The Guardian (UK): Your money in their hands: “Investors own a small part of one of Russia's biggest companies - all part of a risky strategy.”: “Anderson thinks the stockmarket is seriously under-pricing Gazprom in comparison with Western energy companies such as BP or Shell.”: Saturday November 5, 2005

Patrick Collinson reports

You are unlikely to have heard of Gazprom, yet it's the biggest company in Russia, producing 90% of the country's gas, generating 50% of its electricity and making up 8% of its total GDP.

And if you're a shareholder in one of the UK's biggest investment trusts, Scottish Mortgage, you own a small part of it.

Gazprom is one of the biggest holdings in Scottish Mortgage, a trust with £1.6bn under management, run by James Anderson of Baillie Gifford.

Anderson thinks the stockmarket is seriously under-pricing Gazprom in comparison with Western energy companies such as BP or Shell. Gazprom paid £7.4bn to take control of Chelsea boss Roman Abramovich's oil firm Sibneft, and now has a stockmarket capitalisation of around £70bn, equal to the GDP of Ireland last year.

But even at this level, it means its huge oil reserves are in the books at just $1 a barrel. Gazprom has also signed a huge multi-billion pipeline deal bringing Russia's gas under the Baltic Sea to a German port and then on to Britain, replacing our dwindling North Sea reserves.

The drawback is that Gazprom is increasingly seen by analysts as a vehicle controlled by President Putin with the ultimate aim of taking Russia's greatest assets - its oil and gas reserves - back into state hands. It was also Gazprom that ultimately gobbled up Yukos, the company once run by Mikhail Khodorkovsky, sentenced to nine years jail this year for tax evasion and fraud.

At Scottish Mortgage, Anderson thinks the Putin fear factor is misplaced. "Who do I worry about losing value? Gazprom supported by Putin; or BP which is relying on TNK (Russia's third largest oil firm) a company that Putin doesn't like.

"Which is more risky? The management also owns $20bn worth of Gazprom stock and has a huge self-interest in maintaining the share price." Anderson's willingness to invest in what are elsewhere seen as risky overseas assets, has helped propel Scottish Mortgage to becoming one of the best-performing global investment trusts. Over the past year its share price is up 35%, compared to gains of 20%-28% at its chief rivals, Foreign & Colonial, Witan and Alliance Trust.

It wasn't always this way; when Anderson took over the trust in early 2000 the share price was just about to begin a precipitous slide from which it is still to fully recover. Like many other global general trusts, it had over- invested in technology and internet stocks and took a hammering during the bear market.

But it has recovered better than most and Anderson says he's taking the trust back into tech stocks. He particularly likes Samsung and, in total, the trust has a quarter of its holdings in the Asia Pacific region.

However, he is keen to avoid the geographical asset allocation approach favoured by other big generalist investment trusts. He thinks that globalisation means that companies have less and less in common with the markets in which they are listed. This is particularly true of Britain's biggest companies, such as Vodafone, Glaxo and BAT (all in his top ten holdings) which make most of the profits outside of the UK.

The fund has historically invested around half of its cash in UK companies, and still has 42% of its holdings in London-listed stocks. But Anderson claims that by focusing on UK stocks which make their earnings overseas, it is perhaps the most "genuinely global" of the big investment trusts - 18 of its top 30 equity holdings are listed overseas and 17 countries are represented.

He has also cut the number of holdings in the fund to around 90, compared to more than 160 when he took over in 2000. Part of the reason behind the cull is that he believes that the trust was in danger of becoming little more than an index tracker, just replicating the performance of a FTSE index. "We, like many big investment trusts, were becoming very much like an index fund. We were turning from being a good value, active fund to a rather expensive index fund."

But one thing that Anderson has had trouble shaking off is the trust's persistently high discount.

The shares are currently trading at around 18% to the fund's underlying net asset value, with the discount moving in a narrow range of 17% to 21%.

Other trusts have initiated share buybacks in a bid to close the discount, a path that Scottish Mortgage has not taken, but Anderson says the board is "open-minded" about such a move.

The board of Scottish Mortgage might also want to consider a name change. The fund is based in Scotland, but has nothing (any longer) to do with mortgages. It started out life lending money to rubber planters in Malaya but those days are now long gone.

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