James Anderson, a partner at Scottish money manager Baillie Gifford, has personified growth-stock investing during his 39 years with the firm. He was an early backer of
Tesla, and other “exceptional” companies that have defined the modern world—and delivered monumental returns. Despite a bruising first quarter, the $22 billion Scottish Mortgage Investment Trust, Baillie Gifford’s flagship fund, which Anderson began running in 2000 and has jointly managed with Tom Slater since 2015, has returned an annualized 12.9% during his tenure.
As Anderson, who is also a former member of the Barron’s Roundtable, prepares to leave the firm at the end of April, he is as enthusiastic as ever about the potential for singular companies, among them
Illumina (ticker: ILMN) and
Moderna (MRNA), to achieve great things. “A lot of the mistakes made by investors are also a failure of the imagination,” he said in a recent interview in Barron’s office in New York.
No one could accuse Anderson of lacking imagination or uncommon insights, as should be apparent in the edited version of our conversation, below.
Barron’s: Your career has coincided with a mostly golden age for investors. Bond yields fell for nearly 40 years, and stocks rose, give or take a few crises. Transformative technologies created enormous investment opportunities, some of which you seized upon. With inflation now soaring and interest rates rising, is this era coming to an end?
James Anderson: I am more optimistic about transformative changes and their potential than I have been at any point in the past 40 years. I’m thrilled for my successors. One year, at the Allen & Co. conference in Sun Valley [an annual gathering of media, tech, and finance luminaries hosted by Allen & Co., an investment bank], I met with Jason Kelly, [co-founder and CEO] of
Ginkgo Bioworks [DNA]. He looked around at the titans of e-commerce and said, “These fantastic businesses, with almost unimaginable market capitalizations, have been built on disrupting one small and stagnant part of the economy. What lies in front of us is far greater.” And I agree.
Most imminent is the combination of data and healthcare. It is beginning to help us understand biology in ways that weren’t possible before. If you combine that with new genomic insights, we’re at a time of utterly transformative potential in healthcare. We’ve also got the electrification of everything, and there’s much more to be done. Third, synthetic biology has many of the characteristics we saw in other technologies. I feel upbeat about the potential for serious transformation of the global economy in years to come. These things are much more enlightening and powerful than e-commerce and social media.
In times of crisis, correlations go to one. Individual companies don’t matter much. For our investment approach to work in the future, it will be crucial to have a small number of stocks in areas that become true leaders, like Amazon.com [AMZN], Tesla [TSLA], and the like have been in their fields in the past 10 years. Covid and deglobalization have made one less certain, but it is these forces that will determine where we go with interest rates and Federal Reserve policy.
The transformative forces of these technologies underpin the deflationary, or at least disinflationary, tendencies we have had. I am disconcerted by the inflation we have seen, but it would be unusual to have an inversion in the yield curve without thinking that recession, rather than prolonged inflation, is the more likely outcome.
Scottish Mortgage [SMT.UK], like many growth funds, has hit a rough patch, losing 23% in the first quarter. Does this worry you?
It has been a painful period, but unlike many other growth investors, we did fine until December. One should always be conscious that the Ides of March can happen. But I also have a memory of 2008-09. The iPhone was introduced in June 2007, and
Apple’s [AAPL] share price was cut in half between January and October of 2008. We bought Apple during that selloff. Sometimes, taking the pain can be worthwhile.
Is this a time to double down on what you own?
It’s a time to do honest appraisals of individual stocks. It takes three to six months before the stock market starts winnowing through arguments, rather than generalizing about companies. Even now, there is a valuation gap between those companies whose prospects have gotten materially worse, or at least not better, and those whose businesses have gotten stronger.
I am intrigued by a number of companies, irrespective of the current environment. We have owned Illumina for a long time. It has given us substantial, if early, insights into its next-generation chemistry. Its previous generation drove down the cost of sequencing the human genome from roughly $150,000 to $1,000. Now, they think they can drive the cost down to around $2.50.In Illumina’s case, the share price is lower, but the prospects of success have increased.
You bought Moderna more recently. It rose sharply, then fell. What now?
Tesla, the leading stock of the late bull market, is up about 40% in the past 12 months. Why has Tesla managed to hold on in that way? Yet Moderna, a quintessential company of the past two years, is 70% off its high, despite having tens of billions of dollars in cash and quintupling its earnings.
At one level, the whole biotech sector has sold off. But I can’t see anything that would make one more pessimistic about Moderna’s stock now than last spring or summer. Logically, investors ought to be thinking more about the company’s long-term prospects. Messenger RNA is a dynamic platform for treating many different conditions, and Moderna’s own progress in specific programs appears to be on track with what we would have said when the share price was close to $500 rather than $150. We talk to CEO Stephané Bancel regularly. Unless we can uncover a rationale for why the share price is at its current level, we find it very attractive.
Tesla sports a trillion-dollar market cap. What sort of value does the stock offer now?
If Tesla maintains its dominance and technological leadership in the car industry alone, the continuation of its current 30% gross margins could justify a share price three times higher over the next 10 years. If this were to be combined with leadership of the gradual, but real, movement to automobile autonomy, this would rise to around five times the current market value. There is a 40% to 50% chance one or both of these scenarios plays out. If Tesla becomes just another car company, then it’s unlikely to be valued at more than $50 billion. But likelihood-adjusted, we think the shares are cheap—and the company, admirable.
What do you make of Elon Musk’s investment in
From a Tesla perspective, I’m not surprised. While running Tesla is still a huge job, compared with when the company was losing money and coping with executive turnover, it is running itself now—comparatively. We are also shareholders in SpaceX [Musk’s private space-exploration company], and I thought he was preoccupied by SpaceX, so from that perspective, I am surprised. Many years ago, we were shareholders of Twitter, and were frustrated by management changes and the apparent inability to turn this powerful platform into a machine. I don’t think Musk’s investment is about that, though. He takes his interpretation of the moral tasks of our time around free speech incredibly seriously. So, am I shocked that he would do this? No. Do I know where it goes? No.
The work of Hendrik Bessembinder, a professor at Arizona State University, has had an huge influence on Baillie Gifford. He found that just a tiny percentage of companies outperform and matter to investors. Which companies today could matter most?
Sticking with healthcare plus data leads back to Illumina, which has a market cap of $55 billion. That is frivolous, compared with the opportunity set. Owning Illumina now could be like buying
Intel [INTC] in 1970 or
ASML Holding [ASML] in 2000. I would also include Moderna. We have invested in
Recursion Pharmaceuticals [RXRX], which uses AI to help identify drug candidates. It trades around $6 a share, but the potential for upside is huge. Tempus, which is private, is a precision-medicine company building a library of molecular and clinical data. This seems an extremely valuable position.
You are a great admirer of Jeff Bezos. Which other corporate leaders have most impressed you most?
Bezos wrote that if you see a 10% chance of making 100 times your money, take it every time, but you will be wrong 90% of the time. That is so different from [Warren] Buffett, whose rule No. 1 is never lose money, His rule No. 2: Never forget rule No. 1.
ASML makes semiconductor manufacturing equipment. How did a European company based in Veldhoven, the Netherlands, become the key to perpetuating Moore’s Law? It is probably the most important deep-tech company in the world. We talked recently with a Dutch researcher who wrote a book about ASML’s first 20 years. One point he would make is that Martin van den Brink, ASML’s president and chief technology officer, has been personally key in keeping Moore’s Law going.
You’re chairman of Swedish investment firm
Kinnevik [KINV.B.Sweden]. What else lies ahead?
Why can’t we do better in Europe? Relative to our scientific knowledge and entrepreneurial talent, we failed. Partly, it is a lack of ambition, and partly, a lack of pan-European networks. I want to use my links with European companies to see whether we can construct something that addresses these issues.
Thank you, James.
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