Baillie Gifford China Growth bounces back after four-year lull

Baillie Gifford China Growth's strategy is finally back in favour, after the trust beat the sharp rebound in Chinese shares in late 2024.

Performance is back on track at Baillie Gifford China Growth (BGCG ) after a challenging four years.

The £174m portfolio, run by Linda Lin and Sophie Earnshaw, turned its portfolio around over the year to end of January, managing even to beat the sharp rebound in Chinese markets at the end of 2024.

Lin and Earnshaw grew BGCG’s net asset value (NAV) by 35.4% over the 12-month period, ahead of a 32.4% rise by the MSCI China All Share index. BGCG’s shares were up 29.4% over the year.

The latest results mark a turnaround for the trust after three years of lagging the index. This poor performance caused the board to bring in a performance-related tender offer that will allow shareholders to cash in 100% of their shares in December 2028.

Lin and Earnshaw are no doubt hoping to avoid a potential wind-down of the fund in 2028 and believe their growth strategy is finally back in favour and has started to outperform value for the first time in four years.

Analysis by the managers showed that since they took over the trust in 2020, value significantly outperformed growth, as domestic investors sought refuge from the regulatory crackdown and weak economic environment in high-dividend, low growth stocks.

However, expectations for growth stocks have improved significantly since the fourth quarter of 2024, given the ‘pro-growth policy announcements’ coming from Beijing that sent Chinese equities soaring 30% in just two weeks.

‘Policy measures to stabilise the property sector are gradually restoring consumer confidence, while technological and industrial advances continue to drive new growth opportunities,’ said Lin and Earnshaw.

This has enticed foreign investors back into the region, with fund flows turning net positive in the final quarter of 2024 for the first time in two years. With structural tailwinds in place, the managers said 2025 will be ‘a year of renewed potential for long-term investors’.

AI boom

Companies that have powered performance include Shenzhen Megmeet, which makes power supply and electric automation products. Its shares more than doubled after it announced it had been selected as a supplier to semiconductor giant Nvidia, which led Lin and Earnshaw to reduce their position.

Pop Mart, a toy designer and distributor, was another performance driver, thanks to the popularity of its collectible trendy toys. Its profits nearly doubled in the first half of 2024.

The managers noted it is aggressively expanding overseas where it continues to gain traction.

The trust’s fourth largest holding Meituan also boosted gains. Its profits surged 373% year-on-year in the first three quarters of 2024 as it maintained its large market share in food delivery and pursued international expansion into Hong Kong and Saudi Arabia.

‘With AI-driven efficiencies boosting profitability, the company remains well-positioned despite rising competition from Douyin and others,’ said Lin and Earnshaw.

The portfolio’s exposure to high-growth technology and consumer businesses was increased over the year, with the managers taking positions in semiconductor leaders Naura and AMEC.

The managers believe AI is ‘strengthening China’s self-sufficiency’, particularly with the launch of AI app DeepSeek. As the country accelerates AI investment, they hope this will deliver ‘long-term value creation’ for the fund’s technology holdings.

With Donald Trump’s ‘Liberation Day’ threatening a new swathe of levies and ‘reciprocal tariffs’, Lin and Earnshaw exited positions ‘impacted by regulatory or structural risks’.

This included WuXi Apptec, which is facing pressure from the US Biosecure Act, and Asymchem Laboratories which faces geopolitical pressure on biotech outsourcing.

However, they noted that the 10% charge Trump levied on goods imported from China during his first term had only a ‘limited impact’ on the economy and did not exert significant pressure on China.

‘While additional US tariffs and enhanced technological export controls present challenges to some of the businesses in the trust portfolio, we would note that the vast majority of our holdings are generating most of their revenue domestically in China and outside of the US,’ they said.

Baillie Gifford China Growth currently trades on a 9.8% discount to NAV. It shares are down 7.7% over the past three years, which compares to a 3.7% gain by the average trust in the AIC’s China / Greater China sector.