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Imagining Financial Utopia

James Anderson - September 2017

I am not trying to sell you any shares or market any investment product. I have a larger aim. I want to argue for a complete retooling of our investment industry. I apologise for this naive ambition. We've grown too used to the mentality that finance should be measured by its own metrics: outperforming indices and competitors; protecting us from strangely defined risks; meeting even more strangely defined regulatory liabilities and last - but frequently far from least - making a lot of money for ourselves. In the classic words of the past, the customers' yachts are still rather rare.

But shouldn't the role of fund management be judged by higher standards? Might it not be that our failings go beyond self-obsession and greed to playing a major part in the stagnation of modern capitalism? We are tasked with guiding and overseeing the capital allocation of most of the world. If growth and productivity perennially disappoint, if innovation is too often confined to a new app, perhaps the problem lies with us and our preoccupation with safety. That this has not even prevented outbreaks of disastrous financial instability at regular intervals appears an irony of little apparent concern. Perhaps the rise in institutional fund management has been a central, problematic and underestimated element in the decay of entrepreneurial ambition. Putting your hard won savings into recycling current government debt with minimal, zero or even negative interest rates is unlikely to create wealth any more or less than instructing companies to restrain investment for the sake of certain cash generation and supposedly predictable dividends.

Perhaps the rise in institutional fund management has been a central, problematic and underestimated element in the decay of entrepreneurial ambition.

How many companies of size and weight that are prepared to invent the future can any of us identify in the world? How many of these, in turn, are prepared to sacrifice immediate earnings to invest in their dreams - let alone ask for fresh capital to fund their visions? But isn't this the point of equity investing? From epochal Dutch commercial exploration onwards such was the idea. But now?

The clearest exception in our era of truncated ambition is Elon Musk. He ventures into worlds beyond the limit of common abilities and understanding. He commits extraordinary quantities of energy, intellect but also capital to his many projects. As a large shareholder in Tesla it would give us enormous satisfaction should this translate into electric vehicles and solar energy replacing the internal combustion engine and fossil fuels, and autonomous cars saving millions of lives. Yet we've never made an investment for which we've received such criticism. From the generous sharing by hedge funds of their detailed rationales for their hostility (at times Tesla's aggregate short ratio has been 40% of the outstanding capital), to kind emails telling us that we will be central exhibits in the mutual fund hall of shame, it's been an interesting journey. Can Tesla fail? Of course - is there any equity investment that is worthwhile (or indeed credible) that cannot? But equally, can it improve the world and continue to multiply the wealth of our clients several times over? Of course.

The clearest exception in our era of truncated ambition is Elon Musk. He ventures into worlds beyond the limit of common abilities and understanding.

Perhaps the investment field that could most benefit from a radical improvement in its sense of purpose is healthcare. We may well be on the cusp of extraordinary medical advances. The foundations of transforming science appear to be in place after long years of experimentation. This applies in genomics, in gene therapies, in immunology and in the application of data to our health. But if we are to accomplish this great task it will be no thanks to the major pharmaceutical companies who have - accompanied by cheering fund managers - abandoned clinical ambition for me-too drugs and billions in marketing expenses. As an erstwhile leader of Novartis proclaimed, his task was to sell drugs like sugar filled soft drinks. Sadly, this is a sphere in which Britain can claim to be a world leader.

Britain is equally the master of failing to build new enterprises of global scale despite admirable scientific and entrepreneurial resources. This may be natural enough: if finance has evolved in a harmful direction then it is likely that it is in those cities and countries most devoted to finance that the repercussions will be most severe. As London offers a large stock of risk averse asset managers, boasts a cornucopia of hedge funds and harbours a myriad of overly influential investment banks, bad outcomes are near inevitable. Last year's takeover of ARM by SoftBank of Japan demonstrates this Achilles heel. ARM had the chance to become a global technology giant. To do so it needed the willingness to invest at the cost of immediate profits, the management and Board to dream rather than calculate, and supportive shareholders to back this vision. We failed on all accounts. But who cares if the immediate uplift to performance is enough for a bonus?

The views expressed in this article are those of the author. Its express purpose is to highlight areas of intellectual thought and debate which inform the investment philosophy that underpins Scottish Mortgage, in the hope that they may be of wider interest. The author(s) therefore make(s) no suggestion that this article constitutes independent investment research and it is not subject to the protections afforded to such.

Further, it is not intended to be considered as advice or a recommendation to buy, sell or hold any particular investment. Those considering investing in any of the areas highlighted in the article should undertake their own research, seek advice if unsure, and be aware that the value of any investment and any related income, can fall as well as rise, meaning that investors may not get back the amount invested. For those looking for information on Scottish Mortgage specifically, please visit www.scottishmortgageit.com