Morningstar - Q2 2021 - 21

proprietary products in their universe of funds.
The CSA highlighted proprietary products as
a potential conflict of interest in its guidance. The
regulation also requires that all conflicts be
disclosed and addressed in the best interest of
the client. In further guidance, the CSA suggested
that firms have a process to demonstrate that
they are competitive in the marketplace.
Registrants that deal only in proprietary products
must also disclose this fact clearly before
entering a relationship with clients.
Though the regulation falls short of prescribed
advisor titles, under the misleadingcommunications category, the CSA denounced
the use of corporate officer titles for advisors
(such as vice president) unless the individual is
indeed a corporate officer of the firm.
The requirements for conflicts of interest will
begin to be enforced on June 30, with the rest of
the regulation taking effect Dec. 31.
From Morningstar's perspective, the Client Focused
Reforms are a much-needed set of changes
and a large step in the right direction for bettering
the experience of Canadian investors.
Ian Tam, CFA, is director of investment research at
Morningstar Canada.

A Star Manager and
Succession
GREATER EUROPE

United Kingdom
James Anderson, manager of the GBP 16 billion
Scottish Mortgage Investment Trust SMT:UK,
will leave the business next year. After nearly
40 years at Baillie Gifford and 21 years at
the helm of Scottish Mortgage, the veteran investor
will step back from the trust in April 2022.
Tom Slater, who has comanaged the trust with
Anderson since 2015, will continue as
manager, and Lawrence Burns has been named
deputy manager.

Despite this careful succession planning, investors
will doubtless be disappointed. Anderson has
become synonymous with the success of the trust
and its phenomenal track record.
" James Anderson has championed long-term,
high-conviction investing, " says Jonathan
Miller, head of UK Manager Research with
Morningstar. " A number of key positions held today
have at some point seen falls of more than
50%, but Anderson and his colleagues stayed
committed, with a close eye on the disruption and
change these businesses can bring. Never
one to mince his words, Anderson is part of a
cohort of long-standing partners at Baillie
Gifford who have been key to instilling the firm's
investment philosophy. "
Scottish Mortgage has gained a reputation for
being able to spot fast-growing disruptive
businesses and for bringing the opportunity
to invest in unlisted companies to retail investors
at a low cost-the trust's ongoing charge
is just 0.36%. Morningstar analysts downgraded
the trust's Analyst Rating from Gold to Silver
in May 2020 over concerns about the cost
of its debt, which pushed the representative
annual charge up from 0.36% to 0.77%.
However, Morningstar analyst Robert Starkey
commended the trust at the time for
" the combination of a best-in-class team with
a well-executed process. "
With a global mandate, the trust has had the
freedom to invest across the globe and the
market-cap spectrum. Some of Anderson's most
notable calls were investing in Chinese
Internet giant Alibaba BABA and music streaming
service Spotify SPOT before they listed on
the stock market. He has also long held a large
stake in Tesla TSLA, a stock that surged
700% in 2020. He first invested in Amazon.com
AMZN in 2004; the company's shares
have grown from around $50 to more than
$3,028 since then.
First launched in 1909, Scottish Mortgage
has delivered outstanding long-term performance,
with 10-year annualized returns of 24.9%
through mid-March. Since Anderson took the helm
in 2000, the trust has delivered a return of

1,560% compared with 269% for the MSCI
World Index.

Scottish Mortgage was also the best-performing
Morningstar-rated investment trust in 2020,
with gains of 107.46% in its share price. Its large
stakes in disruptors and tech stocks thrived
in a world of lockdowns, home schooling, and
remote working. In addition to Tesla, Amazon, and
Alibaba, the rest of its top 10 holdings are
also well placed to benefit from the COVID-19 era,
including fast-food app Delivery Hero DHER:DE
and biotech company Illumina ILMN.
Investors in the trust will now be wondering
whether to stick with it or depart when
Anderson does-indeed, the share price dropped
1.8% as the market opened the day after the
announcement. When a fund manager leaves
to join another company or set up his own,
investors have the option of following.
Anderson's departure from the industry presents
a different question. And Scottish Mortgage
is rather a unique proposition; there
aren't many obvious alternative funds with a
comparable mandate.
The yearlong management transition ahead is
an excellent example of how succession
planning should be done in fund management.
It isn't a surprise announcement or an abrupt
decision. Slater has been immersed in its
strategy since 2015, and investors will have more
than a year to get used to the idea before
Anderson actually departs. The investment trust
structure is a benefit in this situation for
those investors who decide to stay for the long
term: Even if others flee, the manager will
not have to deal with outflows, because there are
a fixed number of shares in issue. Instead,
the share price goes down.
Nonetheless, Slater is being handed something
of a poisoned chalice. Investors have become
very used to enjoying phenomenal returns
from this fund, and it hasn't finished a discrete
calendar year in negative territory since 2011. That
can't continue forever. Market exuberance
and the current tech euphoria will, at some point,
come to an end. If that happens in the first
few years of Slater's tenure as lead manager,

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