Baillie Gifford European Growth (BGEU ) fund managers Stephen Paice and Moritz Sitte are backing their growth stock picks for a recovery once investors’ alarm over rising inflation and interest rates subsides.

Reporting on a brutal half year for the investment trust, which saw net asset value plunge 24.7% in the six months to 31 March against a 5.2% drop in its European index benchmark, Paice and Sitte said they were optimistic about their portfolio companies which they expected to grow revenues by an average of 25% this year. 

Over the next three years they forecast average annual revenue growth of 19%, well above the 10% prediction at the end of 2019 before the pandemic.

‘What strikes us generally is that fundamentals appear to be on track, yet valuations have collapsed. We won’t get everything right, but this gives us confidence in the prospects for the portfolio,’ the managers said.

Despite the half-year slump, at the end of March the trust remained ahead of the FTSE Europe ex-UK index over the 28 months since they took over the portfolio from Edinburgh Partners in November 2019. A total underlying investment return of 27% was almost double the benchmark’s return of 15.8% and underpinned a 29.7% shareholder total return for the period. Gearing, or borrowing, stood at 11% of assets in March.

However, a continued de-rating of the portfolio, with net asset value (NAV) down another 16% since the half-year-end, has seen the trust lose that outperformance, according to Numis Securities. The NAV is now just 8% up since Baillie Gifford’s appointment compared to a 10.3% gain in the index. Shares that have tumbled 40% this year now trail 11% below NAV compared to an average one-year discount of 4%. In response to the widening discount the trust’s board bought back 5.7m shares, or 1.6%, at a cost of £7.2m, half-year results this week showed.

The market’s shunning of growth stocks was not the only problem. The trust also had some exposure to Russia, with Prosus, the Dutch media investment company that is its biggest holding at 5% of assets, owning the Avito local classifieds business and a stake in VK, the internet search engine formerly known as Mail.ru, in the country. 

Wizz Air, the Hungarian budget carrier the managers backed for a cyclical recovery from Covid, tumbled as the conflict left it with four planes trapped in Ukraine.

The turbulent market provided opportunities to buy and sell stocks with turnover in the portfolio ‘slightly higher than usual’.

The duo bought software companies, Canada-based Topicus.com and Swedish group Embracer, which they believe ‘have long runways for capital allocation and unique cultures.’

Other new additions included Luxembourg-based toy company, tonies, and the trust’s fourth unlisted investment, German digital real estate agent McMakler.

They also added to existing positions whose share price declines were ‘extreme’, such as Swedish green investment company Aker Horizons, Norwegian investment company VNV Global and Polish e-commerce platform Allegro.

Other top-ups include Just Eat Takeaway and Delivery Hero, which like most of the purchases had seen their shares continued to slide in the bear market.

The managers sold IT company Bechtle, pharma company Morphosys and drinks company Pernod Ricard after their shares ran ahead of themselves.

They also trimmed their positions in medical equipment distributor, AddLife, logistics companies, DSV and Kuehne + Nagel, chemicals distributor, IMCD, semiconductor manufacturer, ASML, air conditioning group, Beijer, and heating tech company, NIBE.

‘Valuations felt increasingly stretched against our expectations, as has occasionally been the case over the past two years in particular,’ they wrote.