Baillie Gifford defends crossover between US trust and Oeic

Private companies only make up 10% of NAV

Baillie Gifford US trust fundraise short of target

Baillie Gifford has defended massive crossover between its US trust, which aims to target unlisted companies, and the fund house’s open-ended US fund over a year since launch.

When the trust began trading last year managers Gary Robinson (pictured) and Helen Xiong deliberately mirrored the Baillie Gifford American fund so that the trust could be fully invested at launch, giving them time to hunt for the best private companies.

But 18 months since then the trust’s top 10 largest holdings look nearly identical to the open-ended US fund. Both funds have their largest sector weightings, over a quarter of the portfolio, in consumer discretionary names and share similar exposures to IT, healthcare and communication services.

Baillie Gifford American fund top 10Baillie Gifford US Growth Trust top 10
Amazon – 8.80%Amazon – 8.7%
Market Axess – 6.00%Market Axess – 5.3%
Shopify – 5.60%Netflix – 4.8%
Netflix – 5.40%Shopify – 4.8%
Wayfair – 5.10%Wayfair – 4.8%
Illumina – 4.90%Illumina – 3.9%
Mastercard – 3.90%Alphabet – 3.8%
Alphabet – 3.80%Mastercard – 3.6%
Facebook – 3.80%Facebook – 3.6%
The Trade Desk – 3.70%The Trade Desk – 3.1%
Source: Trustnet and Baillie Gifford US Growth Trust annual report 2019

“A glance at the top 10 holdings of Baillie Gifford US Growth Trust and the Baillie Gifford American fund throws up a lot of similarities,” Baillie Gifford director of marketing and distribution James Budden admitted. But he reiterated that while the US Growth Trust only holds one tenth in private businesses right now this will continue to grow over time.

Workplace comms tool Slack and Elon Musk’s rocket company SpaceX are among the trust’s 11 unlisted holdings, according to the trust’s latest annual report.

It can have up to 50% of net asset value held in private companies.

Premium price tag

The fact that the US Growth Trust is sitting at a premium is one reason not to think about it, said AJ Bell head of active portfolios Ryan Hughes. The trust currently trades at a premium of 2.7% and Hughes notes it has consistently traded at a premium since launch.

Of the two strategies, Baillie Gifford American is better for investors wanting to make a short-term play on the US, said Hughes, though he thinks the trust “certainly could be interesting” over the long run.

He added that managers Gary Robinson and Helen Xiong may be able to take advantage of opportunities further down the cap scale due to the closed-ended structure of the fund. “But right now, you’re not getting that.”

Budden told Portfolio Adviser the funds appeal to different types of investors.

“If investors want to have a stake in what we believe are the best and often biggest companies in America then the fund is the way to go especially with an ongoing charge of just 0.52%.

“On the other hand, the trust is designed to give shareholders access to a growing number of large private companies in the US as its closed ended structure is suited to holding more illiquid stocks.”

While Ucits funds can hold up to 10% in unquoted stocks under current EU regulation, none of Baillie Gifford’s open-ended funds are invested in private companies.

Expensive markets

In Robinson’s and Xiong’s defense, now is not an ideal time to be buying in the private space when the market is expensive and trading at record highs, said Hughes.

“Maybe they can get into some of these businesses at a slightly better price over the next 12 to 18 months. 

In its maiden set of results for the year ending 31 May 2019, Robinson and Xiong snapped up stakes in 12 private companies. One of these investments, ride-sharing company Lyft, went public over the period.

Despite the fact that the trust still largely resembled the American fund at the end of the period, the pair said they had “been delighted by the quality of the opportunities that we have been able to allocate capital to,” highlighting medical imaging firm Butterfly Network which “has the potential to be a disruptive force”.

Gearing gives US Growth a boost over American fund

Budden also touted the trust’s ability to employ gearing which is a good thing “if you believe US stock markets will rise over the long term”.

Baillie Gifford’s US Growth trust has outperformed its American fund over the last year returning 12.7% against the open-ended fund’s 7.6%. Both have generated higher returns than the S&P 500 within that period, though both have fallen against the index more recently with the £2.5bn American fund losing investors money over one month.

1m3m6m1yr
Baillie Gifford US Growth Trust0.010.322.912.7
Baillie Gifford America-2.08.717.67.6
S&P 5001.99.716.610.7
Source: FE Analytics total returns in sterling calculated on 9 August 2019

The US Growth trust can in aggregate borrow up to 30% of net asset value (NAV) of the listed securities though the board expects borrowing to be in the range of 10% to 20% of NAV.

As at the end of May the investment company drew down $15m worth of a five-year $25m revolving credit facility it entered into with ING Bank last August.

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