Scottish Mortgage: "It is our duty to continue bringing down costs for shareholders"

James Anderson

James Anderson, lead manager of the Scottish Mortgage trust, which is one of our First 50 funds, has spoken out about some of the flaws in active fund management.

Presenting at an investment conference in London organised by wealth manager Canaccord Genuity, Mr Anderson remarked that fund management has hardly changed since he took over the management of the trust in 2000.

He said the way the majority of asset managers operate - using an index to measure a fund's volatility - is flawed. Mr Anderson's view is that this results in too many funds index-hugging.

"If you follow the index you will not lose assets," he said. 'In my opinion investors shouldn't even be looking at the composition of an index. But in the fund management world measuring a fund's risk against an index is viewed as important by the people who run asset management businesses.'

Keeping charges down

Mr Anderson adds that "short termism" and an "obsession with macroeconomic noise" are rife in fund management. "So much time is wasted worrying about GDP growth rates, even though all the evidence shows there is no link between GDP growth and equity market returns," he said as one example.

The veteran also waded into the debate on fund charges, stressing that it is Scottish Mortgage's "duty to continue bringing down costs for shareholders". The trust's ongoing charge of 0.45% is much lower than global trust rivals, which typically tend to charge 1%.

Over the years Scottish Mortgage has made a conscious effort to take advantage of economies of scale, reducing charges for investors on the back of growth in the trust's assets, which total £4.4 billion.


Keeping a lid on trading costs also helps reduce the costs investors pay: Scottish Mortgage's typical holding period is around a decade.

Fund charges have come under heavy scrutiny over the past couple of years, on the back of findings from various academic studies shedding a poor light on active funds' ability to add value.

An often-cited advantage is that investment trusts are cheaper on the whole than open-ended funds.

But according to recent research by Tilney Bestinvest this argument is wearing thin. The firm looked at 47 investment trusts and funds that are 'pairs' - run by the same management team.

It found that in 53% of cases the ongoing charges for the open-ended funds are now lower than those for the investment trust.


Jason Hollands, managing director of business development and communications at Tilney Bestinvest, said that in light of the findings, investment trust boards should be looking to negotiate lower fees, particularly when the open-ended fund run by the same fund manager is significantly cheaper.

Baillie Gifford, the Edinburgh-based firm which manages Scottish Mortgage, last week cut fees on its Baillie Gifford Japan and Edinburgh Worldwide trusts. Both trusts are now cheaper than their open-ended equivalents - Baillie Gifford Global Discovery and Baillie Gifford Japanese.

This story was originally written for our sister publication, Money Observer.

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