苏格兰抵押投资信托 — 经理人回顾，截至2020年3月31日年报（詹姆斯·安德森与汤姆·斯莱特）

Managers’ Review We cannot know the consequences of Covid-19 beyond human tragedy. It is presumptuous to make predictions about complex and inherently uncertain matters at any time. Under conditions of stress in society and markets it is even more dangerous. We are better observing rather than concluding prematurely. When faced with the extraordinary it’s far too easy to retreat to preconceptions. As investors we would like to see the current crisis provoke a further acceleration in digitalisation and healthcare innovation. As observers we would hope that the current crisis will prompt increased concern over the threat driven by other extreme outcomes in inequality or climate decay. But it isn’t at all clear that these are more than pious hopes. It is far harder to identify how and why the pandemic has changed our views. Generally it’s perilously early to do so. It’s also dangerous to focus solely on one event however terrible. Two years ago this report quoted the late, great Hans Rosling. He frequently cited a global pandemic as his greatest fear. But he also warned that unusual and negative events warp our minds: ‘if we are not extremely careful, we come to believe that the unusual is usual: that this is what the world looks like.’ At some point he emphasised that we need to return to ‘the secret, silent miracle of human progress’.

The End of Carbon One such miracle may already have occurred. It may eventually be seen as equally historic and as beneficial as the pandemic has been malign. The age of carbon may have ended before the virus spread. For all the drama of the Saudi-Russian clash or of negative oil prices this was a transformation long foretold but finally turning unstoppable in the first quarter of 2020. The remorseless fall in the prices of renewable energy has at last translated into savage competition against traditional fuels. In the first three months of 2020, 52% of German electricity came from renewables. In the UK that figure was 45%. No wonder the share prices of Exxon, BP and Schlumberger were already falling sharply in January and February. Sad though it is to say pandemics are far more common than energy transitions in the history of the world. The rise of renewables and the electrification of transportation will be central to the investing world of the next twenty years at least. It matters.

Geography The Coronavirus has already exacerbated the name calling between America and China. It could hardly be otherwise given the characteristics of leadership in both countries. But it seems clear to us that the geographical centre of the global economy continues to move to Asia, generally at an accelerated pace. This is an observation not an endorsement of one country or a political system. It’s likely at the simplest level that Asian GDP can grow in 2020. That’s improbable in the USA and impossible in Europe. Before and beyond the virus we have been disconcerted by the extent to which business model leadership and systemic dynamism appear to be fading in America, even on the West coast. This too appears to be in contrast to Asia and, in the world of corporate giants, particularly relative to China. I will leave the specific examples to Tom Slater to discuss in the next section of this Report to our shareholders.

The geographical centre of the global economy continues to move to Asia.

Risk and the Index Scottish Mortgage has long believed in the energy revolution. But we cannot become unduly confident. It’s critically important to test all our beliefs. This applies more strongly to our general contentions than to our individual stock decisions. The latter are necessarily subject to specific uncertainties that we cannot wish or diversify away. But if our underlying beliefs are structurally wrong and we are therefore unable to make sense of the investing world for a prolonged period, then we need to reassess. We need to ask ourselves if our philosophy is adapted to the world as it will be rather than as we hope it is. This applies at all times. It applies at least as much when we have been successful as in times of disappointment. It applies even more when the shape of the investing world is changing dramatically.

These comments are meant to convey meaning beyond irritation. The opportunity for us in the last decade has come about because stock markets did not learn. This is unusual. Normally investors, speculators and traders leap restlessly onto new paradigms however questionable their underpinnings. But that hasn’t happened despite, for example, the clear evidence of the power of the internet, the increasing returns to scale it tends towards and the consequent deep competitive moats it offers. Instead of embracing exponential growth, investors and asset allocators have fled. Performance chasing has its own evils but replacing it with endless rebalancing towards ‘value’ strategies backed by a blind conviction that reversion to the mean is inevitable has been an investment tragedy. It’s largely been prompted by misguided theorising. But the theory has been reinforced by the extraordinary grip that Warren Buffett has exercised over the investment world. Of course the very long term record of Berkshire Hathaway is brilliant, of course Buffett has a splendid way with words and the public, of course he doesn’t believe in the silliness of risk as divergence from the index. But Buffett’s success has sanctified a freezing of the investment narrative. Or as Buffett’s brilliant partner, Charlie Munger, puts it with the clarity of a 96 year old, too many investors are ‘like a bunch of cod fishermen after all the cod’s been overfished...that’s what happened to all these value investors. Maybe they should move to where the fish are’. So where will the fish be in the future? Searching for new fishing grounds.

Two years ago in this report we wrote that ‘We do not share the presumption that Scottish Mortgage is doomed to suffer unduly in a bear market. To us the underlying cause of the next market retreat is most likely to be the dawning realisation that broad swathes of the stock market that are assumed to be strong and stable in difficult market conditions are instead acutely vulnerable to severe setbacks’. Three years ago we said that ‘we do not accept that risk resides in owning a portfolio that is different from the index’ and suggested that this definition of risk owed more to the self-interest of the investment industry than to economic reality. We did not predict the current pandemic although the possibility of such a disaster was always present as experts in healthcare and fragility have repeatedly observed. So we did not suspect that the trigger for the collapse in the businesses and share prices of so many major index constituents would lie in Covid-19. But they were indeed vulnerable to severe setbacks even if we expected this to unwind over a decade not a year. There’s not much evidence that capital market ideology will take much notice of the crass failings of its prescriptions. Managers and consultants will continue to talk to themselves of tracking errors and Sharpe ratios as risk controls (the reader is fortunate if they are unexposed to such terms) whilst their clients suffer. The curriculum of the ever more dominant Chartered Financial Analyst (CFA) will not change although its teachings bear little resemblance to market outcomes.

Whilst the collective investment world has shown little enthusiasm for shifting to new hunting grounds the market has adapted, as it does, without most participants. This carries potential problems. The universe of great growth whales is swallowing the minnows. At one point in April the US Nasdaq index, dominated by technology companies, enjoyed a market capitalisation greater than all the developed markets outside America. Or on a plaintive local note Amazon and Alphabet combined are more highly capitalised than all quoted British companies. It’s not clear that this is unjustified. Moreover the perception of relative vulnerability has changed. Most investors craving safety now see Amazon and its kin as far less exposed to economic angst. In general our quoted portfolio has therefore become more conventional and gradually, then suddenly, less differentiated from the index than in the past. This does not unduly concern us at present as the world adapts to wrenching changes but it may become an issue in the future. We must continue to evolve. James Anderson

Managers’ Review Through the patient provision of capital, we aim to support the people and companies that are building the future of our economy. So the absence of dramatic change in the portfolio over the past twelve months should come as little surprise. We still own 29 of our top 30 holdings from a year ago. We believe that having long-term, committed owners can increase the chance of success for companies. Moreover, long-term ownership is the key to capturing the value created by the small number of exceptional companies that drive long-term wealth creation. Our objective is to find such companies and own them long enough to earn that return. Studying the output of our investment process (a portfolio with modest turnover and long holding-periods) risks confusing low turnover with no turnover. Amazon does not remain our largest holding because we are contented owners. It remains our largest holding because our constant search for the world’s most exciting and innovative Growth companies has not turned up another opportunity which we think offers greater risk-adjusted upside. This fierce competition for our capital goes part way to explaining the sale of Chinese internet search company, Baidu, once Scottish Mortgage’s largest holding. Baidu has struggled to use its enduring dominance in Search as a base to build new services for consumers. Failing to evolve means being left behind. China’s online companies have built the backbone of its consumer economy and their pace of development and innovation has been ferocious. Alibaba and Tencent have become dominant platforms through which much economic activity flows and recent events have further cemented their centrality. Whilst these companies started out in the retail and entertainment businesses, they now drive financial inclusion and provide access to credit. In a country where advanced software has been scarce, they are beginning to

TikTok’s popularity continues to grow.

digitise and upgrade a huge swathe of China’s economy and public sector through the provision of systems and data on an unprecedented scale. It is encouraging to see new innovative companies emerging from China’s internet ecosystem. Bytedance is a media company focused on short-form video. It was founded by several former Baidu engineers and may be the first Chinese media company to build a big presence internationally. Younger audiences have flocked to its social media platform, TikTok, which has transcended cultural and geographic boundaries. Bytedance’s core skill is in deploying artificial intelligence to predict the content that each member of its vast audience will be interested in. This skill-set should extend the opportunity well beyond current products. The addition of Bytedance to our portfolio has helped to ensure that we retain a significant exposure to Chinese companies despite the sale of Baidu. The creative ferment, intensive competition and relentless execution that exist in this vast market are a powerful combination for shaping great companies and it remains an important hunting ground for new ideas. Chinese food delivery and local service company, Meituan, narrowly missed out on joining its geographic complement, Delivery Hero, in our top ten holdings. These businesses are driving change in the food industry and their focus on the fastestmoving countries has allowed them to achieve massive scale. Meituan delivers more than 20 million meals per day compared to a mere 500 thousand for US-based peer Grubhub (which we sold during the year). Scale is driving it forward towards profitability and dominance.

Meituan’s yellow jacketed riders have become ubiquitous in large Chinese cities.

The current food industry paradigm of driving to a grocery store, pushing a shopping trolley around the aisles, queuing at a check-out, driving home, putting groceries into cupboards, retrieving them, preparing and cooking a meal then cleaning the dishes is inefficient. Amazon is attacking a number of the steps in the process as it broadens its online offerings and integrates the Whole Foods brand to provide click and collect and home delivery services. Competition in grocery is likely to be intense and capital-consumptive but that is exactly the type of environment

Demand for Tesla’s electric vehicles shows no sign of slowing.

Amazon thrives in. The scale of the opportunity is big enough to make a difference even to a company of Amazon’s size. Berlinbased HelloFresh’s subscription model of delivering locallysourced, fresh ingredients for home-cooked recipes is seeing burgeoning demand across many markets including the US where, notably, it has outcompeted the domestic alternatives. Bytedance’s innovation and audience creation have happened in a time of limited progress in the Western advertising industry from either a product or business model perspective. Facebook and Alphabet are smaller holdings than they once were. Whilst Alphabet continues to make good progress in Search, Facebook’s product focus has for some time been predominantly on firefighting. Thankfully we have been fortunate to benefit from the wisdom of others in navigating this evolving media landscape. We bought a holding in You and Mr Jones, an unlisted advertising agency founded by the eponymous former CEO of Havas, back in 2015. His underlying insight was that the corporate sector needed specialist help in harnessing the increasingly complex online and mobile advertising environment. That foresight has proved correct with big brands moving their business away from large agencies to You and Mr Jones. With consumer internet development muted, it has been left to Tesla to uphold the reputation of West Coast America for bringing disruptive innovation to the world. It has made remarkable progress. The vision and ambition at Tesla have always been clear but at times the company has struggled with execution. That has changed. Steadily increasing and profitable production of the Model 3 sedan has been accompanied by the successful (and earlier-than-planned) production ramp of a new SUV, the Model Y. At the same time the company has completed a second production facility in Shanghai and launched a pickup truck which has already amassed hundreds of thousands of pre-orders. This progress has come amidst delays, cancellations and false starts in electric vehicle production for the established auto manufacturing industry. We wish we could find other big companies that were making such progress in the move to a sustainable energy economy.

We believe software is going to bring profound changes to the transport industry over the next decade. Tesla’s autonomous driving functionality continues to improve as it gathers data from the sensors attached to its large and growing fleet of customer vehicles. The traditional industry will be unable to compete with this technology and we expect it will increasingly turn to companies like our holding, Aurora, which is building a virtual driver for car manufacturers to integrate into their vehicles. If the task of producing autonomous terrestrial vehicles proves too complex then it may be left to companies like Joby Aero to bring the once fanciful idea of flying cars into reality. Healthcare has dominated the headlines of recent months but at the corporate level there have been relatively few noteworthy developments. We are encouraged by the progress of companies working at the intersection of information technology and medicine such as Grail, Zipline and Tempus Labs. Thus far their growth rates reflect their software inheritance rather than the institutional inertia of their chosen market. However, it has been the companies deploying the tools of modern biology in an industrial setting that have been making the most progress. Ginkgo Bioworks is automating the jobs performed by human scientists in order to industrialise the development of new materials. It is harnessing the power of micro-organisms to produce products across industries as diverse as food ingredients, agriculture and speciality chemicals. Without the understandable safety constraints and (less understandable) bureaucratic challenges of working within a healthcare environment, the pace of improvement and related cost declines are remarkable. Whilst the newspapers focus on the gloom associated with the impact of Covid-19 it is important not to lose sight of the fact that we live in a time of great progress. The opportunities for Growth investors are plentiful. Tom Slater

Breaking Down Artificial Boundaries Over the last decade, a significant and growing number of companies around the world have been staying private for much longer in their development before listing on a public stock exchange. The value created while a company remains private is out of reach of most investors, or at least extremely expensive to access.

In 2012, Alibaba became the first private business Scottish Mortgage invested in directly. It became a public company in 2014. Scottish Mortgage still holds every single share in Alibaba that it bought in 2012 as well as many more besides and it has been a top ten holding for years now. Since then, a number of the other private businesses in the portfolio have also subsequently become public companies, most of which continue to be held today. A handful of the unlisted businesses have been taken over while we have held them. Most importantly though, a wide variety of new private companies have continued to enter the portfolio and the overall number and weight of these have continued to rise over time as this has simply been where the best new investment opportunities were found.

In order to maintain the same quality of opportunity set for Scottish Mortgage, we have simply continued to invest directly in any company, public or private, which meets our investment philosophy and criteria. This was achieved with the support of the Board and shareholders. It utilises the benefits of the Company’s closed-end structure and low-cost proposition. There are no additional fees hidden here.

Equity Investing Is All about Capturing Long Run Compounding Returns One of the important advantages that Scottish Mortgage has when investing in established private companies is the ability to continue owning such businesses as and when they become public companies. This means that it is possible to capture the benefits from the long run compounding of returns as they grow from a lower starting value. This graph shows the growth of the importance of this flexibility over the last decade:

8,000

6,000

4,000

2,000

£ million

10,000

%

Jun 2010

Mar 2011

Mar 2012

Mar 2013

Mar 2014

Mar 2015

Mar 2016

Mar 2017

Mar 2018

Mar 2019

Mar 2020

Source: Baillie Gifford. Total assets (in sterling) (left hand axis) Unlisted securities as a % of total assets (right hand axis) Unlisted securities and listed securities previously held in the portfolio as unlisted securities as a % of total assets (right hand axis)

The purple line shows the growth in the total assets of Scottish Mortgage (left hand scale). The orange line shows the growth in the percentage of the portfolio invested in those companies that we initially bought when still private, regardless of their status today (right hand scale). The blue line starts in 2014 at Alibaba’s initial public offering (IPO) and shows the level of just the assets which are not listed on a public market (right hand scale). As can be seen from the orange line, the companies which started out as unlisted holdings now account for well over a third of the total portfolio. Included at the end of this report on page 20 is a table showing the return from each of these companies over the period that they have been held. As shareholders will have gathered from the Company’s Interim Reports, the flexibility to invest in this way has been an important driver of returns over the last decade.

The Importance of Reputation and Relationships The best growth business seek investors whose interests and time horizons are aligned to their own, rather than purely the highest bidder today. As a firm, we have built a reputation based on our actions as engaged and constructive owners of businesses across the world over periods spanning many years on behalf of our clients. Scottish Mortgage’s flexibility means it offers private companies the prospect of an enduring relationship few others can match. We do not come with a predetermined exit timetable, potentially requiring an IPO at an inopportune moment for a business. Further, if and when it does decide to become public, there is clear potential for the level of investment to scale significantly, both for Scottish Mortgage and across Baillie Gifford’s much wider client base. This helps to stabilise what can be a turbulent time for newly public companies. In a world with plenty of investment capital available to the best opportunities, such competitive advantages matter. It is often the companies, rather than the investors, who make the final decision. Not only does our reputation open doors when we seek out opportunities, but we have also seen an increasing number of private companies approach us in recent years. Further, as key individuals work with multiple companies, we see a network effect from these relationships. We go on to select only a very few of the opportunities available. Over this financial year, we considered several hundred private companies but invested in only seven. We have found that it is often possible to have more open discussions with the management teams at private companies, precisely because both sides have made a long term commitment. This helps to build a solid foundation for our relationship, improving the quality of the insights we gain from those running these businesses. The relationship created during the first couple of years of investment while Alibaba was still private, helped us to understand the development not only of the company but also of China better. Such relationships can also be valuable in another way. Scottish Mortgage’s initial investment in Alibaba enabled us to invest in Ant Financial, the financial services giant that Alibaba created directly.

Putting the Private Companies in the Portfolio into Context We seek companies where the likelihood of them succeeding in their extraordinary ambitions combined with the potential returns from doing so far outweigh the likely risk to the capital invested from failure. Though size alone is also not a definitive indication of where this balance of risk and potential return might be in a company, it is somewhat more reflective of this than the public/ private distinction used as a proxy by many.

Today, Ant is the largest unlisted holding (2.3% of the total) and also the largest such company by market value in the portfolio. Its payments platform alone already handles a multiple of the transactions each day that Visa’s does across the globe, yet payments only represents one of the five broad areas of financial services it offers. Were Ant to be listed on the London Stock Exchange (LSE), it would be the largest company in the FTSE 100 based on its size, as can be seen from the graph below. Ant is far from the only private company held already of a scale equivalent to those in the FTSE 100 Index. At the end of March 2020, just under half of the weight of the assets invested in individual private businesses was in companies which would have been already within or very close to joining this group based on their scale, if they were UK listed public companies. Nor is this a new phenomenon. In 2015, when we first invested in Meituan Dianping, it was already of a similar scale to Amazon when we first invested in that company in 2005 and would also have come within the FTSE100 cohort by valuation. By the time it became a public company in 2018, it was almost three times that size. Similarly, Spotify was already a global company when we first invested in 2015 and would have come within this group on the same basis. Again, it was almost three times that size when it became public. These are not the only examples. The graph below places the scale of these private companies held against a familiar frame of reference for shareholders. The line graph plots the market capitalisations of the companies in the FTSE 100 and FTSE 250 against their rank in those indices. The bubbles on the line indicate the private companies’ approximate ranking in these indices based on their market value. The size of the bubbles represents their relative portfolio weights.

Scottish Mortgage’s Unlisted Holdings Valuation (£ billion)

FTSE 100 and FTSE 250 ranking (combined) Source: Baillie Gifford and Factset. FTSE 100 FTSE 250 Scottish Mortgage’s unlisted holdings Valuations based on market capitalisation for FTSE 350 (FTSE 100 and FTSE 250) and enterprise value for Scottish Mortgage’s unlisted holdings. As at 31 March 2020.

The table below ranks these companies by their size and gives their main area of business and their overall portfolio weight.

Unlisted Holdings by Scale

Scale Company

Total assets %

Country*

Industry

Scale Company

Total assets %

Country*

Industry

Ant International

2.3

China

Financial Services

Joby Aero

0.1

US

Transport

Bytedance

0.7

China

Social Media

Essence Healthcare

0.5

US

US Healthcare Insurance

Space Exploration Technologies

0.6

US

Satellite Communications and Aerospace

Carbon

0.5

US

Industrial Manufacturing

Stripe

0.3

US

Financial Services

Clover Health

0.3

US

Healthcare

Airbnb

0.2

US

Travel and Leisure

HeartFlow

0.4

US

Healthcare

Snowflake

0.1

US

IT

Away Inc (JRSK)

0.4

US

Digital Retailer

Full Truck Alliance

0.3

China

Logistics

CureVac

0.1

Germany

Life Sciences

Tanium

0.5

US

IT

You & Mr Jones

1.4

US

Digital Brand Agency

Tempus Labs Inc

1.5

US

Healthcare AI

Zipline

0.5

Rwanda

Healthcare Logistics

Palantir Technologies

0.3

US

IT

Thumbtack

0.4

US

Services Network

Ginkgo BioWorks

1.8

US

Synthetic Biology

Recursion Pharmaceuticals

0.4

US

Life Sciences

Grail

0.8

US

Healthcare

Sana Biotechnology

0.1

US

Life Sciences

TransferWise

1.1

UK

Financial Services

Bolt Threads

0.3

US

Manufacturing

AUTO1

0.2

Germany

Automotives

KSQ Therapeutics

0.2

US

Healthcare

Affirm

0.3

US

Financial Services

Udacity

0.1

US

Education

Aurora

0.2

US

Transport

The Production Board

0.4

US

Food science

Convoy

0.2

US

Logistics

ZocDoc

0.2

US

Healthcare

Indigo Agriculture

0.8

US

Agriculture

Uptake Technologies

0.3

US

Industrial Assets

JAND Inc (Warby Parker)

0.5

US

Eyewear Online

Intarcia Therapeutics

0.1

US

Life Sciences

US

Germany

China

UK

Rwanda

• Country represents the primary area of business exposure for the company.

This is a diverse group of businesses, operating across a wide range of industries, but it must also be considered within the context of the whole portfolio for Scottish Mortgage. The fair valuation pricing policy for these assets is detailed elsewhere in this report and on the Company’s website. The disciplined application of our valuation policy means that the prices of these assets will also be impacted during turbulent times in public markets. We saw this most clearly towards the end of the Company’s financial year in March. However, this policy does also ensure that the published net asset values for Scottish Mortgage remain reflective of the prices we would likely be paid at that point for all of the assets in the portfolio, allowing shareholders to make informed investment choices.

Investment Policy Update Initially, the level of the private companies in the portfolio remained very modest and was monitored by the Board. By 31 March 2016, the unlisted assets represented 11.8% of the total portfolio and it was agreed that it was an appropriate moment to provide further clarity in this area. Shareholders approved a resolution at the Company’s Annual General Meeting (AGM) in June 2016 to update the investment policy. This included the following new provision: ‘the maximum amount which may be invested in companies not listed on a public market shall not exceed 25 per cent. of the total assets of the Company, measured at the time of purchase’. Although this construction meant that, if this level were to be exceeded, no further unlisted investments may be made while this remained the case, it also protected Scottish Mortgage from becoming a forced seller of these private companies based purely on relative and/or absolute changes in the values of the assets. As at 31 March 2020, the unlisted assets represented 20.1% of the total. Though the level has previously been higher than this, it has consistently remained under one quarter of the whole portfolio (see graph on page 17). While we have not yet been formally prevented from simply investing in the best companies available, in practice as the level draws near to the limit considerations over the best use of the remaining capacity do weigh on the investment decisions taken. It is just as important to ensure that further investments may be made in those private companies showing real progress, as it is to ensure that all new opportunities may be judged equally on their fundamental merits. Accordingly, we are seeking shareholder approval to raise the current limit by 5 per cent. to 30 per cent. The scale of Scottish Mortgage ensures that this will be a material amount of additional flexibility in absolute, but not relative, terms. It will enable us to continue to invest simply in the best opportunities available, be they public or private companies, without changing the nature of the investment proposition. Without this change, this valuable flexibility will become severely constrained and largely dependent on the timings of the IPOs of our existing unlisted companies, which we believe would be to the clear detriment of shareholders. Catharine Flood Corporate Strategy Director for Scottish Mortgage

Performance of Holdings Initially Purchased as Private Companies Calendar year of initial purchase

Name

Annualised return %

Innovation Works Development Fund

Innovation Works 2010 Development Fund 14.0

WI Harper Fund VII

WI Harper Fund VII 2011 5.4

Alibaba Group

Alibaba Group 2012 41.9

Essence Healthcare

Essence 2014 Healthcare 20.8

WI Harper Fund VIII

WI Harper Fund VIII 2014 6.9

Palantir Technologies

Palantir 2014Technologies (3.5)

JAND Inc (Warby Parker)

JAND Inc (Warby Parker) 2015 15.7

Spotify Technology SA

Spotify Technology SA 2015 22.2

You & Mr Jones

You & Mr Jones 2015 26.1

Airbnb

2015

Airbnb 5.4

ZocDoc

2015

ZocDoc (8.5)

Thumbtack

2015 Thumbtack (1.2)

Sinovation Fund III

Sinovation Fund17.0 III 2015

HelloFresh

2015 HelloFresh 17.4

CureVac

2015

CureVac (8.3)

Udacity

2015

Udacity (0.1)

Meituan Dianping

Meituan Dianping 2015 36.9

Anaplan

2015

TransferWise

2016TransferWise 34.1

Ginkgo BioWorks

Ginkgo BioWorks 2016 67.4

Denali Therapeutics

Denali 2016Therapeutics 9.2

ARCH Ventures Fund IX

Anaplan 35.2

ARCH2016 Ventures Fund IX 23.1

Intarcia Therapeutics

Intarcia 2016Therapeutics (46.2)

Unity Biotechnology

UNITY Biotechnology 2016 (19.7)

AUTO1

2016

AUTO1 –

Grail

2017

GRAIL 8.3

Orchard Therapeutics Lyft Rubius Therapeutics Clover Health

Absolute return %

Orchard 2017Therapeutics 6.5

2017

Lyft (5.0)

Rubius 2017Therapeutics (18.9)

2017Clover Health 10.8 -100

Denotes unlisted security.

Absolute return %.

Denotes listed security previously held in the portfolio as an unlisted security.

Absolute return %.

• For holdings purchased during the year to 31 March 2020, the return for the holding period is provided in lieu of the annualised return.

The change in colour on the horizontal axis indicates a change in scale.

1400

Name

Calendar year of initial purchase

Annualised return %

Vir Biotechnology

Vir Biotechnology 2017 114.6

Eventbrite

2017 Eventbrite (23.9)

Indigo Agriculture

Indigo Agriculture 2017 20.5

Bolt Threads

2017Bolt Threads (2.1)

NIO

2017

HeartFlow

2017 HeartFlow (1.8)

Uptake Technologies

NIO (16.1)

Uptake 2017Technologies (31.2)

Carbon

2017

Carbon (1.6)

Zipline

2018

Zipline 34.9

Full Truck Alliance

Full Truck Alliance 2018 14.7

Ant International

Ant International 2018 6.6

Slack Technologies

Slack 2018Technologies 67.7

Tempus Labs Inc

Tempus Labs Inc 2018 72.0

The Production Board

The2018 Production Board 9.9

KSQ Therapeutics

KSQ 2018Therapeutics (4.2)

Tanium

2018

ARCH Ventures Fund X

Absolute return %

Tanium 0.4

ARCH Ventures Fund X 2018 (16.6)

ARCH Ventures Fund X Overage 2018 (14.3) ARCH Ventures Fund X Overage Space Exploration 2018Technologies 15.7 Space Exploration Technologies

Recursion Pharmaceuticals Sana Biotechnology

Recursion2019 Pharmaceuticals (3.9) Sana Biotechnology 2019 3.3

Affirm

2019

Affirm 6.5

Aurora

2019

Aurora 5.1 *

Away Inc (JRSK)

Away Inc (JRSK) 2019 1.0 *

Bytedance

2019 ByteDance 4.8 *

Stripe

2019

Stripe – *

Convoy

2019

Convoy (3.6) *

Joby Aero

2020 Joby Aero (7.1) *

Snowflake

2020 Snowflake (1.0) * -100

Denotes unlisted security.

1400

Absolute return %.

Denotes listed security previously held in the portfolio as an unlisted security.

Absolute return %.

• For holdings purchased during the year to 31 March 2020, the return for the holding period is provided in lieu of the annualised return.

The change in colour on the horizontal axis indicates a change in scale.

Managers’ Core Beliefs Whilst fund managers claim to spend much of their careers assessing the competitive advantage of companies, they are notoriously reluctant to perform any such analysis on themselves. The tendency is to cite recent performance as evidence of skill despite the luck, randomness and mean-reverting characteristics of most such data. If this does not suffice then attention turns to a discussion of the high educational qualifications, hard work and exotic remuneration packages that the fund manager enjoys. Sometimes the procedural details of the investment process are outlined with heavy emphasis on risk controls. Little attention is given to either the distinctiveness of the approach or the strategic advantages the manager might enjoy in order to make imitation improbable. We think we should try to do better than this. — We are long term in our investment decisions. It is only over periods of at least five years that the competitive advantages and managerial excellence of companies become apparent. It is these characteristics that we want to identify and support. We own companies rather than rent shares. We do not regard ourselves as experts in forecasting the oscillations of economies or the mood swings of markets. Indeed we think that it is hard to excel in such areas as this is where so many market participants focus and where so little of the value of companies lies. Equally Baillie Gifford is more likely to possess competitive advantages for the good of shareholders when it adopts a long-term perspective. We are a 112 year old Scottish partnership. We think about our own business over decades not quarters. Such stability may not be exciting but it does encourage patience in this most impatient of industries. We only judge our investment performance over five year plus time horizons. In truth it takes at least a decade to provide adequate evidence of investment skill.

— The investment management industry is ill-equipped to deal with the behavioural and emotional challenges inherent in today’s capital markets. Our time frame and ownership structure help us to fight these dangers. We are besieged by news, data and opinion. The bulk of this information is of little significance but it implores you to rapid and usually futile action. This can be particularly damaging at times of stress. Academic research argues that most individuals dislike financial losses twice as much as they take pleasure in gains. We fear that for fund managers this relationship is close to tenfold. Internal and external pressures make the avoidance of loss dominant. This is damaging in a portfolio context. We need to be willing to accept loss if there is an equal or greater chance of (almost) unlimited gain. — We are very dubious about the value of routine information. We have little confidence in quarterly earnings and none in the views of investment banks. We try to screen out rather than incorporate their noise. In contrast we think that the world offers joyous opportunities to hear views, perspectives and visions that are barely noticed by the markets. There is more in the investment world than the Financial Times or Wall Street Journal describe. — We are global in stock selection, asset allocation and attribution. We are active not passive – or far worse – index plus in stock selection. Holding sizes reflect the potential upside and its probability (or otherwise) rather than the combination of the market capitalisation and geographical location of the company and its headquarters. We do not have sufficient confidence in our top-down asset allocation skills to wish to override stock selection. We do not have enough confidence in our market timing abilities to wish to add or remove gearing at frequent intervals. We do, however, have strong conviction that our portfolio should be comparatively concentrated, and that it is of little use to shareholders to tinker around the edges of indices. We think this produces better investment results and it certainly makes us more committed shareholders in companies. We suspect that selecting stocks on the basis of the past (their current market capitalisation) is a policy designed to protect the security of tenure of asset managers rather than to build the wealth of shareholders. Companies that are large and established tend to be internally complacent and inflexible. They are often vulnerable to assault by more ambitious and vibrant newcomers. — We are Growth stock investors. Such has been the preference for Value and the search to arbitrage away minor rating differentials that investors find it very hard to acknowledge the extraordinary growth rates and returns that can be found today. The growth that we are particularly interested in is of an explosive nature and often requires minimal fixed assets or indeed capital. We think of it as ‘Growth at Unreasonable Prices’ rather than the traditional discipline of ‘Growth at a Reasonable Price’. We need to be willing to pay high multiples of immediate earnings because the scale of future potential and returns can be so dramatic. On the stocks that flourish the valuation will have turned out to be derisorily low. On the others we will lose money. — We believe that it is our first duty to shareholders to limit fees. Both the investment management fee (0.30% on the first £4 billion of assets, and 0.25% thereafter – please see page 36) and ongoing charges ratio (0.36% as at 31 March 2020) are low by comparative standards but at least adequate in absolute terms. We think that the malign impact of high fees is frequently underestimated. The difference between an ongoing charges ratio of 0.36% and one of 1.5% may not appear great but if the perspective is altered to think of costs as a percentage of expected annual returns then the contrast becomes obvious. If annual returns average 10% then this is the difference between removing approximately 4% or 15% of your returns each year. Nor do we believe in a performance fee. Usually it undermines investment performance. It increases pressure and narrows perspective.

Evolution We first set out our Core Beliefs in the Annual Report of 2013 and reviewed the statement of these in 2018 to ensure that it still accurately captured how we approach investment. The original still stands, but inevitably our investment philosophy has evolved and no doubt will continue to do so. We therefore added the following: — We are optimists. In a world where limiting volatility and avoiding downside is the dominant investor mentality, we focus unashamedly on the drivers and implications of corporate success. Limiting volatility can make sense for an overall investment portfolio but we doubt the benefits of using equities to meet this objective. The asymmetric payoff structure (you can make far more if you’re right about a stock than you can lose if you’re wrong) is the fundamental attraction of investing in equity markets. Whilst we have long believed in the impact of a small number of exceptional companies, even we are surprised by how narrowly returns have been shown to extend within the market.

Our own research demonstrates that in the past thirty years approximately five per cent. of stocks have returned at least five-fold in any five-year period. Over longer time horizons, this power law is even more dramatic. Academic work on the past ninety years of US data shows that over half of the excess return from equities came from just 90 companies. Investors enjoy little (if any) reward for taking the risk of owning the median stock in the market. Instead it is the outsized impact of a small number of exceptional companies that dominate the payoff structure. — In this context we have defined our core task more narrowly: to identify companies that have sufficient opportunity to deliver such outlying returns and to own them for long enough without interference so that the return accrues to our shareholders. We previously noted our investment time horizon to be at least five years.

In practice, for businesses where our conviction has remained steadfast and our difference from the market view is clear, we have held the shares for far longer. Today eight of our top ten listed holdings have been held for more than five years and three have been held for more than ten. — Whilst listed equity markets currently remain the principal focus of our investments, the nature of capital markets has changed and our search for outliers has moved with it. Some of our most successful investee companies have benefited from (and indeed created) new growth models with dramatically lower financing requirements than has been the case historically. Access to online distribution has grown the addressable market for breakthrough businesses by an order of magnitude. The ability to harness third party infrastructure has drastically reduced the capital intensity of growth. This has made new companies less dependent on external financing.

As a consequence, their boardrooms are not dominated by early financial investors looking to realise their gains and these companies are remaining private longer. They are being selective about their shareholders and they are reluctant to accept the burdens that accompany public status. — We are determined to own the most promising Growth companies in the world. To maintain our opportunity set we have expanded our operations in private markets. This has little impact on our investment process. Access to fluctuating daily quotations for our holdings is more often a distraction than an advantage for a fund with permanent capital. We are preoccupied with company fundamentals and increasingly indifferent to a company’s private or public status. As access to the most promising private companies is dependent on relationships and reputation our task becomes more important, as it is much harder for our shareholders to invest directly.

Our scale and commitment to low costs allows us to do this without changing our fee structure. — As we make these investments we are providing more primary capital to businesses and directly funding investment in future economic growth. The role of public equity markets in providing such investment capital has diminished. Declining holding periods and frenzied speculation around newsflow is the norm. More insidiously, the demand for immediate returns pressures companies to pay out their cashflows to shareholders rather than investing in their future. Professional management teams incentivised to maximise share prices have been happy to oblige, resulting in a declining proportion of cash flow being devoted to research and development or capital expenditure across the market. Such investments are needed more than ever in a world that is experiencing rapid change. Our holdings in public markets are heavily focused on companies whose ownership or management structure allows them to ignore such demands. — Whilst we expressed our scepticism of the value of routine information in our original document, we didn’t articulate where more useful counsel might lie or suggest that we ought to play our part in ensuring its existence.

Some of you may have attended the book festivals we sponsor or read some of the shortlisted titles for the Baillie Gifford Prize for Non-Fiction. We have invested in supporting interesting authors and sought to enhance our investment thinking with their insight. We have built relationships with academics and universities. We are funding research which we hope will inform our long run thinking on companies. At the same time, our time horizon is facilitating a different type of relationship with the management teams with whom we invest. They find little of value or interest in the endless cycle of quarterly updates. They delight in having less frequent and more in-depth discussion about the longer-term development of their business. Getting to listen to the entrepreneurs and visionaries that have built some of these outstandingly successful franchises is a hugely valuable input to our investment approach.

— In turn, this is challenging us to re-evaluate our long-held belief that there is no opportunity for informational advantage in markets. Such inputs seem largely neglected in a world where ‘colour on the quarter’s numbers’ is the main preoccupation of so-called investors. For instance, we first invested in Alibaba back in 2012 as a private company. Through our patient ownership and ongoing support, we have earned the opportunity to speak with the company’s senior management. We believe the growth of the Chinese consumer economy is a transformational force in the global economy and there is no one better placed to help us understand its implications. — Dialogue with management is a valuable input but the relationship extends in both directions. The investment management industry has ceded much of its role in the governance of companies to the vested interests of activist investors. We must do better. Ensuring strong governance and engaging with our holdings on matters of substance is our responsibility. More than that, it is essential if we are to be seen as attractive shareholders by our investee companies and if we are to maximise the returns we can generate on your behalf. Tom Slater and James Anderson Joint Portfolio Managers