A difficult first half to its financial year has not stopped Baillie Gifford China Growth (BGCG) from continuing to reverse the poor performance inflicted on shareholders since the former Witan Pacific appointed Baillie Gifford to run it as a China fund six years ago.
After two strong years of 38.8% and 35.4% investment returns, the £163m closed-end fund saw the net asset value (NAV) of its investments dip 0.9% in the six months to 31 July. The shares slipped 3.3% with a dividend included, as their discount to NAV widened to 9.7% from 7.4%.
However, both those beat the MSCI China All Shares index which fell 5.6% in response to the Middle East conflict, disruption fears around artificial intelligence (AI) and poor growth in the Chinese economy.
Chair Nicholas Pink said the latest bout of outperformance meant the company had reached a “significant milestone” with the portfolio’s 30.8% total return beating its benchmark’s 11.5% over three years, thereby recouping “a large part” of the underperformance since the mandate change.
At 31 July NAV and shareholder total returns were 0.9% and 7.5% below the MSCI benchmark. As the index fell 7.4% over the period, NAV and shareholders losses were 8.3% and 14.9%.
Nevertheless, if the recovery continues BGCG should avoid having to hold a 100% tender offer in just over two years time. The trust’s board said in November 2024 it would let shareholders sell all their shares at a tight discount if its underlying returns failed to beat the benchmark. Twenty months in, BGCG has outperformed by 18.1%.
In the half-year period, its best stocks included top 14.1% holding ByteDance, the unquoted owner of TikTok, whose valuation was pushed 27% higher on the back of strong operational performance. Alibaba, the e-commerce giant in third place at 5.6%, was among the main fallers despite signs that it was using AI to grow revenues.
Fund managers Sophie Earnshaw and Linda Lin were active in the period, turning over 37% of the portfolio. They said China’s competitive position in AI had broadened well beyond DeepSeek, the new low-cost entrant that shocked Western rivals such as Anthropic and OpenAI at the start of last year, with launches from the likes of Zhipu and Moonshot.
“The significance is less about identifying one Chinese model winner and more than the entire ecosystem continues to improve quickly,” they said.
Capital spending by China’s AI developers was a fraction of US “hyperscalers”, making it less vulnerable to questions about monetisation with the main challenge being access to chips, memory and datacentre capacity, they added.
Our view
QuotedData senior analyst Matthew Read said: “While Baillie Gifford China Growth’s NAV slipped slightly in absolute terms, it has outperformed its benchmark by about five percentage points and has now moved ahead of it over three years, which is an achievement given the difficult period that followed the mandate change. The fact that stock selection, rather than broad sector calls, drove the outperformance is pleasing. Our observation is that Chinese market remains uneven, with weakness in property and consumption sitting alongside rapid growth in technology and manufacturing. This should play to Baillie Gifford’s stock-picking approach, although the managers will need to remain cognisant of where valuations in some of the in-demand technology names may have run ahead of fundamentals.”
