78 Finance & economics The Economist November 20th 2021
lies on estimates of the mysterious “output
gap”—or the difference between gdptoday
and a measure of the economy’s poten
tial—the group suggests tweaking some of
the inputs to that calculation. Assuming
more slack in the labour market than the fi
nance ministry does, for example, would
raise the spending limit. Conservatives
dismiss the idea as “Pippi Longstocking
economics”. But it involves no legal jig
gerypokery and rests on assumptions no
more outlandish than those already in use.
“No one understands these bureaucratic
methods, which is why they are politicallyattractive,” says Jens Südekum of Heinrich
Heine University in Düsseldorf. They
could add €20bn of annual spending.
More conventional sources may offer
fiscal crumbs. A new global corporatetax
deal could raise a few billions, as could the
legalisation and taxation of cannabis,
which is likely under the next government.
euclimate funds might offer a bit more.
The odd subsidy might be cut. And the gov
ernment anyway has a tendencyto under
estimate projected tax revenues; 2020
brought in €11.4bn more than expected (see
chart on previous page). These will notflood the coffers, but every little helps.
Each of these proposals, to varying de
grees, may make it into the coalition agree
ment promised by the end of November.
The absurdity of some of Germany’s finest
economic minds concocting complex
schemes to escape the country’s selfim
posed limitations is not lost on all of them.
“It’s ridiculous that so much time is spent
trying to find a way around rules we have
set ourselves,” says Philippa SiglGlöckner
of Dezernat Zukunft. Clicking on “one
weird trick” ads is rarelywise.But Germany
has left itself little choice.nT
hehomeoftheScottishMortgage
Investment Trust (smit) is an office a
mile down the road from Edinburgh
Castle. Aside from that it has little to do
with Scotland, and nothing at all to do
with mortgages. This makes it an apt
flagship for Baillie Gifford, a British
investment manager that prides itself on
its unconventionality. Baillie Gifford’s 12
trusts and 33 funds together oversee
assets worth £346bn ($466bn). That puts
it well below the heavyweight category
for global fund managers, whose mem
bers hold assets in the trillions. Yet the
firm and its star vehicle hold wider les
sons for other fund managers.
Among the previous jobs of members
of Baillie Gifford’s investment team are
ballerina, soldier, doctor and concert
pianist. One partner likes to tell potential
clients that the firm’s equityfund man
agers aren’t much interested in the
stockmarket. Another describes her
enthusiasm for a founder who is so
focused on developing a breakthrough
medical technology that he refuses
pointblank to discuss what his company
could be worth. But even those investors
who insist on vulgar beancounting will
be impressed by the fact that £1,000
invested in the smitten years ago would
be worth around £11,600 today. By con
trast, the same amount invested in the
ftse AllWorld index of stocks would be
worth around £3,800.
The author of this success is James
Anderson, who took the helm of the smit
21 years ago and will step aside in April.
The iconoclastic Mr Anderson partici
pates in a long tradition of fund manag
ers pouring scorn on their own industry.
Conventional asset management, he said
in his latest annual review of the smit, is
“irretrievably broken”. Markets are in
thrall to the “nearpornographic allure ofnewssuchasearningsannouncements
and macroeconomic headlines”.
Mr Anderson has used his tenure to
mould the smitto his liking. When he
took over, the trust, then 91 years old, held
shares in hundreds of listed firms, around
half of which were British. Today it invests
in a few dozen public and private com
panies based all over the world. The mete
oric rise in the trust’s share price was
fuelled by backing companies like Aliba
ba, Amazon, Tencent and Tesla early and
then hanging on to them. Along the way,
the amount of money Baillie Gifford over
saw grew by a factor of ten.
The challenges the firm faces as Mr
Anderson leaves are emblematic of those
that confront the wider industry. The first
is how to prevent a run of extraordinary
performance from reverting to the mean
and becoming pedestrian. Under Mr An
derson, the smitbroadened its horizons to
include new geographies and unlisted
companies. It also placed bets on firms
with unconventional business models
and maverick founders that put other
investors off. That does not mean that theroute to future success lies in finding
more privately owned companies run by
irascible bosses. The smit’s outperform
ance in fact came from its early recogni
tion of trends, such as the growing domi
nance of internet retailers and the in
creasing importance of electric vehicles.
There is no set of rules for arriving at
such insights, and so no guarantee of
repeating them.
The second challenge is to square the
opportunities for returns with investors’
demands for social responsibility. The
firm’s “health innovation” strategy at
tempts to do this, by betting on a hoped
for megatrend that will deliver both
profits and improved medical care. But
elsewhere in Baillie Gifford’s portfolio is
bgi Genomics, a Shenzhenbased firm. It
is part of a group that had two subsidiar
ies placed on an American watch list last
year for “conducting genetic analyses
used to further the repression of Uyghurs
and other Muslim minorities” in Xin
jiang, according to the Commerce De
partment. Even the most quixotic aim
can end up in a moral quagmire.
The final challenge is timeless and
universal: succession. In announcing Mr
Anderson’s departure, Baillie Gifford
emphasised continuity. His replacement,
Tom Slater, has managed the smitjointly
with him since 2015. The philosophy and
investment process of the trust, it in
sists, will not change. Yet it is losing the
leadership of an uncommonly prescient
investor. Mr Anderson himself has writ
ten of his waning enthusiasm for Ama
zon as Jeff Bezos, its founder and ceo,
stepped aside and it ceased to feel like
“Day One” at the company. Having been
founded in 1908, Baillie Gifford’s first era
passed a long time ago. As another day
draws to a close, replicating its successes
will be a tall order.ButtonwoodSuccess and succession
A visionary British firm illustrates the quandaries of fund management