Baillie Gifford UK Growth (BGUK ) has suffered another disappointing period with its underlying asset value doubling the losses of the FTSE All-Share in the six months to 31 October.

Fund managers Iain McCombie and Milen Mileva were defensive of their growth approach which has seen the investment trust’s shares essentially go nowhere in the five years since Baillie Gifford took over from Schroders.

In the latest half-year they admitted to having been ‘overly patient’ with two poor performing companies that they have since dropped from the portfolio.

­The £266m company saw its net asset value (NAV) decline 11.9%, while the FTSE All-Share was down just 5.9% in the six-month period. Shareholders did slightly worse than this as the discount widened from 14.1% to 15%, leading to a 12.5% fall in the shares.

Since the end of April McCombie and Mileva have ditched three companies - Farfetch, Abcam and Naked Wines - and with no new investments, this has brought the portfolio down to 43 positions.

Abcam, the online platform that sells antibodies and made up 3.6% of assets at the end of April, was sold despite being the main contributor to returns as its shares price soared after it agreed to a takeover.

While the takeover is likely to complete next year the fund managers decided to exit so they could recycle the money into existing holdings such as life insurers Prudential (PRU) and Legal & General (LGEN).

However, the other two companies that left the portfolio, fashion technology platform Farfetch and online wine retailer Naked Wines, which made up 0.4% and 0.1% of the portfolio respectively, were cut because of ongoing poor performance. Both their share prices are down just over 73% so far in 2023.

‘We have to admit that both investments have proven to be mistakes,’ the managers wrote. ‘In both cases, there was a long-term growth opportunity from using technology and an interesting business model to disrupt traditional forms of distribution in their respective markets. The challenge for the management teams was to capitalise and execute on the opportunities. Both companies fell short of our expectations.’

The managers said they were ‘overly patient’ in both cases, but added there have been instances where patience has paid off and other companies have managed to come through.

The duo will at least be thankful they have avoided Farfetch’s latest hammering, which saw the shares fall by as much as 50% on Wednesday after the luxury retailer postponed its quarterly results telling the market to rely on previous forecasts and guidance.

McCombie and Mileva said while some investors might use their mistakes as proof the ‘philosphy and process might be flawed’, they ‘strongly refute’ the theory.

‘To attempt to outperform a benchmark one has to accept, whether as a portfolio manager or a shareholder, that investing carries with it risk…Mistakes in investment are therefore an unfortunate fact of life for an investor in good times as well as bad.’

St James’s dilemma

While the managers are confident they have now made the right call to exit the two tech platforms, they are in a puzzle when it comes to St James’s Place (STJ), which has seen its share price fall 41.5% in 2023.

The UK wealth manager, which makes up 2.5% of overall holdings, took a hit after it announced a package of fee reduction changes and a slowdown in new business.

The managers said on the positive side St James’s ‘has addressed this [fee] issue without impacting it’s very important self-employed partner salesforce’ and taken a ‘a tough decision to benefit clients’.

However, the bear case is that this is only just the beginning of pressure on fees and therefore profits, they added.

‘The announcement of a new CEO starting imminently from outside the business (the former well regarded finance director of Prudential) comes at a critical time for the company and we will be engaging with him to understand his thoughts and plans for the future,’ the pair said. ‘In the meantime, the very low rating which discounts a very pessimistic scenario provides breathing space to take stock.’

Positive outlook

Despite all the negatives, the managers are highly optimistic about their current holdings.

They said they were ‘feeling as upbeat about the portfolio as we can remember,’ adding ‘this is not bravado’.

‘Be assured that our feet are firmly on the ground, and we continue to challenge ourselves on what we are doing,’ they wrote. ‘However, we see a pattern of short-term, cyclical concerns overshadow what we view as strengthening long-term prospects of the majority of the companies held.’

While investors wait for a turnaround in performance the board of the trust continues to buyback shares.

Over the period a total of 538,500 shares were bought back for treasury. Following the purchase of a further 334,500 shares since the period end, as at 29 November 2023 the Company has 11,269,700 shares held in treasury accounting for 7.5% of the current shares in issue.

Across five years BGUK has delivered NAV returns of 6.3% and the share price has returned just 0.9%, while the FTSE All Share is up 26.8%. It is the worst performer of the AIC UK All Companies sector over that period, which has an average share price total return of 23.4%.

The shares stood at around 195p when they took over from Schroders in June 2018 and peaked at 254p in September 2021 before unravelling in the scare over inflation and interest rates. They stand at 153.6p, up half a percentage point today.