and much more about the percentage of the aggregate market taken by electric vehicles So having other people making progress as well is not necessarily a bad thing But if that answer is thought to be too soft I will harden it quite dramatically by saying and in a way that surprises me There and even as a great supporter over the years of Tesla. I Think the scale speed and efficiency of their build-out Accepting factors such as Shanghai, which is top really their responsibility at the moment has been truly remarkable And I think their leadership whether counted in market shares or whether counted in terms of Years is getting greater rather than less I do accept that one or two of the companies the VW corpus at large being quite an interesting example Have shown more ability to react. So ex-China I would add in I think this is an important point that Tesla have always said to us that they thought they're most likely rivals and they aren't complacent about this would be from new car Companies new EV companies rather than the traditional OEM ice companies. I personally think that the balance of that may have changed slightly and that from VW to forward There are some of the original companies Hyundai which are making more progress your thought But on the other hand the competitors for Tesla as new EV companies per se extra ex-China seem to me Maybe you're doing very disappointing So it's a bit of a mix picture on that school But no, I think Tesla an extremely strong position and just a huge supporter of Elon Musk personall

JAMES ANDERSON: y We've had our differences, but you know, I I would class that in this. I don't think you should expect somebody Doing what he has done to be entirely a placid character if I can put it that way So, you know my admiration way outweighs My my concerns

MERRYN SOMERSET WEBB: will you open a Twitter account if he takes it over? I Find Twitter quite a valuable tool Not I think for many of the reasons that that he is concerned about doing it There is a wealth of financial information if one could just win it on Twitter

MERRYN SOMERSET WEBB: I am getting so many questions. It's still coming in I asked this morning if anyone had any questions here and they're still piling in The time that it A lot of people would like to know how you feel about crypto currencies and how you feel about companies that are exploiting their technology And if there is anything in there that you feel might be important for the trust I'm guessing you're not a crypto investee yourself. Yeah So the first thing that I would say is that from a couple of years ago

Crypto: "not an innovation remotely akin to the internet"

JAMES ANDERSON: I thought crypto was the quintessential one where I should opt out earliest of taking decisions This is going to play out of 15 or 20 years And I really thought it was better for the next generation to have their views and I've stuck to that fairly thoroughly But at this juncture, I suppose I can address some some norms despite many people, you know back to Bill Miller Who I'm I greatly believing in this very directly Despite the number of people building businesses in it. I do not fundamentally See that crypto is an innovation remotely akin to the internet and all the parallels drawn with that And I think the UK's use cases will be much smaller I think what we should do though, and I'm pretty certain my colleagues are doing this is Try and discern whether there are any business models constrained as they may be by that overall Take which are sufficiently strong business models and instead of buying an asset You're buying a great company and I think it's our duty to do that and you know, I think my colleagues will do that

"Can one do something in broadly defined investing which is of utility?" — what comes next

MERRYN SOMERSET WEBB: Okay, I've used up so much of your time. How are you for time? Another couple of minutes Yeah, yeah all the time in the world seems obviously On the basis that There's a lot of exciting things happening at the moment I mean there is as you discussed earlier There's so many new things happening so many exciting sectors so many possible opportunities And as one of my readers appointed out in the great scheme of fund management, you're really so very young It's just part of you won't stay longer I mean the reason we're having this conversation is because you are retiring but you're leaving behind What looked like several exciting decades ahead?

JAMES ANDERSON: Well, can I invert that? It's certainly ought to be taking that I am leaving because I am negative This is not a very good question. No one is thinking that for a second. Good. Good. Good. I I think I can have a Career in what should we call it? Like you I'm worried about the terminology associated that But can one do something in broadly defined investing which is of utility And which needs to be done. It was best done in a different setting. I think Can now I've taken on a role in Sweden already But you all well know that in Sweden there are many entrepreneurs with very distinctive takes on what is possible in the world You know my connection with North Fulton with power makes a fellow board manager at Chinavik I think these people are making some best efforts To serious not gesture Decarbonization in the world and I think for many reasons that is an important thing to back the other element which I've always felt very strongly about is That we have a failure of European capitalism Relative to its potential and I think for this context I probably include Britain in in in Europe I don't want to get into that too much. Let's not get into that, but Then there are basically still both Entirely independent nationalists Which national system sorry rather than nationalisms which don't meet each other So you don't get that sense of network and community which actually I think is outside How most people think about America but absolutely exist, you know Some ways I think of Silicon Valley as a giant correct super are for the competing series of entity and Also, I think that there is a lack of Ability to translate all the deep scientific and technical knowledge is particularly in universities in Europe Into something that is valuable in a commercial sense. I it's really interested last year It was an event put on Illumina where Jennifer Doudna was talking The gene Lady and Nobel Prize winner and she was asked why she was involved in so many companies and She paused and said Companies are great for getting things done and I I think that is right and perhaps it takes us full circle round And I don't quite know how I'm going to address this sort of Stream of consciousnesses are giving you about but these are tasks that I feel very seriously about And I'm not sure they are really about what equity markets do from month to month I don't know if you can solve those problems. I think we'll all be will be even more impressed And we've been with the last 20 years of your career Problems, but you know, I might be able to have a little bit of role in helping of some of them So yeah, I agree with you. I'm not I'm not a my golf game is sufficiently bad that I wouldn't be tempted To do that.

One stock for 20 years: Ginkgo

MERRYN SOMERSET WEBB: All right one last question which you will refuse to answer I'm gonna ask it anyway. If you could reach into the Scottish mortgage portfolio and take one stock away with you For 20 years. Oh, which one would it be?

JAMES ANDERSON: I Was I was once asked I'm not playing for time here No, I was once asked what were you over forever and but that junction my actual answer was BYD which would be I'm making ups and downs since it's that period of time if we say that it's for Next 20 years 20 years 20 years or 10 if that would be Assuming for the moment that actually I think it's becoming a lot easier the longer you give yourself Oh, well, we have it takes us longer to be able to check in. Yeah, I so Assuming that one has some disposable Worth from the hence it's for upside you're focusing. I Think I would opt for Ginkgo You know Lightlihood of success is of course lower than many of the other ones that you I tell us briefly about the company Is effectively how should put this? The intel of synthetic biology in that's providing the foundry capacity To make various chains. So for instance one of their earlier projects. The interest is lot Was a joint venture with Bayer to make plants produce their own nitrogen rather than it would be having put of fertiliser But you know what you can do is so unlimited and perhaps it's a good ending point staring I was having a conversation with the ever enthusiastic but extremely articulate Jason Kelly who's that the CEO of Ginkgo and it was the end of the Sun Valley conference And you know we spent the previous three over two days mostly hearing from these giant behemoths and Jason Looked across at the leaders of many of these companies that he could adjoining tables and said to me, you know From Facebook to Google. I think he included Amazon as well and probably the Chinese companies these Companies have become enormous beyond dreaming Just by disrupting one small stagnant sector of the economy advertising What synthetic biology does could disrupt everything Manufacturing certainly but all the product development and the and the like and I think it is know those Possibilities and dreams which we can't be certain about which we need to go back to what we thought you had to do the imaginings about that really mattered and You know wouldn't want to be better if we could just close the valuation book at any quarter I'm not saying it because Jeff Rice's collapsed recently and just see where that takes us over 20 years So yeah, and I'll try to remember this

MERRYN SOMERSET WEBB: There's a great place to end it James Thank you so much for giving us so much of your time hugely appreciated and Good luck in all these goals you set yourself in retirement. Thanks very much and I've enjoyed your very Thoughtful and productive challenges from you directly from shareholders over the years. So thank you