Baillie Gifford European Growth 04 December 2023

Baillie Gifford European Growth Trust (BGEU) owns a highly differentiated portfolio of high-growth companies based in Europe, managed by Stephen Paice and Chris Davies. The portfolio has almost no crossover with European indices and the typical European equity fund, Stephen and Chris purely looking for companies they have a high conviction can at least double in value over five years, and ideally for those that can be the biggest index weights in the future, rather than the present.

Growth equities have been under pressure this year, as rising interest rates and fears of a recession have led to high levels of risk aversion in markets. Stephen and Chris report that their portfolio has largely performed well operationally, with the long-term growth prospects unchanged or improved. Nevertheless, market sentiment means that valuations have fallen markedly (see Portfolio), arguably increasing the attractions for long-term investors. They have been adding to a number of stocks in their portfolio at lower valuations and have also picked up a handful of new companies where they believe there are exceptional growth prospects being discounted by consensus. Where there have been problems with portfolio companies, the managers are looking through what they see as temporary issues, focusing relentlessly on the long term.

While the growth bias is important, the trust also stands out for the highest allocation to mid-caps in the AIC Europe sector, and the 10.9% allocation to unlisted stocks. The trust has structural Gearing which contributes to volatility in the shares and amounts to c. 15% of NAV.

With its style out of favour, BGEU’s shares have moved onto one of the widest discounts in the AIC Europe sector, and at the time of writing, this Discount is 14.1%.

The last two years have been disappointing for shareholders, but the question now for current or potential holders is what the future holds or what is priced in to the shares, both of BGEU and of the underlying holdings. The managers point to some stark statistics which highlight that the exceptional growth outlook for their companies is not reflected in their rating. Certainly it seems that all environmental factors have been working against the trust: high interest rates have led to investors favouring value stocks, risk aversion has led investors away from mid-caps and increasingly into cash, while the valuations of unlisted companies have been called into question in the absence of many deals. With BGEU’s own shares treading on a wide discount versus history and versus peers, we think there is potential for strong performance once sentiment shifts, and the managers argue it is time to “lean into growth” rather than chase the defensive large caps that have performed better this year.

We acknowledge it may take time for sentiment to shift, and with a highly active portfolio like BGEU’s, good results or operational developments for individual companies are likely to be as important to a re-rating. Promisingly, there are rumours that Northvolt, the portfolio’s largest position and Europe’s leading EV battery manufacturer, is seeking to IPO next year. This could not only see a valuation uplift in the portfolio if the pricing is good, but also dispel some of the negativity around private company valuations, which may be affecting BGEU’s discount.