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Baillie Gifford US back to square one

Baillie Gifford US Growth has published results for the 12 months ended 31 May 2022. Those of a nervous disposition should look away now – over the period, the share price and NAV returned -45.5% and -35.3% respectively, which compares with a total return of +12.2% for the S&P 500 Index. Effectively, this gives back all of the trust’s outperformance of the S&P 500 since its launch in March 2018. From 23 March 2018, launch date, to 31 May 2022, the share price and NAV have returned 67.2% and 95.6% respectively. This compares with a total return of 93.0% for the S&P 500 Index

In summary:

  • Turnover remains low, consistent with the company’s five year plus time horizon.
  • The manager added a few listed holdings, participating in the IPOs of Rivian Automotive, HashiCorp and Duolingo.
  • The manager sold Zillow, Vroom, Glaukos and Lyft, which they think had veered off track from their forward-looking hypotheses.
  • The manager made seven additional private company investments: BillionToOne, Blockstream, Databricks, Discord, Faire Wholesale, Snyk and Solugen.
  • Three of the trust’s existing private company holdings, Aurora Innovation, Ginkgo Bioworks and Warby Parker, went public during the period.
  • As at the end of May, the trust held twenty-four private company investments which collectively comprised 36.4% of total assets.
  • The board says that it is currently seeing a significant dislocation between share prices and fundamentals but the prospects for the innovators that are driving change remain bright.

The priority is to generate capital growth over the long term, and there is no dividend target. The net revenue return per share for the year to 31 May 2022 was negative 1.88p (year to 31 May 2021, negative 1.78p). As the revenue account is again running at a deficit, the board is recommending that no final dividend be paid.

Extract from the manager’s report

Most businesses are still growing strongly, however there are some exceptions. In situations where the forward-looking hypothesis is off track, we have bucketed these stocks into those where we believe the issues are cyclical and temporary and those where there are potential structural factors at play.

One example from the latter category is connected fitness equipment maker Peloton. The company wrongly extrapolated pandemic-level demand and now has an inappropriately large cost base. It is working to address this issue and has brought in a new CEO with previous experience at Netflix and Spotify. Netflix too has faced weaker demand as it has exited the pandemic. Its subscriber base shrank in the first quarter of 2022 for the first time in a decade. It is unclear to what extent this is a cyclical versus structural phenomenon, but we suspect the weaker macro environment is a contributory factor.

The pandemic has transformed the scale of many companies in the portfolio, and these companies are emerging in much stronger shape than they went in. Take Shopify, the provider of software for merchants, as an example. Its gross merchandise value and revenues have tripled since the start of the pandemic, and 10% of all e-commerce sales in the US now flow through the platform. This scale has enabled Shopify to increase its investments and broaden out its product offering. It has also made Shopify the default choice not only for online merchants, but also for marketplaces that are looking to integrate e-commerce into their offerings. For example, Shopify now has partnerships with Facebook and Instagram Shops, TikTok and JD.com. This is driving a powerful flywheel effect. The more partner integrations that Shopify has, the more attractive it becomes to merchants. And the more merchants Shopify has, the more attractive its platform is to marketplace partners. Shopify has been one of the weakest performing stocks in the portfolio recently, but the business is as strong as ever.

Moderna, the mRNA therapeutics company, has also grown in both in scale and scope since the start of the pandemic. The company has become a household name on the back of its Covid-19 vaccine but that is not what first attracted us to invest. We participated in the IPO, long before Covid-19, because we were excited by the broad range of diseases that we thought its mRNA technology platform could address. As we entered the pandemic Moderna did not have any drugs on the market and was consuming cash. The Covid-19 vaccine has accelerated the company’s path to market and to profitability. The business is now highly cash-generative, and it has billions of dollars of cash on the balance sheet. This financial strength has enabled it to invest more in R&D and broaden out its pipeline. The company is now working on developing treatments for a vast range of diseases including cancer, cardiovascular disease and HIV.

There are many sectors of the economy which are undergoing technology-led change. The pandemic served to accelerate this. However, these structural shifts were underway long before the pandemic and we believe they are likely to continue long after the pandemic. In sectors ranging from retail to healthcare to finance to education, digital adoption remains early. We are currently seeing a significant dislocation between share prices and fundamentals but the prospects for the innovators that are driving change remain bright. We are confident that the fundamental strengths of these companies will be reflected in share prices in time.

USA : Baillie Gifford US back to square one

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