Baillie Gifford trust reveals get-out clause if it can’t beat its index

Investors in Baillie Gifford UK Growth could be offered an exit route to sell shares at their true value if it continues to underperform its index.

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This is the second Baillie Gifford-managed investment trust to put its performance on the line. Baillie Gifford Shin Nippon will also offer investors an escape route if the performance of its underlying investments (the net asset value or NAV) fails to beat the MSCI Japan Small Cap Index over three years to 31 January 2027. If it underperforms, it will commit to a one-off tender offer (of 15% of the issued share capital).

In common with Baillie Gifford Shin Nippon, Baillie Gifford UK Growth’s offer is aimed at frustrated shareholders who have endured three years of underperformance and seen the trust’s discount widen to -15%.

Subject to a successful continuation vote for the trust, due at the coming Annual General Meeting (AGM) in September, the trust’s board is proposing a one-off exit opportunity at NAV, but only if its NAV underperforms the FTSE All-Share index from 30 April 2024 to 30 April 2029.

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The board will also put forward a resolution for an extra continuation vote to be held in the 2027 AGM, ahead of the schedule for one vote every five years.

For the year to 30 April 2024, the trust’s NAV return was just 0.6%, well behind the 7.5% return for the FTSE All-Share. The share price fell -0.5% over the same period.

It has now underperformed the FTSE All-Share for three consecutive 12-month periods. Over three years it has lost investors 25%, while the benchmark is up 22%.

Detractors to performance have been St James's Place, a UK wealth manager; Burberry, a luxury goods retailer; and Genus, a leading animal genetics company. Not holding HSBC has also been a notable detractor.

Its growth style of investing has also been out of favour as interest rates have risen and cyclical stocks have performed well, such as mining and oil firms, which the trust does not invest in.

Nevertheless, the board continues to back Baillie Gifford. It said it is encouraging shareholders to vote in favour of the continuation of the trust, arguing that headwinds to the way the trust invests will not last forever and the trust will resume its historical outperformance.

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Chair Carolan Dobson said: “The board is reassured that the current portfolio is populated with exciting growth businesses with strong competitive positions and large market opportunities. The fundamentals of the portfolio look strong, with 97% of the portfolio having positive earnings or cash flows and one-year forward sales growth and earnings better than the index.”

Investment trust analyst Numis says the high-growth nature of Baillie Gifford UK Growth differentiates it from other UK-focused investment companies and the style headwinds have “clearly contributed” to a period of significant underperformance over recent years.

However, it notes that performance recovered to match the FTSE All-Share in the second half of the results period.

Several investment trusts have introduced performance-related tenders in recent years, Numis notes, offering shareholders a partial exit opportunity should performance underwhelm.

They include JP Morgan Emerging Markets and Templeton Emerging Markets Investment Trust, which have also set out five-year periods where they have pledged to beat their benchmarks.