Anthony Hilton: A free-thinking investor with an appetite for adventure

Most investment trust annual reports don’t tell you much. The chairman will make a few bland comments, probably culled from the Financial Times of three months ago.

The investment managers will talk about how their “process” separates winners from losers; how they have beaten the benchmark, if not today then at some point in the past five years; they say how political risk is making things difficult and the future is incredibly cloudy. But investors have nothing to fear because in spite of these difficulties, they are confident they have the skills to navigate successfully through to the other side.

It is not surprising most reports are discarded.

Scottish Mortgage Investment Trust, managed by Baillie Gifford, is the exception. It focuses on long-term growth which takes little account of benchmarks, is global in nature, has a large proportion of private companies in its portfolio and is absolutely the opposite of an index-tracker.

Given that tracking and exchange-traded funds seems to be the default purchase of investors, the report issued a couple of weeks ago is a breath of fresh air. And in passing it suggests why index-trackers are heading for a fall. James Anderson, one of two portfolio managers on the trust, does spend a few lines on the rise and fall of the markets but says though this preoccupies the City, “it is far from evident that these levels of volatility signify much of significance”.

But what is significant, he says, is how he and his colleague Tom Slater are paying much more attention to shares which are not yet public and where it is therefore hard to take a stake. They have been reluctant to stress this area too heavily, they say, because their education in venture capital was incomplete. But “we have now become more convinced of our abilities”.

They are in fact already on the case. Some 34% of assets started out with them as private companies, even if some have gone public subsequently. But whereas venture capital funds generally take a 2% management and 20% performance fee, these managers charge no more than 0.37%.

Unlike venture capital, which seeks an exit for its funds when companies go public, SMT is often happy to do the opposite and buy more. It takes the view that there will be very few real winners in a sackful of mediocrity and it wants to be a major shareholder when a company does shoot the lights out. For a few tech companies particularly, the opportunities are immense.

It is true too that capital-raising has changed. Companies used to go public because they had to build factories and distribution. These days it is brainpower that counts, not fixed assets, so companies stay private for much longer. There are literally hundreds of unicorns — private companies with a $1 billion of more of valuation — worldwide.

It was also the case that while growth shares had their short time in the sun, value investing was the one true faith. Warren Buffett particularly espoused this. But while this may have once been true, growth stocks have been in the ascendant for the past 20 years.

There are two reasons why. First, value stocks had a franchise which endured though the vicissitudes of markets and cycles and were always there. Now they die, often at the hands of technologically driven competitors. More and more giants in the world economy, the value companies, will fail.

Second, growing companies did not scale up satisfactorily. But today this tends not to be true because of the network effect which gives some companies colossal power. The marginal cost of software once its development is paid for is virtually zero.