Baillie Gifford US Growth Trust Has 36% Private Firms

Baillie Gifford

The £600 million Baillie Gifford US Growth Trust plc reported that the fund’s share price and net asset value (NAV) returned -4.6% and -2.1% respectively in the six months to November 30, 2022, compared with a total return of 5.4% for the S&P 500 Index.

Since March 2018, the fund’s launch date, to November 30, 2022, the trust’s share price and NAV have returned 59.4% and 91.5% respectively versus a total return of 103.4% for the S&P 500 Index.

“We have a long-term approach and would ask shareholders to judge performance over periods of five years or more,” said the fund.

At the end of November, the fund held positions in 24 private companies which comprised 35.6% of total assets.

The trust made two new purchases over the last six months, Roblox and Sweetgreen, and made two complete sales during the period — Teladoc and Peloton.

“Market conditions remain challenging,” said Baillie Gifford US Growth Trust.

“The Federal Reserve’s attempts to bring down inflation through aggressive interest rate rises has led to a re-pricing of growth stocks.

“And whilst there are now some signs of inflationary pressures abating, the Federal Reserve has maintained a hawkish stance, leading to fears that they will go too far with rate rises and tip the economy into recession.

We do not believe we can add value by making macro predictions or second guessing the Federal Reserve. Our approach remains resolutely bottom up.

“Our aim is to identify the exceptional growth companies in America and hold on to them for long periods of time. In doing so, we hope to capture the upside inherent in their business models.

“We believe this is the right approach for long-term investors because, whilst share prices and fundamentals can become detached in the short-term, over the long-term they are strongly correlated.

Of course, for companies to reach their long-term potential they must have the resilience and adaptability to navigate the inevitable macroeconomic, internal and competitive challenges that they will face along the way.

“We believe our portfolio companies are in aggregate well placed to manage through a more challenging environment given the strength of their competitive positions and corporate cultures.

“Indeed, we place a lot of emphasis on culture in our research and, in our experience, companies with distinctive cultures tend to be more durable and adaptable than average.

The reporting period has been one of a contrast between weak share prices and strong fundamental progress in many of our holdings.

“As we have said in the past, we believe the world is going through a period of almost unprecedented change, driven by the convergence of a multitude of technologies such as the internet, mobile devices and machine learning.

“The associated disruption was initially concentrated in a couple of big and important sectors, like retail and advertising, but it seems to be speeding up and spreading out.

“Over the last six months, whilst the market has been preoccupied by macroeconomic and geopolitical risks and uncertainties, our portfolio holdings have continued to innovate and drive progress across a wide range of sectors of the economy.

Take healthcare as an example. We have owned Moderna in this portfolio since the company’s IPO in December 2018, well before the start of the pandemic.

“We were enthusiastic because we thought Moderna’s mRNA technology had the potential to be a true platform and tackle a broad range of diseases.

“The development of a vaccine during the coronavirus pandemic served as proof of concept for the technology. It also accelerated Moderna’s route to market and helped build the company’s financial strength.

“However, as encouraging as it was for the platform hypothesis, the Covid-19 vaccine was just a single indication.

In recent months we have had further evidence to support the hypothesis that mRNA has broad therapeutic potential. For example, at its R&D day back in September, Moderna published encouraging early-stage data in two rare diseases.

“And then in December, it released phase 2 data from its personalised cancer vaccine trial, which is being run in collaboration with Merck.

“The trial showed that the combination of Moderna’s mRNA drug and Merck’s drug Keytruda reduced the risk of cancer recurrence or death by 44% compared with Keytruda alone in melanoma patients. This is a truly remarkable result and speaks to both the power and flexibility of Moderna’s mRNA technology.

“The company expects to move this drug into phase 3 trials in 2023 and it will also expand its efforts to study additional tumour types beyond melanoma.

“It is difficult to overstate the significance of this development for Moderna and for patients. This new data indicates that we are moving from a world of spaghetti at the wall drug development with low probabilities of success to one of true repeatable technology platforms where learnings are carried across from one drug to the next and success begets success.

There have also been interesting developments at one of our holdings in the education sector. Duolingo, the maker of the world’s most downloaded language learning app, uses data and machine learning to deliver effective, engaging and personalised language lessons.

“The app benefits from a powerful data flywheel. The more users who use the app, the more data the company collects, the better the lessons become.

“Despite this, until recently, founder Luis von Ahn thought we were still over a decade away from the point where the app would be more effective than having a human tutor.

However, recent breakthroughs in generative AI, the field of AI associated with text and image generation, have caused him to reassess this and he now thinks Duolingo may be able to match human tutors within five years.

“Historically, personalised tuition was reserved only for those of the greatest means. However, Duolingo is now well on the path to changing this and democratising access to tailored education.

Just as Duolingo has been democratising access to education, the company’s largest holding SpaceX has been helping a larger percentage of the world’s population gain access to fast internet via Starlink. Starlink is an internet service powered by a constellation of low-earth orbit satellites.

“SpaceX’s reusable rockets have made such a service economical for the first time. It is easy to take fast internet for granted if you live in an urban area but more than 90% of the earth’s surface remains uncovered by wireless networks.

“Starlink promises to deliver fast internet just about anywhere on earth. Furthermore, as the service is space-based rather than land-based, it is less susceptible to interference, as demonstrated during the war in Ukraine. Starlink is scaling rapidly, and in December SpaceX announced that it had acquired its one millionth subscriber.

These three developments represent just a small snapshot of the progress that is being made across the portfolio. During challenging times like these it is easy to become distracted by share price volatility and short-term macro uncertainty, but it is innovations like those mentioned above which matter most for long-term investors.

We made few changes to the portfolio during the reporting period. Turnover has been low even by historic standards. This partly reflects our conviction in existing holdings. Most of the stocks in the portfolio are executing well and we remain confident in their long-term potential.

We made two new purchases during the period. We took a holding in gaming platform Roblox. We have been researching the company since before its IPO and used recent share price weakness as an opportunity to initiate a holding.

“We also bought a small position in salad restaurant chain Sweetgreen. Again, this is a stock we have been following for some time. The company is early in its rollout and has the potential to increase its locations manyfold.

“We hold the founders in high regard and believe the company has built a defensible moat through the combination of its supply chain expertise and its use of technology in ordering. We also made two complete sales during the period: telemedicine company Teladoc and connected fitness company Peloton.”