Scottish Mortgage fund manager James Anderson has rubbished the prospects for value investing in the face of deep structural change in capital markets and believes the writing of famed investor Benjamin Graham does not contradict his thesis.
The growth investor’s comments come despite the fact the Baillie Gifford investment trust was hit hard by the tech-led sell-off that began in October and has lost shareholders 12.1% in the period since compared to 7.6% losses in the FTSE All Share, according to FE Analytics. Amazon, Alibaba, Tencent, Tesla, Baidu and Netflix all feature in the trust’s top 10.
At an investment forum for professional investors, Anderson (pictured) said the team had not changed its investment thesis on the back of the sell-off.
Scottish Mortgage performance
| 3m | 6m | 1yr | 3yr | 5yr | 10yr | |
| Scottish Mortgage Investment Trust | -2.14 | -9.99 | 3.13 | 91.78 | 145.29 | 672.90 |
| FTSE All World index | -4.81 | -3.59 | -2.98 | 54.75 | 71.58 | 222.92 |
| IT Global sector | -3.53 | -7.29 | -4.10 | 51.59 | 67.47 | 233.18 |
Source: FE Analytics
He said: “I think we’ve become more convinced the world is changing: more convinced that we’re going to see more extremes, more convinced the world is changing fast, and more convinced that the financial markets are completely messed up and they’re being turned into instruments for making money for people participating in financial markets rather than serving savers and society. I think we all need to reflect a great deal more on that.
“There are extraordinary levels of selfishness in capital markets that disturb me greatly.”
He said the relationship between companies and shareholders has become corrupted due to short-termism. “When we hear we are not bothered by valuation, frankly, I get pretty annoyed.” The team is more interested in long-run free cash flow than justified short-run P/E, he said.
Structural change has upended cyclical markets
In an echo of comments made by rival equities manager Nick Train in summer 2018, Anderson told the forum value investing would not work in the current period of deep structural change, which he compared to previous eras of large-scale disruption, such as the industrial revolution and the advert of steam and railways.
He said: “Sometime over Christmas and the new year I re-read that great bible of those who do believe in that world, Benjamin Graham’s The Intelligent Investor, the Jason Zweig-edited edition. He really keenly acknowledges that his world, value-driven investing, only works when you’re dealing with cycles rather than structural change. And he was writing in a period of huge cyclical change, not huge transformation.”
However, Willis Owen head of personal investing Adrian Lowcock said the more growth managers line up to say value is dead the more he feels like markets are closer to a shift to value. “If value managers started to say the same thing I think that would raise more eyebrows.”
In July 2018, Train said the symptoms of a cyclical upturn could be seen in rising bond yields and commodity prices but that value continued to languish. Both managers pointed out the FTSE was set to be a loser from their thesis with Anderson highlighting carmakers and oil majors as casualties from the shift away from value.
“The opportunity set is somewhere else,” he said. “It’s not a matter of cycles; it’s a matter of deep, deep structural change.”
Lowcock thought UK banks and housebuilders could be poised to perform once Brexit uncertainty is out of the way. However, he said technology clearly represents a threat to some businesses and disruption could throw up value traps.
