At the GCV (Global Corporate Venturing) seminar in November 2021, James Anderson, Baillie Gifford's star fund manager, spoke with James Mawson, editor-in-chief and CEO of GCV, about the ills of the UK capital market.
James Anderson joined Baillie Gifford in 1983 as a partner at BG and a fund manager for the firm's flagship investment trust, Scottish Mortgage.
He began managing "Scottish Mortgage" in 2000 and has generated around 1500% returns for shareholders over 20 years, compared to 277% for the FTSE Global Benchmark Index over the same period. (Learn here: About 1500% return in 20 years, world-class great business collector Baillie Gifford James Anderson: I'm more like Munger than Buffett)
As early as June 2021, Anderson said that the UK capital market was "terminally ill", killing local technology companies.
In this dialogue, Anderson sharply criticized the problems in the UK are that technology companies cannot be expanded, fund managers like to do short-term and not risky enough, and the willingness to invest funds is low and lacks an international perspective...
Anderson said long-term investing is important, but it's also important to move away from the index and admit that market movements are actually unrelated to the overall performance of most stocks.
The long-term performance of each country is dominated by a handful of outstanding companies, and we need to identify and support those things that matter.
So what investors do is find people and companies with a sense of purpose and grow with them, rather than focusing on companies that are worried about how their stock prices will go the next day.
Anderson is about to retire from BG in April. At the end of the conversation, he said he was about to become chairman of the Swedish investment group Kinnevik, trying to solve some European problems.
"It's something I really want to try and contribute to," Anderson said.
James Anderson
Here's the full text of the conversation translated from Smart Investor:
The problem in the UK is that tech companies cannot be scaled up
Q: There are more than 800 unicorns (companies with a valuation of more than $1 billion and a short start) worldwide, 36 of which are in the UK. Do you think this number can reach more? (According to the Hurun Research Institute, by the end of 2021, there are 1,058 unicorn companies in the world, including 487 in the United States, 301 in China, 54 in India, and 39 in the United Kingdom)
James Anderson: I don't think so. And I find it very disturbing that the British media is constantly looking for excuses for the UK recession.
I've always believed that the problem in the UK is not in the number of unicorns, but in the size (which cannot be expanded).
Now, Scottish Mortgage is probably the UK's largest tech company. This is a very strange situation.
Q: In an interview with the UK's Financial Times in June 2021, you said that the UK capital market is "terminally ill" and that such a market is killing local technology companies. You somehow boil it down to fund managers – they like to do short-term and lack the spirit of adventure. Do you still think these are the problems? How to solve it?
James Anderson: I definitely think that fund managers are a big part of the problem. I do not want to in any way evade our responsibility for this situation.
I was deeply touched by ARM's first acquisition by SoftBank.
We were at Baillie Gifford, in charge of Scottish Mortgage, which was ARM's largest shareholder at the time.
At the time, we were trying to find allies to stop this. We got some responses from Legal & General, but nothing else.
We tried to convince the board that it was a bad thing for arm to be acquired; we tried to convince ARM's management to try to run the company on its own, and we got very little response.
Even the British government has made it clear that we should say that this is a victory for the UK, because ARM is attractive enough to be acquired by SoftBank ... There is nothing we can do about this kind of thing.
Long-term investing is important, as is it important to stay away from indices and admit that market movements are irrelevant to the overall performance of most stocks
Q: What do you think constitute a healthier market environment?
James Anderson: Let me start with fund management.
From this perspective, long-term investing is important, but it's also important to move away from the index and admit that the market movement is actually irrelevant to the overall performance of most stocks. The long-term performance of each country is dominated by a handful of outstanding companies, and we need to identify and support those things that matter.
I have reflected on the UK stock market with Sir John Kay and I think the above point is a fundamental theme.
But I also completely agree with John's point that targeting high stock prices often doesn't produce great companies. Companies should be mission-oriented and should not "go astray" in the way these achievements are achieved.
The City of London is problematic, dominated by investors who are "always looking for the next deal". Most funds are managed with an overall no long-term vision, although there are exceptions.
For the most part, we don't have real management ambitions. There is also no board support to achieve this long-term goal. We always believe that the problem is limited or superficial, which is very slow, because the problem is often very profound.
The UK lacks the will to invest
Q: On average, UK companies spend more on share buybacks and dividends than they earn in net income. Do you think part of the reason for the UK's poor R&D investment is that UK fund managers aren't focusing on innovation and long-term strength?
James Anderson: I think so. The whole system does not encourage this, nor is it regulated.
But I think you're making a very strong point, that the willingness to invest in the UK is not as good as china, and even compared to North America, we lack the willingness to reinvest.
Look at Tencent, which has an amazing track record in terms of investment. Expand internationally to companies like Snap and Tesla, not just Asian ones. This is a lesson for all of us, and among U.S. companies, the only one that really has a similar reinvestment problem is Amazon.
The problem is, we all think that the British stock market is still in the 19th-century model, building canals, building railways, spending money all the time. That's why we have to encourage the growth of the private equity and venture capital markets and see it as a good thing.
A British foreign secretary in the 19th century once said in a very different context: "You need to create a new world to replace the balance of the old world." "That's what we have to do, that's what VCs are doing. Of course, there will be ups and downs, but this is basically something that needs to be strengthened in the next 10 years.
I prefer to have Sequoia as my partner than any UK institution today
Q: Over the past 25 years, the number of public companies has halved, and it feels like investors are trying to update the burdensome companies that have fallen in the rankings because of lack of innovation by giving these private companies higher valuations and bringing them into the open markets. Is this true? How can an entrepreneur or venture capitalist take advantage of this mindset shift?
James Anderson: I think that's right. While what I've said so far is rather bleak, there are still opportunities ahead of us.
Essentially, in my career, everything has to do with Moore's Law (the number of transistors that can fit on an integrated circuit doubles every 18 months) and semiconductors, and if I had taken that seriously in the first place, it would have been excellent for our customers. However, semiconductors are expanding, both in themselves and in the application of other technologies, and we are seeing this in healthcare and transportation. So, I think there's still a chance.
The quality of shareholders in VCs is also important. I prefer to have Sequoia as my partner than any UK institution today. I think Sequoia allows you to invest, to invest for the future. A lot of these venture capital was originally generated by companies that didn't need capital, but now these companies also need a lot of money, but they have better access to it in the private market than in the public market.
Q: Private capital markets are as liquid as public capital markets. How can we ensure that these private or public companies can continue to grow? It feels like public capital markets are starting to say, "We can't allocate money to these listed companies and expect them to do well because we're not providing long-term value to our clients." "It feels like things are changing, what do your fellow fund managers think? Are they still happy to accept management fees and bonuses?
James Anderson: Yeah, you're right. Life will be very comfortable at this level if you wish. So the notion that merely declaring risk is exponential volatility is one of the most ridiculous claims I've ever heard. Abstractly, the situation in the UK is getting better, but that downplays the pace of development.
You talk about this shift, it's happening in a way, but at the same time, what I'm seeing is byteDance's value in the private market is about $500 billion, Rivian is not going public until more than 60 billion, SoftBank and Tiger Global are constantly weighing businesses... Relative to the frontier, the UK may be lagging behind more than it really is, even if we think it is better in theory than it was a few years ago.
Can't be too optimistic, the most important thing is hard technology
Q: Ken Cooper, Head of Risk Solutions at Uk Commercial Banking, asks: In the context of short-term pressures and short-term funding, how can universities help businesses scale up in the longer term?
James Anderson: We need to make the UK market perform better. I don't believe how many companies aspire to be a company worth hundreds of billions of dollars. I did an investment trip in Berlin and that's what we say about companies there. In this regard, Berlin is doing well relative to the rest of Germany, but you should not be happy that you have 20 billion or 30 billion.
In response to Ken, I would say, "Tell those who have management, supporters and markets that they can reach that scale." "I really appreciate what the university is doing, but it has to focus on something bigger.
Q: Last week we brought a delegation of corporate investors to Cambridge, and one of the delegations from Oxford brought some startups with them. It feels like the university system is starting to join the investment, and as capital flows, these startups seem to be entering unicorn status. But to become the next generation of leading companies, they must reach hundreds of billions.
James Anderson: We can't be too optimistic, we can't just think they're going to be the west coast of the United States or the east coast of China.
The most surprising example is asML in the Netherlands, which is probably the company that has had the biggest impact on my thought process in decades. How did it break away from Philips, face bankruptcy many times, and finally become bigger than Intel? It's really hard technology, and it goes back to the university system, but I admire it very much. We need to take our failures seriously.
Q: The UK's International Safe Investment Act came into force in January, which means taking acquisitions and minority investments more seriously. Do you think such restrictions will delay the entry of capital into strategic areas?
James Anderson: I'm deeply disturbed by the extent to which the United States, with the help of Britain, has drawn itself into a war against China for the next 20 years. I'm more in favor of the need for connections.
For example, in a conversation with Tobi Lutke (SHOPIFY's CEO), he noted that if he needed to get out of Ottawa, he could go to Silicon Valley to see if he could sell the company and start over. This is very encouraging. There's nothing wrong with seeing if selling a company works for a company.
But I think a lot of it has to do with the company's managers and boards of directors, who shouldn't want to sell. People sometimes feel like they've done their life's work and paid off, but you need someone who's obsessed with elon Musk. As he said, if he wanted to make money, he wouldn't do it by making electric cars. He clearly has a sense of mission.
I'm sorry if anyone gets offended by that thought, because there will be different people, but I think we have to find these people with a sense of purpose and grow with them.
Q: In terms of the overall environment, is the UK better than it was 20 years ago? ”
James Anderson: If you ask me in the abstract, is it better than it was 10 years ago or 20 years ago? I would say yes. However, I am not quite sure about the relative situation. I'm sure a steady stream of entrepreneurs will help the market, they have successful models and teams, but I would ask: "Has the financing and support background of domestic institutions in the UK improved a lot?" ”
When we think about allying with new companies in Europe, the US or China, we don't see a lot of other Britons. I think it's a challenge. We think we're well-equipped financially, but in fact, venture financing is not very large.
Don't get involved in companies where you worry about how the stock price will go the next day
Q: British investors lack international ambitions today than ever before. Why do you think there is a shortage of people trying to invest abroad and bring the idea back to the UK?
James Anderson: It has to do with the role that fund managers have been indoctrinating into. We have to correct our mindset and think about what our job is. The job of a fund manager is not to excel in the next three months, not to make extra money, but to create a good company. When this thought process is over, you're more likely to get good results than you want to buy things that are "about to go up."
Q: But Woodford missed out on Oxford Nanopore's gains, which is a good example of someone trying to think that way, but with little success. (Oxford Nanopore, which has been a core stake in the unlisted portion of Woodford's former flagship fund, Equity Income, was sold to U.S. investor Acacia Research last year, so Woodford missed out on Oxford Nanopore's gains in the period after its listing.)
James Anderson: The essence of reward is to always focus on a few people. I'm not the best person to talk about Oxford Nanopore, though.
However, you have to make judgments about the people behind the company. I think the hidden part of this is the judgment about the motivation, quality, and ethics of the people involved. I do worry that in our desperate search for UK tech companies to invest in, the media and investors tend to be too magnanimous towards certain companies. The example of Oxford Nanopore, if viewed in the opposite direction, is not wrong.
Q: What will you do in retirement?
James Anderson: I've served as chairman of the Swedish investment group Kinnevik and need to see how it goes. I need to think a little bit and talk to my network to see if I can solve some of these issues across Europe. I especially don't want to get involved in companies where you're worried about how the stock price will go the next day, and I'm trying to solve some European problems, something I really want to try and contribute to.
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