Boohoo bites £373m Baillie Gifford UK Growth Trust

Baillie Gifford

The £373 million Baillie Gifford UK Growth Trust reported on Friday its net asset value (NAV) per share increased 2.8% in the six months to October 31, 2021, compared to a 5.4% increase in the FTSE All-Share Index, total return, over the same period.

The share price of the closed-end fund fell 5.6% over the six months on a total return basis as the shares moved from a premium of 2.8% to the NAV per share to a discount of 5.6%.

The trust said Manchester online fashion giant Boohoo was one of the “main detractors” from performance in the period, and not owning major oil stocks also hurt the fund.

Four new stocks were bought by the fund in the period: pharma-tech company Exscientia; online wine retailer Naked Wine; DNA sequencing developer Oxford Nanopore Technologies; and online money transfer platform Wise.

Three stocks were sold: marine and energy equipment and services provider James Fisher & Sons; defence business Ultra Electronics; and Jackson Financial following its spin-out from Prudential.

“As a reminder, we don’t agonise (or crow) over short-term performance and instead remain focused on building conviction in the long-term investment potential of companies,” wrote Iain McCombie and Milena Mileva, managers of the fund.

“We think that this will be the key determinant of long-term investment success for shareholders which really matters.

“Since taking on management of the portfolio at the end of June 2018, the NAV is up 23.5%, the share price 25.7% and the FTSE All-Share Index 10.6% (all on a total return basis).

“The main detractors from performance in the period were … Renishaw (the founders were unable to find a buyer who shared their long term vision for the company) and Lancashire Holdings (the insurer announced higher than expected storm losses).

“Not owning the major oil stocks in the period was the other notable detractor.

“In terms of positives, an agreed bid for Ultra Electronics resulted in a large surge in its share price, while encouraging operational updates meant strong share price performance from St. James’s Place, Ashtead and Volution.

“The post-pandemic disruption of global supply chains and the rising spectre of inflation have been the topic du jour in financial markets for much of this year. 

“Our investment style is resolutely bottom up; trying to understand the growth and competitive dynamics of individual businesses, so we have little confidence in making accurate macro-economic forecasts and will certainly not try to trade our way around such issues.

“We are, however, alert to the potential for a major change in conditions and try to incorporate that as part of our deliberations on individual companies.

“It is important to frame issues, such as supply chain disruption, in the context of our long-term approach; ultimately, this ought to be a temporary phenomenon and we are more interested in identifying the kind of deep, enduring changes which can enable businesses to deliver sustained above average growth.

“For example, elevated freight costs are certainly a headache for Boohoo in the short-term and impacted the share price.

“However, the pandemic has also only reinforced the divide between the structural winners and losers in fashion retail and we think Boohoo is resolutely in the former camp.

“Whilst the market frets over temporary cost headwinds and post-Covid-19 normalisation, we are more interested in the long-term investments Boohoo has continued to make in its multi-brand platform, investments which are significantly expanding its total addressable market.

“The impact of supply chain disruption is not uniformly negative.

“Some businesses and management teams can use periods of turbulence to their advantage, leverage their competitive strengths and put pressure on the competition.

“Good examples of this in the portfolio are the kitchen supplier Howden Joinery (a highly integrated manufacturing and distribution operating model has enabled it to maintain industry leading stock availability), clean air solutions provider Volution (where the management team was nimble in anticipating supply chain bottlenecks and pre-emptively built up its inventory) and 4imprint (whose long-standing and cooperative relationship with its suppliers is helping it maintain its differentiated level of customer service).

“In all these cases, there is clear evidence that the companies are gaining market share against their competitors.”