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Baillie Gifford to take over Schroder UK Growth

13 April 2018

Schroders has been sacked as manager of Schroder UK Growth following a prolonged period of poor performance under Philip Matthews. Baillie Gifford will take over the mandate.

The board of Schroder UK Growth (SDU) has sacked Schroders and awarded the mandate to Baillie Gifford managers Iain McCombie and Milena Mileva.

The decision follows a prolonged period of disappointing performance for the investment trust under Julie Dean's successor Philip Matthews, which has resulted in a persistent double-digit discount.

'Accordingly, the board has concluded that, in order to provide the best investment outcome for existing investors and to position the company to attract new investors, it should make the change to implement a new, "best ideas" investment approach managed by Baillie Gifford,' the board explained.

Over the past three years, Schroder UK Growth's share price has risen by 35.5%, which compares to 80.9% by the average share price return across the Association of Investment Companies' UK All Companies sector. Since December 2015, the fund has traded on a double-digit discount to net asset value (NAV) and was yesterday trading on a 13.1% discount. The shares jumped 5.8% to 182p today on the news.

Mileva joined Baillie Gifford in 2009, and has worked as an investment manager in the UK equity team since 2012. Citywire AA-rated McCombie co-runs the open-ended Baillie Gifford Managed fund with Steven Hay and has returned 37.6% over the past three years, ahead of 21.6% by the average fund in Citywire's Mixed Assets - Aggressive sector. 

Over the same period, Matthews has grown the NAV by 14.7% versus a sector average of 18.8%.

The trust will be renamed Baillie Gifford UK Growth fund and its ticker will change to 'BGUK'.

The £259 million trust's investment objective and policy will not change under Baillie Gifford. However the new managers will revamp the portfolio in line with their high-conviction 'best ideas' approach. The team is likely to hold around 40 UK growth stocks under the new process. 

The board has served Schroders with three months' notice, but an official date for the transition has not been set yet.

Management fee

Baillie Gifford will receive an annual management fee of 0.5% of the NAV under the new contract. In order to offset any payment to Schroders relating to the termination of their contract and to contribute towards other costs associated with the manager change, including stamp duty, Baillie Gifford has agreed to waive approximately six months of its management fee. Based on the current NAV, this equates to £732,000. 

Under the new investment management contract, each party must provide six months' notice to terminate.

Long and winding road

Matthews took over management of Schroder UK Growth in 2014 from Dean, after she left to join Sanditon. Prior to this, the trust had been run by Richard Buxton, who left to join Old Mutual Global Investors in 2013, where he now works as a fund manager and chief executive.

In January of this year, Schroders sought to take action to improve the trust's performance by taking Matthews off the £898.8 million open-ended Schroder UK Alpha Plus fund . The asset manager hoped that Matthews would be able to focus solely on the trust and that performance would turn around. However, after three months of lacklustre returns, the board has lost patience.

Attempts to narrow the fund's discount via a share buyback policy also failed to achieve the desired effect.

Schroder UK Growth has suffered a fall from grace since Buxton stepped back from managing the trust in May 2013. Schroders was then able to hang on to the mandate when Dean took over.

However, after her exit 16 months later the board launched a review and beauty parade, allowing other managers to pitch for the mandate. The board felt this was in the interests of shareholders and at the time analysts raised the possibility that the trust could switch back to former manager Buxton at Old Mutual.

However, the board and major shareholders decided to stick with Schroders under Matthews, subject to a number of conditions. The first was that Schroders would cover the entire cost of transitioning the portfolio to Matthews' approach, estimated to have been around £1.6 million.

In addition, Schroders agreed to a 'fee holiday' covering a minimum of 14 months up to the end of 2015 and a fee cut from 0.6% to 0.5% per annum.

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