Pressure is increasing for the managers of Baillie Gifford US Growth (USA ) who are hoping to halt underperformance by adding AI beneficiary and Facebook owner Meta back into the portfolio, while US activist Saba Capital has doubled its stake to 10.6%.

The fund has had a turbulent time since its launch in 2018 with net assets almost halving to £638m from a peak of £1.1bn in 2021 as its growth strategy fell deeply out of favour post-pandemic.

The six months to the end of November continued the run of bad luck as the net asset value (NAV) climbed 4.1%, versus a 7.9% return from the S&P 500, although the trust’s shares were 12.3% higher over the period, narrowing the discount from 22% to 16%.

On the back of the results Saba Capital decided to increase its holding from 5.05% to 10.6%, according to a stock exchange announcement. 

Saba holds numerous Baillie Gifford trust, including Scottish Mortgage (SMT ), on which it made a 30% return on last year as the discount narrowed. 

‘Storm is easing’

Managers Gary Robinson and Kirsty Gibson said the  and although they cannot assume ‘that the sun will always shine’, they are taking ‘comfort from the fact that the companies held in your portfolio are executing, and executing well’.

They called for patience from investors and for them to judge them over a five-year time frame, quoting Berkshire Hathaway’s Charlie Munger, who died last year: ‘The big money is not in the buying and the selling, but in the waiting.’

The longer-term figures are not favourable – since launch to 30 November, the share price was up 61.8% and the NAV has risen 98.2%, in comparison with a 117.8% total return from the S&P 500.

The managers said that ‘waiting, or a willingness to be patient, is an underappreciated skill set in investing’, but said it was different to inaction, which was ‘hope that share prices recover, and a better exit opportunity presents itself’ rather than conviction in a stock.

Gibson and Robinson had predicted that 2022 would be a year of ‘reorientation’ and 2023 of ‘execution’ as the fund’s companies experienced a valuation re-set after the pandemic as higher interest rates grabbed hold.

‘For some the reorientation, and subsequent execution, has been easier given the greater levels of resilience in their business models,’ they said, citing property marketplace CoStar and electric vehicle maker Tesla.

Other companies had to trim operations while maintaining investments for future growth in order to transition to profitability, including Canadian e-commerce group Shopify, which delivered the largest single peak-to-trough hit of 82% between November 2021 and October 2022. The shares are up 347% since Gibson and Robinson first invested.

Growth stocks have bounced back considerably over the past year, led by the ‘Magnificent Seven’ tech stocks – made up of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla – but there are still ‘dislocations’ between price and valuation to exploit.

This saw the duo buy back into Meta, formerly Facebook, having sold out ‘several years ago’ on concerns around ‘regulation, relevance, and recruitment’.

‘We have seen progress on all three fronts,’ said the managers.

The regulatory environment is ‘more benign’ and its reels feature, which allows users to view video content, is helping it battle TikTok and ramp up towards $10bn of revenues.

Gibson and Robinson also had a theory as to ‘why the best engineers want to come to Meta’ and it lies in artificial intelligence (AI).

‘The greatest opportunity in AI comes from proprietary datasets, and Meta has a considerable advantage here. AI can be a significant revenue and returns driver for the company,’ they said.

‘These reasons, combined with a shift in attitude internally around allocating resources, led us to re-take a look.’

A new position was also taken in Sprout Social, the social media management company, which is benefiting from the proliferation of social media channels that has made managing a brand online more complex.

‘Sprout’s platform provides a single control centre that enables effective analysis and management across social media,’ said the managers.

‘The market has consolidated significantly over the past few years, and the resulting potential for substantial revenue growth with margin expansion is underappreciated.’