Economic uncertainty = personal opportunity? (Henley Literary Fest recap)

Today’s economic uncertainties and ultra-low interest rates offer opportunities for good returns from savvy investment managers.

That was the message from Catherine Flood of the Scottish Mortgage investment trust in conversation with Iona at the Henley Literary Festival.

In front of an 80-strong audience in the town hall, Iona quizzed Catherine on how the £3billion trust has reaped spectacular returns from its faith in technology giants Apple, Amazon, Google and other trailblazers of the internet economy.

In the first half of the hour-long free event, Iona answered questions from Catherine on her book ‘Spare Change’, later signing a healthy batch of copies for audience members.

Describing the book as “incredibly practical”, Catherine said she had been impressed by its analysis of the financial industry and advertising, and of money in relationships. “The book should be given to university students, but it has applications right across the spectrum because we all make these financial decisions – who did you think you were writing it for?”

Iona: “I was thinking of me, a reasonably normal young woman of 28. I was lucky, and some young people do learn these lessons as they grow up, but many are brought up to be quite dysfunctional about money, and you learn your financial habits and attitudes by the age of eight. It’s good to talk to your children about money, and impress upon them the need for frugality and not see money as the only way to prove their self-worth. But it can be a very sensitive subject and even taboo – some people are more comfortable talking about their sex lives than money.

“You get a sense of what is happening in your peer group and there is a massive appetite for financial information, which is not being given to them.”

Asked whether money should be taught in schools, Iona said that as long as personal finance remained an unexamined subject within the Citizenship curriculum, it would inevitably be marginalised because of the relentless focus on exams and grades.

“If you try to pretend that handling money is straightforward and easy you are doing a massive disservice to young readers, you have to put in some effort – but the pay-off is huge. It is not just having more pounds in your pocket, it is the confidence you get and the sense of empowerment.”

On how young people feel about investing, Iona said: “When people are coming into investing for the first time they have to consider how long they want to be invested for….people wonder whether they might get married or have a family and they put it off.   But there will never be a perfect time, you have to jump in, get the best information you can, and accept it is not necessarily going to be a three or four year job, you have to be patient.”

Iona asked Catherine how investment managers would respond to the current environment, with the shadow of Brexit, depressed interest rates, and global economic turbulence. She also suggested that passive, index-based management had been praised even by that doyen of investors Warren Buffett.

“If you take a long-term approach, active management has a real opportunity,” Catherine said. “If you want returns that are different from the market average, you have to do something different. There are active managers who over time do beat the index, though there will be periods when they underperform – you have to look at performance over the time horizon you set for it.”

Iona asked what a fund like SM meant by saying it was ‘high conviction’.

“You need diversification, but you also need to have enough invested in the most successful companies….some of the companies in the portfolio are doing something structurally different, they are growing quickly because they are absolutely dominant – Amazon, Facebook, Google and from China the likes of Tencent and Baidu. You have to take a long-term view and look at the fundamentals, what a company actually does: Amazon is just a retailer, but does it better than bricks and mortar – 40% of Americans live within 20 miles of an Amazon distribution centre – and it gets paid by its customers before it has to pay its suppliers.”

The internet pioneers could reach millions or even billions of people without building a factory or needing to raise capital on the stock market, such was the accelerating power of the web, Catherine noted. But they could not be lumped together as a ‘technology’ sector.   “Some of the labels that get applied don’t do justice to what you are investing in. You have to go back to the golden rule of understanding your investment.”

Scottish Mortgage’s biggest holding, Illumina, makes the machines used for human genome sequencing, the cost of which had been cut dramatically and was set to fall further, holding out the possibility of a massive ramp-up in demand.

On the trust’s most successful investments, Catherine said in any fund you might expect a fifth of your investments to double over five years, but five per cent of them might make a five-fold return – and the trick was to work out what made them perform so well.

Asked about the suspicion aroused in many would-be investors by the industry’s reputation for excessive fees, Catherine said: “The point about costs is absolutely critical because costs erode long-term, compounding returns. Scale means you can defray costs, and bringing down costs to your end investor is the single thing you can do which is always going to be positive…the industry has had some outrageous charging structures.”

Scottish Mortgage has one of the lowest charges to investors of any global investment company or comparable fund in the market

Catherine said short-termism had increased dramatically, with shares now held on average for less than a year compared with six years in the 1980s, and four out of five companies admitted they put the need for smooth quarterly earnings ahead of the need for important capital investment.   The trust’s managers Baillie Gifford, sponsors of the Henley Literary Festival, are renowned for their long-term approach.

Iona finally raised the issue of advice, and whether people could rely on the new breed of computerised ‘robo’ advice to take their investment decisions, particularly when starting out.

She said: “I do wonder whether putting information into a computer isn’t a too simplistic way of addressing the complicated needs you will have.”

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