Baillie Gifford European Growth Trust’s managers are keeping the faith after the growth sell-off and Ukraine crisis left its share price in the lurch.
The £345.1m trust’s shares plunged 28.8% in the six months to 31 March 2022, while net asset value (NAV) per share fell 24.7%. This was far worse than the FTSE Europe ex UK, which ended the period down 5.2%.
Baillie Gifford took over the mandate from Franklin Templeton Investments’ subsidiary Edinburgh Partners in October 2019, shifting its focus from value-oriented names to high-growth stocks, a move which has recently come back to bite shareholders.
Year-to-date, the trust’s shares are down over 39%, on par with the brutal losses sustained by the Edinburgh manager’s Scottish Mortgage and Edinburgh Worldwide investment trusts.
The bulk of its holdings are software and computer services businesses, followed by personal goods and industrial engineering firms, according to its latest factsheet.
Geopolitical uncertainty from the war in Ukraine, rising inflation and interest rates, and the probability of a recession have made matters worse.
“Seldom have there been so many reasons to fear Europe. Add to all this the collapse of the company’s share price since September and you’d be forgiven for wondering how we manage to get up in the morning,” managers Stephen Paice (pictured), Moritz Sitte and Chris Davies wrote in the interim report.
“Such challenging performance is never easy to endure. It’s especially difficult looking through our performance attribution statistics and seeing so few strong positive contributors.”
Revenue growth and balance sheets remain solid
Despite the bleak outlook, the trio is remaining “optimistic” because of the portfolio’s long-term focus on “companies driving and benefiting from inexorable, momentous changes that promise to rewrite industries, habits and lives” as well as the underlying fundamentals.
They noted the expected revenue growth for the portfolio is 25% for the calendar year 2022 and 19% per annum over the next three years, which is higher than the 10% pa growth forecast at the end of 2019.
Balance sheets are also “in good shape”, with the average net debt/Ebitda ratio for the portfolio standing at 0.6x, three times lower than the benchmark (1.8x).
“If we were seeing widespread operational weakness, we’d be feeling significantly less enthusiastic,” they said.
Share price weakness provides opportunity to top up
Four new positions were added to the portfolio over the period – Tonies, McMakler, Topicus.com and Embracer – and the managers took advantage of share price weakness to add to seven holdings, including discount airliner Wizz Air and Just Eat Takeaway.
Delivery Hero, another position that was topped up, is one of the biggest fallers in the portfolio, with shares down 68% year-to-date. Yet the managers point out it is one of their fastest growing holdings, aiming to grow revenues by 60-75% this year, after doubling revenues in 2020 and 2021.
“We cannot predict whether our recent underperformance will persist, or for how long, but we can assure shareholders that we remain devoted to building a portfolio capable of generating the long-term returns they rightly demand,” the trio said.
“Importantly, we feel well-placed to exploit an increasingly rich European universe at a time when sentiment towards European growth has seldom seemed so gloomy.”
At the trust’s AGM, shareholders greenlit proposals to double the level of unlisted investments from 10% to 20% of total assets.
