View the article online at http://citywire.co.uk/money/article/a872388
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.
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.
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%.
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