Tesla, Amazon.com and Tencent stock picker will be a hard act to follow

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A star stock picker moving on, even one who spotted Tesla early, is no cause for alarm at Scottish Mortgage Investment Trust (LON:SMT).

That’s the view of Darius McDermott, the managing director of FundCalibre.

READ: Scottish Mortgage says joint manager of its portfolio is to move on

“Despite the news of James Anderson’s retirement next year, we see no reason to remove our Elite Rating on the Scottish Mortgage Investment Trust. The way Baillie Gifford runs its business is by having co-managers on all of its products, putting it in a strong position for succession planning,” McDermott said.

The investment trust, which has made a mint from investing early in so-called FAANG technology stocks (and Tesla, of course), announced this morning it had been notified by Baillie Gifford, its investment manager, that after nearly four decades at the firm, James Anderson will retire from the Baillie Gifford partnership at the end of April next year.

As a result, he will step down as joint portfolio manager of Scottish Mortgage Investment Trust on that date.

The key word there is “joint”.

As FundCalibre’s McDermott observed: “The trust is run on a team-based approach and has a well-defined investment philosophy focusing on secular growth – none of which is likely to change.”

The news comes at an interesting time for technology stocks

Anderson’s fellow partner Tom Slater will continue as lead portfolio manager when Anderson retires while another partner, Lawrence Burns, will become deputy portfolio manager with immediate effect, presumably to learn the ropes from two acknowledged stock-picking mavericks.

Fiona McBain, the chair of Scottish Mortgage, was fulsome in her praise of Anderson.

“James’s approach of identifying and holding transformational growth companies has helped drive economic progress and delivered exceptional returns for shareholders. He has also pioneered our investments in private companies, one of the trust’s most important strategic initiatives to date,2 she said.

According to figures from Trustnet, Scottish Mortgage’s (SMT) net asset value (NAV) per share rose 500% between March 2016 and February 15 2021, although since then technology stocks have lost some of their zing as investors rotate into bombed-out “value” stocks in anticipation of an upturn in their fortunes as the global vaccine roll-out (slowly in some cases) does its stuff.

That sort of rotation becomes self-perpetuating, with momentum investors selling the tech stocks “because they are going down” (and thus causing them to decline even further) and buying the value stocks “because they are going up”.

US broker Alliance Bernstein noted in a research note this week that many investing models are build to accumulate stocks “where there is agreement between Value and Momentum”.

In this instance, momentum refers not only to an improving share price but also an acceleration in earnings growth.

The concept of earnings, of course, is an alien one to many tech investors but not necessarily Baillie Gifford, which has clearly been playing a long game with its investments into the likes of Tesla, Tencent, Illumina and Amazon.com.

It has also advised SMT to build up a decent stake in Moderna, the drugs company set to make a mint from its COVID-19 vaccine.

The biotech stock was not in SMT’s top 10 holdings at the end of 2020 and its appearance now at number nine, and the trust’s well-timed paring of its Tesla holdings (5.1% of its portfolio, down from 8.9% at the end of 2020), suggest that the trust is not just going to live on past glories and that its investment manager, Baillie Gifford, might actually have a clue about spotting winners.

A textbook case of excellent succession planning

Interactive Investor said the changing of the guard is “a textbook case of excellent succession planning”.

“Tom Slater became co-manager of the trust in 2015 and will now become lead manager. This should be hugely reassuring for shareholders in the trust, who also have the benefit of a smooth transition, with Anderson co-managing the trust for another year but we will be following due process and putting this trust under formal review. We will be looking to learn about the impact on the whole team of this change, and to learn more about Lawrence Burns,” said Dzmitry Lipski, the head of fund research at interactive investor.

Ryan Hughes, the head of active portfolios at AJ Bell, said Anderson’s “clear, high conviction approach” and his “willingness to invest in early-stage companies and hold them while they become global winners” had helped make the investment trusts the 31st largest company on the London Stock Exchange.

“Since being appointed manager on the trust on the 1 April 2000 he has delivered a staggering 1,700% returning, equivalent to turning a £1,000 investment into £18,000 compared to just £4,440 if invested in the FTSE All-World benchmark,” Hughes said.

Despite evidence to the contrary in the England cricket team, good things don’t last forever and James Anderson – the stock-picker, not the swing bowler – will move on, probably to become non-executive chairman of the Swedish investment company Kinnevik AB, a company quoted on the Nasdaq Stockholm Stock Exchange.

Anderson, who is only retiring from Baillie Gifford not working life, has been nominated for the chairman role at Kinnevik and as SMT holds shares in Kinnevik and many of the companies the Swedish firm has invested in, he will recuse himself from any investment discussions regarding those companies.

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