China is the area to watch for innovation, according to the managers of the Scottish Mortgage Investment Trust (SMT) and Tom Slater and James Anderson are focusing more of their resources on the region in the belief that this is where the opportunities are. Slater says there has been a “cluster of innovation in the San Francisco area” but now the most exciting companies are coming from China.
And while the trust is best known for its big holdings in big tech companies, it was two biotech businesses which Slater thinks were most notable in the portfolio in 2020. “Moderna’s efforts to address the Covid-19 situation and Illumina’s to provide the tools were notable. In effect, it took four days to find the solution to the Covid crisis – two days to sequence the virus and two days by Moderna to transfer that into a model that would trigger an immune response.”
Spotting Disruptors
Anderson and Slater have gained a reputation for being able to spot disruptive companies set to shake up their industries, often investing in businesses before they list on the stock market. One such unquoted business is Chicago-based Tempus, which offers a small device that oncologists can carry around with them to help them answer queries. Slater says: “They are really beginning to show how enormous quantities of data can translate to accurate medical recommendations.”
It’s the pair’s ability to spot such up-and-coming businesses that have helped the Silver-rated investment trust to deliver stellar annualised returns of 39% over five years, and the trust soared 110% last year alone, making it the best performer among Morningstar-rated trusts. Such impressive performance has attracted an army of loyal investors and assets have swelled to a staggering £17 billion. But Anderson and Slater are not concerned by the size of the trust, and say scale won’t stop them investing the companies they want to.
Slater says: “If you own a relatively concentrated portfolio and you don’t change the names you own very often, it allows you to get deep into the interesting areas that you believe have the potential for growth. It’s not about shallow coverage on what the companies are reporting every 12 weeks, but the search for the entrepreneurs with a vision and an interesting business model, and then backing the way they go about exploiting those opportunities.”
Transport is another area on the minds of the investment duo. Slater says: “You are starting to see significant amounts of capital pumped into this area. By my count, 12 companies involved with electric vehicles have raised half a billion dollars each. That’s going to start to change things.”
One company set to scale-up its operations is Aurora, a data business helping traditional car makers compete with the likes of Google (GOOGL) and Tesla (TSLA) on self-driving vehicles. The fund also invests in Convoy, which is involved in tracking truck freight loads and Neuro, which offers kerbside delivery using autonomous electric robots, a service which is likely to become increasingly popular in the post-Covid world. Elsewhere, the fund holds Zipline, which offers medical deliveries using airborne drones; it started in Africa but has recently expanded into the US.
Anderson says: “With all these investments, it’s so important that we speak to and learn from companies, and we also try to build our broader expertise with scientists and the like. We’re not trying to be clever, we’re trying to learn.”
Land and Expand
Also in the transport space is Chargepoint, the world’s largest EV charging network, and the trust has made a commitment to invest in the firm when it lists on the stock market in the coming months. “It’s the ultimate ‘land and expand’ company,” says Slater. “It doesn’t sell energy, it sells the equipment to charge vehicles and the software to handle the process. Once you’re in, you’re not going to go to a new provider, you’re just going to buy more charging points and pay more to Chargepoint in rental fees.” Already dominant in the US, the challenge now is to replicate that success across Europe.
With so many other transport-related ideas in the portfolio, are the duo finally looking to reduce their holding in Tesla, which still accounts for 10% of the portfolio? While some observers have suggested there may be practical issues in offloading such a sizeable stake, Anderson and Slater insist that’s not true.
Slater says: “There have been behavioural challenges to investing in Tesla since we bought shares in 2013. The way we deal with that is to stick to our process.” Unlike many investors, the managers do not have a target price in mind for a stock, but instead keep in mind what they find attractive about a company, what its opportunities are and how likely it is to capitalise on them. “We keep away from the stock price and hysteria and focus on our process,” says Slater. “There have been at least 30 times since we’ve owned Tesla that its share price has dropped 30%.”
Anderson adds: “It important that the two of us connect on this and engage with each other and with the company, but we don’t really take other people’s views.”
