UK Core Q4 investment update

As with any investment, your capital is at risk. Past performance is not a guide to future returns.

Chloe Darling-Stewart (CDS): Happy New Year everyone and welcome to this Q4 Baillie Gifford UK Equity Core Strategy update. As a brief reminder, this strategy is looking to invest in the best of British businesses for the very long term.

My name is Chloe Darling-Stewart. I'm an investment specialist with the team, and I'm delighted to be joined today by Iain McCombie, who is head of our UK equity team and lead portfolio manager on the strategy.

Over the next 10 minutes or so, Iain and I will discuss what's been going on in the UK market, some of the stories which have been driving recent performance, and discuss the uptick in activity that we've seen in the portfolio over the quarter. So, Iain, welcome.

Iain McCombie (IM): Hi, Chloe.

CDS: Let's kick off with the big picture. It's been quite an eventful few months over the quarter with the US election and the long-anticipated UK budget. How would you characterise that market environment?

IM: It's interesting the fact there's quite a lot to talk about, but actually if you look at what the market did, it didn't do very much. But I think in one sense we're still trying to work out what the long-term implications of them are.

So as you said, to the surprise of most commentators, Trump won the presidency quite comfortably. So we'll have to see what that actually brings. Though, again, if you look at the history of it, people assumed it was going to be terrible last time, and it turned out to be nothing quite as bad as people had feared. So we'll just have to wait and see there.

But I think the one that is closer to home for the UK strategy, which I think has had some impact, I guess, is, as you said, the Labour budget, where we saw the largest tax increases for 30 years. And I think it went down pretty poorly. And I think this relentless negativity by the Prime Minister and the Chancellor has sapped confidence.

And we are starting to see some impact of those tax rises already in terms of employment and confidence. So there is a bit of a challenge there. But it's still early days. And we are ultimately bottom up. But you asked the question. That's the answer.

CDS: And from that bottom-up perspective, are you seeing any of this reflected in the performance of the companies in the portfolio?

IM: Yeah. Well, the strategy for the quarter underperformed slightly. You know, as I said, (the) market didn't move very much and we were slightly underperformed that. But I think it's interesting what actually, if you unpick it, what hurt us.

And in particular, what hurt us was our exposure to domestic cyclicals. Things like our exposure to Bellway and Persimmon, the UK house builders, where, frankly, they performed quite poorly. Not operationally, but basically the sentiment impacted them as people digested what the budget was meaning and also the fact that interest rates, gilts, were starting to pick up.

Property companies such as Shaftsbury and Helical also underperformed, although both had actually pretty decent trading updates in the period.

Now there were some good news within that and instantly the financials, some of our financials performed extremely well. Things like Wise, St. James' Place and Standard Chartered. So they all actually had good operational updates and the share prices responded well. So a bit of a mixed bag in the quarter.

CDS: In turning to portfolio activity, we were relatively active over this last quarter with three new holdings. Could you perhaps walk us through some of the new purchases?

IM: Yeah. I mean, relatively speaking, we were active. But I mean, we're still, you know, the strategy is still very much low turnover. So let's not get too carried away there, Chloe. But yes, you're right, we made three acquisitions, three new buys.

The first one was Cranswick, which was a food producer, which might not sound like a typical growth business, but actually it's got a great long-term track record. It's the number one player in pork products and increasingly moving into poultry products too. And it uses its cash flow to invest in state-of-the-art facilities. It's got much better facilities than anyone else.

Supermarkets that use it really value the supply chain, the surety of supply chain, which has been a big issue, I'm sure you'll know after Covid with supermarkets running out of stuff, Cranswick never let people down. So that has been a real boost for them. And new product development is also very good for them. You know, it's higher margin kind of products. We're not selling commodity products and therefore it's good for supermarkets, good for Cranswick.

A second business that we bought, which is one we've admired for a long time, is a company called Spirax Group. It's an engineering business, and it does all the things like heat transfer and steam products and so on, mostly to other manufacturers and other engineers. And it's a global business, and it's got a fantastic long-term track record.

Now, what's happened there in the last few years is that they had one or two businesses that performed really well going into COVID, and they've been a bit sluggish coming out of that. And the market has been a bit disappointed by that. It's been one or two operational challenges in an acquisition that they made a couple of years ago. And the share rating has come down.

Now, we always liked this business, but we always thought the rating was a bit too high. Now, that's come back substantially. We spent a bit of time talking to management, and we think, actually, the prospects there still remain very good over the long term. So we took a holding.

And last and not least is an IPO that we took part in, Applied Nutrition. Now, as the name suggests, it makes nutrition products for the sports energy market. It's an entrepreneurial business. It's been run by a founder for 10 years. And they've already built up a very profitable business, not just in the UK, but up to almost 80 countries now. and we think they've got some real opportunities to really develop some of those market positions in the future.

So those are the kind of things that we bought. So still the common point is there that they have a growth angle and we're really excited about them.

CDS: Clearly quite differentiated in different flavours of growth throughout those. Clearly you'll have to have made some sales in order to finance that. Could you perhaps walk us through your rationale for the sale of Hargreaves Lansdown and IG Group?

IM: Yeah. Well, Hargreaves Lansdowne is pretty simple. It's the number one financial platform for savers. But as you know, there was an agreed takeover bid for it by private equity, and we decided just to sell out in advance because we could see these opportunities to invest that money. And so we took it out there. So that was that one.

With IG Group, this has been a longstanding holding. It's a spread betting business and (offers) other kind of derivative products for consumers. And it's been performing okay. It's got a new CEO who is pretty impressive, but I think he's been very upfront with the fact that he thinks that they've been losing market share because they haven't been nimble enough and they've probably missed out on some opportunities, and pretty much gave a hint that they're going to break and buy things to try and plug those gaps and change that. And he's commendably honest in saying that this is not going to be an overnight story.

So we just got a little bit concerned that perhaps it's going to take a bit of time for that business to potentially turn around. And therefore, we decided there are better sources of capital. And therefore, we wanted to invest in other businesses. So that's why we decided to sell it.

CDS: Okay, so to wrap things up, as 2024 has come to a close, what would you say are your key reflections over the year?

IM: Well, I think the thing that has encouraged us is that share prices are going back to following fundamentals. That some of the best performing stocks in the year, things like Marks & Spencer or Just Group, the annuity provider, responded really well in the year to very positive trading updates.

And I think that that's a good sign for us that having had a period of disruption pre-Covid, post-Covid, I think that that growth style that we have might, maybe, might be coming back into favour again. And that's certainly a sign for that.

Equally, there's still a lot of macro stuff that's floating around and people, as I said, are worried about the kind of near-term outlook in the UK and that's impacted some of our businesses. But I think bottom line clearly is I think our portfolio is still really well positioned for the medium to long term.

We're investing in businesses with good financials, better growth prospects, and I think the valuations remain reasonable. So we remain very upbeat.

CDS: Well, I think that's a fantastic place to end things. Thank you, Iain. I hope that's given you a good sense of what's been going on in the quarter and why we remain enthusiastic for the prospects of your portfolio as we enter 2025. Thank you very much for tuning in and please do get in touch if you have any questions.

Annual past performance to 31 December each year (net%)

Annualised returns to 31 December 2024 (net%)

Source: Revolution, FTSE. US dollars. Returns have been calculated by reducing the gross return by the highest annual management fee for the composite. 1 year figures are not annualised.

Past performance is not a guide to future returns.

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