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Walter Scott’s Thirteen Questions to Loudon and Scott

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In this series of short profiles, we ask leading fund managers to defend their investment strategies, reveal their views on cryptocurrencies, and tell us what they would never buy.

This week’s interview subjects are Lindsay Scott and Paul Loudon, investment managers at Walter Scott & Partners and part of the investment team that sub-advises the Morningstar Silver-rated BNY Mellon Long-Term Global Equity Fund and the five-star rated BNY Mellon Global Leaders Fund.

Which sectors do you think will be the most promising in 2023?

Walter Scott’s investment team are fundamental, bottom-up stock pickers, meaning that our daily research identifies the best companies to enhance our portfolio, rather than the merits of their sector or geography. While this approach can be counter-cyclical, we invest with a long-term horizon, looking for world-class companies that we believe can generate superior real returns over the next five to ten years and beyond.

What are the biggest economic risks today?

Lindsay Scott: I think we can all agree that a military conflict across the Taiwan Strait would be economically devastating. Taiwan has a large presence in the global semiconductor supply chain, so manufacturing of cars, industrial equipment, medical supplies, smartphones and other products that use semiconductors would be devastated not just in China and Taiwan, but around the world.

Paul Loudon: Looking back over the past year, we are concerned by the sudden nature of the increases in interest rates we have seen globally and the multiple delayed effects that have yet to surface. It is clear that the global banking system was stressed earlier this year, but we do not know what hidden risks and headwinds may still be lurking beneath the surface.

Please explain your investment strategy.

Throughout our 40-year history, our philosophy as a bottom-up, non-benchmark-driven, research-based investor has remained constant. In particular, the BNY Mellon Long Term Global Equity Fund seeks to provide investors with long-term real rates of return by investing in a high-conviction portfolio of 40-60 concentrated blue-chip companies. Throughout our strategies, we invest with the intent to buy and hold shares for a long-term investment horizon in order to harness the power of compound growth and provide investors with exposure to the highest quality companies the global markets have to offer.

Who are some investors you admire?

LS: I worked at Walter Scott & Partners for 20 years and learned everything I know from the firm’s founders, Walter Scott and the late Ian Clark.

PL: Chuck T. Acklet, François Rochon and Peter Seylern are three career investors with a similar philosophy of long-term, quality growth investing to ours, and I enjoy reading their views.

What is your favorite “forever stock”?

LS: Novo Nordisk is a specialty pharmaceutical company with a strong tradition of research and development. This year marks the company’s 100th anniversary, and since then the company has established itself as a pioneer in the diabetes field, a tradition that continues today.

PL: Edwards Lifesciences is an American medical technology company that thinks very long term and reinvests a significant percentage of its revenues into research and development. The company is looking to solve an underserved problem by treating aortic stenosis, a disease that is only going to become more prevalent as the global population ages.

What would you never want to invest in?

We never invest in companies that are unprofitable or not currently growing. After all, we are not interested in investing in companies that do not have a proven, profitable business model or attractive unit economics in the hope that one day the company will “maybe” become profitable.

Growth or value?

We are growth investors at heart. But like many other investors, you could say we maintain a GARP (Growth at a Fair Price) ethos. We are always looking for companies that demonstrate sustainable, high-quality growth over the long term.

A house or a pension?

Pensions. A home is a really important asset and for many people, it’s the most important asset they’ll own in their lifetime. But even if you had some extra cash, you probably wouldn’t want to buy a home with the money you had. We always stress the importance of reinvesting that money in the stock market and optimizing your available pension contributions.

Cryptocurrencies: Great or Bad?

While we want to be optimistic about future disruption, crypto assets are still not well regulated, there is not enough reliable and accessible information, and bad actors still exist in the space. From an investment perspective, crypto assets are also unproven as an inflation hedge or stable store of value. Blockchain is an exciting technology that certainly has a place in the financial sector, but it has yet to find its footing.

What can be done to improve diversity in fund management?

We believe that education is everything, and that it has to be at the grassroots level. After all, open-minded employment will be limited if a significant portion of the current workforce is still reluctant to talk about and learn about investing. The concept of investing can be really scary, and investment management can seem like a whole other world. That’s why we think it’s important to talk to young people from different backgrounds, in schools and universities, about investing and the amazing opportunities that everyone has access to through a career in fund management.

Have you ever worked with a company and been particularly proud (or disappointed) with the outcome?

Our 20-person team thoroughly debates companies to ensure that only those that meet our strict investment criteria and standards are added to the portfolio, and we typically only invest in companies with strong ESG profiles. That said, we are open to getting involved when there is a clear opportunity to effect positive change.

What is the best advice you have ever received?

LS: “If you can’t understand it, don’t invest in it.” No one is going to praise you for investing in a complex company. You always have a better chance of success by investing in a company that’s easy to understand.

PL: Taking inspiration from Benjamin Graham’s “Mister Market” fable, I think it’s helpful for investors to interpret the market not as an all-knowing, all-consuming, incredibly rational machine, but rather as a manic-depressive agent that can swing quickly from manic euphoria to totally irrational pessimism.

What would you be doing if you weren’t a fund manager?

LS: When I applied to college I was planning to go to med school, but I decided to focus on biology instead. And now as a generalist investor I have the opportunity to meet with pharmaceutical companies. Outside of investing, I love learning about the pharmaceutical industry and am amazed at how science is advancing.

PL: Realistically, my parents are lawyers so I would probably follow in their footsteps, but if I had to use my imagination, I would like to be a professional golfer.

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