Former star Japan fund manager relocates to Shanghai to head up new China office as investment group behind Scottish Mortgage Trust ramps up activities in a country viewed as a technology superpower.
Baillie Gifford global equities fund manager John MacDougall has moved to Shanghai to head up its new China office as the investment group behind Scottish Mortgage Trust (SMT ) ramps up its activities in a country it views as a technology superpower that could soon overtake the US.
McDougall, a former manager of Baillie Gifford Shin Nippon (BGS ), a Japanese smaller companies investment trust, relocated from Edinburgh with his family last year to become chairman of Baillie Gifford Investment Management Shanghai, its new wholly foreign-owned enterprise (WFOE) in the city.
Baillie Gifford opened the office last year and poached Amy Wang (below) as its head of China from rival Aberdeen Standard Investments where she had a similar role. Wang, a Chinese national educated in China and the US, previously worked in China for Franklin Templeton and Amundi Pioneeer.
A spokesman for Baillie Gifford said: ‘The new office will enable us to broaden our investment research base in China, deepen our long-standing relationships with many of China's most exciting growth companies and forge further links with the local academic community.
‘In the medium term, the Shanghai office will also enable us to explore more opportunities in the Chinese domestic and foreign asset management sector,’ he added.
Shanghai is China’s biggest city with a population of 26.3m and the country’s financial hub. It is also home to Tsinghua University with which Bailie Gifford is funding research into computational biology which seeks insights from medical data to diagnose disease.
Sending MacDougall to oversee its operation there is a sign of how seriously Baillie Gifford, which manages assets of £207bn, is taking the move as it jostles with Western rivals for influence and access in the world’s second biggest economy.
MacDougall, who joined the Edinburgh-based organisation 19 years ago, is highly regarded within the group and became a partner in 2016, a year after stepping back from Shin Nippon, which he had run for eight years and turned into its sector’s top performer. He subsequently helped run Edinburgh Worldwide (EWI ), a global smaller companies investment trust.
As a member of Baillie Gifford’s long-term global growth team, MacDougall works with Scottish Mortgage managers James Anderson and Tom Slater. Gaining direct experience of China could pave the way for him becoming a co-manager of SMT with Slater, who doubles up as the group’s head of US, when Anderson, the global growth head, eventually retires.
Slater (above) referred to MacDougall’s new role, first reported in Asian Investor in November, at an investor event yesterday in London.
China’s innovation and growth
Scottish Mortgage, the UK’s biggest equity investment trust, has just over 20% of its £8.6bn invested in China, considerably less than the 53% invested in the US.
Nevertheless, with long-standing investments in Chinese internet giants Tencent and Alibaba, and more recently the latter’s enormous financial spinoff Ant Financial, which held $168bn in its money market fund at the end of 2018, the SMT duo regard China as the natural counterpoint to the US.
They believe China is catching up with the US in terms of technology innovation and invention. Last year Scottish Mortgage invested in Bytedance, the video-sharing app whose popular TikTok platform has emerged as a challenger to Facebook.
The privately-owned company, valued at $75bn when SMT took a stake, is typical of the big, technology ‘unicorns’ SMT has backed within the £1.8bn unquoted portion of its portfolio in an effort to capture the growth of such companies before they join the stock market.
Although the unquoteds account for 21% of the trust, close to a 25% cap that the board may have to raise, the managers have spread their bets among 40 companies with Bytedance only accounting for 0.7% of the trust.
More significant is the 12.5% exposure to Alibaba and Tencent, which outweighs the 10.3% weighing to Amazon and Facebook of the US, in which the former is by far the favourite as the fund’s top position at 8.8% at the end of November.
Slater told investors that China’s internet companies ‘have a totally different understanding of their consumers’ due to the universal popularity of social media platforms such as Tencent’s WeChat. The valuable datasets this gave them was being enhanced with machine learning.
‘It gives them an incredible home market advantage,’ Slater said.
Although the trend in the mobile phone revolution was for technology platforms like Amazon and Tencent to get bigger and bigger, it was not one-way traffic.
Slater cited Baidu as an ‘interesting exception to the rule’. Scottish Mortgage last year sold out of the company, which it had held for several years, after its core search engine became less relevant due to WeChat’s dominance and its centralised structure meant it could not expand into travel and local services.
The writing was possibly on the wall for the investment when Baidu chief executive and co-founder Robin Li turned down the opportunity to get into short-form video when some of his engineers suggested the idea. They subsequently left the company and founded Bytedance, Slater said.
‘We haven’t seen anything yet’
After a wobble last autumn when its shares dipped 6% below their underlying net asset value (NAV) as investors worried about tech stock valuations, US-China trade war and a global recession, Scottish Mortgage has bounced back to a 2% premium over NAV.
Over one year the shares are up 25% and over five and 10 years have delivered 152% and 517% total returns, well above their AIC Global sector average.
Like other top performers in the growth bull market of the last decade, SMT is frequently the subject of speculation that it may run out of road if markets and investors switch to cheaper and higher-yielding ‘value’ stocks.
Anderson (above) dismissed the idea of a growth to value rotation. ‘I think we haven’t seen anything yet,’ he said, adding: ‘It seems to me that many of the companies that people are looking to benefit from mean reversion could be physically destroyed.’
This was a reference to the grim prospects Anderson believes face oil and gas companies and utilities if the technical problems around storing renewable energy are solved and energy becomes virtually free.
The writer invests in Scottish Mortgage through his pension