Baillie Gifford European puts brave face on collapse

The Baillie Gifford team behind the £1.6bn European fund are backing their growth stock picks for a recovery once investors’ alarm over rising inflation and interest rates subsides.

Reporting on a brutal half-year for the Baillie Gifford European Growth (BGEU) investment trust, which saw net asset value (NAV) plunge 24.7% in the six months to 31 March against a 5.2% drop in its European index benchmark, managers Stephen Paice, Moritz Sitte and Chris Davies said they remain optimistic as their underlying holdings continue to expand rapidly irrespective of the recent stock market selloff. 

Their similarly positioned European fund, where they are joined by co-manager Josie Bentley, has also racked up some of the worst returns across the entire universe of open-ended funds this year. Despite longer-term outperformance, in the six months to Friday the portfolio was down 38.8% versus the average 12.9% decline in its Investment Association sector. 


In the trust’s interim results, the managers said they expect their portfolio holdings’ revenues to grow by an average of 25% this year. They forecast average annual revenue growth of 19% over the next three years, well above the 10% predicted at the end of 2019, before the pandemic.

‘What strikes us generally is that fundamentals appear to be on track yet valuations have collapsed. We won’t get everything right but this gives us confidence in the prospects for the portfolio,’ the trio said. 

Despite the half-year slump, at the end of March the trust remained ahead of the FTSE Europe ex-UK index over the 28 months since they took over the portfolio from Edinburgh Partners in November 2019. A total underlying investment return of 27% was almost double the benchmark’s return of 15.8% and underpinned a 29.7% shareholder total return for the period. Gearing, or borrowing, stood at 11% of assets in March.

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However, a continued derating of the portfolio, with NAV down another 16% since the half-year end, has seen the trust lose that outperformance, according to Numis Securities. The NAV is now just 8% up since Baillie Gifford’s appointment, compared with a 10.3% gain in the index.

Shares that have tumbled 40% this year now trail 11% below NAV compared with an average one-year discount of 4%. In response to the widening discount, the trust’s board bought back 5.7m shares, or 1.6%, at a cost of £7.2m, the half-year results showed last week.

The market’s shunning of growth stocks was not the only problem. The trust also had some exposure to Russia, with Dutch media investment company Prosus – its biggest holding at 5% of assets, in line with a similar weight in the open-ended fund – owning Russian local classifieds business Avito and a stake in Russian internet company VK, formerly known as 

Wizz Air, the Hungarian budget carrier the managers backed for a cyclical recovery from Covid-19, tumbled as it was left with four planes trapped in Ukraine after Russia’s invasion.

The turbulent market provided opportunities to buy and sell stocks, with turnover in the portfolio ‘slightly higher than usual’.

The Baillie Gifford managers also bought two software companies – Canada-based and Swedish group Embracer – which they believe ‘have long runways for capital allocation and unique cultures’.

Other new additions include Luxembourg-based toy company Tonies and German digital real estate agent McMakler, the trust’s fourth unlisted investment.

They also added to existing positions whose share price declines were ‘extreme’, including Swedish green investment company Aker Horizons, Norwegian investment company VNV Global and Polish e-commerce platform Allegro.

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Other top-ups include Just Eat Takeaway and Delivery Hero whose shares, like those of most of the purchases, continued to slide in the bear market.

The managers sold IT company Bechtle, pharma company MorphoSys and drinks company Pernod Ricard after their shares ran ahead of themselves.

They also trimmed their positions in medical equipment distributor AddLife, logistics companies DSV and Kuehne + Nagel, chemicals distributor IMCD, semiconductor manufacturer ASML, air conditioning group Beijer and heating-tech company NIBE.

‘Valuations felt increasingly stretched against our expectations, as has occasionally been the case over the past two years in particular,’ they wrote.


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