Posted by on Jun 9, 2014 in Blog, Columns |

By Jason Zweig | 6:27 pm ET  June 6, 2014
Image Credit: Christophe Vorlet

Fund managers helped cause the last financial crisis—and they will contribute to the next one unless they and their clients stop obsessing over short-term performance.

So says James Anderson, head of global equities at Baillie Gifford, an asset-management firm based in Edinburgh, Scotland, that manages $175 billion.

Mr. Anderson wants to break the cycle of impatience, but he is battling long odds. His approach is also a reminder that individual investors often can act more rationally and responsibly than big investment firms can.

Mr. Anderson is the lead manager of the $4.4 billion Scottish Mortgage Investment Trust, a London-listed portfolio, and the $23.2 billion Vanguard International Growth Fund, which Baillie Gifford runs on behalf of the U.S. fund giant Vanguard Group.

Mr. Anderson’s results speak for themselves. Scottish Mortgage has earned an average of 13.1% annually over the past decade, compared with 9.3% for the FTSE All-World Index. Vanguard International Growth has returned 8.7% annually for the past 10 years, versus 7.9% for the MSCI ACWI ex US benchmark.

(A disclosure: In 2007, Baillie Gifford paid me to give a talk at the firm’s headquarters in Edinburgh. I joined The Wall Street Journal a year later; the Journal’s rules prohibit reporters from accepting speaking fees.)

Mr. Anderson isn’t a value investor who buys cheap stocks and waits patiently for the market to appreciate them. Instead, he focuses on rapidly growing companies that already are popular—and often expensive by conventional measures.

Among his favorite holdings:, Google, Apple, Facebook,, Tesla Motors, LinkedIn and the Chinese Internet giants Baidu, Tencent Holdings and soon-to-be-public Alibaba Group Holding, which he bought into in a private offering in 2012.

What all these companies have in common, Mr. Anderson says, is that they aren’t “beholden to the habits of quarterly capitalism.” Instead of trying to maximize their short-term growth in earnings per share, these firms focus almost entirely on growing into the distant future.

“Very often, the best way to be successful in the long run is not to aim at being successful in the short run,” he says. “The history of capitalism has been lurched forward by people who weren’t looking primarily for the rewards of narrow, immediate gain.”

In short, he doesn’t just want to find the great companies of today—but those that will be even greater companies tomorrow and for decades to come.

So, inspired partly by the late investor Philip Fisher — author of the influential book Common Stocks and Uncommon Profits and a mentor to Warren Buffett — Mr. Anderson begins his research by trying to figure out what a company will look like after the next five years.

And he seeks to be as long-term as these companies themselves. Mr. Anderson typically holds stocks for a decade at a time and has held at least one, Atlas Copco of Sweden, for more than a quarter-century. The average stock mutual fund hangs onto its typical stock for less than 18 months at a time.

He says that most fund managers’ relentless focus on short-term results, fed in part by the myopia of their clients, helped drive many banks to take the kinds of risks—borrowing too much and keeping too little capital in reserve—that tipped the world into financial crisis.

“But where does the responsibility for that really reside?” asks Mr. Anderson. “Who demanded that banks grow so quickly and without sufficient controls on risk? I think we [fund managers] did.”

Investment firms that earn high fees on assets under management regardless of performance, and whose returns are measured over short periods such as months or quarters, have no incentive to think long term.

Individual investors, on the other hand, don’t answer to anyone but themselves and can—in fact, should—have a horizon of decades.

A recent survey by Stanford University and the National Investor Relations Institute found that 65% of corporate executives feel that “a company with a shareholder base that is dominated by investors with short-term investment horizons” can’t focus on strategic decisions.

Mr. Anderson has helped organize a group in the U.K., the Investor Forum, that will seek to promote more-patient thinking by companies and asset managers alike. It will launch this summer and so far has attracted a handful of leading fund managers, including Vanguard and Capital Group, the Los Angeles-based firm that manages more than $1.3 trillion.

To crack the problem, fund managers, their clients and the companies they invest in all need to extend their horizons, Mr. Anderson says—and to recognize that they share a common interest in doing so.

“It’s amazing how some of the largest and greatest companies hunger to have shareholders who are genuinely long-term,” he says.

Mr. Anderson calls his investing style “growth at an unreasonable price”—because the prices of some of his stocks will go up hundreds of times if he is right, while others will go bust if he is wrong. No wonder he has so little competition among professional fund managers.

But patient, prudent individual investors could try emulating him at will.


Source: The Wall Street Journal