The Week: Lessons from a veteran investor

James Anderson’s may be leaving Baillie Gifford in April next year, but the investment philosophy he has put in place looks set to thrive long after his departure. He has been a robust critic of many aspects of the investment management industry and his greatest contribution has been to challenge a number of cliches that had been allowed to flourish, unchecked, among fund managers.  

Not losing money is the most important factor

It is easy to point out that a stock falling 50% needs to grow 100% to get back to its original price. However, Anderson challenged the view that not losing money was the key to compelling long-term returns. Instead, he focused on the asymmetry of returns. If an investor puts in £1, the most they can lose is £1, whereas if you’d bought a single Amazon share in May 1997 at $1.70, it would now be worth $3,137.50. This, he believes, should be the focus for any investor.

Benchmarks matter

Anderson has long believed that active management needs to be properly active. The active management industry had become associated with short-term trading round a benchmark, but his view is that allocating capital with no reference to the underlying merits of the assets involved isn’t really investing. Instead, his focus was to invest clients’ money in actual companies doing actual things. The problem with the benchmarking approach is that it keeps capital tied up in the equity of companies that won’t do well in the future.

It’s all about beating the competition

Like all businesses, asset managers need a social licence to operate and that doesn’t come from trading BP between themselves, it comes from allocating capital to good businesses. It isn’t a game, where a fund manager tries to get one over on the competition. That is simply fighting over returns rather than creating them. Anderson believes fund managers need to focus on the actual creation of wealth - technological breakthroughs, smarter distribution models, building better and more efficient infrastructure, imagination and creativity.

Short-termism is no problem

Companies need stable capital over the long-term to achieve their goals – whether than is finding a vaccine for Covid, or inventing the next electric vehicle. Anderson’s view is that far too many companies are not investing in their own future because investors are compelling them to take a short-term view. This is particularly true for countries where there is pressure from institutional investors to pay high dividends, such as the UK.

You need to invest in stocks you don’t like

Baillie Gifford has carved a clear niche for itself. Investors who buy its funds know that they’re not getting a benchmark weighting + or – 3%. This could increase relative risk, but it means the group’s fund managers won’t hold HSBC unless they really believe it’s going to go up.

The investment industry needs to be called to account every now and then. In his near four decade long career, Anderson has been a welcome bulwark against complacency.