Baillie Gifford UK Growth 23 April 2020

Baillie Gifford UK Growth Fund (LON:BGUK) aims to generate long-term capital growth by investing in a portfolio of what the managers regard as exciting, high-growth prospects: companies which are using new technologies to open up competitive advantages.

Iain McCombie and Milena Mileva utilise a differentiated, long-term investment approach to find high-quality growth opportunities. The portfolio includes 44 companies and is therefore one of the most concentrated in the AIC UK All Companies sector, although allocation to each holding is relatively evenly split. Unlike many peers in the sector, the trust has limited exposure to small- and micro-cap companies, and little exposure to traditional defensive sectors. However, as we discuss in the Kepler View section, a number of holdings in the portfolio have proved considerably more resilient than one might imagine. The managers split their companies into four different categories, recognising that growth comes from a number of different areas. These categories are: business-to-consumer compounders, niche business-to-business champions, niche/growth financials and special situations.

Since taking over the portfolio in June 2018, the managers have outperformed the benchmark and generated the strongest returns of any trust in the AIC UK All Companies sector. This has been during both rising and falling markets, suggesting an ability to generate attractive returns regardless of the wider environment. Although this is a relatively short time frame in which to judge the trust’s performance, the philosophy and process have been tried and tested in the open-ended space, as we discuss in the Management section. Currently the trust is trading at a discount of close to 7%, wider than the AIC UK All Companies sector average of 3.1%.

In our view, BGUK’s key differentiating features have been behind the trust’s outstanding recent performance figures in both rising and falling markets.

First and foremost, the growth focus has been a key driver of returns in 2019 and 2020. Growth companies outperformed during the bull market, and these same stocks displayed resilience in terms of sales and earnings during the falling market of 2020. The emphasis on quality and growth companies has meant that the portfolio has low exposure to areas which have been hurt most by the current crisis, such as traditional retailers. Typical ‘value’ areas such as energy and financials are also under pressure as a result of the recessionary environment, and this is helping BGUK in relative terms thanks to its low exposure to them.

The exposure to technology has been particularly important. As we discussed in our recent strategy note 'Children of the revolution', technology and e-commerce companies have been relatively insulated from the coronavirus crash, and a huge number of BGUK’s holdings are technology based, such as Auto Trader, Rightmove, RELX, Just Eat and boohoo. BGUK’s portfolio has low levels of debt, is capital light and more exposed to e-commerce, which has helped it outperform during the pandemic. We therefore see the discount of c. 7% as an attractive entry point into a trust which has shown significant resilience in falling markets as well as outperformance in rising markets (albeit over a short time under the current managers).