The manager of Baillie Gifford’s flagship £3.5bn trust has defended his recent move to allow unlisted companies to make up to 25 per cent of his trust’s portfolio, and denied it’s a risky decision.
Last week, the Scottish Mortgage Investment trust board announced its plan to increase the upper limit fot its holdings of unquoted companies, driven by the movement of corporate financing from the public to private sector.
But the move was met with criticism by some advisers, who suggested this level of exposure was very high, particularly given the lower disclosure requirements for unlisted investments.
When FTAdviser asked James Anderson how he plans to calm concerns he is raising the risk profile of the trust by increasing its exposure to unquoted companies, he said the move was “the opposite of risky”.
“We think there is a terrible and dangerous confusion between risk and volatility in financial markets,” he said, describing risk as “the permanent loss of capital”.
“I would challenge anybody to come up with a view as to why most of our big companies today are not more risky - in the sense of permanent loss of capital - than what we own in the unquoted companies.
“It is that potential destruction of the vast bulk of the quoted major British companies that would worry me, rather than the volatility and disclosure surrounding unquoted firms, which we will do our best to mitigate.”
Currently, the £3.5bn trust has an informal limit of 15 per cent for unlisted companies and uses up approximately 10 per cent.
Mr Anderson said investing in unlisted firms gives savers an opportunity to access companies they would not be able to tap into otherwise, and argued the boundaries between quoted and unquoted companies should be softened.
The US and China are currently where he sees the most potential for unquoted companies, with the Scottish Mortgage portfolio heavily weighted towards North America at 46 per cent and China at 17 per cent.
“As long as people are prepared to have a long time frame then this is not risky, because we think the fundamental ability of our companies to generate longevity, cash flow, and profitability is way greater than what is in the index.”
The fund manager explained one of the reasons his team had decided to boost the unquoted cap was due to the lack of growth prospects and competitive advantage for quoted companies.
Part of the problem in the UK, he said, is British companies are faced with a “depressing” layer of obstacles, which stunts the potential for companies to grow on a global scale.
“It is a long time since there was a truly great British company,” Mr Anderson said, suggesting there is a lack of “real determination and obsessiveness” to invent and innovate in the UK, compared to the “insane drive” of people in the US.