Baillie Gifford UK Growth (BGUK) has published results covering the year to the end of April 2021. The NAV total return of 37.7% was significantly ahead of the 25.9% registered by the All-Share index. The share price total return for the same period was 53.7%, as UK equities returned to favour. Performance was led by Farfetch, Ashtead, Volution Group and Just Group and the portfolio managers continue to be enthused by their long term prospects as well as for the portfolio in aggregate. Two new positions were initiated over the year (the insurer Lancashire Holdings and the credit scorer Experian) and two exited (Rolls-Royce and the pub and restaurant operator Mitchells & Butlers). Annual turnover of the portfolio was 3.0% and gearing stood at 1% at the financial year end.
Looking back on how governments averted financial disaster
BGUK’s manager’s report section recapped last year as follows:
“Our report last year described the twelve months to 30 April 2020 as being hard to match for escalating drama. We stand by that, but we can’t help thinking that the last 12 months were certainly one of the oddest for both the writers and, we suspect, most readers too. Being under lockdown of varying degrees for most of the period and facing the worst recession on record would have on the face of it suggested a gloomy outcome for investors, so how do we reconcile the rather healthy market returns recorded?
In our view there were a couple of factors that go to the heart of answering that. One was the UK Government (amongst others) funding a generous furlough scheme and other measures of support and consequently borrowed hugely to pay for this extra spending, despite a fall in tax receipts. Policy mistakes were made and there will have to be some reckoning to right size the rather ugly financial position of the UK, but the alternative of doing nothing was far worse. The second factor was that key elements of our sometimes much maligned capitalist system essentially did their job. A decade ago, Hollywood released a big budget film ‘Contagion’ which depicted some medical aspects of a pandemic which now appear eerily prescient. In other aspects though the film was considerably off the mark portraying society as having partially collapsed and the military stepping in to feed a starving population. What we have seen in reality is something more remarkable and inspiring. Businesses and dedicated employees across the globe adapted to this unprecedented situation so that sophisticated supply chains for the most part held together and kept the global economy ticking over far better than most doomsters had feared. That the system didn’t fall over, many businesses looked after their stakeholders and most people in these trying times have behaved sensibly, is easily glossed over yet points to a key conclusion. Most economies are battered and bruised, but our belief is that stockmarkets were cheered by the relative resilience of both consumers and businesses in aggregate. Despite everything, businesses now have a decent opportunity to rebuild in the years ahead.
This unusually long discourse (for us) is relevant because it lends credence to our confidence in the type of businesses we own in the portfolio which have strong market positions and healthy financials. This is illustrated by the fact that we sold only two holdings in the portfolio over the 12 months (Rolls-Royce and Mitchells & Butlers). Naturally this lack of activity (we only bought two new holdings as well) might be misconstrued. In fact we spent a lot of time thinking and speaking to management teams and we came to the view that despite the undoubted short term uncertainty that tempered our enthusiasm for deploying gearing, the long term investment cases for most of our businesses remained intact. So yes, we sat on our hands, but consciously so.”
Manager’s outlook
“As we turn to the future, beyond what is hopefully a rapid mass inoculation roll-out, to economic and business recovery in a post pandemic world, all companies will have to change and adapt to a very different but still highly uncertain corporate landscape. The only thing we can note with near certainty after recent events is the folly of precise predictions. Some aspects of consumer and business behaviour may well – hopefully – go back to ‘normal’. But as we’ve mentioned in previous reports, we also recognise that many patterns in the way we all work, travel, shop, consume and interact have probably shifted irreversibly. So too have attitudes towards the state, to the role of governments and our tolerance of enormous deficits, with all complex societal and generational dilemmas that involves. To any investor who sees their task as considering the future, it has been a most humbling reminder of the power of nature, its unpredictability and ability to disrupt all things we assume as normal.
Finally, but quite separately, it once again feels remiss not to at least mention Brexit to this specialist UK audience. In the scheme of a global pandemic it still feels rather parochial. And as a reminder, this and other macroeconomic or political events do not feature prominently in our company led, ‘bottom up’ investment process either. Nevertheless, leaving the European Union is still a big deal in the modern political, economic and cultural history of the UK. Having had the initial ‘political’ Brexit a year ago, we finally had the real thing – an ‘economic’ Brexit – at the end of 2020. Four months on, it remains close to impossible to disentangle any discernible economic impact to the companies in our portfolio: the huge distortions to everything from the pandemic make that a rather futile exercise for now. There have inevitably been a few signs of teething problems around the new, post-deal, trade arrangements, and much is still to be decided on swathes of the important service sector of the economy. It also seems fair to say that our post-separation relations with the EU have been rather, erm, ‘tricky’. Overall, however, and whilst it is far too early to say anything definitively, there have not been obvious signs of immediate economic distress.
All of this might sound daunting or even depressing. That is the wrong conclusion to draw. As growth investors we think about opportunities as well as risk and businesses with the finances, the long term vision and strong culture have a better than average fighting chance of successfully exploiting the undoubted opportunities out there at present. We think your portfolio is positioned accordingly and we look forward to updating you further in the future about our progress.”
Changes to the investment policy proposed as BGUK targets private company investments
We also note that BGUK’s board is proposing to amend the investment policy, subject to shareholder approval at the next AGM.
BGUK’s proposed investment policy will be as follows:
- The company invests in a portfolio of between 35 and 65 companies selected for their potential to provide, in aggregate, attractive returns relative to the total return of the FTSE all-share index.
- The portfolio is invested primarily in listed equities but may also invest in unlisted investments, including private companies, convertible securities, and equity-related derivatives.
- On acquisition of any unlisted investment, the company’s aggregate holding in unlisted investments shall not exceed 10% of the total asset value of the company.
- The company may also use derivatives for efficient portfolio management purposes.
- The majority of investments are constituents of the FTSE 350 index although constituents of other UK FTSE indices may be held.
- The company is also permitted to make investments outside of the UK where these investments have a meaningful connection with the UK.
- The size of individual stock holdings depends on the managers’ degree of conviction, not the stock’s weight in any index.
- The company may not invest more than 15% of its total assets in any one single company measured at the time of investment.
- The maximum permitted investment in other listed investment companies (including investment trusts) is 10% of total assets at the time of purchase unless such companies have a stated investment policy not to invest more than 15% of their total assets in other listed investment companies, in which case the limit is 15%.
- The level of gearing within the portfolio is agreed by the board and the absolute amount of any gearing should not exceed 20% of the net asset value of the Company at the time of drawdown.
- The company can also hold up to 20% of total assets in cash or cash equivalents.
BGUK: Baillie Gifford UK Growth shares soar on UK recovery