04 Nov 2010 | Person To Person

Scottish Mortgage - Investment and Conviction 

Tom Slater, the new deputy manager of Scottish Mortgage talks to Heather Farmbrough about investment and conviction.

Sitting over a coffee in a cafe in Edinburgh with Tom Slater, deputy manager of the Scottish Mortgage Investment Trust PLC since February this year, I discover that the brand new batteries for my tape recorder do not work. “Do you do this kind of interview often?” he asks. “I suppose so”, I reply, wondering what he is getting at. “Why?”

“Well,” he says, “two of my colleagues recently went to Singularity University in the USA, which addresses some of the planet’s most pressing problems by understanding the development of exponentially advancing technologies, and were given audio recording pens. I was thinking that one might be very useful for you.”

Tom’s colleague later lends me a Livescribe Echo Smartpen. It may be relatively low-tech compared with some of Scottish Mortgage’s investments but it has a whiff of James Bond about it. However, the mention of Singularity University kicks off a conversation about the impact of developing technology on computing and genetics – Tom read maths and computer sciences at Edinburgh University - to challenges and opportunities created by immigration and education. He knows a little about the latter as his mother was head of a secondary and further education college.

We discuss the idea that as change happens, the pace accelerates. Think of the speed of economic development in China, add the implications of technological change and compare this with the UK’s industrial revolution. For a fund manager, what matters is how this is applied to investment decisions. “If we can invest in the beneficiaries of change, then the returns are so much larger,” answers Tom. “If you look at two of our Chinese stocks - Baidu, the Internet search engine or Tencent, which is an Internet community built around messaging and gaming - then I think the principle of exponential growth does apply.”

TECHNOLOGICAL CHANGE
Since James Anderson became manager, Scottish Mortgage has moved a long way from its UK market bias to the current, more streamlined, global portfolio, which reflects James’ and Tom’s belief in the future importance of China, technology and technological change, and conviction that the western financial system remains flawed. This is a logical but bold view. Does that make it risky? “We do think about the concentration of risk within the portfolio,” answers Tom. “We ask what strong ideas we have – like our views on the financial system – and how this would expose us to risk if we were wrong. It challenges us to test our views.”

However, there is a big difference between risk and volatility. “We accept volatility in share prices,” Tom says. “But risk is missing that while the UK and US have stodgy economic growth, the global economy could grow at a rate almost unprecedented in history. If we are tied to the idea that other faster growing economies are more risky than investing in the UK or US, we run the risk of missing the bigger picture”

Tom has encouraged James to follow his convictions further, particularly in China, where the trust has increased its holdings in Chinese stocks, such as CTrip, the domestic travel-booking agency. He has also been behind other share purchases, such as America Latina Logistica, the privatised railway company operating in Brazil, and FLIR Systems, which provides infrared cameras, and thermal imaging for security cameras and energy leaks. The potential is considerable, he says. “Why do building security cameras only function during the hours of daylight? Why don’t we allow people to see hazards in the road beyond the range of their headlights? Why don’t law enforcers or fire-fighters have the ability to see in the dark? These are examples of how we can profit from anticipating change happening.”

POWER OF INDIVIDUALITY
What happens if he and James were to disagree? Tom considers. “James is intolerant of sloppy thinking or ill-thought through arguments. If you bring your own prejudices to something he can be very challenging. I hope he gets something out of my challenging his views.”

Tom also has his own part of the trust, in which he can buy shares he believes in even if James does not. “I’ve never believed in either group decision making or the veto approach,” James tells me later. “It’s much more about unusual ideas that can make you multiples of money, and this is a way of achieving this.”

Walking back to the office, we chat about Tom’s ten-week-old baby son until I ask him if he can sum up Scottish Mortgage in one sentence. He pulls a face but gets it in three. “Part of it is about backing convictions and doing what we said we would. We are very different from other large global trusts in not having the big FTSE 100 stocks like Shell or BP. We see the greatest opportunities in more exciting parts of the world that remain underrepresented in global stock markets.”

Thinking about it afterwards, I am not surprised that this bright, likeable but self-assured young manager has already made an impact on Scottish Mortgage.

This interview took place in September 2010 and all information contained is correct as at 31 August 2010.
 

Please remember that changing stock market conditions and currency exchange rates will affect the value of investments and any income from them. Investors may not get back the amount originally invested.

Scottish Mortgage invests in emerging markets where difficulties in dealing, settlement and custody could arise, resulting in a negative impact on the value of your investment. Investing in emerging markets may cause greater fluctuations in the value of the trust compared to investing in established markets.

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 on investments which does not constitute independent investment research and accordingly it is not subject to the protections afforded to independent research.

Tom Slater
Tom graduated from the University of Edinburgh with a BSc in Computer Science with Mathematics in 2000.  He joined Baillie Gifford in 2000 and is an Investment Manager in the Long Term Global Growth team.  Tom became a CFA charterholder in 2003.