Baillie Gifford US Growth (USA) fund managers Gary Robinson and Kirsty Gibson have promised to take profits more often and monitor the balance of their high-growth portfolio to avoid a repeat of the 2022 crash from which the £757m investment trust is still recovering.

In annual results to 31 May, the company admitted its five-year performance had severely disappointed with a shareholder return of 26.7% compared to underlying growth in net asset value of 45.4% that was less than half of the 92.1% return from the S&P 500, the US stock market benchmark.

The bursting of the growth bubble in late 2021 when inflation and interest rate expectations started to soar has weighed on the trust’s performance since launch in March 2018. While net asset value has grown 170% in line with the S&P 500, the weak performance of the shares in the past four years means shareholders have received much less at 138.3%.

Better in a tracker

While investors have not lost money after piling into the popular launch, and hanging on through thick and thin, it has been an uncomfortable ride. They would have been better off in an S&P index tracker fund, which the managers admitted would have given them cheap access to the big incumbents of the US stock market but not the transformational growth companies they like to back, such as Elon Musk’s unquoted SpaceX, the trust’s biggest holding at 11.3% of assets.

Investors have learned the hard way that growth investing with Baillie Gifford requires a long-term view and nerves of steel. Nevertheless, the two thirds plunge in the share price from a 388p peak in February 2021 to a 135p low 15 months later was too much, the board and managers belatedly agreed.

The trust’s current fact sheet shows that USA shares soared 66% in the 12 months to 30 June 2021 as tech stocks soared in the online surge during lockdown, and then promptly slumped 57% in the following 12 months as the inflationary impact of the war in Ukraine undermined the appeal of unprofitable growth companies.

Robinson and Gibson said, “the volatility that we delivered during and after the pandemic exceeded our expectations”.

Portfolio improvements

To reduce the risk of that happening again, the managers have implemented what chair Tom Burnet called “construction enhancements and guide rails to improve how they build and maintain a high-conviction, high-growth portfolio”.

They cited two main aspects to this:

• Automatically retesting upside forecasts on companies once they have made 2.5 times the original investment;
• Closely monitoring the overall shape of the portfolio to balance growth styles, maturities, and structural drivers.

The managers admitted implementing the second of these with the 27 illiquid unquoted holdings that make up 34.9% of USA assets would be tricky. Nevertheless, they said they would have “regard” to portfolio construction when making new investments in private companies.

Time will tell whether these changes will be enough to preserve investment returns, as well as make them, for a trust whose sector split has remained much the same in the past year.

Burnet, Robinson and Gibson have a lot to be grateful for regarding the patience of shareholders who backed the board and overwhelmingly defeated Saba Capital’s attempt to seize control in February.

The activist hedge fund still owns 29% so is doubtless the first in the line of shareholders offering feedback on strategy, marketing and the merits of share buybacks when versus new investments.

Year of recovery

Fortunately, the trust’s admission of past excesses comes at a time of recovery. USA achieved a 22.1% underlying return on net assets in the year to 31 May that smashed the 7.2% gain in the S&P 500.

To be fair all of that was generated in the first half of the year when the managers were busy adding four new listed positions compared to just one, Globant, an IT services provider, brought in the second half.

The pair have recently been more focused on private companies, adding two, Rippling, a workforce management system operator, and Runway AI, an AI video platform, in the second half of the year. Runway is the latest in a line of stocks where the managers see big opportunities from artificial intelligence, ranging from Amazon to Cloudflare, a global cloud platform, and data warehouses Databricks and Snowflake.

The second half was more challenging after the post-US election  “Trump bounce” with NAV per share falling 5.6% as tariff woes and the challenge to the US’s AI companies from China’s DeepSeek rattled markets. The period since year-end has been more positive, however, with assets up 14% in the past three months.

That set the tone for the managers’ concluding comments, saying while the volatility of the past five years was “daunting” and “disorientating”, it was in transitions such as this when “truly foundational companies” demonstrate their value. Shareholders will hope the managers have learned their lessons as well and prove to be more reliable stewards of their capital.