Interview with Tom Slater: we meet the co-manager Scottish Mortgage Trust

24 October 2018

Tom Slater, co-manager of Scottish Mortgage Investment Trust gives Edmund Greaves the lowdown on his fund – a Moneywise First 50 Fund for beginner investors.

What is Scottish Mortgage Trust?

Scottish Mortgage Trust is a 110-year-old investment vehicle. Despite its long history, it remains quite oriented toward the task of finding the world’s best growth companies. In doing that we aim to be very long-term owners of companies not traders of their shares.

We look for companies that have huge opportunities to grow, exceptional management, exceptional culture, and we think we have an edge in going after those opportunities.

By investing in these companies on behalf of our shareholders we aim to produce long-run growth and capital. Because we don’t trade a lot, we don’t consider market indices and we don’t try to ameliorate the effects of volatility.

We expect to be volatile, certainly relative to the market, but we believe that is the only way you can invest if you are to achieve that aim of long-term capital growth for shareholders.

What are your top holdings?

While the fund has about 80 positions, this is very concentrated in the top holdings. At the time of the annual report at the end of March the top 30 companies accounted for 80% of the portfolio.

Our largest holding is Amazon, which accounts for approximately 10% of the trust’s assets. We bought Amazon in 2005 so it’s been in the portfolio for over a decade. We're more excited about it today than we were 10 years ago - the opportunity has grown.

If Amazon has been by far the largest contributor, it’s because it has brought new technologies to bear on an industry which was not prepared to embrace those changes.

The second largest holding is Illumina who are the makers of genomic sequencing machines. We believe Illumina and what they're doing in genomics is bringing the same type of radical change as Amazon to the healthcare industry.

Our criteria for investing in healthcare companies has been ones that reduce costs for the system as well as improving outcomes for patients. It has been pretty rare to find that combination. We think Illumina fits that description.

Alibaba and Tencent are the two next largest holdings. We've consistently believed that the growth of Chinese economy to become one of the world’s dominant economic forces would be one of the largest changes affecting the investment world.

That’s a view which has gone in and out of favour with the market. Its currently quite an unfashionable view because of concerns about Trump’s trade war with China.

China is the one place in the world where we see entrepreneurial drive and vision from companies that are able to scale in a way that compares to the phenomenal businesses that come from the West Coast of the US.

We invested in Alibaba in 2012, and in Tencent in 2009; both are long-standing holdings. I think what Alibaba is doing in the small- and medium-sized business space in China both through providing a retail portal and increasingly providing tools, software and payment services to those companies puts it in a phenomenal position to grow over the next 10 years.

What’s really striking is that whereas Western counterparts have a difficult relationship currently with government and regulators, these companies are seen as the enablers of many of the Chinese state's agenda, whether that’s driving financial inclusion or exporting soft economic power. They're supported even as they disrupt businesses of state-owned enterprises.

Scottish Mortgage Trust Key Stats:

  • Launched: 1909
  • Fund size: £7.6 billion
  • Ongoing charge (OCF): 0.37%
  • Yield: 0.57%

As at 4 October 2018.
Source: FE Trustnet

What have you recently bought and sold?

One of the trends in the trust over the past five to six years has been the growing proportion of investments that are not listed on stock markets. With many attractive growth companies in the world, we observed the trend that a lot of these companies are choosing to remain private longer.

Private companies have been a significant component of our new purchases. If you look at the recent past a number of these companies have actually gone on to list on the stock market.

In the unlisted space, Ant Financial is an online payments business that came out of Alibaba. That has been our single largest private investment to date at $250 million.

There are others such as Meituan-Dianping, which is a Chinese local services company oriented towards food delivery. It had its IPO in September. We've been owners of its shares for several years as a private company and we added to that holding as it moved to be a public company. The same is true of Nio, the Chinese electric car company.

In the listed markets, new purchases that we've made recently include Pinduoduo. This business is a Chinese online commerce platform. Its aim is to address the needs of half a billion or so people who have been slow to move online.

Pinduoduo is addressing that audience by providing a group-buying model. You can purchase an item online, and if you can get your friends, neighbours, colleagues to buy the same item then the whole group gets a discount. It’s quite a different retail format, but one which really resonates with the customer base.

What drove the big cut in the fund’s charges this year?

We've tried to both cut the charges and grow value.

The trust's assets have grown meaningfully over the past few years, but we don’t believe in getting bigger for the sake of getting bigger. It only has value if we can use that scale to do things differently for our shareholders. One of the things that we can do is spread the costs over a larger base, sharing the benefits of scale by cutting the fees.

It was also about driving value. We've increased the proportion of the trust that is invested in successful private companies. It’s very difficult to get access to these types of investment opportunities. Most of the structures which are available charge substantial fees, often 2%, and some share of performance.

We provide a way for smaller investors to get access to these types of innovative growth companies, but without paying any additional fees.

What is the first thing you ever invested in?

My grandparents opened me a savings account with NatWest bank in the late 80s when I was around 10 years old. At the time you could earn with this bank account a family of five porcelain pigs, at different levels of savings, all the way up to the daddy pig. I invested in that account to try and save enough money to get the whole collection.

Within two or three weeks of starting work, 18 years ago at Baillie Gifford, I bought a flat. That was my first serious investment. Incredible as it seems the cost of a mortgage was going to be lower than the rent that I would have had to pay on a single bedroom apartment in Edinburgh.

I also started buying stocks on my own account around the same time, but starting work in September 2000 I managed to lose myself quite a lot of money over the intervening three years [thanks to the Dotcom bubble burst].

What’s been your best investment decision?

It was the decision to invest Alibaba in 2012. Yahoo had fallen out with Alibaba because it had been taking Alipay assets out of the joint venture. Yahoo management at the time felt that they were trying to steal the assets.

When Alibaba tried to raise money to buy them out many believed Yahoo’s version of events. We were large owners of Tencent and Baidu already, so we understood the power and value of the Alibaba platform and were happy to support the transaction.

The value of the company has gone up about tenfold since then.

And the worst?

One of the worst for me personally was Lending Club. This was an online marketplace for loans to individuals. We bought it when it came to the market, at the end of 2014.

Our average in-price in the shares in 2014 was $18.26, and we sold it in May 2016 for $3.99. It was pretty catastrophic.

The issue that they faced is they were trying to pursue some aggressive growth targets. Unfortunately, they cut corners in the pursuit of this. That really undermined the case for the business model, and the founder resigned.

It was a pretty painful experience. But we accept that some of these stocks go wrong because we're looking for companies that can deliver an outsized return. You have to take considered risks to do that.

If you had one tip for an investor getting started today, what would it be?

It would be to focus on fees. Fees might look small as a percentage of the fund or investment today, but when you work out the maths of that over the years it adds up to a huge amount of money.

It is the one element of the investment that is guaranteed if you're investing in stock markets.

Minimise your fees, but always in the context of maximising the after-fee return.

The man behind the fund

Tom is joint manager of Scottish Mortgage Trust (SMT), alongside James Anderson. He joined Baillie Gifford (the firm behind SMT) in 2000 and worked in the developed Asia and UK equity teams before joining the long-term global growth team in 2009.

Tom became a partner in the firm in 2012. He was appointed joint manager of Scottish Mortgage Investment Trust in January 2015 having served as deputy manager for five years.

In 2015, he was appointed head of the US equities team and is a decision maker on long-term global growth portfolios. Tom’s investment interest is focused on high-growth companies, both in listed equity markets and as an investor in private companies.

Sector breakdown

Five-year discrete calendar performance of Scottish Mortgage Trust

Scottish Mortgage Trust PLC (SMT)39.821.413.316.541.1
Sector Average
(IT Global)217.46.821.123.5

Source: FE, 4 October 2018

Top 10 holdings

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