Joe Faraday, the new fund manager of Baillie Gifford European Growth (BGEU), has moved quickly to overhaul the severely underperforming investment trust by replacing nearly a third of its stocks with big additions in defence, financials and energy.
Faraday, who officially replaced Baillie Gifford colleagues Stephen Paice and Chris Davies on 1 April, listed 21 new positions in the portfolio of around 55 stocks in half-year results today. These account for just over 31% of the £315m portfolio.
He said these would broaden the trust’s exposure to growth themes and profit drivers such as defence, where he has added German arms manufacturer Rheinmetall and Portuguese drone manufacturer Tekever, both at 1.6% of assets, alongside France’s Airbus at 2.1%.
Utility groups Deutsche Telekom and Spain’s Iberdrola offering steady compound returns have been allocated 2% and 1% positions, and TotalEnergies of France comes in at 2.7% to cash in on high energy prices and the transition to renewable energy.
The biggest sector shift was towards banks and insurers where Faraday has invested nearly 14% in the likes of KBC of Belgium, Allianz, UBS, Swiss Re, Allied Irish Bank, Piraeus of Greece in appreciation of their strong balance sheets and exposure to rising interest rates.
Novo Nordisk, the struggling obesity drug provider where the trust had held a 2.6% position last year, was the most notable of 11 big stocks sold to make way for the new arrivals.
Other companies exited were German credit and real estate platform Hypoport, French employee benefit platform Edenred, luxury retailer LVMH, Italian hearing aid provider Amplifon, AI consultant Reply, Swedish private equity firm EQT, growth fund Kinnevik, Dutch software firm Topicus, biotech company Camurus and Swiss pharmaceutical giant Sandoz plus other smaller positions.
However, Faraday has not entirely abandoned the growth approach of his predecessors. Bending Spoons, the rapidly growing Italian mobile retail platform, remains a top holding at nearly 10%, for example, although exiting the unquoted position in such a short time would probably have been impossible even if he had wanted to.
Faraday said some disposals had performed poorly and demanded a harder assessment. Others, such as Sandoz, had worked and were sold based on share price strength and valuation.
“In each case, the question was the same: is this still the best use of capital once valuation, concentration, timing, and the range of possible outcomes are considered together? Where the answer became less compelling, capital was recycled,” he stated.
Faraday unveiled the new-look portfolio in interims showing a further 9.2% decline. That compared to a 4.4% gain in the FTSE Europe ex UK index in the six months to 31 March, which is bad news for a trust desperately hoping to avoid a 100% conditional tender offer in 2028 that could see it wound up if too many shareholders decide to sell their shares.
Shareholders’ actual loss in the half year was slightly less at 8.8% as the shares saw the discount, or gap to net asset value, narrow from 8.6% to 8.2%. The board bought back £30.4m of shares, contracting the trust by 8.8%, as it sought to bring the shares closer to their true worth.
All this leaves BGEU attempting to recover from a 26.5% fall over five years, making it the only trust in its Europe sector to be in negative territory over that period. The FTSE index has advanced 62% meanwhile.
Chair David Barron said: “This level of underperformance is clearly disappointing and underlines the need for change.”
“We believe the changes made are a positive step towards better execution, and ultimately stronger performance,” he added.
Our view
Richard Williams, senior analyst at QuotedData, said: “BGEU’s new manager Joe Faraday, who took on the role post-period end, has made sweeping changes to the shape of the portfolio, perhaps justifiably looking at the company’s large underperformance of the benchmark. In are structurally supported sectors such as banks (playing on rate sensitivity), defence (rearmament), and energy (higher prices) interspersed with utilities and increased German exposure and out are poorly performing stocks (including Novo Nordisk and LVMH). Its decisiveness has better positioned the portfolio to navigate a range of macroeconomic scenarios in the current volatile landscape.”
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