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Baillie Gifford eyes AI fund launch to spot the next Teslas

23 January 2020

Scottish Mortgage investment manager considering plans to launch fund using artificial intelligence (AI) to spot the next generation of stock market winners.

Scottish Mortgage investment manager Baillie Gifford plans to launch a fund using artificial intelligence (AI) to spot the next generation of Amazons, Googles and Teslas.

Charles Plowden, senior partner and lead manager of the Monks  (MNKS ) global investment trust, told investors in London today the group was considering providing the capital to start a fund managed by an ‘experimental’ investment team assembled last year.

Plowden said the four-strong team, comprising of a fund manager and three research scientists, had been investigating how machine learning could be used to improve company analysis and stock-picking.

Unlike hedge funds who have pushed into AI to develop ultra-fast trading strategies, Plowden said its focus was on using ‘AI to spot the features of good business’ and identify tomorrow’s big winners.

‘Most fund managers use machine learning for faster trading. Our goal is not to do things faster but to capture more data,’ Plowden told the Winterflood Investment Trusts conference.

‘AI is not going to replace us but to assist us,’ Plowden (above) said in reference to the role of active fund managers.

‘We may seed a fund in the next year,’ he added.

Any new Baillie Gifford fund will differ from existing AI funds, such as the actively managed Smith & Williamson Artificial Intelligence and Polar Capital Automation & Artificial Intelligence funds, and the index-tracking L&G Artificial Intelligence exchange traded fund.

These invest in companies in engaged in the development and exploitation of AI, such as Google owner Alphabet and online grocer Ocado, rather than using AI to screen potential investments.

Tesla rebound

Plowden’s comments come as Baillie Gifford, the biggest external investor in Tesla (TSLA) with a 7.5% stake, enjoys a feeling of vindication after shares in the electric car pioneer soared 123% in the past three months following the company’s report of a rare quarterly profit and attainment of production targets.

The long-term position in Tesla, headed by the controversial serial entrepreneur Elon Musk, has helped propel Scottish Mortgage (SMT ) 27% higher since November. Monks, which has a smaller Tesla stake, has gained 12%.

Tesla’s breakout – after a difficult two years for the stock – will bolster Baillie Gifford’s belief in sticking with companies whose long-term prospects its analysis indicates are the best.

The magic 1.3%

The group’s attraction to AI follows ground-breaking analysis it commissioned from Hendrik Bessembinder, a professor at Arizona State University, who found just 4% of US stocks had generated the entire gain in the US stock market from 1900.

Last year, the academic updated his study to cover 62,000 global stocks and concluded just 1.3% had delivered all the long-term gains from equities.

This has inspired Baillie Gifford fund managers in their search for the tiny number of companies capable of ‘asymmetrical’ or extremely one-sided, long-term, positive returns.

Data explosion

Baillie Gifford declined to comment further on its AI fund plans this afternoon but last August Kyle McEnery, an investment analyst involved in the project told the Financial Times the aim was to help fund managers respond to the ‘explosion in data and the increase in processing power’ of computers.

‘Our approach is helping our investors to do what they do better. We are breaking down the investment process and seeing if there are any areas where a computer would be helpful – if a human is wasting their time on an area when it would be better spent on a higher value task,’ McEnery, a former physicist said.

It is unclear what structure the new fund might take. Baillie Gifford is best known for its range of investment trusts, such as Scottish Mortgage, an £8.7bn global fund listed on the London Stock Exchange and the UK’s biggest equity trust, whose ‘closed end’ format is suited to the growing number of private, unquoted companies its managers are backing.

In the past two years it has launched Baillie Gifford US Growth (USA ) and Schiehallion (MNTN ) to offer a wider range of investors access to the growth of tech-based ‘unicorns’ that are delaying their move to public stock markets.

However, the group also runs open-ended investment companies and the bulk of its £207bn of assets under management are in corporate pension funds.



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