Baillie Gifford European gets back to growth with 20% first half gain

Fund managers Stephen Paice and Chris Davies believe the slump in their investment trust's performance is over as European inflation and interest rates fall.

Baillie Gifford European Growth (BGEU ) is enjoying a turnaround in fortunes after a couple of tough years, claiming there is an ‘abundance of inflection points’ for it to exploit in the future.

The £355m portfolio, which has been managed by Baillie Gifford since 2018, has suffered from its growth bias given the rapid rise in inflation and interest rates. However, falling inflation and expectations for interest rate cuts in Europe and the US mean the investment trust has started to rally, and managers Chris Davies and Stephen Paice said ‘it feels like a better time to be a long-term European growth investor than it has for several years’.

Investors have been rewarded for their patience with a total underlying return from the portfolio of 20.2% in the six months to 31 March versus a 14.9% return from the FTSE Europe ex-UK index. The share price rose 18.5%, including dividends, over the same period to end at 98.6p per share – a discount of 14.6% below net asset value (NAV).

Investors are likely to cheer the latest set of results given the dire three-year numbers with NAV down 16% over three years, and the shares sliding 28.5%.

The fund managers said shareholders rightly expect ‘outperformance as a matter of course, not as an exception’.

‘Believe us when we say that we – as shareholders too – have been unhappy with recent performance,’ they said.

‘We cannot promise that performance will continue to improve, nor would we seek to argue that every stock in the portfolio will do great things, but the abundance of positive inflection points and reasonable valuations give us cause for rational rather than blind optimism abut the years to come.’

The managers turned over 10% of the portfolio in the six months, positioning into ‘long-term winners’ such as new holding Genmab, which delivers antibody-based treatments for blood cancer. They also added to CRISPR Therapeutics, which has a cure for sickle cell disease, and received the world’s first approval for its gene-editing machine.

Within technology, platform companies have been ‘scaling at pace’ but the managers said what has changed is that ‘many are now paying more attention to costs, which should help drive profitable growth’.

This includes Spotify, which is ‘getting its staff costs under control after a period of heightened hiring’, but Paice and Davies have made a small reduction in their holding as the shares have performed strongly and ‘while we’re willing to give management the benefit of the doubt for now, we remain vigilant’.  

Hypoport, Germany’s leading online mortgage platform, is one platform company that the managers have added to. It also had to make staff cuts in 2023 but saw share price gains during a severe market downturn.

‘Mortgage volumes appear to have bottomed out, and with recovery hopefully imminent, Hypoport should deliver attractive profit growth,’ they said.

Not all online businesses have been a success for the fund and the managers sold three stocks as ‘it became increasingly clear that these business models are less attractive than we had initially believed’.

Online fashion retailer Zalando is fighting increasing competition from Shein and Temu and while the managers ‘had hoped that Zalando’s services for brands, like marketing and fulfilment, would have a positive impact on profitability…they haven’t’.

AUTO1, Europe’s largest platform for used cars, suffered from ‘wafer thin margins’ alongside a higher cost of capital from higher interest rates.

‘AUTO1 will find it increasingly difficult to scale, particularly as incumbent online classifieds companies continue to encroach on its turf,’ said Davies and Paice.

Meal-kit delivery business HelloFresh was also dropped from the portfolio as it suffered two profit warnings in as many quarters as its ‘core meal kit business had begun to decline while the company is trying to grow [ready-to-eat business] Factor, which requires significant investment’.

Growth stocks are benefiting from an easing in the forces that sparked their downturn in 2021, offering ‘potential tailwinds to valuations’ .

The managers predicted ‘a strong rebound in the small and mid-cap companies we are disproportionately exposed to’.


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