Baillie Gifford UK Growth 11 March 2019
This is a non-independent marketing communication commissioned by Baillie Gifford. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Baillie Gifford UK Growth is a quality growth portfolio with a highly active, long-term approach. The trust was taken over from Schroders in June 2018 and completely overhauled, with 42 new holdings purchased and all but a few small inherited positions sold.
Managed by Iain McCombie and Milena Mileva, the aim is to identify companies with the best long-term growth prospects without reference to the index, and to hold for a minimum of five years. The portfolio is well represented in the technology, financials and consumer-facing sectors, and light on banks, oil and gas and defensives such as healthcare and tobacco.
The intention is to run structural gearing of 10% in the long run, and the managers will build this up as the opportunities arise.
NAV performance has been behind the index in the short period since the handover as growth companies have retrenched relative to cheaper stocks. However, following the award of the mandate to Baillie Gifford, the discount has come in considerably from an average double digit discount in the previous three years, to the current level of 5.3%, which compares to an AIC UK All Companies sector average of 8.5%.
With the new managers focusing on growth first and foremost, the dividend has been cut. The board has guided that there will be a stepped cut to the dividend, and the interim was half last year’s. The historic yield is 2.5%.
It is an unfortunate irony that Baillie Gifford’s style has become a headwind just as the decision to change manager was taken. However, we would caution that six months is a very short time period and says nothing about the prospects of the company over the longer run. Baillie Gifford’s highly active, long holding period approach is supported by academic research as being linked to alpha generation, and the success of Scottish Mortgage shows what can be achieved on a global stage. It may seem counter-intuitive to buy into the UK for growth given all the negativity in the headlines around Brexit, but we share the managers’ conviction that the UK has plenty of world class companies and would suggest that buying when they are out of favour should be advantageous in the long run.
|A long term, active approach
|Structural gearing and a high growth style could underperform in down markets
|High allocations to companies in secular growth areas such as technology
|Recent underperformance doesn’t give the new mandate the best start
|A team approach which uses the combined insights of experienced and successful UK and global teams
|The dividend is unlikely to satisfy income seekers