Baillie Gifford UK fund managers Iain McCombie (pictured below) and Milena Mileva may have seen their investment trust and funds suffer a huge blow in the growth sell-off of the past seven months, but at least the stock pickers are avoiding the fundamental mistake of changing their approach when the going gets tough.

In half-year results for the Baillie Gifford UK Growth (BGUK ) investment trust they have run for four years, the stock pickers acknowledged the dismay investors would feel at the 16% drop in net asset value (NAV) suffered in the six months to 30 April when the FTSE All-Share delivered a positive return of 8.7%.

Big falls in animal genetics company Genus (GNS), online luxury fashion retailers Farfetch and Boohoo (BOO) swamped the few stocks such as distributor Bunzl (BNZL), which made a positive return.

The interim report covers most of the period in which markets have sharply de-rated growth stocks in response to rising interest rates and surging inflation. Shares in the £240m investment trust fell even more as investor sentiment collapsed, leaving investors with a total loss of nearly 28% as the stock slid to a wide discount to asset value.

Float like a butterfly, drop like a stone

‘We know and understand that you expect better of us in the future. All we can say in response is that the strength of conviction in our process and the portfolio which derives from it, lead us to the conclusion that the portfolio is well placed to deliver tangible value over the next few years,’ they told shareholders.

‘As stock pickers of a relatively concentrated portfolio there is no place to hide. However, it also leads to this simple but powerful observation: we have spent a lot of time re-examining the fundamentals of the companies in the portfolio and we believe that they remain strong,’ they said.

‘You therefore won’t be surprised that we’re sticking to our process. The boxer Mike Tyson reportedly said: “Everyone has a plan until they get punched in the face.” All too often we see underperformance in the investment world leading to style drift. The time-honoured investment process is jettisoned when the punch in the face of (inevitable) poor performance arrives,’ they added.

The managers returned to their boxing metaphor as they urged investors to think long term and trust their experience of investing through several market cycles, a dotcom boom and bust, the global financial crisis and pandemic crash and rally.

‘However, no matter what gets thrown at us, having the experience to trust in our tried and tested process, will, we believe, get us through these challenging times. To paraphrase Muhammad Ali, the investor who is not courageous enough to take risks will accomplish nothing in life,’ they said.

Wayve goodbye to outperformance

Investors should be reassured by the duo showing the courage of their convictions, adding a small position in their first unquoted company, Wayve, a UK developer of self-driving vehicles. But it would be understandable if some long-term holders had begun to regret the board’s move to sack former fund manager Schroders and appoint Baille Gifford from June 2018.

Over three years to last Friday, the trust’s NAV fell 3% and the shares, reflecting this year’s de-rating, dropped nearly 12% against an 11% rise in the All-Share index, ranking it fifth out of six funds in the AIC UK All Companies sector. 

In the past month the board, like other Baillie Gifford trusts including Scottish Mortgage, has begun buying back shares after the stock fell to a 15% discount to NAV. Last month, City of London Investment Management, a leading buyer of over-sold trusts, lifted its stake to 5%. 

Meanwhile their open-ended funds, which invest in a similar list of stocks, have also tumbled. Morningstar data from Citywire websites shows that in the three years to 30 April, McCombie’s £248m Baillie Gifford UK Equity Core  rose 4.5% but ranked just 155 out of 212 funds in its sector. Mileva’s (pictured below) £848m Baillie Gifford UK Equity Alpha , which takes a more aggressive and focused approach, slumped 15% to rank 208 out of 212 funds. 

Portfolio changes

Within the trust McCombie and Milevan opened five new positions and exited three stocks keeping stock turnover low at just above 5% and leaving them with 40 positions at the end of April.

Before Christmas, they brought in UK-based but US listed pharma-tech company Exscientia, online wine retailer Naked Wines (WINE), DNA sequencing developer Oxford Nanopore Technologies (ONT) and online money transfer platform Wise (WISE). All have fallen heavily this year and each represent 0.3%-0.8% of net assets.

After a shareholder vote, the fund managers can invest up to 10% in private unquoted companies not listed on a stock exchange. Wayve Technologies, the first of these at an initial 0.5% weighting, excites the pair by the way the UK company is using artificial intelligence (AI) to make self-driving cars.

‘This is a very difficult problem, but the pay-offs to making a system work and obtaining regulatory approval are extremely large. Wayve appears to be well placed with its differentiated approach of training a single neural net on the whole problem, allowing AI to develop solutions without the imposition of human-coded rules.

‘The AI is developed using just a few cameras placed on vehicles operated by high-traffic fleet partners such as Ocado. In theory, its approach is much cheaper and better able to adapt to new environments than more “traditional” approaches to autonomous driving, which are yet to be deployed beyond limited pilots despite the many billions invested,’ they explained.

The pair sold marine and energy equipment and services provider James Fisher & Sons (FSJ), defence business Ultra Electronics (ULE) and Jackson Financial, following its spin-out from Prudential (PRU).

Despite the stock market mauling, the pair remained positive. ‘Rising inflation and its implications for growth business that are investing their earnings for future returns has resulted in poor share price performance for many. Despite this, the fundamentals for many of these businesses remain strong, particularly for those that have pricing power and can therefore increase their earnings,’ they wrote.