UK Chancellor of the Exchequer, Rachel Reeves, is acting as though her body has been possessed by the spirit of a vintage pull-string talking doll, that just has the preloaded dialogue, ‘Growth’ on its internal disk; as for every question that she is asked, it seems that ‘Growth’ is the only response she has.
Reeves and her boss, Prime Minister Keir Starmer, have pinned a lot on finding the golden goose of growth in an anaemic and dysfunctional UK-economy, but it’s not looking good with EY (Ernst & Young), the Big Four accountancy firm predicting at the beginning of the week that UK economic growth will be worse than the disappointing 1.5% predicted, down to 1% in its predictions for 2025.
Also banking on UK growth are the managers of the GBP312m Baillie Gifford UK Growth Trust [LON:BGUK] which is part of the Association of Investment Companies’ UK All Companies sector.
The fund aims to achieve capital growth predominantly from investment in UK equities, with the aim of providing a total return in excess of the FTSE All-Share Index and celebrated its 30th anniversary last March.
Lead manager is Iain McCombie, who is Baillie’s head of UK Equities. He’s been with the Scottish fund manager for thirty-years, initially working on the US Equity team. He said, regarding the Baillie Gifford UK Growth Trust: “The portfolio is 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.”
McCombie is assisted by Milena Mileva, who is the epitome of Oxbridge, holding degrees from both universities, and an employee of Baillie since 2009, becoming a partner of the firm in 2022. It’s not been a walk in the park for the UK Growth Trust, something that McCombie admits himself.
Tough three years
He said: “[…] it’s been a tough three years,” but he still believes that the UK is a growth market, “[…] If you look at the UK market, the FTSE 100 is about 84% of the overall market. That’s very concentrated. So, you can imagine, people want to talk about the well-known companies in the UK: the BPs, the Shells, the big banks, which are not really what we think of as growth companies. So that colours what’s going on, but if you look at our portfolio, in contrast to having 84% in the FTSE 100, we have 44%. So, we’re finding lots of growth opportunities outside the FTSE 100.”
McCombie argues that the data has shown over the last 30-years that it’s the smaller companies that create the most growth, hence the fund’s greater bias to mid- and small-cap stocks. The fund also has the mandate to invest up to 10% of assets in unquoted companies. That said, having secured the mandate, McCombie has only made one unquoted investment: “[…] a company called Wayve Technologies […] it’s a very interesting business and when we said we wanted to invest in unlisted, we wanted to find companies that are unique. […] you can’t find them on the listed side of things. Wayve is a great example of that. It’s a very early-stage business, but what it’s trying to do is try to help solve the problem of autonomous driving.”
More than kicking the tyres
The team has literally test-driven Wayve, with Mileva taking a spin in a Wayve piloted vehicle: “[…] she remarked, even over a year [Wayve] went from being pretty impressive to very impressive in terms of number of times or [the] very few number of times that the driver had to intervene. So, as you get more data, [the system] gets better at [driving]. Now, the good news [is others have invested into Wayve, which] vindicates our approach […] earlier this year, [from] two or three very well-known big tech investors [who] put GBP1bn into Wayve at a much higher valuation. So, it’s an early sign that other people are now buying into what’s going on in Wayve [which is] a good example of a British company that’s really at the cutting edge [and] doing really well.”
The fund has quite a concentrated portfolio, typically holding 35 to 65 positions, and although is benchmarked against the FTSE All-Share Index, is not benchmark-constrained and agnostic to index, sector or industry weightings, so the fund’s return is often quite volatile, compared to benchmark, and targets capital returns over dividend yields.
Whatever McCombie and Mileva are doing, it is having a positive short-term impact, with the fund being in top position in sector (on a share price total return basis to 31st January) with a +22% return, against a sector average of +18% according to the AIC.
Longer-term underperformance woes
Over the longer term, however, the picture is a bit grimmer. The fund returned +10.7% over five-years, against a sector average of +18%. However, over this time period the range between the top fund, Fidelity Special Values [LON:FSV] with a +42.1% return and the bottom-fund in the six-fund sector Aurora UK Alpha [LON:ARR] with +8.9%, was quite broad.
McCombie’s fund trades at a discount to premium of -10.44%, higher than the sector average of -9.2% and has an ongoing charge of 0.7%, which was par for the course in the sector. The fund has a dividend yield of 2.85%, a bit behind the sector average of 2.9%
Baillie Gifford UK Growth Trust top five holdings
| Investment | Sector | Weighting |
| Games Workshop LON:GAW | Consumer Discretionary | 6.3% |
| Volution Group LON:FAN | Industrials | 5.8% |
| Auto Trader LON:AUTO | Technology | 5.5% |
| Experian LON:EXPN | Industrial Support Services | 5.0% |
| Wise LON:WISE | Technology | 4.6% |
| Source: Baillie Gifford, 31st December 2024 | ||
Over 10-years, the fund was bottom-of-the-pile, with a +56.2% return against a sector average of +115.7%. Fidelity, again the top-fund, weighed-in with a return of +143.9%. The question remains, has Baille Gifford turned a corner?
Well, from a clue in the name, the Baille Gifford UK Growth Trust is very growth-orientated, and over the past three-years or so growth stocks have been shunned, as the market adopted a more value-based and defensive approach to investing in the UK. Those big and stodgy, dividend-paying stocks have done well, and smaller, more-nimble growth stocks have suffered. This has, however, meant that a lot of traditional growth stocks are really cheap and can be snapped up for a bargain price. Should Reeves manage to pull off a growth-miracle, you should expect to see these stocks surge in value as the recovery blossoms, which will be a boon to shareholder of this investment trust.
McCombie maintains his long-term confidence in the portfolio, and whilst noting recession risk has increased, he believes that the investment trust’s portfolio companies are financially sound and have resilient balance sheets. As inflation is put back in its box (hopefully), sunnier climes might be ahead for this neglected part of the UK economy, which will be key to sustainable recovery.
