Growth companies have proven to be some of the best stocks to buy over the past 20 years. Names such as Nvidia, Palantir and Tesla have made investors an absolute fortune.
However, those are US-listed growth shares that usually command a premium valuation compared to London-listed firms. But what if there was a way to invest in high-quality UK growth stocks at a discount while also collecting income?
Read on and I’ll reveal one investment trust that offers just that…
Concentrated, bespoke, and high-conviction
Investment firm Baillie Gifford is synonymous with identifying many top growth companies. Recently, its funds holding SpaceX have made massive returns.
A few years ago, it started managing the Baillie Gifford UK Growth Trust (LSE:BGUK). This is a “concentrated, bespoke, high-conviction, actively-managed best ideas portfolio of listed and private UK growth businesses“.
Unfortunately, the performance has been disappointing so far. As of October, the trust had underperformed the FTSE All-Share Index over one, three and five years. Not great.
So why am I highlighting this one? Well, I see a number of reasons to be more optimistic moving forward.
For a start, some of the key holdings look top notch to me. The largest is Games Workshop, which has incredibly high profit margins and a loyal army of customers worldwide.
Then there’s cross-border specialist Wise and Volution, the maker of indoor air quality solutions and ventilation products. To my mind, all three have solid long-term growth prospects.
Also attractive is that the trust’s shares are trading at a 10% discount to net asset value (NAV). Essentially then, you’re buying a portfolio of UK companies — that also includes AJ Bell, Experian, RELX, and Sunbelt Rentals — for 90p on the pound.
If the gap between the share price and the actual asset value closes in future, it would provide an extra boost to returns. This isn’t guaranteed, of course, but the trust has been buying back a ton of its own shares to try and narrow the discount.
Finally, I like that there’s income, with the portfolio holding dividend stocks like Legal & General, Diageo and Greggs. The trailing dividend yield is 2.66%.
What’s gone wrong?
There appear to be a couple of key things that have hampered performance. One is that quality growth investing has gone out of fashion in recent years, with UK market returns dominated by banks and commodity stocks. So the backdrop hasn’t been favourable for this investing style.
Another is that the managers have made some poor stock picks. Names such as Diageo, Burberry and Bunzl have really underperformed. More recently, holdings including Experian, Auto Trader, RELX and Rightmove have been hit by AI-eats-software fears.
Continued underperformance is a risk, though it’s worth mentioning that the total return was 17.7% in the six months to 31 October. That’s not bad at all (and was slightly ahead of the index).
Moreover, if the trust fails to turn things around before 2029, the board will launch a tender offer (allowing you to sell shares at a narrower 2% discount to NAV). This would guarantee an exit route very close to the true value of the assets.
Weighing everything up, I reckon this UK growth trust is worth assessing more closely at 214p. My view is that many of the holdings are currently undervalued.
Should you invest £5,000 in Baillie Gifford Uk Growth Trust Plc right now?
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Ben McPoland owns shares in Diageo, Games Workshop, Legal & General, Nvidia, and Wise.
