Baillie Gifford £300m UK Growth Trust in ‘poor’ year

Baillie Gifford HQ in Edinburgh

The £300 million Baillie Gifford UK Growth Trust has reported a “poor year of relative performance” for the year to April 30, 2023, in which net asset value (NAV) total return (capital and income) was 1.1% compared to 6% for the FTSE All-Share Index total return.

The share price total return of the fund for the same period was negative 1.3%.

The investment trust said the largest detractors to its relative performance were technology focused venture capital firm Molten Ventures, IT professional services provider FDM Group, property developer Helical, and online luxury fashion retailer Farfetch.

“Not holding BP was also a notable detractor,” said the fund.

Notable positive contributors to relative performance were toy manufacturer and retailer Games Workshop, luxury goods retailer Burberry, and promotional merchandise marketer 4imprint.

Two new positions were initiated in the period: IT infrastructure provider Softcat, and digitisation specialist Kainos.

One position was sold — online food ordering and delivery company Just Eat

The fund’s investments positions in Euromoney Institutional Investor and Homeserve were exited following takeovers.

A final dividend of 3.60p per share is being recommended (2022: 3.91p).

The fund reported that Baillie Gifford & Co’s total assets under management and advice as at June 14, 2023, were around £234 billion. That’s down from roughly £360 billion at December 31, 2021, before the brutal global sell-off in the technology and growth stocks which feature heavily in the fund management group’s portfolios.

The investment trust’s managers Iain McCombie and Milena Mileva wrote: “We are disappointed and sorry to be writing to fellow shareholders about a poor year of relative performance for the portfolio.

“While we totally understand that you might be despondent or frustrated, we remain firmly of the view that the portfolio is well positioned for the future and as a consequence portfolio turnover has remained low at 5%.

“If one thinks in terms of half-year periods, the company has endured a difficult period of performance since November 2021 up to the end of October 2022. The principal reasons for that were a toxic combination of our ‘Growth style’ falling out of favour and a few large UK mega-cap stocks such as big oil and big pharma performing better in tougher or more uncertain times.

“Of course, some of our stock picking hasn’t been ideal either but the data is pretty unambiguous. The style headwinds we have encountered are the biggest factor for the underperformance.

“For example, the biggest detractor to performance over the year to end April 2023 was Molten Ventures, the investor in private growth businesses.

“Unsurprisingly, given the fall in valuations of private companies globally, it recently announced that its unaudited net asset value had declined by 17% in the year to 31 March 2023.

“So yes, a tougher year for Molten but its share price declined by 59% meaning that at our year-end Molten traded at a 60% discount to this lower valuation. Clearly the stockmarket expects further valuation declines but this extreme pessimism seems at odds with the underlying progress Molten has seen in most of its main investments.

It begs the question of whether our growth style is simply misguided and we need to adapt to different times?

“We can only address the question with humility as we cannot be sure that we ‘know’ the correct answer. Our experience tells us two things: firstly, many people want simple answers to complex problems, which explains the rise of populist politicians in many countries.

“This type of thinking is seductive and persuasive after poor periods of performance and probably explains why ‘style drift’ is the biggest ‘killer’ of fund managers.

“We are not complacent and have debated between ourselves, and also with the board (one of the great benefits of the investment trust structure), as to whether we could or should have done things differently in the last two years.

“The answer in both cases is that, as bottom-up stock pickers, we should continue to back our judgement. Indeed, to be blunt, had we tried to chase short term performance, it would have meant endorsing a skill that we have repeatedly said we lack and also abandoning our investment principles.

“Attempting both would have created more problems and concerns without necessarily having improved performance.

“The second observation from experience is that as individual managers we have been through long patches of underperformance before and the key lesson learnt is to stay true to one’s beliefs and investment style, no matter the temptation.

“Thus, we have tried to remain focussed, stay long term in our investment horizon and to keep appraising the stocks in the portfolio as to whether we think they will be additive to its performance. We probably sound like a broken record, but we believe that share prices follow fundamentals and the latter are good in this portfolio.

“Again, this is probably only of partial reassurance. The elephant in the room is of course when will growth as a style come back into favour? It would give us no greater pleasure to answer that positively but we have to be honest and say that we simply have no idea when this will happen.

“At least we can report that in the second half of the financial year being reported on, the portfolio modestly outperformed the index that itself rose by a healthy 13%.

“Of course, we have absolutely no idea if this is a turning point or a random event, but at the very least this gives us a little encouragement that some of the domestic doom and gloom that we reported on at the half-year has started to lift as the aftershocks of the Truss administration fade and the economic data proves not to be as dire as widely predicted …”

The fund’s chair Carolan Dobson wrote: “I intend to step down from the board no later than next year’s AGM and, in line with good corporate governance, will play no role in the recruitment of my successor.

“Accordingly, I have asked Mr Andrew Westenberger to chair a Nomination Committee to appoint my successor.

An external recruitment consultant will be engaged shortly to undertake the selection of a list of suitable candidates for consideration by the Nomination Committee, after which a recommendation will be put to the board for approval.

“The external recruitment consultant will be asked to put forward candidates with the desired skillset and also with a diverse range of characteristics.

“The board is ambitious to meet and support the Listing Rule diversity targets and will take these and any other best practice matters into account when determining the appropriateness of a candidate and final appointment.

“The importance of diversity will be an important factor in the candidate shortlist.”