Working on the fund with lead manager James Anderson, the pair have consciously narrowed down the holdings, with a 50/50 UK and global benchmark also abandoned.
“We narrowed the number of stocks down from 120, 10 years ago, to 70 today,” says Slater.
“But that number is misleading because the top 30 holdings account for 80% of the assets, so it is actually more concentrated than you might believe and therefore we will be very volatile relative to the index. We know that and we think that is what our shareholders own us for.”
The net widens
A product of Baillie Gifford’s graduate recruitment programme, Slater worked on Asia Pacific and UK mandates before he joined Anderson on Scottish Mortgage in 2008. Today it is Asia, specifically China, where he is seeing the best growth opportunities particularly in the technology sector.
This bridges two of the three big investment themes in the portfolio – that markets underestimate the pace of technological change; and the rise of China to be a global dominant economic power will have a transformational effect on companies wherever they are from.
Tencent, the Chinese social media business, is a key holding in the trust, which has been highly profitable since it was first founded in 1998, and listed in 2004 on the Hong Kong Stock Exchange.
Says Slater: “Tencent has grown into micro blogging and gaming, and the most recent development is a mobile messaging app, WeChat, which could be what takes it out of the Chinese market to become a global player. All the time it’s been able to find the things that people are prepared to pay for, and it has 800 million active monthly users.”
He adds: “One of the big distinctions between the Chinese internet players and the Western ones has been that they aren’t competing with modern, efficient, commercial infrastructure as they build these platforms.
“Penetration could go much higher, much faster. Just calling these ‘internet’ stocks doesn’t really capture it; it’s the underlying infrastructure for the commercial and retail economy that’s been built on with this technology.
You see it with Tencent, but you also see it with Baidu and Alibaba, which are three of our largest holdings.”
Group dupe
Slater says he and Anderson do not believe in using the term ‘emerging markets’, because it groups together such a heterogeneous selection of countries and companies.
He explains: “In China, you effectively have a developed economy across the eastern seaboard and a massively underdeveloped heartland. Just talking about a continental country like China as one entity is difficult in itself, so this idea that you can cover such a huge swathe of the world as just ‘emerging markets’ is something that we try to fight against.”
While positive on China, other Asian and Latin American economies are less favoured. For example, the only Indian stock of note in the portfolio is mortgage provider HDFC. Despite the recent sell-off, Slater says he also struggles to see interesting business in Brazil even at the lower prices.
Doubling up
Among the strict criteria for stocks being considered for the portfolio is that companies must be able to demonstrate that they can double their sales over the next five years, and maintain a competitive advantage.
Is it optimistic then to hold maturing businesses such as the likes of Amazon.com, Google and Facebook in the top 10 positions?
“Facebook is actually a very profitable business; the question is how big is its potential, and how far can they go with this” Slater counters.
“I don’t think a global economic downturn would be the dominant issue for that business in such an early stage of its development. The big question is how effective is advertising on this platform and how much of it can they serve to users.”
Crisis management
The third of the big themes occupying the managers is scepticism towards the financial services sector and the level of reform that has gone on since the financial crisis in 2008.
However, Banco Santander is an exception – and is currently in the top 10 holdings – because of how it came through the crisis without having to do a significant capital raise.
“We think the fact there is a family presence at Santander really did show up in terms of the conservatism with which the bank’s balance sheet was managed and the acid test of that was in the crisis,” Slater explains. “It does have assets in some really quite interesting areas of the world, particularly its South American franchise so we think there’s scope for growth in there. It stands out in an environment where there aren’t many attractive financials to own.”
Opposites attract
Slater attributes part of the reason he and Anderson work well together is because of their different backgrounds – he was educated in mathematics and computer science, while the lead manager studied history.
“We have a slightly different way of viewing the same issues, and there’s an envy on both parts,” reveals Slater.
“I always find it quite frustrating when he has a deep historical background on themes, but I think he envies my understanding of how certain technologies work or insight into the financial aspects of some of the things that we look at.”
Slater is involved in Baillie Gifford’s graduate recruitment scheme as a recruiter now, and he suggests diversity is key to finding the right candidates: “There are lots of companies with big graduate recruitment budgets fishing in that pool of business-oriented degree subjects and to find graduates who have broader interests in the world and haven’t necessarily considered investment management is quite a rich pool to fish in”.
The skill set of being a stockpicker has evolved over time, and with average holding periods having come down across the investment trust universe, Slater says he sees good businesses which are “crying out” for shareholders who will judge them over sensible time horizons.
“They are sick of Wall Street’s quarterly earnings game, and that’s how a relatively obscure Scottish private partnership has been able to build relationships with these companies – we have demonstrated that we are long term and they want to have us as shareholders.”
