Has BGEU passed its “inflection point”?

Usually, we find turning points in trends happen unnoticed, and it is only once a new trend has become established that an inflection point is retrospectively recognised. In that light, we find the strong performance reported by Baillie Gifford European Growth (BGEU) in its interims quite intriguing. Last week the company reported a NAV total return of 20.2% for the six months to the end of March, well ahead of the 14.9% returned by the FTSE Europe ex UK Index.

BGEU has a portfolio with exposure to an attractive and diverse set of growth themes. Companies in the semiconductor supply chain sit alongside luxury goods manufacturers, technology platforms, healthcare companies and niche manufacturers in the industrials space. The managers have highlighted the decreased valuation placed on these growth opportunities over the past two years or so, while the growth prospects have not deteriorated.

Another interesting feature of the portfolio is the heavy exposure to small and mid-caps. Large caps have been in favour over the past year or so as markets have recovered, another headwind to performance, but BGEU’s good results may indicate that investors are beginning to look for growth opportunities further down the market cap spectrum. Like in the UK, in continental Europe it is often private equity which is swooping on cheap growth stocks. A good example is Adevinta, the Norwegian online classifieds group, which has been bid for at a 54% premium to the market price. BGEU think even this has undervalued the business, but have sold the position as the deal is highly likely to go through.

BGEU has itself been looking to take advantage of some of these cheap valuations. During the period the managers bought Lonza after the share price halved following the loss of a contract. Lonza is a Swiss contract development and manufacturing organisation which supports biotechs with products and services as they develop drugs. Assa Abloy, an electric lock manufacturer, was also bought after a derating. Existing holdings DSV, Sartorios Stedim Biotech, Royal Unibrew, Hypoport and Moncler were among those added to on weakness.

Last week we highlighted that Europe is unabashedly a growth market, which actually has more home-grown growth to shout about than might be realised. Typically a growth investor has to compromise on valuation, with high expected earnings growth requiring a higher price per share. After a weak couple of years, this premium to be paid is lower. But the main driver of returns should be earnings growth, and in this respect, the better economic growth outlook for Europe and its major trading partners is the most important potential tailwind to near-term performance. Currently, BGEU’s shares are available on a c. 15% discount to NAV, with the price not having kept up with the NAV in recent months. Arguably this offers some decent compensation for not having quite picked the inflection point, if that is what this turns out to have been.

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