Baillie Gifford US Growth Trust has published results for the 12 months ended 31 May 2023. The share price and NAV returned -13.8% and -2.7% respectively. This compares with a total return of 4.7% for the S&P 500 Index. There is no dividend (no net income to pay one out of).
Buyback abandoned
The shares moved from a discount of 12.3% last year to a discount of 22.4% at 31 May 2023. Having bought back 2,206,300 shares, to be held in treasury, at a total cost of £3.6m in May 2022 with limited impact on the discount, the board took the decision to use the capital to invest in new growth opportunities instead. As of last night, the discount was 17.6%. Panmure Gordon (UK) Limited is replacing Investec, broker to the company since IPO.
Consistent with the manager’s long-term approach, turnover in the portfolio was just 7.1%. As at 31 May 2023, it held 25 private company investments which collectively comprised 34.5% of total assets. One additional private company investment was made into Oddity. Peloton, Teladoc, Appian, Butterfly Network, Carvana and First Republic were all sold during the period and the manager added three listed holdings to the portfolio: Roblox, Sweetgreen and Doximity.
Extract from the managers’ report
The managers kick off with an apology:
During the period from 23 March 2018, launch date and first trade date, to 31 May 2023, the company’s share price and net asset value total return (after deducting borrowings at fair value) returned 44.1% and 90.4%, respectively. This compares with a total return of 102.0% for the S&P 500 Index* (in sterling terms). We are disappointed. We asked you to judge us over the long term, and as shareholders and managers of the Baillie Gifford US Growth Trust, we are dissatisfied with our five-year performance. These are not the numbers we looked to deliver at the company’s fifth anniversary.
They go on to say:
Whilst share prices have been volatile since inception, the fundamental progress of the companies within the company has been phenomenal.
Zipline, the drone delivery company, was our first private investment. Today it represents 2.3% of total assets. In 2018, Zipline’s operations were predominantly in Rwanda, where its autonomous drones played a pivotal role in delivering medical supplies, specifically blood, to hard-to-reach locations. Fast forward to 2023, and Zipline serves 3,400 hospitals and health facilities globally and is contracted to serve more than 10,000 by the end of the year. While initially focusing on medical supplies, the company has expanded into ecommerce, animal, and agricultural products. Zipline is now the largest autonomous drone delivery company on earth, having flown over forty million commercial, autonomous miles, and is on track to make twice as many deliveries this year as all previous years combined. And with Zipline’s home delivery system launching two months ago in the US, it is just getting started.
In 2018, Shopify, the commerce platform for merchants and the largest public investment in the company, had gross merchandise value (‘GMV’) of ~US$40bn, a 2.6% take rate, and revenue had just crossed the one-billion-dollar mark. Fast forward to 2023, and GMV sits at close to US$200bn, the company’s take rate in quarter one was over 3.0% and FY22 revenue was close to US$3bn. Additionally, the company launched numerous products, including Shop Pay Instalments in 2021 and Audiences (an advertising tool) in 2022. With net cash of US$3.9bn, there is plenty of scope for innovation and new product launches.
Space Exploration Technologies (‘SpaceX’) makes rockets and satellites. In 2018 SpaceX made 21 launches, about half of which made successful ground landings. In 2022 the company launched 61 orbital missions, nearly doubling its previous single-year record of 31, set in 2021. That number means that SpaceX launched, on average, every six days from one of three sites. It is driving the launch market, taking two-thirds market share. It has achieved this by making its service much cheaper, driven by reusable rockets. Nothing illustrates this more effectively than SpaceX recently relaunching one of its Falcon rockets for the fifteenth time. SpaceX is leveraging this cost advantage to move into the communicationns sector with Starlink, a low earth orbit satellite constellation to deliver fast broadband to rural areas. It already has over one million customers. Starlink recorded its first quarter of positive free cash flow in 2022 and President and COO Gwynne Shotwell has said publicly that the internet business “will make money” in 2023, joining the core launch business which already “makes money”.
Amazon’s cloud offering AWS has grown revenues from US$26bn in 2018 to US$80bn today. Wayfair, the online homeware business, has more than doubled its top line since 2018, seen gross margin expansion of more than 700 basis points and nearly doubled its active customer base from 13 million to over 21 million. CoStar, the commercial and residential real estate company, has increased its revenue 126%, adding over US$1bn, since the company’s launch, expanded margins and reduced them again as it invests counter-cyclically in new growth opportunities. Watsco, the heating, ventilation and air conditioning (‘HVAC’) distribution business, has improved gross margins by 410 basis points, built an ecommerce business which is now over 33% of sales and grown EPS at a 24% compound annual growth rate.
In terms of drivers of performance:
There have been some changes to the top ten over the last year, with NVIDIA, Netflix and CoStar moving into its ranks. All have become larger holdings because of solid share price performance; CoStar and Netflix over the past year and NVIDIA since the beginning of this year. A reduction in Illumina moved it out of the top ten. The ability to read DNA remains foundational for advances in healthcare, but the competitive landscape is evolving rapidly, and the company’s execution has disappointed.
We sold Peloton, Teladoc, Appian, Butterfly Network, Carvana and First Republic during the period. Abiomed was acquired by Johnson and Johnson. Butterfl y Network, the portable ultrasound company, struggled with its go-to-market strategy and significant turnover among its executive team. While we hope Butterfly can succeed, we felt the probability of doing so was diminishing, and we sold the holding. Our most recent sale was Carvana, the online used car dealership. While the opportunity for the business remains large, we concluded that it had become constrained by its financing position. The company has taken steps to address its finances, but we are concerned the cost controls may cut into its ability to compete effectively.
We sold First Republic as the bank grappled with a run on its deposits in the wake of the Silicon Valley Bank collapse. We have long admired First Republic’s service model, deep customer relationships, conservative lending culture and management team, but these features did not provide protection when panic set in. Given the existential risk in the near term posed by deposit withdrawals and the higher cost of replacement funding depressing future profitability, we sold the holding with a heavy heart. [we discussed the collapse of First Republic in our recent note on Polar Capital Global Financials]
USA : Manager laments five-year underperformance of Baillie Gifford US Growth