Britain has many good quality, growing companies, but investors have been ignoring them as they fixate on the dominant US mega caps. That’s left valuations close to low points and trusts focused on this area trading on wider than normal discounts. Baillie Gifford UK Growth Trust (BGUK) is a good example of this.

As with any investment, capital is at risk.

At the time of writing, fund flow data clearly shows that international investors have been withdrawing from the UK equity market for a number of years. Considerable column inches have been dedicated across the financial press to the reasons why, so no need rehash those here, but the result is that the UK now looks very cheap versus both its own history and against other regions, with small cap and growth stocks at the sharp end of the derating.

It is fair to say that the strong performance of the US market – driven largely by the stratospheric performance of a very narrow group of technology stocks that are heavily exposed to the growth in the use of artificial intelligence – and a strong US economy, haven’t helped UK equities’ relative performance. Instead, they have contributed to an environment where most international investors have either found very little to get excited about in the UK market, or are ignoring it altogether.

After a tumultuous few years under the previous Conservative administration, the election of the new Labour government last year, which swept to power in a landslide, was expected to give rise to a period of much greater political stability. This would allow businesses to better plan for the future and, along with the prospect of a less hardline approach with Europe (still far and away the UK’s largest trading partner), the outlook for both economic growth and returns from UK equities was looking increasingly positive. Signs that inflation was slowly retrenching, increasing the likelihood of further interest rate cuts, added to a growing sense of optimism.

After an initially rocky start, this seems to be coming to pass but the change of administration in the US has had the reverse effect to that of the UK. At home, President Trump has signed a raft of executive orders that are designed to shrink the state aggressively and, on the international stage, upend the global rules-based system – both with his approach to resolving the conflict in Ukraine and the implementation of significant tariffs against a range of significant trading partners, including traditional allies.

These developments, particularly the imposition of tariffs, have hit markets – particularly in the US, where the S&P 500 has lost over 200 points in the last week. The UK market, in comparison, appears to be emerging well from this period of turmoil with the boost since the tariffs came into force putting its returns in positive territory over most of the standard time frames at the time of writing.

To be clear, the S&P500’s 3.7% fall over the last week is a tiny dent when set against the c 94% return it has generated over the last five years. In comparison, the UK has managed a rise of 0.1% over five days but just 31% over five years. However, with President Trump showing no sign of retrenching and seemingly digging in for the long haul, and higher volatility – particularly in the US – being the new order of the day, could the UK with its very attractive valuations be well positioned for a recovery?

We think the answer to this is yes and particularly for the growth end of the market, which has also been heavily weighed down by an environment of higher interest rates. Although inflation’s path of retrenchment has not been a straight line, the direction of travel still appears to be towards lower inflation and interest rates and, if this comes to pass, UK growth equities should be major beneficiaries. This has led us to look at BGUK.

Looking at the UK all companies sector, BGUK is the most growth focused of its peers. Not surprisingly, it has had a challenging three years – 2022 was particularly bad as its NAV lost 22% as inflation and interest rates took off in the aftermath of the invasion of Ukraine (a cessation to hostilities could be a huge boon to UK growth equities and BGUK would likely benefit significantly from the change in sentiment) – but today there is significant latent value present in its portfolio.

We recently spoke to one of BGUK’s lead managers, Milena Mileva. She thinks that both Baillie Gifford (BG), as an unashamedly growth focused house, and BGUK, are incredibly well-positioned to exploit these inefficiencies. Milena acknowledges that BG’s growth strategies are not all-weather and that its UK strategies, in particular, have faced significant headwinds during the last three years but says that as the turbulence subsides, they are being rewarded. 2024 was a relatively good year, for example, and she is very confident that there is a lot more to come. Ironically, she says that BGUK’s portfolio is well positioned, even in an inflationary environment albeit that the market is yet to acknowledge it. Its focus on companies that have an edge and are able to grow sustainably tends to lead to a portfolio of stocks that are inherently resilient and weather market cycles. She points out that, despite all of the gloom, the UK has some truly exceptional companies (the UK has traditionally been very good at innovation) and that these are cheap growth stocks, not cheap value stocks.

BGUK’s portfolio has a number of unique assets. Milena cites Genus as an example. This company has had a torrid time but BGUK firmly believes in the stock, noting that its gene-edited porcine reproductive and respiratory syndrome (PRRS) resistant pig is game changing. The company is awaiting a ruling from the FDA which has been slow in coming – the FDA has never approved a gene-edited pig before and the change in administration hasn’t helped – but PRRS is a major issue and the upside from Genus’s technology is huge. Milena firmly believes that the benefits of this are so significant that any of the risk from potential tariffs are minor in comparison.

Milena is frank that the last three years have been painful but says that they have not changed their approach. Instead, they are staying very close to their companies, watching how they’re developing, and debating the pros and cons of their positions extensively. The result of all of this work is that BGUK’s managers remain very confident in the trust’s portfolio and, reflecting this and the existing low valuations of the stocks it already holds, turnover has been low with the manager largely adding to the trust’s existing positions. BGUK’s managers firmly believe that the quality of the portfolio will come out in the end and are continuing to do what they are good at until the market turns. In the meantime, there is still potential for more M&A as trade buyers step in.

BGUK’s board of directors are not sitting on their hands either. BGUK has been actively repurchasing shares, which are NAV accretive for remaining shareholders, and, at the end of January, its board announced an important update to the trust’s buyback policy: BGUK is now aiming to maintain a single digit discount. This seems to be working – as at 19 March 2025 the discount to NAV was 10.6%. In addition, the board has already said that it will give shareholders the opportunity to realise their investment in full – at close to NAV – in 2029 and is offering shareholders an additional continuation vote in 2027.

It is clear to us that the valuation opportunity in UK equities is significant and, in our view, the valuation gap does not make sense, particularly with trade buyers and private equity running their slide rules over the space. It is also true that, while the US market has eclipsed the UK’s in recent years, its politics are becoming increasingly difficult and there are good reasons to look elsewhere, recognising that, while the US will remain important, it is unrealistic that it will perennially maintain market leadership.

Within UK equities, growth is particularly cheap and for well documented reasons. However, these headwinds will not last forever and UK growth stocks could move quickly if the market moves in their favour. BGUK would benefit significantly from this and, in the same way that its discount has tended to widen when growth and the UK have moved out of favour, it would likely narrow as interest resurges. From this perspective, the upside-downside risk looks asymmetric, and, in the meantime, BGUK also benefits from NAV accretive repurchases in the near term, an option to get out in full in 2029 or call time in 2027 if things are not going to plan. We think it is time to take a fresh look.

Past performance is not a guide to future returns.

Important information

This article does not constitute, and is not subject to the protections afforded to, independent research. Baillie Gifford and its staff may have dealt in the investments concerned. The views expressed are not statements of fact and should not be considered as advice or a recommendation to buy, sell or hold a particular investment.

The Trust can borrow money to make further investments (sometimes known as “gearing” or “leverage”). The risk is that when this money is repaid by the Trust, the value of the investments may not be enough to cover the borrowing and interest costs, and the Trust will make a loss. If the Trust’s investments fall in value, any invested borrowings will increase the amount of this loss.

The Trust can buy back its own shares. The risks from borrowing, referred to above, are increased when a trust buys back its own shares.

Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). The investment trusts managed by Baillie Gifford & Co Limited are listed on the London Stock Exchange and are not authorised or regulated by the FCA.

A Key Information Document is available at bailliegifford.com.

Marten & Co (which is authorised and regulated by the Financial Conduct Authority) was paid to produce this article on Baillie Gifford UK Growth Trust Plc.