Scottish money managers' moves reflect shift in economic power
EDINBURGH: When Google Inc, owner of the most popular Internet search engine, said on Jan 12 it may close its website in China, Edinburgh money manager James Anderson sold the stock and bought Beijing-based rival Baidu Inc.
Since then, Baidu has risen 34 percent and Google has lost 8.5 percent. That kind of call helped propel Anderson's closed-end fund, Baillie Gifford & Co's 1.87 billion-pound ($2.8 billion) Scottish Mortgage Trust Plc, to the best performance among its UK peers over the past year.
A janitor cleans a metro station platform next to a Baidu.com Inc advertisement in Shanghai. Baidu shares have risen 34% since rival Google said on Jan 12 it may shut down its business in China.
"Google was admitting they had lost in China," said Anderson, who is Baillie Gifford's chief investment officer and responsible for 56 billion pounds in total. "It was revealing and added to the imputed value of Baidu."
Fund managers in the Scottish capital are increasingly moving their money to reflect the shift in economic power to countries such as China and Brazil from the US and Europe.
Scottish Mortgage has 60 percent of its assets in US, UK and other European stocks, down from 80 percent in 2004, and Anderson expects that to fall further.
The century-old Scottish Mortgage Trust's biggest holding is Rio de Janeiro-based Petroleo Brasileiro SA, Brazil's state-controlled oil producer, making up 5.1 percent of the fund. The firm, known as Petrobras, is also the biggest stake for Murray International Trust Plc, another Edinburgh fund.
"I like my ideas to come from the countries producing economic growth," said Anderson.
'Special' China
The switch to Baidu from Google meant each company accounted for 2.7 percent of Scottish Mortgage's assets as of Jan 31, putting the Internet search companies among the fund's 10 largest holdings.
"We find many, many more individual Chinese companies that are great secular growth companies similar to what you saw in America," Anderson said. "China is a special category beyond all others."
Scottish Mortgage, Baillie Gifford's first client, was founded in 1909 to invest in rubber estates in Malaysia and Sri Lanka to benefit from demand for automobile tires.
Baillie Gifford's main clients are US retirement funds including the California Public Employees' Retirement System, the largest US public pension fund, as well as money managers such as Vanguard Group.
Investments in what Anderson calls "rising powers", along with lessening dependence on the UK and avoidance of most financial stocks, helped boost returns.
Best return
Scottish Mortgage is a general growth fund, which targets stocks and bonds that gain in price more than average. It advanced 90 percent over the year to March 1, compared with an average return of 50 percent for 30 similar funds, according to data from Chicago-based research firm Morningstar Inc.
Anderson has run the fund since 2000. His second-biggest Chinese holding, after Baidu, is in Beijing-based New Oriental Education & Technology Group Inc, the largest private education company in the country.
Other investments include Ctrip.com International Ltd, China's biggest online-ticketing company, Belle International Holdings Ltd, the largest retailer of women's shoes, and Tencent Holdings Ltd, China's biggest Internet company.
Brazil accounts for three of Scottish Mortgage's largest investments, with index-linked government bonds due 2045 and Vale SA, the world's largest iron ore producer, alongside Petrobras. Earnings from Brazil also are the reason behind his stake in Banco Santander SA, Spain's largest bank.
"The Western financial system and the Western housing markets were unsustainable," he said. "We have known that for 15 years. It was implausible that we could have continued. You need to split off casino banking from utility banking."
Scottish Mortgage had avoided large holdings in financial stocks "for some time", although it made a mistake in owning shares of UBS AG, the largest Swiss bank by assets, said Anderson. UBS is down 17 percent over the past six months.
This year, Anderson bought or added to stakes including San Jose-based Cisco Systems Inc, the world's largest maker of networking equipment, Intuitive Surgical Inc, maker of robotic surgical systems, Polish copper miner KGHM Polska Miedz SA and Poland's former phone monopoly, Telekomunikacja Polska SA.