Baillie Gifford European Growth Trust (BGEU) announced its annual results for the year ended 30 September 2024. The company delivered a NAV total return of 12.1% compared to a total return of 15.3% for the comparative index. The share price total return was 9.3%. At the time of publishing, the company’s discount sat at 17%. The net revenue for the year was 0.72p per share (2023: 2.68p). A final dividend of 0.6p per share is being recommended (2023: 0.40p) for a yield of around 0.5% .Commenting on the performance, chairman Michael MacPhee noted: “The six-month interim period ending in March was a stronger period for the company, and growth investing more generally. The second half of the year, however, felt like a pause for breath as various macroeconomic and election data points were digested. This is a reminder that the recovery of our performance will not be linear but it does not derail our belief in the managers and the view that operational progress and growth in cashflows will be the main driver of value creation for the foreseeable future.”
During the year, the board committed to a performance-triggered tender offer of 100% of the company’s issued share capital which will be triggered if the company’s NAV total return per share (measuring debt at fair value) underperforms the return of the FTSE European ex UK Index (in sterling terms) over the four years to 30 September 2028.
The rationale for the performance driven tender offer is outlined below:
“At the annual strategy session of the company held in September 2024, the board undertook a review of the performance of the company and various related matters, including investment risk. Key areas of review included valuation and diversification. The board found the discussion around investment risk to be highly informative. Aside from the damage done to valuation of long-term growth by a major shift in interest rates, there is no doubt that stock-picking mistakes have been made. We wanted reassurance that lessons had been learned, however, and are optimistic on this score.
“In the 21 months since the end of 2022, the European equity market has posted positive returns. However, the company has underperformed. While markets have been up, it has not been a typical post-recession recovery. Indeed, the threat of a recession has certainly played its part in creating a nervous environment. The bulk of the index performance has been accounted for by 11 of Europe’s largest stocks. While market concentration has been a global phenomenon, in Europe it has been steady, cash-generative companies that have led this concentration rather than big tech (as in the US). As the managers are European growth investors, they typically have a large portion of the company’s portfolio invested in small and mid-sized companies, and therefore the continued outperformance of large caps has harmed the company’s own performance recovery to this point when gauged against an index weighted towards large-cap companies.
“Following this in-depth review, the board continues to hold a strong belief in the company’s mandate and has confidence that, over the longer term, the managers have the ability to outperform as the current headwinds to growth investing will not last forever. Valuations move around, but time is on your side if underlying idiosyncratic operational growth and opportunity is at the heart of your investment analysis. Whilst maintaining this belief, the board is painfully aware of the disappointing absolute and relative performance of the company over the last three years and recognises that shareholders expect the company to outperform broad market indices over the medium term. It is therefore proposed to commit to the following.”
Discussing the outlook for the trust, the managers noted:
“Our diversified portfolio is exposed to themes that should underpin structural growth for years, if not decades. We have serial acquirers consolidating fragmented markets, innovative healthcare companies meeting unmet medical needs and driving costs out of the system, some of the largest and most powerful e-commerce and digital entertainment platforms in the world, companies providing hardware and software for the further advancement of Moore’s Law, solutions providers helping us to transition to a lower carbon economy, capital allocators investing in private markets, and a collection of the highest quality luxury brands.
“In terms of cyclical tailwinds, broader macroeconomic conditions are more supportive than they have been for many years. Interest rates and inflation are either falling or stabilising, normal ordering patterns are resuming in many industries we are exposed to, M&A activity is picking up, as are the number of IPOs, and the outlook for demand seems to be improving from a low base.
“The most compelling reason, however, is that we believe valuations do not reflect this upside. Looking at the portfolio in aggregate (characteristics below), we can see that when compared to the index, our companies have been and are likely to continue growing faster, are generating higher returns on equity and invested capital, and have stronger balance sheets. For these qualities we would expect to pay a valuation premium versus the index, but even this has been narrowing significantly. In our minds, this understates the fundamental, durable attractions of our portfolio. We also see record levels of discounts right across Europe, across the small and mid-cap sector, and on Investment Trusts and other listed holding companies. This Investment Trust is now trading on a record wide discount of around 16% to its own NAV.”
BGEU: Baillie Gifford European Growth optimistic despite challenges over 2024
