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Scottish Mortgage: 69 of top 100 companies 'doomed'

More than two thirds of the world’s biggest companies will be swept away in next decade, say managers of UK's largest investment trust.

 
Scottish Mortgage: 69 of top 100 companies 'doomed'

Sixty-nine of the world’s 100 biggest stock market companies ‘face doom in the next 10 years’ as a result of the revolutions sweeping the energy, healthcare, transport and communications sectors, according to James Anderson of Scottish Mortgage Trust (SMT ).

‘I think we live in a completely different world than we did 12 months ago,’ said Anderson, co-manager of Baillie Gifford’s flagship £3.3 billion global fund, which has forged ahead of many of its rivals with big bets on the winners from long-term technological advances, such as Amazon, the e-commerce giant.

While most investors will remember 2015 as a period when concerns over China’s economic slowdown and US interest rate policy dominated markets, Anderson and co-manager Tom Slater flagged up the continued slide in the oil price as well as developments in energy storage and genomics as the landmark events of the year.

Crisis in thought

2015 was a year when ‘outside possibilities have become probabilities’, Anderson (pictured) said, adding that the pair were still studying the ‘deep ramifications’ of concepts such as free energy and cancer tests for everybody.

Anderson, a well-known scourge of index-hugging, short-term fund managers, attacked the stupidity of the finance industry for not attempting to grasp the significance of the changes occurring around it.

‘I think there is a profound crisis in the language and data with which we talk,’ he told an audience of investors and stockbrokers in London yesterday.

Conventional economic measures such as GDP (gross domestic product) failed to capture what was really going on in the world, said Anderson.

‘Just about everything I'm about to say constitutes a downward pressure on GDP and inflation but in all other respects it is good for humanity and the economy,’ he declared.

'Oil is dead'

In a series of iconoclastic statements, Anderson claimed that 2015 had seen ‘the end of fossil fuels’.

He said this was a combination of Saudi Arabia and Opec countries forcing oil below $40 a barrel while the price of lithium batteries had become cheaper, heralding a revolution in renewable energy as it would become practical for people and companies to store solar and wind power.

‘Oil is dead,’ he pronounced, adding that Opec members had simply bought themselves a bit of time with their over production of the carbon fuel. ‘What we need to think about are the consequences for the Western oil industry,’ said Anderson, whose fund has not held a major oil stock for at least three years.

Healthcare costs to fall

Citing work by the Cleveland Clinic Medicine Institute, Anderson also forecast that healthcare costs would start to fall this year, following the dramatic slide in genetic research with the price of genomes falling from $1 million in 2001 to $5,000 in 2015.

He said this trend disproved the so-called ‘Eroom’s law’ which states that fewer drugs are produced despite soaring research and development costs. (‘Eroom’ is ‘Moore’ spelled backwards as it was meant to be the reverse of Moore’s law which correctly predicted that computers would become more powerful and cheaper.)

‘Healthcare costs will start to fall. That is such a powerful reversal of what we’ve been used to for decades that we need to take it seriously,’ he said.

Amazon at $4,000 a share

Anderson also had a dramatic prediction for Amazon, the e-commerce pioneer founded by Jeff Bezos, which is Scottish Mortgage’s biggest investment, accounting for 10% of the fund’s assets.

Amazon (AMZN.O) shares have doubled in the past year to $608, valuing the company at $285 billion, but Anderson said he and Slater had a ‘top side’ valuation of $4,000 a share.

This was based on an assumption of e-commerce taking 15% of retail sales with Amazon accounting for half of that, he said. Anderson also included a valuation for Amazon’s rapidly growing web services division, whose corporate clients include Netflix and the CIA.

‘They don’t really have a challenger: not here, not there - no one has got close,’ he said, revealing that Amazon believed it had a commanding seven-year lead over its competition.

Goodbye Twitter

Slater (pictured) explained that 2015 had seen strong performance from online networks such as Amazon, Facebook and Google and their Chinese counterparts Alibaba, Baidu and Tencent. All are held by Scottish Mortgage and were benefiting from the 3 billion people using mobile phones to access the Internet across the world.

‘The value of a network increases quadratically – if it doubles in size it increases in value far more,’ Slater said.

‘The ability to execute at massive scale used to be an attribute only Google possessed. It’s clear Amazon and Facebook are members of that club. Their enduring qualities are now recognized by the market,’ he added.

However, a divergence between these big winners and their smaller rivals, such as Twitter (TWTR.K), was apparent said Slater.

‘Is their [Twitter] audience of nearly 300 million going to be enough?’ asked Slater, saying that he and Anderson were reconsidering their investment in the messaging website whose shares have tumbled 45% in the past 12 months.

More unquoted investments

Referring to the managers’ decision to invest 10% of Scottish Mortgage’s assets in unlisted technology companies that have not reached the stock market, Slater said the emergence of Internet businesses was a challenge to fund managers.

‘Companies can grow to enormous scale with next to no capital requirements. They don’t have dominant early stage backers pressing them to go public,’ he said.

Fund managers had to invest off market if they wanted to take advantage of the opportunities, although he acknowledged the risks were higher and required the managers to do even more analysis than they would on a quoted stock.

In November the managers added at least three unlisted companies to the 16 unquoted companies in the portfolio. These are Udacity, an online education provider; CureVac, a German biotechnology firm; and HelloFresh, a food subscription service.

Picking up on Anderson’s excitement for healthcare prospects, Slater said it would be an area the managers would focus on in the next two years. Another recent addition to the portfolio has been Juno Pharmaceuticals (JUNO), a US biotech listed on Nasdaq, the US technology exchange.

Last year Scottish Mortgage generated a total return for shareholders of 13%. Over longer periods it is one of the top performing of 36 trusts in the Association of Investment Companies' Global sector. Over five and ten years it is ranked third and second with respective returns of 98% and 218%. 

13 comments so far. Why not have your say?

Roger Savage

Jan 08, 2016 at 19:01

"Oil is dead" and " it would become practical for people and companies to store solar and wind power" are incredibly naïve statements given a rising world population and the complete inability of any power source (currently openly known about) to fill the massive gap that would be left by oil and gas if it was truly "dead".

Solar and wind power may be beneficial in certain scenarios but as a viable, widescale replacement for oil and gas - nonsense. Total nonsense.

It wasn't that long ago that 'experts' were proclaiming the opposite view in terms of oil prices ($200/barrel) and in terms of energy generation capacity vs. demand. Many wind farms are net users (in freezing conditions), not generators of electricity when the wind doesn't line up with peak demand or when it's too windy for the turbines. Without subsidies, renewables aren't particularly attractive financially either.

I also think that many commentators forget about the by-products of oil - e.g. the amount of plastic tat people love buying - oil is not even just about energy.

The current situation is not a demand based situation. Sure, there's an excess of oil about at the moment but the real reason is geopolitical games and manipulation of the oil price - a race to the bottom by governments and regimes seeking to finish each other off. It's got nothing to do with people abandoning oil as an energy source, nothing at all. The fall out is a temporary oversupply and low oil prices. The reduced level of investment and shelving of projects will feed into higher prices.

Amazon has some value but when the bubble of cheap credit, helicopter money and ZIRP turn in on themselves and commodities rocket, consumerism and people relentlessly buying stuff they don't really need whilst living beyond their means might come into sharper focus.

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Denis Bourke

Jan 08, 2016 at 19:55

Well said Roger S. The present policy of Scottish Mortgage rings of all my eggs in the one basket. I remember the cant in the 1990s of sunset and sunrise industries. However, sunset still provides my food and clothing, builds my roads, maintains the infrastructure, fuels my car, and so on.

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J Thomas

Jan 08, 2016 at 23:48

Amazon at $4000 per share? Once they are forced to pay tax in the jurisdictions they operate in or be blocked from access it will be $40 per share.

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Chris Clark

Jan 09, 2016 at 09:31

@Roger Savage: Compare the 10 year performance of the following three shares:

BP

http://finance.yahoo.com/echarts?s=BP&t=2y&l=on&z=l&q=l&p=b&a=r14%2Cm26-12-9&c=#{%22range%22:%2210y%22,%22allowChartStacking%22:true}

EXXON

http://finance.yahoo.com/echarts?s=XOM&t=2y&l=on&z=l&q=l&p=b&a=m26-12-9%2Cr14&c=#{%22range%22:%2210y%22,%22allowChartStacking%22:true}

VESTAS WIND

http://finance.yahoo.com/echarts?s=VWS.CO+Basic+Tech.+Analysis&t=2y#{%22range%22:%2210y%22,%22allowChartStacking%22:true}

and guess which two I am not invested in.

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alex lee

Jan 09, 2016 at 09:58

Anderson is the man we should pay attention to for unlike blackrock world mining trust he has the mandate to make money on behalf of the ordinary punters.

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Roger Savage

Jan 09, 2016 at 12:41

@ Chris Clark

Well, congratulations on your investment.

However, I didn't say shares in any companies in alternative energy had performed badly (indeed, most alternative energy companies have historically done very well from subsidies too).

What I did say is that alternative energy can't possibly fill a void left under the (ludicrous) premise that "oil is dead". You may be invested in wind power but do you use any products or services based around oil products in your daily life? Do the people around you?

Past performance of shares is no guarantee of the future and, if you follow markets regularly, you'll know how individual shares and indeed markets can be manipulated. Thus, share prices are often somewhat different to reality - on the upside and the downside.

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Chris Clark

Jan 09, 2016 at 17:30

@Roger Savage: Oil used in transport and warming far exceeds oils used in plastics. Replace that by electricity and a big chunk of global warming goes. The reasons why Exxon and BP finance the denier industry is because their boards see the writing on the board.

As does the Bank of England who doesn't fork out to climate deniers or re-assuring shareholders their damaged shares are in fact safe.

I don't drive, take the Underground, and look forward to the local bus being fully electric rather than a hybrid.

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Ladysaver

Jan 09, 2016 at 17:55

Chris Clark, and how will the electricity for "fully electric" buses be generated?

I think you'll find that oil and gas are mighty important in electricity generation.

You have to plug electric vehicles in and recharge them. With, er, electricity, generated mainly from oil. The Underground is powered by electricity too. Companies like Shell are not stupid. They do intelligent long-term scenario planning on future demand for all fuels, both fossil and renewable (solar, wind, wave power etc), to determine long-term investment. I would rather look at these than listen to nonsense such as "oil is dead". Roger Savage is right. Renewables will have an increasing role in supplying the needs of a future world population of 9bn+, but cannot any time soon take over from oil and gas, and indeed coal, which still has a place, particularly in power generation.

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Trevor Smith

Jan 09, 2016 at 19:02

I am a shareholder in Scottish Mortgage but it worries me that the managers have seemingly neglected to consider what non oil product(s) will fuel aviation in their timescale

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alan franklin

Jan 10, 2016 at 16:59

Global "non" warming is one of the world's biggest con-jobs, with the expression varied to "climate change" anytime we get a cold spell, as many countries have in recent years. That way they cover all bases.

Never mind, it's good for grants to palaces of delusion, like the "university" of East Anglia, which colluded with US academics to publish only those statistics which support their absurd notions.

The UK had warmer spells in the past, like during the Roman occupation when wine was produced in the far north. No doubt the warm period was due to all the carbon produced by ox carts....

Have you noticed that no mention is ever made on "Lamestream media," of any opposing ideas, despite the fact that thousands of scientists have declared there is no such thing as man-made climate change? The Biased Broadcasting Corporation is especially guilty.

Come out against the prevailing false science and you are a non-person on TV, like David Bellamy, who has been barred from TV since opposing the lies. Further, you can't get your papers published.

I recall that in the 70s science orthodoxy was all for the "coming global ice age." Yes, the Beeb broadcast scary documentaries showing the Thames all iced up, with Big Ben poking out from an ice floe.

It would be hilarious were it not for the fact that government policy is based on this rubbish.

Invest in Shell and ignore the claptrap advice above. Wind power? Take a look at the nearest idle windmill, which produces occasional bursts of electricity at six times the cost of conventional power stations.

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Micawber

Jan 10, 2016 at 17:25

It will be a long, long time before alternative portable energy sources replace the convenience and ubiquity of petrol and diesel. When will it take only five minutes to recharge your car, or swap batteries at a service station in five minutes for a new set at comparable price per mile to petrol or diesel? And especially if fossil fuel is now cheap and plentiful......

So very often these crystal ball merchants turn out to be sort of right, but not in any short time frame and not in foreseeable applications or solutions that are adopted by the consumer.

However, meanwhile they get their publicity and some new customers for their fund, perhaps.

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Spartacus

Jan 10, 2016 at 19:46

Oil is not only an energy source, it's a feedstock to make plastics among other things. Try making a laptop case out of a wind turbine

"Oil is too valuable to burn" as they say

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Keith Cobby

Jan 11, 2016 at 09:46

SMT is my largest holding. Anderson and Slater don't worry about the markets as they are growth oriented stock pickers. They are not infallible but it wasn't so long ago the portfolio was full of commodity companies. Their position with oil stocks is that they are ex-growth (like coal!) and while the oil companies may provide an immediate dividend stream their best times are behind them.

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