Mr. Slater, you’re a proponent of long-term investment strategies. How can equity investors find companies that generate exceptional returns on a multi-year basis? 

Investors need to develop approaches and views that differ from the mainstream. However, the market tends to be very good at following precedents. If certain areas of the economy have developed well and individual companies in those areas have managed to build big market capitalizations, that creates a playbook which investors then like to use. They are happy to pay upfront just to gain access to the next successful online network business. However, it’s important that a company offers a new solution that can be truly transformational. In several areas, the market hasn’t fully realized what transformation means.

Could you expand on that?  

Our patterns of consumption are changing, an effect that has been accelerated by the pandemic. Whereas people previously went grocery shopping or ate at restaurants, they have embraced online delivery services to a much higher extent now. As the volume through the online channel increases, the service improves and delivery times shorten. Due to higher efficiency, it has become possible to offer additional products beyond prepared food. In Europe, there are companies like Hellofresh and Delivery Hero that possess outstanding growth potential. Still, investors haven’t been buying into their prospects to the same degree that they did for pioneers from China. There, the delivery trend gained traction much earlier because of the rapid growth of the middle class, whose habits aren’t as entrenched as in developed countries.

How will the way delivery services operate change?  

Innovations like autonomous driving are complementary to the delivery trend. The technology is advancing rapidly and there are several interesting developers active in this segment. We own shares in Nuro, a company whose vehicles carry goods instead of humans. It’s much easier to develop autonomous cars for deliveries as they can be optimized for the safety of people on the outside without having to take into consideration the safety of people on the inside. In addition, passengers use cars to travel for longer distances, while in delivery they operate at shorter and clearly specified ranges. Therefore, the Artificial Intelligence faces a less challenging environment with copious amounts accessible data, enabling a much faster deployment of the vehicles.

Much in the same vein, which potential do drones offer to investors?  

Drone technology definitely has the potential to become revolutionary. We own Zipline, an American company that develops and operates delivery drones with a range of up to 100 kilometers. Delivery by air makes a lot of sense in regions where the infrastructure is inadequate, especially for goods with a short shelf life. Using drones can bring down costs significantly. Currently, they are mostly deployed in sub-Saharan Africa to deliver medical products and blood supplies. In Rwanda, 75% of the blood deliveries outside of Kigali, the capital city, use Zipline drones. The technology is now making its way back to western economies – not only for medical supplies but also for general merchandise deliveries.

Nuro and Zipline are privately held companies. Don’t you worry that large, publicly traded players from the logistics and commerce sector will eventually push these pioneers out of the market?   

It’s true that the incumbent industry leaders will eventually adopt new technologies or processes that are evolutionary. However, if a company that is new to the market has a business model that is revolutionary, established players will find it much harder to adapt to that. The automotive industry is a prime example of that, as Tesla completely turned the market on its head and traditional carmakers have been struggling to keep up.

Baillie Gifford first invested in Tesla in 2013 in defiance of many skeptics. The company still represents one of the largest positions in the Scottish Mortgage Investment Trust. What are the main factors that assure you its share possesses further upside potential?  

Tesla have always had a great vision and the drive to deliver products that customers really like. The challenge for them was to implement that at scale, and they’ve shown the ability to do so over the past years. The ramp-up of the Model X that started in 2015 was a sign of that, and the recent success of the Model 3 in Europe only underlines their potential. Tesla delivered on their first Model 3 production facility in China, while the gigafactory in Berlin and the second facility in China are coming through on budget and schedule. In addition, development for the company’s AI chips is progressing fast and they are demonstrating a striking ability to drive margins through these solutions.

How will the mobility megatrends discussed so far affect suppliers in the automotive industry?  

Over the next decade, the processing power required in vehicles will increase massively. This will probably translate into chip volumes growing for a long duration of time. The challenge with semiconductor companies has always been that the industry is deflationary and very competitive, so software developers have accrued more value than chip makers. Now, semiconductor manufacturers face very interesting opportunities. We are invested in ASML because we believe the entire global chip industry depends on them as a supplier, while Nvidia looks promising because it has specialized in producing chips for machine vision systems and AI applications. Meanwhile, a greater geographic fragmentation of the industry has become apparent. Therefore, we also invest in Horizon Robotics, a company that’s producing chips for autonomous vehicles in the Chinese market.

How has the pandemic contributed to the fragmentation of industry you mention?  

The trend that has been established during the Covid crisis has definitely led to greater nationalism. The world is dividing into spheres of influence, one that’s controlled by the US and one that revolves around China. This development creates some significant challenges as many of the companies that we invest in have profited massively from globalization. Large e-commerce companies face a difficult task in navigating between the different ecosystems. Markets such as India will eventually fall into one of the two spheres – thus, the competition between Amazon and Alibaba is becoming much more intense there.   

Many other trends have accelerated during the pandemic. To what extent does this worry you?

Many market participants talk about the economy opening up again and everything going back to normal. However, the second order effects of the pandemic have become apparent through the current supply chain disruptions and labor shortages – and there will be third and fourth order effects. People have had a time out and reassessed their goals in life. In the long term, this will have a massive impact on the labor force, as employees reduce their working hours. In the meantime, the situation is also becoming more uncertain for companies who have experienced almost universal adoption of their services in the past two years. It’s impossible to predict how exactly this will affect the markets. For us as investors, it’s about finding the companies and management teams that can navigate this transition and drive change in the future. 

You’ve had success as early investors in Amazon. Now, the biggest position in the Scottish Mortgage Investment Trust is Moderna, whose share price has already risen by over 150% over the past year. How does your approach to this stock differ from the strategies of other investors?

Several stocks that we regard as promising have already performed strongly over the past two years. However, investors are trading them on the short-term momentum in their businesses rather than on any interest in the long-term opportunities they offer. Moderna is a very good example of that: The market focuses on the company’s Covid vaccine story, not the broader applications of messenger-RNA technology. The share price dropped massively in early November because Moderna reported that revenues from the vaccine were going to be less than what analysts expected. This happened partly due to production delays and partly due to allocating existing products to low-income countries. None of that has anything to do with our investment thesis, which revolves around the potential of transforming the disease-prevention space through mRNA.

However, interfering with the human genome is still highly controversial. Will ethical concerns prevent mRNA from being employed for prevention of genetic diseases on a larger scale?  

Editing a person’s DNA in such a way that those edits will then be passed on to the next generation is highly controversial. That’s not what mRNA does. Instead of making fundamental changes to the human genome, mRNA delivers a message to a human cell in order to generate a protein and repair faulty mechanisms within a patient’s body. Immunization programs save millions of lives every year, but the prevention of infectious diseases remains an unmet need for a vast number of people worldwide. mRNA can contribute to a solution for this problem.

How will the de-globalization effects of the pandemic affect biotech companies in particular? 

During the first wave of the Covid crisis, an element of vaccine nationalism gained hold. It became evident during the pandemic that an underdeveloped domestic biotech sector can become a national security risk. Thus, a national imperative for companies to build out their domestic capacities will likely follow from that, as people always respond to the last crisis rather than think about the next one. We believe that healthcare companies should rather focus on their returns and scale of development globally as we move out of the crisis. 

A significant part of your strategies at Baillie Gifford revolves around the growth prospects of the Chinese tech industry. What are the main risks associated with this investment focus on a long-term basis?

China’s political structure as a one-party state is difficult to understand for us as Western assetmanagers. There is always the risk of state intervention as Beijing’s antitrust efforts have led to some dramatic moves against individual companies. For investors, these regulatory challenges have been painful in the short term. However, the fact that the Chinese government is in a position to act decisively without concern for other stakeholders in the system can be positive as it leads to a reduction in power for monopoly platforms. At the same time, the scale of opportunity and the entrepreneurial culture in China are unique.