Q&A: Baillie Gifford’s James Anderson

James Mawson: There are 800 unicorns – private companies worth at least $1bn in value – around the world, of which 36 are in the UK. Are we punching above our weight, and are you being a bit greedy in wanting more?

James Anderson: No, I do not think so and I find the eternal search for excuses by the British media, in whatever form, for British economic decline troubling in the extreme. I do not think, and I hope I have been consistent about this, that it has ever been about having that number of comparatively smaller companies. I do not think that is where the British dilemma exists. It is about scaling companies and at that level. On an updated basis, Scottish Mortgage is probably the largest technology company quoted in Britain. That seems a very strange situation to me.

JM: In an interview with the Financial Times in June 2021 you said there was “a deep sickness” in the UK capital markets. It was effectively hard and it was stifling homegrown technology entrepreneurs. You put that down in some ways to the fund managers, their short-term performance and lack of risk-taking supporting the entrepreneurs. Do you still think these are issues and what do you think could help?

JA: I am absolutely of the view that fund managers are a very large part of the problem. I would not want in any way for us, or for me, to escape responsibility for that situation.

One of the seminal moments from my point of view would be when ARM was first taken over by SoftBank and we were at Baillie Gifford and in quite a large sense at Scottish Mortgage, ARM’s largest shareholder. We tried to find allies to fight that situation. We got some response from Legal & General, but none apart from that. We tried to persuade the board that this was a bad thing. We tried to persuade management to attempt to run the company itself. What we got back was very little response and from the then government, an indication we should say this was a triumph for Britain, that ARM was attractive enough to be bought by SoftBank. We do not get many shots at this type of thing, so having one is very important as a path of emulation. It is all the ingredients that I think we need to take a very tough look at.

JM: Can you describe a little bit more about the ingredients you think would make up a more healthy environment?

JA: Let me start with the fund management side. The long-term is profoundly important from this point of view, but so is the willingness to be away from the index and acknowledging that markets are not actually about the overall performance of most stocks. Performance over the long-term in every country is dominated by a few exceptional companies, rather than by that. It is identifying and backing those that is critically important.

I served with Sir John Kay on his review of British equity markets and I think that was an underlying theme, but I would also take one of John’s views, which I fully share from that perspective, which is that very often you do not get to have great companies by aiming to have great share prices. They should be mission led and they should not be oblique in the way you get to those achievements. That is a big part of what we do not acknowledge.

I will up the ante a bit by saying the City of London is a huge problem in all of this. It is dominated by investment bankers who are looking for the next deal. It is major fund management [looking at the next quarter] and it is hedge funds which do not have the attitude in general, although there are exceptions, to back this long-run vision. We do not really have the management ambition or the board backing in most cases to get that. We do not help ourselves by believing the problems are limited or superficial. They are very deep.

JM: On average, UK companies spend more in share buybacks and dividends than they earn in net income. Do you think part of the issue for the UK’s chronic R&D investments is that fund managers are not focusing on innovation and longer-term strength?

JA: I think that is right. The system has not encouraged that and nor has regulation, on the whole, but I think you make a very powerful point. We all know we do not have our opportunities to seek in China, but even compared with North America, the desire to reinvest is lacking. Look at Tencent, which has an astonishing record in real investing, extending internationally into Snap and Tesla and the like, rather than just being Asian in any way. It is a lesson for us all, and of the American companies it is really only Amazon of the giants that has had that similar
re-investment issue.

The problem is that we all envisage stock markets as still in the 19th century model, building canals and railroads, whereas it has been money extraction. This is a big part of why we have had to encourage the development of private and venture markets for much of this and regard it as a good thing. Whereas the scale there can be an awful lot greater.

There was a British foreign secretary in the 19th century who said in a very different context, you need to create a new world in creation to replace the balance of the old. That is what we are having to do and that is what venture capital is doing. Of course, there will be ups and downs, but that is basically a picture which will strengthen over the coming 10 years.

JM: During the past 25 years, the halving in terms of the number of listed companies on the stock exchange, almost feels like stock market investors are calling these private companies into the public markets by giving them higher evaluations to try and renew the more encumbered, which have not invested in innovation and therefore are dropping down the ranks. Is that a fair way of putting it? And how are entrepreneurs or venture capitalists taking advantage or making use of that mindset shift.

JA: I think that is right. While what I have said so far has been fairly bleak, there are also opportunities still in front of us. Essentially, everything has been to do with Moore’s law and semiconductors during my career and if I had just taken that seriously in the start, it would have been the best for our clients. But, both in its own direct effects and in other technologies, that is broadening out now, so that we see in healthcare and transportation what has happened in just semiconductor world recurring. So, I think there is still an opportunity to get this right.

Is it also a lot about the quality of the shareholders in venture companies. I would much rather have Sequoia on my side than whatever British institution I feel like picking on today. I think it allows you to invest, and invest for the future. A lot of this ventures material came about, at first, by these companies not needing capital, but that is now transitioning into them needing a lot of capital, but being able to get access to it in private markets better than they can in public.

JM: We see the private capital markets being as liquid as the public capital markets. So how does the governance then make sure that those private companies or public companies can then support and continue growing? It feels like culturally it is starting feel as though the public capital markets are saying: “we cannot, in some ways, rake the money out to these listed companies and expect them to do well because we are not delivering value over the longer term to our clientele, our constituents. It feels like things are changing, but what do your fund manager peers think? Are they still happy taking their performance fees and their bonuses?

JA: Yes, you are right. It is going to be a very comfortable life at that level, if that is what you are willing to do. Hence, the notion of just declaring risk to be volatility around an index, which is one of the most absurd statements I have heard that feeds into that. It is getting better in the abstract, but that underplays the pace of development and that is not what we are not really acknowledging here?

You talk about that happening and it is happening to some extent, but at the same time, what I am seeing is ByteDance worth around $500bn in private markets, with all the susceptibility of what we are talking about, or major American companies, today’s example being Rivian not going public until it was at least 50 or 60 billion. What both SoftBank and Tiger Global have done to scale this and that, therefore, Britain, relative to the frontier, may be further back now than it actually was, even if we think that it is better in the abstract than it was a few years ago.

JM: Ken Cooper, head of venture solutions at the British Business Bank, asks: “How can universities take a more longer-term focus to help companies scale amid the backdrop of short-term pressures and short-term funding? And should they just be selling to UK public companies?”

JA: We need to make British markets perform better. I am not convinced that much is coming out that has the ambition to become a hundred billion dollar company. I was on an investment trip in Berlin and that is what we were saying to the companies there. Berlin has done a great job relative to the rest of Germany in this context, but you should not be happy with being 20 or 30 billion. In response to Ken, I would ask: “Tell us those ones that have the management, the backers and the market that they can get to that sort of scale.” I am quite complimentary about what the universities are doing, but there has to be this laserlight focus on getting much bigger.

JM: We took a delegation of corporate investors to Cambridge last week and a delegation came from Oxford with some startups. It feels as though the university system is starting to join up, that capital is flowing and those companies are getting into some of that unicorn status. But, for them to be the next generation of leading companies, they will have to reach a hundred billion.

JA: We must not be too generous with us just thinking it is about the west coast of America or the east coast of China, because, the most amazing example, and the company that has probably had the biggest influence on my thought process over the decades, would be ASML in Holland. How did it get to be bigger than Intel from having a shed outside Phillips and facing bankruptcy several times? That is really hard tech as well. It reaches back into the university system, but it is something that I deeply admire. We need to be serious about our failings.

JM: The international security investment act is coming into force in January, which is meant to look a bit more seriously, not just at the takeovers, but at minority investments. Do you think these types of restrictions are going to put off capital coming into strategic areas, or do you think, ultimately, having Chinese companies invest in Oxford spin-outs will allow them to get an early stage idea and then move the ideas to a faster ecosystem?

JA: I feel deeply uneasy about the extent to which America, as ever aided by Britain, is digging itself into a war against China for the next 20 years. I am much more on the side that we need to build connections. As an example, in conversation with Tobi Lutke, and the extraordinary successes of Shopify, he makes the point that if he needed to get outside Ottawa, he could go and revive himself by going around Silicon Valley, but now he needs to go and do that, not just in China, which he had absolutely emphasised, but basically everywhere. That is very encouraging. I do not think there is anything wrong about having a look at whether it is appropriate to companies.

But I think a lot of this is to do with the managers and the boards of the companies involved. They should not want to sell out. I think until you really change that, then we have got a big problem. Of course, you understand in various instances people feel they have done their life’s work, they earn their returns, but you need obsessional people like Elon Musk. As he says, if he had wanted to make money, he would not have done it by manufacturing electric vehicles. He was plainly doing it for the mission involved in this. On the whole, I still find that lacking. I am sorry if there are individuals who are offended by that thought because, plainly, there will be people who are different, but I think we have to find those and build with them.

JM: I was talking to Simon White, who runs flexible chip company Pragmatic in the northeast of England. He asked: “How do we build these big companies?” You do not have to sell. Think about the type of capital. Think about what the limitations will mean if you give away your IP to another group. Ultimately, are you leaving the UK in a better place than it was 20 years ago in terms of the overall environment?”

JA: If you are asking me in the abstract, is the situation better than 10 years or 20 years ago? I would say yes. I am less sure that the relative situation is, though. I believe serial entrepreneurs help and they have the model of success, the emulation and the teams, but I would ask: “Has there been that much improvement in the financing and supportive background from domestic British institutions?”

When we are thinking about aligning ourselves with new companies in Europe, America or China, we do not see many other British people. I view that as a challenge. We think of ourselves as being well-equipped in the financial sense and yet it does not seem to me to be the reality in venture financing at scale.

JM: The lack of international ambition is relatively surprising given the investment trust history. Why do you think there has been a lack of capital going outside of the borders to try and invest and then bring back ideas to the UK.

JA: It links back to what you were saying about what fund managers are brought up to see as their role. If we alter the mentality to say: “What is our job? Our job is not outperforming over the next three months. It is not earning a bonus. It is about creating companies.” Anything we can do that helps on that score is really important. Given the workings of obliquity, you are far more likely to have good results at the end of that process than you are when you say, I want to buy whatever is going up.

JM: The Woodford scenario, given their backing of Oxford Nanopore, is a good example of someone who tried to do it without much success.

JA: It is the nature of returns that it is always getting concentrated on a small number of people. I am not in the best position to talk about Oxford Nanopore, though. Some of my colleagues, it is only because of our tense relationship with Illumina over the years, and I still think it will be challenging to build at that scale. But, you have to make judgements about these people. I suppose the hidden part of this is about judging the motivation, quality and ethics of the people involved. I do worry that too often in our desperate search to anoint British models of technology investing, there is a temptation for the media and investors to be too generous to some companies, even if the Nanopore example is perfectly fair in the opposite direction.

JM: Lastly, what will you be doing in your retirement?

JA: I have already taken on a role as chairman of the Swedish investment group Kinnevik and I need to see how it goes. I need to do some thinking and talk to a network of people. Can we address some of these issues on a more European scale? I do not particularly want to be involved in the companies where you are worried about what the share price will do the next day. I am trying to have a role in addressing some of these questions in any European context is something I would very much like to try and make a contribution on.

Qraft Technologies

South Korea-based financial services company Qraft Technologies has raised $146m from SoftBank Group. Part of the money will be used to help the company expand in the US and China, while an undisclosed amount will be used to fund share purchases from undisclosed investors. Qraft said it would open offices across New York and San Francisco, as well as Hong Kong.

SoftBank said it would become a customer of Qraft to run an artificial intelligence (AI)-enabled public portfolio management system. Qraft develops and operates deep learning-based algorithms that provide portfolio weight signals which can be alpha-generative. The company has used its AI engine for its NYSE-listed exchange-traded funds (ETFs).

Kentaro Matsui, managing partner at SB Investment Advisers, which runs the two Vision Funds, and former managing director at SoftBank Group, said: “Qraft can revolutionise the way financial institutions manage public equity assets, by providing their own AI technologies that have been tested and proven in the US equity market.”

Robert Nestor, former president of Direxion ETFs and head of BlackRock’s iShares Factor ETF business, who recently took charge of Qraft’s US expansion as US CEO, said outside of trading, AI technology had only just started to change the $100tn asset management industry. He added that, traditionally, managers tried to find alpha – the excess return on an investment after adjusting for market-related volatility and random fluctuations – by developing a hypothesis and testing it against data to support or disprove the model. With AI, however, the algorithms can look at the data and come up with models to generate outperformance.

SoftBank’s private company data from its portfolio and insights could bring unique insights to public trading Nestor said. “It is an inevitable evolution.”