Schroders may be one of the most respected fund-management businesses in London, but earlier this year the directors of the Schroders UK Growth Fund decided they’d had enough.
After two disappointing replacement managers for Richard Buxton, who left for Old Mutual in 2013 after 11 years, they switched to Baillie Gifford, becoming the Baillie Gifford UK Growth Fund (LSE: BGUK).
The news was received positively, given Baillie Gifford’s reputation, and the discount to net asset value at which the shares traded dropped sharply, although it has since edged out to 8%.
The new managers, Milena Mileva and Iain McCombie, follow the Baillie Gifford house style: investing for the long term, low portfolio turnover, an overlap with the benchmark FTSE index of only 15%, and a relentless focus on quality growth stocks to the exclusion of macro-economic and political factors.
Change is inevitable
“We look for companies that put customers and employees first,” Mileva says. So that’s companies with a strong identity and vision that focus on innovation, put long-term investment before short-term profit maximisation, and have the ability to change and understand that it is inevitable. “Very few companies have the courage to follow such a strategy consistently.” The list of 40-or-so holdings includes Rightmove, Autotrader and Just Eat, which have used technology to disrupt established businesses – in these cases, estate agency, second-hand cars and takeaway food.
One of the largest holdings is fund supermarket Hargreaves Lansdown, which in 25 years has gone from a small office in the backstreets of Bristol to having one million customers, thanks to investment in technology, its product portfolio and customer services. “There is long-term structural growth in the UK savings market and customer retention rate is 94%.” There is a similar-sized but more controversial investment in wealth manager St James’s Place, but Mileva insists that the high fees are justified by strong performance for its clients.
Don’t overlook the high street
High-street retailing may have its problems, but this doesn’t put Mileva off “premium lifestyle brands”, such as Burberry and Ted Baker. The latter, still 30% owned by its founder, is “quirky and unique, avoiding traditional advertising, supermodel sponsorship and giveaways to celebrities. It has never pursued growth for its own sake and the online offering reinforces, rather than undermines, its stores.”
Investors pessimistic about the outlook for British manufacturing may be surprised to see a number of industrial companies in the portfolio. Mileva draws particular attention to Renishaw, the Gloucestershire-based engineering company.
The company spends 15% of revenue on research and development, and doesn’t outsource manufacturing, believing that “only by manufacturing yourself can you learn how to do it better”. As a result, Renishaw is “very cyclical but has great consistency of attitude”.
Though Prudential and Legal & General make it into the list of the ten largest holdings, the mega-caps, such as HSBC, GlaxoSmithKline, BP and Vodafone, which may provide investors with reassurance owing to the familiarity of their names but which have held the FTSE 100 index back recently, are absent.
Cautious investors may prefer to wait for evidence that the managers of Baillie Gifford UK Growth are delivering on performance, but longer-term followers of Britain’s premier fund-management company will take success for granted and snap up the shares on the current discount.