The directors of the Schroder UK Growth investment trust recently fired their fund manager. The trust’s assets will be moved to Baillie Gifford; a new high-conviction, focused, “best ideas” strategy will be implemented; and the trust will be renamed the Baillie Gifford UK Growth Fund.
This makes sense. A trust’s directors are there to look out for the interests of shareholders, which involves ensuring they are getting value from the fund managers they use. Schroders didn’t appear to be doing a particularly brilliant job. Despite the trust’s name, it has long focused more on value than growth stocks (think Shell and Lloyds), which hasn’t been working – the trust has underperformed the FTSE All-Share over three and five years and the shares have traded at a nasty discount to net asset value. There is also every reason to think that Baillie Gifford, a genuine growth investor, could do a brilliant job (its record is impressive, as MoneyWeek readers invested in Scottish Mortgage will know) and new managers Iain McCombie and Milena Mileva plan to completely revamp the portfolio. It’s hard to find much to criticise, especially as the discount has all but halved since the news broke.
Yet it still makes me feel a tiny bit uneasy. Look back to the accounts that this trust published in April 2000, just as the great technology boom was about to come to a very nasty end. The directors were settling on a change of strategy. Given the “growing importance of high-growth stocks to the UK stockmarket, particularly those in technology-related areas”, they concluded that the fund was “too heavily biased towards stocks in out-of-favour, lowly rated companies known as value stocks”. That, said the chairman, was to be reversed. This was a horrible decision. The Nasdaq peaked in March, and by the time the directors published their report, the game was already up.
It won’t be quite the same this time: valuations aren’t super-extreme and Baillie Gifford is a responsible growth investor (you won’t find the types of fantasy firms that were popular in late 1999 in its portfolios). However, technology stocks have outperformed hugely, and growth valuations are stretched. That might make anyone who thinks the biggest driver of long-term returns is the price you pay when you buy (that’s us) notice the relative value in the healthcare, banking and energy sectors (the very ones Schroders was in). For more on ways into this market, see this week’s cover story, while Max King reckons now is exactly the time to buy out-of-favour, lowly valued stocks!
Finally, some news. MoneyWeek is looking for a managing editor to work with John Stepek and me to oversee the commissioning, editing and production of the magazine on a weekly basis – as well as to help shape our long-term future. If you are interested, or know someone who should be, please get in touch.