Baillie Gifford’s Anderson takes swipe at Buffett

James Anderson of Baillie Gifford

Baillie Gifford’s James Anderson, co-manager of the £9 billion Scottish Mortgage Investment Trust, took a swipe at American investment guru Warren Buffett’s “value” investment style in the trust’s annual results published on Friday.

Anderson wrote that “endless rebalancing towards ‘value’ strategies backed by a blind conviction that reversion to the mean is inevitable has been an investment tragedy.

“It’s largely been prompted by misguided theorising.

“But the theory has been reinforced by the extraordinary grip that Warren Buffett has exercised over the investment world …

“Buffett’s success has sanctified a freezing of the investment narrative.”

Scottish Mortgage soared above a record £10 billion stock market valuation this week — with its share price rising 50% in the last eight weeks amid the coronavirus crisis.

The Edinburgh-based closed end fund is now the UK’s largest investment trust — and is a major shareholder in many prominent global companies including Tesla, Amazon, Tencent, Netflix and Alibaba. 

Nonetheless, writing in the annual results, Anderson said: “The opportunity for us in the last decade has come about because stock markets did not learn.

“This is unusual.

“Normally investors, speculators and traders leap restlessly onto new paradigms however questionable their underpinnings.

“But that hasn’t happened despite, for example, the clear evidence of the power of the internet, the increasing returns to scale it tends towards and the consequent deep competitive moats it offers.

“Instead of embracing exponential growth, investors and asset allocators have fled.

“Performance chasing has its own evils but replacing it with endless rebalancing towards ‘value’ strategies backed by a blind conviction that reversion to the mean is inevitable has been an investment tragedy.

“It’s largely been prompted by misguided theorising.

“But the theory has been reinforced by the extraordinary grip that Warren Buffett has exercised over the investment world.

“Of course the very long term record of Berkshire Hathaway is brilliant, of course Buffett has a splendid way with words and the public, of course he doesn’t believe in the silliness of risk as divergence from the index.

“But Buffett’s success has sanctified a freezing of the investment narrative.

“Or as Buffett’s brilliant partner, Charlie Munger, puts it with the clarity of a 96 year old, too many investors are ‘like a bunch of cod fishermen after all the cod’s been overfished … that’s what happened to all these value investors. Maybe they should move to where the fish are’.

“So where will the fish be in the future?

“Whilst the collective investment world has shown little enthusiasm for shifting to new hunting grounds the market has adapted, as it does, without most participants.

“This carries potential problems. The universe of great growth whales is swallowing the minnows.

“At one point in April the US Nasdaq index, dominated by technology companies, enjoyed a market capitalisation greater than all the developed markets outside America.

“Or on a plaintive local note Amazon and Alphabet combined are more highly capitalised than all quoted British companies.

“It’s not clear that this is unjustified.

“Moreover the perception of relative vulnerability has changed.

“Most investors craving safety now see Amazon and its kin as far less exposed to economic angst.

“In general our quoted portfolio has therefore become more conventional and gradually, then suddenly, less differentiated from the index than in the past.

“This does not unduly concern us at present as the world adapts to wrenching changes but it may become an issue in the future.

“We must continue to evolve.”