09 Nov 2011 | Business

Private Investors' Forum - Tom Slater 

Investing in a Brave New World was the theme for
Baillie Gifford’s Private Investors’ Forum at the
Central Hall, Westminster - 13 October 2011.

Read what Gerald Smith, manager of The Monks Investment Trust and Baillie Gifford’s CIO; Tom Slater, deputy manager of The Scottish Mortgage Investment Trust; and Patrick Edwardson, manager of SAINTS all had to say on the day.
 

Tom Slater on investing for Scottish Mortgage

“What are the important issues?” Tom asked. “There’s never been a time where a group of already significant companies has been able to grow so rapidly with such limited capital requirements.” The global economy offers specialised opportunities for successful companies such as Apple, where year on year sales are up by 80% and Amazon, where sales are up by 50%. Indeed, these examples are a manifestation of the rapid pace of technological change.

As a global, long term £2bn investment trust, Scottish Mortgage seeks to be owners of companies for the long term. Managers pay close attention to analysing companies and management.

Tom agrees with Gerald Smith that fund management commentators are very gloomy at the moment. “I don’t know how many times I have heard the word crisis and yet last year was one of the best for the global economy in three decades”, Tom said. “The IMF expects the global economy to grow by 4% in 2011.”

We should not underestimate the importance of the increasing wealth of many nations, including China, argues Tom. “I am struck by how little we hear of the companies and economies of Northern Europe at the moment. Unemployment in Germany is at record lows while Poland did not have a recession in 2009. Elsewhere, Brazil was a net lender to the IMF during 2008-9.”

In China, there is still a huge amount of growth to look forward to as demand for luxury goods is continuing, educational achievement levels are high and entrepreneurial and innovative Chinese internet companies growing rapidly.  Tom admitted that one of the more worrying signs is the possibility of political upheaval, but explained that he needed to look at these issues from an investment perspective. He reported that the CEO of New Oriental Education, a Scottish Mortgage investment, believes that the tendency of the brightest students to study overseas before returning to China is favourable in this respect.

Even this, however, may be less significant than the exponential and possibly underestimated pace of technological change borne out by the doubling each year of the number of computers companies hosting sites on the internet, the bandwidth of mobile communication networks and the rapid growth of online software such as Google search.   The corporate sector used to have to own all its own technology to store data; the move by business users to data storage through cloud computing is only just beginning, says Tom. Amazon, Scottish Mortgage’s largest shareholding is placed to be one of the major providers of cloud computing to businesses. In 2000, Amazon sold just books on the internet: now it has 30 product categories and yet is still only 1/12th the size of Wal-Mart. The effects of the technological revolution in retail are still relatively embryonic, says Tom, and one of the lines Amazon is most excited about is clothing.

In healthcare, Scottish Mortgage focuses on identifying businesses that will improve clinical outcomes, particularly in genetic medicine, such as gene sequencing company Illumina, in which the trust invests. Meanwhile, there have been some early examples of mainstream drug companies releasing genetically targeted treatments for cancer. Elsewhere, Intuitive Surgical, another Scottish Mortgage investment, provides robots used to perform prostate and gynaecological surgery.

Tom sees the banks as the exception to his otherwise optimistic outlook and questions why any fund manager would wish to invest in a business where remuneration levels are much higher than they should be. However, he sees opportunities in alternative energy notably solar power and the next generation of bio fuels using plant stalks and leaves. He reports too increasing interest from utility companies in this area.

As a long term investor, however, Tom recognises it is important to recognise the danger of overlooking a change in the investment case for a particular company. “We agree, as individuals on the team at Baillie Gifford, on very little and that challenge is very important in helping to identify why things may have changed.” He accepts that managers have to acknowledge the limits of their knowledge. “I think we have to look at the long term horizons; we don’t try to be tactical by changing gearing.”

Please remember that the value of a stock market investment and any income from it can fall as well as rise and investors may not get back the amount invested. Investments with exposure to overseas securities can be affected by changing stock market conditions and currency exchange rates.

The views that are expressed in this article should not be taken as fact and no reliance should be placed upon these when making investment decisions. They should not be considered as advice or a recommendation to buy, sell or hold a particular investment.

This article contains information and opinion on investments that does not constitute independent investment research and is, therefore, not subject to the protections afforded to independent research.

The Trust invests in emerging markets where difficulties in dealing, settlement and custody could arise, resulting in a negative impact on the value of your investment.

Scottish Mortgage can borrow money to make further investments (sometimes known as "gearing"). The risk is that when this money is repaid by the Trust, the value of the investments may not be enough to cover the borrowing and interest costs, and the Trust will make a loss. If the Trust's investments fall in value, any borrowings will increase the amount of this loss.

Tom Slater
Tom graduated with a BSc in Computer Science with Mathematics from the University of Edinburgh in 2000.  He joined Baillie Gifford the same year and worked in the Developed Asian and UK Equities Investment Teams before joining Long Term Global Growth Team in 2009. Tom became a CFA charter holder in 2003.