While 2024 has been a reasonable year for growth investors generally, for those looking just at the UK it has still required patience and a need to stay focused on the fundamentals.
As Baillie Gifford director James Budden put it at the firm’s latest private investor forum, inflation, rising interest rates and geopolitics have had the effect of ‘shrinking’ the market’s time horizon, creating headwinds for the performance of growth stocks.
The result is, especially in the case of the UK, there are plenty of opportunities for those prepared to take a long-term view.
‘GROWTH ON SALE’
Iain McCombie, co-manager of the Baillie Gifford UK Growth Trust (BGUK), admits some investors see the UK as lacking innovative growth companies, yet ‘if you think share prices follow fundamentals, UK growth stocks look cheaper than they have for a long time’.
The trust’s aim is to maximise capital growth by buying UK companies which have the potential to generate a total return in excess of the FTSE All-Share.
Managers McCombie and Milena Mileva describe the portfolio as ‘a high-conviction, concentrated selection of our best ideas in the UK with a bias to mid- and smaller-cap growth companies, where we intuitively believe the growth spot for UK equities to be’.
After beating the index conclusively in the two years to September 2021, the trust struggled in 2022, but performance improved in 2023 and in the year to September just gone the company streaked ahead, posting a 19% share-price return and an 18% NAV (net asset value) return against a 13% gain for the benchmark.
Despite this return to form, the trust still trades at a 15% discount to NAV, which means investors can now get a double discount on a selection of innovative, and in some cases disruptive, UK companies.
DIFFERENT APPROACHES
The UK is no different to any other market globally, in that the fastest-growing companies tend to be the best performers.
McCombie cites Auto Trader (AUTO), the trust’s second-largest holding, which is an established FTSE 100 company yet is a good example of a business which is growing faster than the market appreciates.
Not only is it the number one player in the used car market by a factor of 10, which gives it tremendous network effects, but management are driving new ways of increasing turnover, such as the new ‘Dealbuilder’ service which allows customers to get pre-approval for finance, with the company taking a small slice of the revenue.
McCombie also holds smaller stocks such as Kainos (KNOS) and Softcat (SCT), both relatively new holdings for the trust.
There is a strong focus on management with a vision for their business, and McCombie lauds the team at fantasy miniatures maker Games Workshop (GAW) – which has been such an outperformer it is being promoted to the FTSE 100 – for their ability to continue exploiting their IP (intellectual property) yet keep their customers onside.
PRIVATE AND OTHER HOLDINGS
Finally, in common many other Baillie Gifford trusts, UK Growth has the flexibility to invest a proportion of its assets in unlisted companies.
The limit on unquoted stocks is 10%, but at present the trust is well below that level with just one holding, Wayve Technologies, an early-stage autonomous driving company developing ‘Embodied AI’, which makes up 1.1% of the portfolio based on its initial valuation.
When the trust initially invested in Wayve in 2022, alongside Microsoft (MSFT:NASDAQ), it was estimated to be worth around $1 billion making it a so-called ‘unicorn’.
Earlier this year, however, US mobility firm Uber (UBER:NYSE) signed a strategic partnership with Wayve and invested in another fundraising round, which valued the business significantly higher than in 2022 although the figure wasn’t published.
Also, the managers have taken advantage of the discount to NAV to buy back their own shares, with the result that as of the end of November 15% of the outstanding share capital is now held in treasury stock.
These shares could be issued once the price rises to a premium to NAV, or they could be cancelled in which case NAV per share would automatically rise due to there being fewer shares in circulation.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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