James Anderson, the man who reengineered Scottish Mortgage and made it the flagship for the entire investment trust sector, and not just Baillie Gifford for who he worked for 40 years, leaves today, and investors will again wonder what the future will bring after a 40% slump in its shares in the past five months?

Marking the departure of arguably the most famous long-term investor in the UK currently, Baillie Gifford has published the transcript of a conversation between Anderson and Lawrence Burns, who became the trust’s deputy manager when Anderson announced his retirement just over a year ago.

The article is as much a platform for promoting Burns, who is much less well-known than SMT’s established co-manager Tom Slater who is about to take the reins of the £13bn FTSE 100 constituent, as it is in celebrating Anderson’s achievements.

Fascinating individual

These achievements were varied over the years for Anderson always provided good copy. While I found his comments on stocks and global trends insightful, his famously caustic diatribes were a delight. My favourite moment was when he compared former prime minister Theresa May to Stalin or Hitler for blaming the ‘cult of individualism’ she said had contributed to public dissatisfaction with globalisation. Anderson said there would have been no Amazon, Alibaba, Facebook or Illumina if May had her way.

Outbursts like this made Anderson fascinating but it is the nine-fold increase in the trust’s shares since the pioneering fund manager took over from Max Ward in early 2000 that investors will be grateful for.

Anderson’s decision to shift the portfolio away from the UK, where it had been 43% invested, and pivot it towards the far more dynamic US underpinned the even more significant advance in his growth philopsophy which sought to spot the biggest long-term winning companies wherever they could be found, an approach he has honed with Slater (pictured below) in the past seven years.

Even after the recent hit from the savage selloff in growth stocks, SMT remains by far and away the best-performing investment trust in its sector, producing a total shareholder return over 10 years of 607% that dwarfs the 220% of global stock markets as measured by the MSCI World index.

Volatile winner

As I’ve described many times, that long-term success is marked by periods of sharp over- and underperformance – no investor will forget how Scottish Mortgage more than doubled in the internet surge of 2020, or how it has undone a big chunk of that return with a tech slide in spring of last year acting as prelude to the latest downturn since November. These are not recent trends. Before the past decade’s historic returns, the trust was a huge faller in the 2008 financial crisis.

Scottish Mortgage is not for the faint-hearted or people who will settle for steady or mediocre returns, or even consider that they are a practical or desirable prospect. Nevertheless, it is only natural for investors to wonder if an edict against not taking profits or cutting your winners should always apply to their holdings in this volatile fund?

For even Anderson is baffled by the pummelling the trust has received in its investments during the great rotation caused by rising interest rates and inflation. In an interview with the Financial Times this month, Anderson spoke of his shock at the indiscriminate nature of the switch from growth to value that has seen shares in good companies punished alongside those with weaker prospects.

Sadly, the article on Baillie Gifford’s website does not refer to the short-term slump in Scottish Morrgage, although it is a useful restatement of the team’s core values that Slater and Burns will carry forward. These will be familiar to many readers and cover areas such as the enduring importance of Moore’s Law with increased computing power transforming sectors like healthcare, in addition to the revolutions it has brought in retail, advertising and media.

Keeping in touch with the smartest people in the world in business and academia is clearly also going to be the hallmark for a trust that has taken pride in its access to the likes of Amazon’s Jeff Bezos and Professor Henrik Bessembinder of Arizona State University.

Anderson and Burns (above) take what is now a habitual swipe at rival fund management houses for hugging stock market indices and focusing on short-term volatility, rather than on achieving the best long-term outcomes for their investors.

The mean irony

But it is in this section that come two comments from the managers that are laden with irony for the trust’s many investors.

Burns makes a sympathetic observation for fund managers, noting that ‘if you do, as we know, outperform by quite a lot, the most common reaction is that clients will often take the money away. You can see why therefore a lot of conservative behaviours exist within fund management.’

That surely is not the experience of Anderson and Slater? Reading this, I thought the truth is relatively few investors have taken their money away from Scottish Mortgage as it has deflated, judging by how the shares have not generally fallen to a wide discount to asset value. Many loyal investors – including me! – did not take profits and kind of wish they had, as, if nothing else, it would have made the decision to hold on with the rest feel less dangerous.

Anderson isn’t entirely helpful either. ‘My observation is that markets tend not to have cycles but very prolonged periods of working and not working. A lot of people make the mistake of thinking that the market will revert to how it was before, which seems profoundly unlikely.’

So, should investors assume the post-pendemic value renaissance will endure and the conditions that powered Scottish Mortgage so far this century may not return?

It’s impossible to say. The most personal bit of the managers’ encounter is when Burns pays tribute to the ‘hard battles’ his mentor has fought against the status quo. I can well imagine the fierce arguments Anderson had with his colleagues over the years. Unfortunately, it looks to me that investors have a similar internal battle with themselves as to whether they hold, fold or buy more of the investment trust.

As I’ve said before, Scottish Mortgage offers great value: for an annual ongoing charge of 0.34% a year, investors get access to an actively managed, concentrated list of global equities with a diversified side-pool of exciting unquoted stocks. But who knows if the portfolio will return to its winning ways?

Personally, I believe it will and that investors will continue to find some place in their portfolios for SMT’s distinctive and restless pursuit of the the best companies. Nevertheless, it is possible that Anderson’s departure is not just the end of a personal era but coincides with a more significant turning point in investment markets. We will wait and see.