Final Results
RNS Announcement: Preliminary Results
Baillie Gifford US Growth Trust plc
Legal Entity Identifier: 213800UMIOUWXZPKE539
Regulated Information Classification: Additional regulated information required to be disclosed under applicable laws
Results for the year ended 31 May 2020
During the financial year to 31 May 2020, the Company's share price and net asset value returned 46.5% and 44.2% respectively. This compares with a total return of 15.0% for the S&P 500 Index total return* (in sterling terms).
¾ Lockdowns introduced to slow the spread of the virus have disrupted regular patterns of demand.
¾ Most of the Company's holdings have been beneficiaries of these shifts, although some have been on the wrong side of them.
¾ New listed holdings include video-conferencing company Zoom, telemedicine company Teladoc, and three enterprise software companies, Workday, Twilio and Cloudflare.
¾ Eight additional unlisted investments were made, and two existing unlisted holdings went public.
¾ At 31 May 2020, the Company held 17 unlisted investments, comprising approximately 12% of total assets.
Baillie Gifford US Growth Trust plc seeks to invest predominantly in listed and unlisted US companies which the Company believes have the potential to grow substantially faster than the average company, and to hold onto them for long periods of time, in order to produce long term capital growth.
You can find up to date performance information about Baillie Gifford US Growth on the US Growth Trust page of the Managers' website at www.bgusgrowthtrust.com ‡
Baillie Gifford US Growth Trust is managed by Baillie Gifford, the Edinburgh based fund management group with around £280 billion under management and advice in active equity and bond portfolios for clients in the UK and throughout the world (as at 1 September 2020).
Investment Trusts are UK public limited companies and are not authorised or regulated by the Financial Conduct Authority.
‡ Neither the contents of the Managers' website nor the contents of any website accessible from hyperlinks on the Managers' website (or any other website) is incorporated into, or forms part of, this announcement.
Past performance is not a guide to future performance. The value of an investment and any income from it is not guaranteed and may go down as well as up and investors may not get back the amount invested. This is because the share price is determined by the changing conditions in the relevant stock markets in which the Company invests and by the supply and demand for the Company's shares.
3 September 2020
The following is the Preliminary Results Announcement for the year to 31 May 2020 which was approved by the Board on 2 September 2020.
Chairman's Statement
It is with pleasure that I present the Annual Report for Baillie Gifford US Growth Trust plc ('the Company') for the year to 31 May 2020. During the period, we witnessed the spread of the Covid-19 pandemic, with equity markets experiencing their most significant falls for a decade in March 2020, before recovering in the following
months.
The Board is pleased to be able to report that our Managers have moved seamlessly to working remotely and that both portfolio management and all regulatory and administrative tasks have continued uninterrupted. The Managers continue to stick to their long-term investment approach and are focused on identifying the exceptional growth companies in America.
During the financial year to 31 May 2020, the Company's share price and net asset value returned 46.5% and 44.2% respectively. This compares with a total return of 15.0% for the S&P 500 Index * (in sterling terms). Over the period from 23 March 2018 (launch date and first trade date), the Company's share price and net asset value returned 88.1% and 85.7% respectively compared to a total return of 40.6% for the S&P 500 Index * (in sterling terms).
The Board is encouraged by the net asset value total return that the Managers have been able to deliver over the period since launch. However, we would ask shareholders to judge performance over periods of five years or more. Further information about the Company's portfolio performance is covered by our portfolio managers, Gary Robinson and Helen Xiong, in their Managers' Review.
Share Issuance and Buy-backs
The Company's shares have continued to consistently trade at a premium to their net asset value and the Company has issued a further 31,965,000 shares in the year to 31 May 2020 at an average premium to net asset value of approximately 3%, raising further proceeds of £48.1 million.
At 31 May 2020 we had authority, which was granted at the initial launch, to issue a further 738.2 million shares. This authority expires in March 2023.
The Company also has authority to buy-back shares. The buy-back facility was sought to allow the Company to buy-back its own shares when the discount is substantial in absolute terms and relative to its peers. The Company will be seeking to renew the buy-back authority at the forthcoming Annual General Meeting.
Gearing
On 1 August 2018, the Company entered into a five year US$25 million revolving credit facility with ING Bank N.V., London Branch. The facility is available to be used to fund purchases of securities as and when suitable opportunities arise. As at 31 May 2020 US$18 million (31 May 2019 - US$15 million) had been drawn down under the facility.
Earnings and Dividend
The Company's priority is to generate capital growth over the long term. The Company therefore has no dividend target and will not seek to provide shareholders with a level of dividend. The net revenue return per share for the year to 31 May 2020 was a negative 1.05p (period to 31 May 2019, a negative 1.09p). As the revenue account is again running at a deficit, the Board is recommending that no final dividend be paid. Should the level of underlying income increase in future years, the Board will seek to distribute the minimum permissible to maintain investment trust status by way of a final dividend.
Unlisted Investments
As at the Company's year end, the portfolio weighting in unlisted investments stood at 12.2% of total assets, invested in seventeen holdings (2019 - 10.8% invested in eleven holdings). There were eight new purchases in the year and two stocks, Peloton Interactive and Slack Technologies, listed. There is commentary on the new holdings in the Managers' Review and Review of Investments below.
Since the year end further investment has been made in Away (JRSK), Ginkgo Bioworks, Indigo Agriculture, Space Exploration Technologies and Tanium, and a new holding acquired, Epic Games.
Your portfolio managers remain alert to further special and high potential opportunities not widely accessible through public markets.
Annual General Meeting
The Annual General Meeting of the Company has been scheduled to be held at Baillie Gifford's offices in Edinburgh at 9.30am on Friday, 9 October 2020 but, given the ongoing uncertainty around when public health concerns will abate, the Board will continue to monitor developments and may decide to prohibit shareholders
from attending in person. Accordingly, the Board encourages all shareholders to exercise their votes at the AGM by completing and submitting a form of proxy. We would encourage shareholders to monitor the Company's website at www.bgusgrowthtrust.com where any updates will be posted and market announcements will also be made, as appropriate. Should shareholders have questions for the Board or the Managers or any queries as to how to vote, they are welcome as always to submit them by email to trustenquiries@bailliegifford.com or call 0800 917 2112.
Information on the resolutions can be found on page 58 of the Annual Report and Financial Statements. The Directors consider that all resolutions to be put to shareholders are in their and the Company's best interests as a whole and recommend that shareholders vote in their favour.
Brexit
This year the Company is once again required to comment on the potential material impact of Brexit on its future prospects. Notwithstanding the UK's departure from the European Union on 31 January 2020, little has changed over the year. The Board has reconsidered the uncertainties surrounding Brexit and can see no scenario that it believes would affect the going concern status or viability of the Company. As the vast majority of the Company's
assets are denominated in US dollars, the Company's greatest exposure to any potential impact from Brexit is through fluctuations in the exchange rate at which the value of its assets are converted into sterling (the Company's functional currency and that in which it reports its results).
Outlook
The last 12 months have been extraordinary ones for investors in the US stock market and it seems probable that the next 12 could be equally turbulent. At the time of writing, it seems probable that we are at the dawn of a significant global recession and ongoing market volatility is to be expected. In that context, it is comforting to note that as long-term investors in exceptional growth companies, many of the organisations in which we are invested have thrived during the period. As the digital transformation that has been accelerated by the Covid-19 pandemic continues, the portfolio should be well positioned to benefit in the long term. All that being the case, the Board and the Managers remain confident in our outlook.
Tom Burnet
Chairman
2 September 2020
* Source: Refinitiv and relevant underlying index providers. See disclaimer at the end of this announcement.
For a definition of terms see Glossary of Terms and Alternative Performance Measures at the end of this announcement.
Past performance is not a guide to future performance.
Managers' Review
Overview
A lot has changed in the six months since we wrote the Interim Management Report. A pandemic has swept across the world causing immense suffering and loss. Lockdowns, closures and distancing measures have been introduced to slow its spread. These in turn have caused great social and economic strain. We are still in the middle of all of this. Some countries appear to have the virus under control. In others, it is still spreading largely unchecked. It is not clear what trajectory it will take from here. Pandemics have been a regular occurrence throughout human history. However, no two viruses are the same and the economy is more interconnected than ever before. We ought to be humble when thinking through the long-term implications of such a complex situation. What we can say with conviction is that we will come through this and, when we do, the world will have changed.
The lockdowns have disrupted regular patterns of demand. Consumers have turned to online services for their shopping and entertainment needs. Workers have embraced digital collaboration tools, for example video-conferencing, to stay connected with colleagues. Patients have increasingly been meeting with their doctors via telemedicine services. On the other hand, demand for real world services, for example travel and entertainment, has been negatively impacted. Most of our holdings have been beneficiaries of these shifts, although some have been on the wrong side of them. It has been encouraging to see so many of them supporting the economy, but the crucial question for us as long-term investors is whether the current period will lead to any enduring changes.
Prior to the pandemic, e-commerce comprised just 16% of retail sales in the US. Globally the figure is even lower. The low penetration is surprising given the advantages of e-commerce relative to bricks-and-mortar retail. Online offers access to lower prices and greater selection, and it is often more convenient. It is not better in every situation, but its advantages argue for greater adoption than what we see today. So why is it that, in the US (one of the most mature internet markets in the world), over 80% of shopping is still done offline? Habits and inertia are major factors. Consumers mainly shop offline because that is the way they have always shopped. Behaviours are slow to change. Hence why the rise of e-commerce has been slow and steady rather than explosive up until this point.
However, the lockdowns have forced consumers to change their habits and shift their purchases online. E-commerce penetration rose as much in the first half of 2020 as it did in the prior five years combined. Amazon had to hire an additional 175,000 workers just to keep up with demand. Wayfair's revenue growth rate accelerated from around 20% year-on-year in the first quarter to 90% year-on-year in April. Given the advantages of online shopping, some consumers may continue with it even as the offline world re-opens. The old habits have been broken. Rather than a demand spike, what we may be seeing right now is pull-forward of the future.
Habit-breaking forces are also underway in the world of work. Why is it that most workers still come together in the same place at the same time, five days per week? This structure made sense when jobs were primarily concerned with making physical things. However, in today's knowledge economy, there are many jobs which do not require colleagues to be together in space and time to collaborate. Remote working is not optimal in every circumstance, but the flexibility that it affords is better for some. Many companies have learned this first hand as they have moved to home-working in response to the pandemic. Portfolio holding Shopify is one example. Founder Tobi Lütke recently tweeted that the company was going 'digital by default' and declared that 'office centricity is over'. If workforces do become more distributed, this will make communication and collaboration more challenging, creating opportunities for enterprise software companies like Zoom and Slack.
Some of our healthcare holdings have made direct contributions to the Covid-19 response. Moderna Therapeutics is attempting to develop a vaccine. It is moving swiftly. It took just 25 days for the company to produce its first clinical batch, which is testament to the strength of its novel drug development. There is still much work to do but early read-outs from its clinical trials have been encouraging. Elsewhere, unlisted holding Butterfly Network's handheld ultrasound machines have been used on the front lines to assess and monitor patients with Covid-19 both inside and outside of hospitals. Teladoc, the leading telemedicine provider which we bought in December last year, has been helping patients to connect safely to their doctors via remote services. Usage almost doubled in the first quarter of the year. In all three cases these companies have displayed impressive agility in the face of rapidly changing market circumstances.
The backdrop has been challenging for all, but the companies in the portfolio which interface with the real world have been particularly affected. For example, Lyft, the ridesharing company, saw demand fall by 75% in April. Medical device company Glaukos' revenues have been impacted by the postponement of elective procedures such as cataract surgeries. As previously mentioned, we have little insight in to the exact timing and trajectory of the recovery. However, we are confident in the resilience and adaptability of the holdings in the portfolio and remain enthused about their long-term growth opportunities.
Portfolio Changes
Portfolio turnover remains low. The top ten holdings are virtually unchanged from a year ago. The one exception is Tesla, which temporarily dropped out of the top ten this time last year because of share price weakness. In terms of the listed holdings, towards the end of last year, we initiated positions in video-conferencing company Zoom and telemedicine company Teladoc. We had no idea that, six months later, they would be playing such a central role in supporting the economy through the pandemic. More recently we added three new enterprise software companies to the portfolio: cloud-HR and finance software company Workday, cloud-communications provider Twilio, and web security company Cloudflare. The digitisation of the enterprise and shift to cloud is gathering pace, which is creating opportunities for cloud-native businesses such as these.
These purchases were funded by various complete sales. There was no notable pattern to them. We sold Agios Pharmaceuticals on cultural concerns following the departure of both its de-facto founder-CEO and its Chief Scientific Officer. We sold out of online-education provider 2U due to weakening conviction in the company's competitive edge and business model. We used the Uber bid news as an opportunity to sell Grubhub following a period where the company lost its position of leadership in the US take-out delivery market.
We made eight additional unlisted investments over the last twelve months: Ginkgo Bioworks, Thumbtack, Stripe, RigUp, Warby Parker, Convoy, Airbnb and Snowflake. We have included a description of each of these below. Two of our existing unlisted holdings, Slack Technologies and Peloton Interactive, went public in the period. The net result was that, at the end of May, we held positions in 17 unlisted securities which collectively comprised 12% of the total assets. Taking into account companies which were previously unlisted, but which are now public, this figure rises to 15%.
Cloud Infrastructure Platforms
Payments platform Stripe is the largest of our unlisted holdings. At the end of the reporting period it was 2.2% of total assets, placing it just outside the top ten. Stripe was created to solve challenges associated with starting and scaling businesses. The payments world is messy. There is complexity within and between regions. Each geography has its own unique banks, credit card rails, mobile wallets, cultural norms, regulators and regulations. It is an extraordinarily challenging landscape for any company to navigate, never mind a start-up. Stripe helps its customers overcome these complexities. Its platform sits above the financial system and interacts with it on their behalf. It aims to make sending and receiving money as simple as transferring information.
Stripe is a cloud-based infrastructure platform. Three other portfolio holdings - Shopify, AWS (a division of Amazon), and Twilio - also fall within this category. These companies perform a similar intermediating role to Stripe but within different domains: e-commerce, IT infrastructure, and communications respectively. Each of the platforms has a distinctive approach, but there are common threads that cut across all of them. They can all be thought of as operating systems which sit above complex networks of institutions or infrastructure. They use software to remove this complexity, making it easier for the underlying infrastructure services to be managed and consumed. Their business models transform capital costs into operating costs and enable their underlying customers to run more flexible and leaner operations. They deliver their services over the internet.
These businesses are helping to lower barriers to entrepreneurship. Instead of investing vast sums of money up-front in building data-centres and other types of infrastructure, companies can rent access via these scaled platforms. For example, through Shopify, online retailers can gain access to all the tools they need to run their business, from order management to fulfilment. Twilio enables its customers to build communications functionality into their applications without the need for relationships with telecoms companies or millions of dollars in capital investment. It has never been easier to start and scale an online business. All an aspiring entrepreneur needs to get going is a good idea and a smartphone.
The platforms themselves have the potential to be very valuable businesses. They each operate in large markets of US$1trillion or greater. Their business models generate flywheel effects causing them to get stronger as they grow. They are well aligned not only with their customers but also with the broader ecosystem of developers, suppliers, and partners which build on top of them. Each of them is founder-led, mission-driven, innovative, and run for the long-term. In lowering barriers to entrepreneurship, they are performing an important societal role and increasing the vitality of the global economy. This has become even more critical at a time when the world is shifting online faster than ever.
These companies form a prominent part of the portfolio. Shopify and Amazon are the two largest holdings. Both Twilio and Stripe are recent additions to the fund. Collectively they comprise almost one-fifth of the Company's assets.
Investment Principles
Last year, we introduced our investment principles for the first time. We have included them again this year, unaltered. We hope that by publishing our investment framework in this and future communications that we will provide shareholders with a useful reminder of our philosophy and a yardstick with which to measure us. The third of the principles concerns outliers:
'We believe, and academic work has shown, that long-term equity returns is dominated by a small handful of exceptional growth companies that deliver outsized return. Most stocks do not matter for long-term equity returns, and investors will be poorly served by owning them. In our search for exceptional growth companies, we will make mistakes. But the asymmetry inherent in equity markets, where we can make far more in a company if we are right than lose if we are wrong, tells us that the costliest of mistakes is excessive risk aversion.'
We have included a paper below to further explain our thinking on outliers and the role that asymmetry plays in driving long-term returns.
Outlook
At the end of the Interim Management Report, we said that we believed technology would become ubiquitous over the course of a decade and extend into all parts of society. Whilst acknowledging the challenges and uncertainties with looking forward, our confidence in this is as high as ever. The world remains under great stress, but innovation continues at pace which bodes well for the long term. Indeed, it was remarkable to see, in the midst of the pandemic, SpaceX successfully transporting crew from the Kennedy Space Center to the International Space Station. This was a first for a private company. As we have said before, innovation is speeding up and spreading out to sectors which have hitherto been untouched by the digital transformation. This is creating a rich pipeline of ideas across a broad range of business models and industries. Baillie Gifford US Growth Trust, with its long-term and genuinely active approach which bridges across the listed and unquoted opportunity set, provides the ideal vehicle to navigate these shifting waters and to hopefully identify and own the exceptional companies which are at the nexus of these important societal shifts.
Outliers Everywhere
We are all familiar with the concept of wealth inequality - the idea that the top 1% of the population own approximately half of the world's wealth, and probably commands more than half of media attention. Outliers interest us because they are rare, but the distributions that produce them (i.e. long-tailed distribution) are far more common than the term implies. In the US, around 1.5 million separately titled books are published every year, but fewer than 500 of them go on to sell more than 100,000 copies. Most classical music played by orchestras are written by four classical composers. There are more than 170,000 words in the Oxford English Dictionary, yet 90% of communication is done with just around 500 words. Asymmetric distributions emerge across all domains, in almost any creative endeavour. The stock market is no different.
Why do outliers exist?
Long-tailed distributions exist because events are not independent of each other. Book sales and city populations, unlike trips to the grocery store, are not independent. When one person buys a book, he or she increases the chances that others will buy it. When a city grows in population, it adds more job opportunities, making it more attractive to others looking to move. In each case, there is some positive feedback loop where an action increases the probability that others will do the same. Over the past decade, our world has become more interconnected than ever with the internet, mobile and social networks. Markets that were once independent have become interconnected. When this phase shift happens, the seeds of long-tailed distributions are sown, and it becomes a matter of time and probabilities for outliers to emerge. As markets become more interconnected, we should expect to see more long-tailed distributions, and the long-tails that we see may become elongated. In plain English, we will see more winnertakes-most dynamics in markets.
How does this work in practice? For positive feedback loops to occur, two conditions must be satisfied:
i) People must know what to buy.
For generations our consumption decisions were driven by habit. Whether it is Colgate toothpaste, Kellogg's cereal, or Nestlé coffee - we purchase those products almost instinctively because those are the brands we consumed growing up. The traditional marketing model involved pushing consumers through a 'funnel' from awareness -> familiarity -> consideration -> purchase -> loyalty. Brands that had the most to spend on advertising and marketing are most successful at influencing decisions and building loyalty. That 'funnel' is largely dead. Today our purchasing decisions are driven far more by recommendations than by brands, and what was a one-way funnel is now a circular journey with two-way dialog. An Amazon 4.5-star rating with more than 1,000 reviews is more influential to the purchasing decision than a promoted product with few or poor reviews. Products that rely on social or word of mouth marketing are more successful than those that rely on marketing dollars alone.
More interestingly, empirical studies have shown that social effects create bigger winners. A study of college students music downloads shows that letting subjects know what songs other students have downloaded created more skewed distributions compared to the control group. That is, social influence magnifies the inequality between winners and losers.
Note that social influence is not the same as network effects. Network effects refer to situations where the value of the product increases with more users. Social influence does not explicitly change the value of the product or service to the user. Hence, social influence can be present in a broader set of businesses that we may not typically associate with network effects. Think Kylie Jenner, who created a US$1 billion cosmetics empire selling lip-enhancements on Instagram and Shopify, at 22 years young. The connectedness of our world amplifies the effects of social influence. The best-selling album in year 2000 sold around 10 million copies globally. The most popular song today has been streamed more than 2 billion times on Spotify.
Finally, social influence can work in reverse, and is not limited to companies. In fact, it is most visible in many social issues, from climate change to Black Lives Matter. It is perhaps not surprising that a 16-year old's lonely protest outside the Swedish parliament can escalate to a global school strike six months later, or that George Floyd's gofundme page has received the most donations in gofundme history.
ii) People must be able to buy the product.
Here again our world has changed radically from only a decade ago. Specifically, we are moving from the physical to the digital. In the physical world, there are production constraints that define the boundaries of growth. Tesla and Peloton Interacitve for example, are arguably constrained by the lack of supply, not lack of demand. However, over the past decade, more and more products and services have become digitised, being delivered through the internet. Think books, music, entertainment, software, mobile applications, etc. There is no marginal cost of production, no supply constraints, and no friction to distribution. This, combined with the positive feedback loops through social, allows for growth rates that have not been physically possible before.
Even in areas where products or services are not digital, new business models have emerged to reduce the traditional growth constraints. AWS turned capex into opex for any entrepreneur wishing to start a business, eliminating the need for upfront capex investments. Airbnb made use of existing spare capacity and distributed the cost of growth amongst the millions of homeowners. Ride-hailing apps took advantage of the low utilisation of cars and the abundance of unskilled labour. You may need to wait to own a Tesla, but you do not need to wait to commute from A to B. Software + internet + mobile has increased access to previously scarce resources and have formed the building blocks of new business models that are rearranging business paradigms.
Putting it all together
Our world has become more connected and digital, creating the conditions for more and bigger outliers than what was possible before. The outliers today are of a different magnitude than what we have seen before because the software + internet + mobile has transformed the addressable opportunities, probabilities of success, and long-term returns. Specifically, markets have become interconnected through the internet, creating winners of a global scale. The pace of exploitation is faster because distribution through the internet is instant and free. The interconnectedness of our world creates feedback loops that gets stronger with scale, reinforcing the competitive edge of the outliers as it grows. The digitisation of goods and services often implies zero marginal cost of production and/or distribution, leading to increasing returns to scale.
Very rarely do we find a company that has all these qualities. However, when we do, we have the happy quaternity of large and growing addressable market + higher terminal market share + rising probability of success + increasing returns. We all know how sensitive valuations are to any one of those metrics. Having all four metrics align mean that valuations can change dramatically over short spaces of time. This is not as unusual as it sounds as the positive feedback loops make it likely (inevitable?) that several variables will move in contagion. This is what we have seen with Amazon; what we are seeing with Shopify, Tesla, and Trade Desk; and what we believe we will see with Twilio and Wayfair. When this happens, the biggest risk is not that we get the timing wrong, but that we do not own enough of these companies.
Investment Principles
To our shareholders
Our core task is to invest in the exceptional growth businesses in America. Over the full course of time, these companies will develop deep competitive moats and generate abnormal profits and unusually high shareholder returns. We endeavour to generate returns for our clients by helping in the creation and improvement of such useful enterprise. To the extent that we are successful in identifying these companies, we believe that we can multiply the wealth of our clients over the long term.
Managing shareholders' money is a huge privilege, and not one we take lightly. It is a relationship, not a transaction. Relationships can only be built on a foundation of trust and understanding. It is with this that we seek to lay out the fundamental principles by which we will manage your money and the framework for how we make decisions so that you, our shareholders, can decide whether it aligns with your investment philosophy.
- We believe the fundamental measure of our success will be the value we create for our shareholders over the long term. It is only over periods of five years or more that the characteristics we look for in businesses become apparent. Our turnover has been in the teens, consistent with our time horizon. We ask that our shareholders measure our performance over similar periods.
- Short term volatility is an inevitable feature of the market, and we will not manage the portfolio to reduce volatility at the expense of long term gain. Many managers are risk-averse and fear loss more than they value gain. Therefore, they accept smaller, more predictable risks rather than the larger and less predictable ones. We believe that this is harmful to long term returns, and we will not shy away from making investments that are perceived to be risky if we believe that the potential payoffs are worthwhile. This means that our performance may be lumpy over the short term.
- We believe, and academic work has shown, that long-term equity returns are dominated by a small handful of exceptional growth companies that deliver outsized returns. Most stocks do not matter for long-term equity returns, and investors will be poorly served by owning them. In our search for exceptional growth companies, we will make mistakes. But the asymmetry inherent in equity markets, where we can make far more in a company if we are right than lose if we are wrong, tells us that the costliest of mistakes is excessive risk aversion.
- We do not believe that the index is the right starting point for portfolio construction. The index allocates capital based on size. We believe that capital should be allocated based on marginal return and the ability to grow at those rates of return. Big companies are not immune to disruption. We do not manage the portfolio to an active share target, but we expect the active share of this fund to be high.
- The role of capital markets has changed, and we have evolved with it. As companies are remaining private for longer, so too have we broadened our search for exceptional growth companies into private companies. We are largely indifferent to a company's private or public status. We will conduct diligent analysis and allocate capital to where the highest returns are likely to be.
- We may discuss long term trends and themes present in the portfolio, but we do not plan on discussing short term performance. We believe our duty is to maximise the long term wealth of our shareholders, and that creating narratives around short term performance serves our shareholders poorly.
- We will endeavour to operate in the most efficient, honest, and economical way possible. That means keeping our management fees and ongoing costs low. We recognise that even modest amounts, when allowed to compound over long periods of time, add up to staggering sums, and we do not wish to dilute the compounding of returns with the compounding of costs.
With this foundation, we hope to build Baillie Gifford US Growth into a world class savings vehicle. We are grateful that you have joined us on this journey, and we look forward to a long and hopefully prosperous relationship with you.
Baillie Gifford Statement on Stewardship
Reclaiming Activism for Long-Term Investors
Baillie Gifford's over-arching ethos is that we are 'actual' investors. We have a responsibility to behave as supportive and constructively engaged long-term investors. We invest in companies at different stages in their evolution, across vastly different industries and geographies and we celebrate their uniqueness. Consequently, we are wary of prescriptive policies and rules, believing that these often run counter to thoughtful and beneficial corporate stewardship. Our approach favours a small number of simple principles which help shape our interactions with companies.
Our Stewardship Principles
Prioritisation of long-term value creation
We encourage company management and their boards to be ambitious and focus their investments on long-term value creation. We understand that it is easy for businesses to be influenced by short-sighted demands for profit maximisation but believe these often lead to sub-optimal long-term outcomes. We regard it as our responsibility to steer businesses away from destructive financial engineering towards activities that create genuine economic value over the long run. We are happy that our value will often be in supporting management when others do not.
A constructive and purposeful board
We believe that boards play a key role in supporting corporate success and representing the interests of minority shareholders. There is no fixed formula, but it is our expectation that boards have the resources, cognitive diversity and information they need to fulfil these responsibilities. We believe that a board works best when there is strong independent representation able to assist, advise and constructively test the thinking of management.
Long-term focused remuneration with stretching targets
We look for remuneration policies that are simple, transparent and reward superior strategic and operational endeavour. We believe incentive schemes can be important in driving behaviour, and we encourage policies which create alignment with genuine longterm shareholders. We are accepting of significant pay-outs to executives if these are commensurate with outstanding long-run value creation, but plans should not reward mediocre outcomes. We think that performance hurdles should be skewed towards long-term results and that remuneration plans should be subject to shareholder approval.
Fair treatment of stakeholders
We believe it is in the long-term interests of companies to maintain strong relationships with all stakeholders, treating employees, customers, suppliers, governments and regulators in a fair and transparent manner. We do not believe in one-size-fits-all governance and we recognise that different shareholder structures are appropriate for different businesses. However, regardless of structure, companies must always respect the rights of all equity owners.
Sustainable business practices
We look for companies to act as responsible corporate citizens, working within the spirit and not just the letter of the laws and regulations that govern them. We believe that corporate success will only be sustained if a business's long-run impact on society and the environment is taken into account. Management and boards should therefore understand and regularly review this aspect of their activities, disclosing such information publicly alongside plans for ongoing improvement.
Review of Investments
A review of the Company's ten largest investments and additions to the unlisted securities as at 31 May 2020 is given below.
Top Ten Holdings
Shopify
7.7% of total assets
Shopify provides software tools which allow merchants to easily set-up and manage their businesses across an increasingly complex and fragmented retail landscape. Shopify's software helps to make merchants more efficient by automating large swathes of their operations (e.g. marketing, inventory management, payments, order processing, shipping) thus allowing them to focus on product market fit. The company maintains a rapid pace of innovation and is run by an impressive founder who has built a distinctive merchant-focused culture.
Amazon
7.7% of total assets
Amazon addresses huge market opportunities in the form of global retail and global IT spending. In retail, it competes on price, selection and convenience and is improving all three as it gets bigger. Amazon's AWS (Amazon web Services) division is less mature than its retail business, but it is no less exciting. Here, Amazon is in a clear position of leadership in what could turn out to be one of the largest and most important market shifts of our time. Both opportunities are outputs of what is perhaps most distinctive of all about Amazon - its culture. Amazon optimises for customer delight. The company is run with a uniquely long term perspective. It is willing to be bold and scale its experiments (and failures) as it grows. These cultural distinctions allow Amazon to possess the rare and attractive combination of scale and immaturity.
Tesla
7.1% of total assets
Tesla makes electric cars, battery storage and solar power systems. The company has proven that cars can be environmentally friendly without compromising on style, safety, or performance. We are in the early stages of a major shift in the transportation industry towards EVs, and Tesla is the best positioned globally to capitalise on this. It is an innovative and mission-driven company whose success is aligned with the interests of the planet.
Wayfair
4.7% of total assets
Wayfair is an online furniture retailer but thinks of itself as a software company with an edge in logistics for large pieces of furniture. Furniture has historically been a difficult category for e-commerce due to the challenges of providing a good experience. Consumers want to visualise the product in their homes; they want to know exactly when the product will be delivered so they can be at home to receive it; and they want to know that they can easily return the product should it not meet their expectations. Suppliers are incredibly fragmented and do not have the scale to deliver these experiences to the consumer. Wayfair has managed to bring all the suppliers together under its brand and is applying its tech expertise to create a superior customer experience. On the front end, it has built a visual browsing platform, allowing customers to search by image, or to visualise a piece of furniture in their homes to scale. On the back end, it has built a sophisticated logistics and distribution network that ensures speedy and reliable delivery to consumers. The business is capital light and has a negative working capital, meaning that growth is largely self-funded. Online penetration of homeware is still in the low teens and we believe there is substantial opportunity for the company ahead.
Netflix
4.0% of total assets
Netflix has the potential to become the first truly global content and distribution media brand. Its base of more than 180 million subscribers allows it to invest in building a strong customer proposition through its library of exclusive and desirable content. This in turn attracts more subscribers, creating a powerful flywheel that distances itself from other likely competitors. The shift from linear TV to on-demand streaming is still in the early stages, and Netflix is a prime beneficiary.
MarketAxess Holdings
3.4% of total assets
Most corporate bonds are currently traded in a very old-fashioned manner via telephone. This is a time-consuming process for traders trying to source the bonds from/for willing sellers/buyers. MarketAxess operates an electronic trading platform for credit securities. The platform connects buy-side investors and the broker-dealer community, facilitating electronic transactions in a cost-effective and efficient manner. The company has established strong trading networks and is innovating on capabilities and products to create a more liquid, transparent and efficient way for clients to trade bonds. This is driving a secular shift towards electronic trading. Over time, the market opportunity should grow as the company leverages the opportunity to expand into other credit products. The business is inherently scalable and benefits from network effects, making the marginal returns very attractive.
Alphabet
3.2% of total assets
Alphabet continues to see strong growth in its core Google search business, where the strength of the company's competitive position affords it a pivotal role in the migration of advertising dollars from traditional media to the internet. Whilst search has been around for some time, it continues to improve at an impressive rate and we believe there remains scope for significant innovation and continued strong growth. The company has a distinctive, long term focused culture which encourages bold thinking and innovation. We think there is a reasonable probability that one of the company's many new ventures outside of search could become a substantial revenue and profit generator in future.
The Trade Desk
3.2% of total assets
The advertising industry is undergoing a wholesale shift in the way that advertising is bought and sold. Whereas in the past advertising was bought and sold in bundles, in the digital world, advertising can be transacted on a one to one basis, targeting only the audiences that are relevant. The Trade Desk provides the technology that enables this targeted buying of advertising through real-time auctions. Its platform connects media buyers to a wide range of digital inventory and provides a set of tools to help buyers determine what price to pay for those ad opportunities. This is known as programmatic advertising - the buying of advertising using data. Programmatic advertising is still in its infancy and is growing rapidly, supported by higher efficacy and a tangible demonstration of return on investment. As the programmatic industry becomes mainstream, it will consolidate around a handful of buying platforms, and we believe that The Trade Desk will emerge as the leading buying platform for the independent internet.
Illumina
3.0% of total assets
Illumina is the global leader in next-generation sequencing equipment and consumables. The company's mission is 'to improve human health by unlocking the power of the genome'. Given the inefficiencies in the healthcare system, the opportunities to do so are vast. The availability of low-cost whole genome sequencing is helping to drive a better understanding of the molecular basis of disease, which in turn is leading to greater insights and better decision making. One example of this is the use of sequencing as a companion diagnostic tool in cancer. Most cancer drugs only work in a small subset of cancer patients. In the past, doctors relied on educated guesswork to make treatment decisions. With sequencing information, they are now able to do so based on underlying genetics, leading to better outcomes for patients and cost savings for the system.
Mastercard
2.8% of total assets
Mastercard is one of two dominant payment networks. It is a scalable, asset-light business that is benefiting from a structural shift away from paper-based payments to electronic forms. Mastercard is ideally placed to benefit from this trend given reliability, security and scale, all of which act as tremendous barriers to entry. Novel forms of payment technology are built on its network and are accelerating the pace of adoption. We think Mastercard can sustain its profitability while growing its revenue at above average rates for many years to come.
Unlisted Securities purchased in the year to 31 May 2020
Airbnb
0.2% of total assets
Airbnb is an online accommodation marketplace. It uses technology to facilitate the exchange of services between travellers seeking accommodation and homeowners who want to lease their spare bedroom or apartment. In many ways, Airbnb is the pioneer of a new type of marketplace that we now call the 'sharing economy', an economic system that allows asset owners to unlock earnings opportunities from their underutilised assets, in this case their homes. Airbnb has been able to build trust around the platform which enables strangers to host other strangers in their homes. This, combined with the global network effects in a two-sided marketplace, creates a durable advantage in what is a growing and dynamic market.
Convoy
0.8% of total assets
Convoy operates a digital freight network. Its platform helps to efficiently connect shippers and carriers. The market is fragmented on both sides, which makes it difficult for shippers and carriers to work together directly. The industry has historically been intermediated through a network of mostly offline brokers who have conducted business over the phone. Convoy is attempting to digitise and automate the role of the broker and, in doing so, improve the transparency and efficiency of the trucking industry. Convoy is using technology to offer a superior service to both shippers and carriers. Furthermore, its digital network benefits from a flywheel effect. As more shippers join its network, carriers have more options and can operate at higher capacity utilisation with fewer wasted hours. As more carriers join, shippers benefit from lower costs and higher service quality.
Ginkgo Bioworks
0.7% of total assets
Ginkgo is a prominent player in the emerging field of synthetic biology. We live in a chemical world, where everything from vitamins to face cream all use ingredients derived from petroleum. The age of chemicals was based on the assumption that everything nature can do, man can do better and cheaper. But technological advancements in our ability to read, write, and edit DNA is allowing biology to retake the lead in some areas. This is opening a new frontier for industrial biotechnology where chemical processes are being replaced by biological ones. Ginkgo is a cultured ingredients producer. It provides the organism engineering skill and can genetically modify yeast that can be fermented to produce almost anything the customer desires, such as rose oil or sweeteners. The long-term opportunity is to make biology predictable, opening the door to using biology to manufacture a multitude of different products, many of which we cannot even imagine yet.
RigUp
0.9% of total assets
RigUp brings a modern, tech-enabled solution to a market that has thus far seen little in the way of disruption and is inefficient for both contractors and operators. Traditionally, the energy industry has sourced employees through a fragmented network of 'mom and pop' staffing agencies, which have agreements with a relatively small number of operators and contractors. This limits their utility, yet they take a significant cut. It is a sub-optimal way for operators to get the right contractors in the right place at the right time. Given the costs of running a platform, and the growing shortage of labour in the energy industry, this is an increasingly pressing problem. RigUp's solution is a platform that matches contractors and operators. This makes life much easier for both parties, providing greater choice and a more efficient and more lucrative way of finding workers or jobs.
Stripe
2.2% of total assets
Stripe is a payments technology company. Founded in 2010 by Irish brothers Patrick and John Collison, the company is in the process of developing a platform for sending money seamlessly and compliantly between any two internet-connected nodes in the world. The company processes massive volumes of payments from a broad customer base, ranging from US start-ups to global giants. Stripe's long-term ambition is to make entrepreneurship easier and thus significantly increase the amount of business conducted online.
Snowflake
0.2% of total assets
Snowflake is a cloud-based data warehouse company. It allows businesses to store and analyse their data using cloud-based tools, which make it less expensive and easier to manage than previous types of data warehouses. Growth will be driven by the universal desire for insight through data collection. Data warehouses are not new, but Snowflake's delivery model removes friction from the user experience. This should expand the addressable market. Snowflake's cloud-based architecture also brings to the table a substantial boost in performance relative to incumbent solutions. Over time, Snowflake has the potential to strengthen its first mover advantage via (a) network effects which will emerge as future solutions like its data exchange gain popularity and (b) cloud-agnosticism which will take advantage of customer aspirations to move toward the flexibility of a multi-cloud infrastructure.
Thumbtack
0.2% of total assets
Thumbtack provides an online marketplace for local service people such as plumbers, decorators, and home-movers. This is a vast market which has been slow to move online. The challenge is to simultaneously generate liquidity in thousands of individual markets by region and function. The company has just been through a business model shift which has significantly strengthened the product offering. It has moved from a slow and cumbersome desktop-based, request-for-quote model to a mobile-first, 'instant-connect' one where users instantly see a list of relevant service providers and their prices. This significantly improves the user experience and creates a liquid marketplace that few others can match. The long-term ambition is to become the go-to marketplace for a whole category of services, of which home repairs is a subset.
Warby Parker (JAND)
0.9% of total assets
Warby Parker sells its own brand corrective eyewear online and through its retail stores. It has a novel approach to retailing and branding and is one of the pioneers in the 'direct-to-consumer' market. By bypassing intermediaries and vertically integrating, Warby Parker is able to offer high-quality products at low prices. The company has built a strong brand known for its design and customer experience. Its business model gives it substantial cost advantages over traditional retailers. The company remains a very small part of the US eyewear market, and we believe there is a compelling opportunity to compound growth over a decade or more.
Income statement
|
|
For the year ended 31 May 2020 |
For the period from 7 February 2018 To 31 May 2019 |
||||
|
|
Revenue £'000 |
Capital £'000 |
Total £'000 |
Revenue £'000 |
Capital £'000 |
Total £'000 |
|
Gains on investments |
- |
140,652 |
140,652 |
- |
50,864 |
50,864 |
|
Currency gains |
- |
88 |
88 |
- |
1,040 |
1,040 |
|
Income (note 2) |
595 |
- |
595 |
699 |
- |
699 |
|
Investment management fee (note 3) |
(2,206) |
- |
(2,206) |
(1,893) |
- |
(1,893) |
|
Other administrative expenses |
(380) |
- |
(380) |
(359) |
- |
(359) |
|
Net return before finance costs and taxation |
(1,991) |
140,740 |
138,749 |
(1,553) |
51,904 |
50,351 |
|
Finance costs of borrowings |
(485) |
- |
(485) |
(401) |
- |
(401) |
|
Net return before taxation |
(2,476) |
140,740 |
138,264 |
(1,954) |
51,904 |
49,950 |
|
Tax |
(79) |
- |
(79) |
(100) |
- |
(100) |
|
Net return after taxation |
(2,555) |
140,740 |
138,185 |
(2,054) |
51,904 |
49,850 |
|
Net return per ordinary share (note 4) |
(1.05p) |
57.85p |
56.80p |
(1.09p) |
27.54p |
26.45p |
The total column of this statement represents the profit and loss account of the Company. The supplementary revenue and capital return columns are prepared under guidance published by the Association of Investment Companies.
All revenue and capital items in this statement derive from continuing operations.
A Statement of Comprehensive Income is not required as the Company does not have any other comprehensive income and the net return after taxation is both the profit and comprehensive income for the year.
The accompanying notes at the end of this document are an integral part of the Financial Statements.
Balance sheet
As at 31 May
| 2020 £'000 | 2019 £'000 |
Fixed assets |
|
|
Investments held at fair value through profit or loss (note 6) | 474,136 | 296,434 |
Current assets |
|
|
Debtors | 1,627 | 51 |
Cash and cash equivalents | 16,089 | 5,952 |
| 17,716 | 6,003 |
Creditors |
|
|
Amounts falling due within one year (note 8) | (15,650) | (12,508) |
Net current assets/(liabilities) | 2,066 | (6,505) |
Net assets | 476,202 | 289,929 |
|
|
|
Capital and reserves |
|
|
Share capital | 2,618 | 2,298 |
Share premium account | 116,607 | 68,839 |
Special distributable reserve | 168,942 | 168,942 |
Capital reserve | 192,644 | 51,904 |
Revenue reserve | (4,609) | (2,054) |
Shareholders' funds | 476,202 | 289,929 |
Net asset value per ordinary share | 181.92p | 126.17p |
Ordinary shares in issue (note 9) | 261,765,000 | 229,800,000 |
The accompanying notes at the end of this document are an integral part of the Financial Statements.
*
Statement of changes in equity
For the year to 31 May 2020
| Redeemable preference shares £'000 | Share £'000 | Share premium account £'000 | Special distributable reserve £'000 | Capital Reserve# £'000 | Revenue reserve# £'000 | Shareholders' £'000 |
Shareholders' funds at 1 June 2019 | - | 2,298 | 68,839 | 168,942 | 51,904 | (2,054) | 289,929 |
Ordinary shares issued (note 9) | - | 320 | 47,768 | - | - | - | 48,088 |
Net return after taxation | - | - | - | - | 140,740 | (2,555) | 138,185 |
Shareholders' funds at 31 May 2020 | - | 2,618 | 116,607 | 168,942 | 192,644 | (4,609) | 476,202 |
For the period from 7 February 2018 to 31 May 2019
| Redeemable preference shares £'000 | Share £'000 | Share premium account £'000 | Special distributable reserve £'000 | Capital Reserve# £'000 | Revenue reserve# £'000 | Shareholders' £'000 |
Shareholders' funds at 7 February 2018 | - | - | - | - | - | - | - |
Redeemable preference shares issued | 50 | - | - | - | - | - | 50 |
Ordinary shares issued (note 9) | - | 2,298 | 237,781 | - | - | - | 240,079 |
Redemption of redeemable preference shares |
(50) | - | - | - | - | - | (50) |
Cancellation of share premium | - | - | (168,942) | 168,942 | - | - | - |
Net return after taxation |
- | - | - | - | 51,904 | (2,054) | 49,850 |
Shareholders' funds at 31 May 2019 | - | 2,298 | 68,839 | 168,942 | 51,904 | (2,054) | 289,929 |
The Capital Reserve balance at 31 May 2020 includes investment holding gains of £186,483,000 (2019 - £47,861,000).
# The Revenue Reserve and Capital Reserve (to the extent it constitutes realised profits) are distributable.
The accompanying notes at the end of this document are an integral part of the Financial Statements.
Cash flow statement
| For the year ended 31 May 2020 | For the period from 7 February 2018 to 31 May 2019 | ||
| £'000 | £'000 | £'000 | £'000 |
Cash flows from operating activities |
|
|
|
|
Net return before taxation |
| 138,264 |
| 49,950 |
Net gains on investments |
| (140,652) |
| (50,864) |
Currency gains |
| (88) |
| (1,040) |
Finance costs of borrowings |
| 485 |
| 401 |
Overseas withholding tax |
| (80) |
| (98) |
Changes in debtors and creditors |
| 220 |
| 440 |
Cash from operations* |
| (1,851) |
| (1,211) |
Finance costs paid |
| (521) |
| (287) |
Net cash outflow from operating activities |
| (2,372) |
| (1,498) |
Cash flows from Investing activities |
|
|
|
|
Acquisitions of investments | (87,106) |
| (271,569) |
|
Disposals of investments | 48,780 |
| 25,999 |
|
Net cash outflow from investing activities |
| (38,326) |
| (245,570) |
Cash flows from financing activities |
|
|
|
|
Ordinary shares issued | 48,088 |
| 240,079 |
|
Bank loans drawn down | 53,878 |
| 28,778 |
|
Bank loans repaid | (51,543) |
| (17,024) |
|
Net cash inflow from financing activities |
| 50,423 |
| 251,833 |
Increase in cash and cash equivalents |
| 9,725 |
| 4,765 |
Exchange movements |
| 412 |
| 1,187 |
Cash and cash equivalents at start of the period |
| 5,952 |
| - |
Cash and cash equivalents at 31 May |
| 16,089 |
| 5,952 |
* Cash from operations includes dividends received in the period of £533,000 (2019 - £651,000) and interest received of £64,000 (2019 - 35,000).
The accompanying notes at the end of this document are an integral part of the Financial Statements.
List of Investments as at 31 May 2020 |
Name | Business | 2020 Value £'000 | % of total assets* | 2019 Value £'000 |
Shopify Class A | Cloud-based commerce platform provider | 37,851 | 7.7 | 14,584 |
Amazon | Online retailer and cloud computing provider | 37,620 | 7.7 | 26,278 |
Tesla | Electric cars, autonomous driving and solar energy | 34,733 | 7.1 | 8,461 |
Wayfair | Online furniture and homeware retailer | 23,141 | 4.7 | 14,381 |
Netflix | Subscription service for TV shows and movies | 19,611 | 4.0 | 14,641 |
MarketAxess Holdings | Electronic bond trading platform | 16,888 | 3.4 | 16,130 |
Alphabet Class A | Online search and other online services | 15,646 | 3.2 | 11,469 |
The Trade Desk | Advertising technology company | 15,609 | 3.2 | 9,444 |
Illumina | Gene sequencing equipment and consumables | 14,757 | 3.0 | 11,827 |
Mastercard Class A | Global electronic payments network | 13,629 | 2.8 | 10,837 |
Stripe Series G Preferredu | Online payment platform | 10,961 | 2.2 | - |
Chegg | Online education company | 10,877 | 2.2 | 3,982 |
Workday | Enterprise information technology | 9,938 | 2.0 | - |
First Republic Bank | Private banking | 9,646 | 2.0 | 8,319 |
Facebook Class A | Social networking platform | 9,310 | 1.9 | 10,784 |
Zoom Video Communications | Remote conferencing service provider | 9,054 | 1.8 | - |
ABIOMED | Manufacturer of heart pumps | 8,303 | 1.7 | 8,996 |
CoStar Group | Commercial property information provider | 8,221 | 1.7 | 5,841 |
Roku | Online media player | 7,916 | 1.6 | 6,212 |
Peleton Interactive | Connected fitness equipment | 7,090 | 1.4 | 3,333 |
Slack Technologies | Collaboration software | 7,052 | 1.4 | 3,697 |
Space Exploration Technologies Series J Preferredu |
Rocket and spacecraft company |
5,740 |
1.2 |
5,221 |
Space Exploration Technologies Series K Preferredu |
Rocket and spacecraft company |
1,308 | 0.2 | 1,190 |
|
| 7,048 | 1.4 | 6,411 |
Novocure | Electric field based cancer therapies | 6,870 | 1.4 | 6,049 |
Chewy | Online pet retailer | 6,785 | 1.4 | - |
Teladoc | Telemedicine services provider | 6,768 | 1.4 | - |
Watsco | Air conditioning, heating and refrigeration equipment distributor |
6,722 | 1.4 | - |
Alnylam Pharmaceuticals | Therapeutic gene silencing | 6,548 | 1.3 | 2,657 |
Redfin | Technology-based real estate brokerage firm | 6,490 | 1.3 | 2,565 |
Moderna Therapeutics | Therapeutic messenger RNA | 6,114 | 1.2 | 1,939 |
NVIDIA | Graphics chips | 5,728 | 1.2 | 2,044 |
Penumbra | Medical tools to treat vascular diseases | 5,508 | 1.1 | 4,157 |
Butterfly Network Series D Preferredu | Portable ultrasound and diagnostics | 2,807 | 0.6 | 2,359 |
Butterfly Network Promissory Noteu | Portable ultrasound and diagnostics | 2,022 | 0.4 | - |
|
| 4,829 | 1.0 | 2,359 |
Warby Parker (JAND) Series A Preferredu | Online and physical glasses retailer | 2,446 | 0.5 | - |
Warby Parker (JAND) Series C Preferredu | Online and physical glasses retailer | 2,068 | 0.4 | - |
|
| 4,514 | 0.9 | - |
Name | Business | 2020 Value £'000 | % of total assets* | 2019 Value 3'000 |
RigUp Series D Preferredu | Jobs marketplace for the energy sector | 3,640 | 0.7 | - |
RigUp Series D-1 Preferredu | Jobs marketplace for the energy sector | 809 | 0.2 | - |
|
| 4,449 | 0.9 | - |
Twilio | Cloud-based communications platform | 4,293 | 0.9 | - |
Zillow Group Class A | US online real estate services | 4,075 | 0.8 | - |
Denali Therapeutics | Clinical stage neurodegeneration company | 3,963 | 0.8 | 2,314 |
Stitch Fix | Online clothing retailer | 3,827 | 0.8 | 3,305 |
Convoy Series D Preferredu | Marketplace for truckers and shippers | 3,814 | 0.8 | - |
Appian | Enterprise software developer | 3,811 | 0.8 | - |
Glaukos | Ophthalmic medical technology company | 3,691 | 0.8 | 3,776 |
Ginkgo Bioworks Series E Preferredu | Bio-engineering company developing micro organisms that produce various proteins |
3,424 |
0.7 | - |
Tanium Class Bu | Online security management | 3,413 | 0.7 | 3,174 |
Activision Blizzard | Videogame company | 3,405 | 0.7 | 2,013 |
HEICO Class A | Aerospace parts | 3,377 | 0.7 | 3,659 |
Interactive Brokers Group | Online broker | 3,331 | 0.7 | 3,759 |
Yext | Digital knowledge management | 3,008 | 0.6 | 2,715 |
Zipline International Series C Preferredu | Drone-based medical delivery | 2,986 | 0.6 | 3,521 |
Affirm Series F Preferredu | Consumer finance | 1,197 | 0.2 | 1,190 |
Affirm Promissory Noteu | Consumer finance | 809 | 0.2 | - |
Affirm Series A Preferredu | Consumer finance | 744 | 0.2 | - |
|
| 2,750 | 0.6 | 1,190 |
Niantic Series C Preferred u | Augmented reality games | 2,274 | 0.5 | 2,380 |
Indigo Agriculture Series E Preferredu | Agricultural technology company | 1,959 | 0.4 | 2,290 |
Indigo Agriculture Sub Promissory Noteu | Agricultural technology company | 278 | 0.1 | - |
Indigo Agriculture Commonu | Agricultural technology company | 58 | <0.1 | - |
|
| 2,295 | 0.5 | 2,290 |
Aurora Innovation Series B Preferredu | Self-driving technology | 2,027 | 0.4 | 2,380 |
Away (JRSK) Series D Preferredu | Travel and lifestyle brand | 1,291 | 0.3 | 1,785 |
Away (JRSK) Series Seed Preferredu | Travel and lifestyle brand | 531 | 0.1 | - |
|
| 1,822 | 0.4 | 1,785 |
Lyft | Ridesharing | 1,599 | 0.3 | 2,896 |
Cloudflare | Cloud-based provider of network services | 1,477 | 0.3 | - |
Thumbtack Class Au | Online directory service for local businesses | 1,149 | 0.2 | - |
Airbnb Class Au | Online marketplace for travel accommodation | 925 | 0.2 | - |
Airbnb Series D Preferredu | Online marketplace for travel accommodation | 68 | <0.1 | - |
Airbnb Series E Preferredu | Online marketplace for travel accommodation | 40 | <0.1 | - |
|
| 1,033 | 0.2 | - |
Snowflake Class Bu | Developer of a SaaS-based cloud data warehousing platform | 862 | 0.2 | - |
New Relic | Cloud-based performance management software | 204 | <0.1 | 3,794 |
Total Investments |
| 474,136 | 96.6 |
|
Net Liquid Assets |
| 16,626 | 3.4 |
|
Total Assets |
| 490,762 | 100.0 |
|
* Total assets less current liabilities, before deduction of borrowings. u Denotes unlisted security.
| Listed equities % | Unlisted securities† % | Net liquid assets % | Total assets % |
31 May 2020 | 84.4 | 12.2 | 3.4 | 100.0 |
31 May 2019 | 87.4 | 10.8 | 1.8 | 100.0 |
Figures represent percentage of total assets.
† Includes holdings in ordinary shares, preference shares and convertible promissory notes.
Distribution of total assets *
|
|
At 31 May 2020 % |
At 31 May 2019 % |
|
Communication Services |
12.2 |
15.0 |
|
Consumer Discretionary |
27.2 |
24.0 |
|
Consumer Staples |
0.5 |
0.8 |
|
Financials |
8.9 |
10.6 |
|
Healthcare |
13.7 |
15.1 |
|
Industrials |
7.8 |
12.0 |
|
Information Technology |
24.3 |
19.9 |
|
Materials |
0.7 |
- |
|
Real Estate |
1.3 |
0.8 |
|
Net Liquid Assets |
3.4 |
1.8 |
|
|
100.0 |
100.0 |
* Total assets represents total net assets before deduction of all borrowings.
|
Notes to the financial statements |
|
1. |
Principal accounting policies The Financial Statements for the year to 31 May 2020 have been prepared in accordance with Financial Reporting Standard 102, 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' on the basis of the accounting policies set out in the Annual Report and Financial Statements which are unchanged from the prior period and have been applied consistently.
The Company was incorporated on 7 February 2018 and therefore the comparatives figures in notes headed up '2019', where applicable, are for the period from 7 February 2018 to 31 May 2019. |
||||||||
|
2. |
Income |
2020 £'000 |
2019 £'000 |
||||||
|
|
Income from financial assets designated at fair value through profit or loss |
|
|
||||||
|
|
Overseas dividends |
528 |
664 |
||||||
|
|
Overseas interest |
21 |
- |
||||||
|
|
|
549 |
664 |
||||||
|
|
Other income |
|
|
||||||
|
|
Deposit interest |
46 |
35 |
||||||
|
|
|
595 |
699 |
||||||
|
3. |
Investment management fee Baillie Gifford & Co Limited, a wholly owned subsidiary of Baillie Gifford & Co, has been appointed as the Company's Alternative Investment Fund Manager ('AIFM') and Company Secretaries. Baillie Gifford & Co Limited has delegated portfolio management services to Baillie Gifford & Co. Dealing activity and transaction reporting has been further sub-delegated to Baillie Gifford Overseas Limited and Baillie Gifford Asia (Hong Kong) Limited. The Investment Management Agreement is terminable on not less than six months' notice. The annual management fee is 0.70% on the first £100 million of net assets and 0.55% on the remaining net assets. Management fees are calculated and payable quarterly. |
||||||||
|
4. |
Net return per ordinary share |
2020 Revenue |
2020 Capital |
2020 Total |
2019 Revenue |
2019 Capital |
2019 Total |
||
| Revenue return after taxation |
(1.05p) |
57.85p |
56.80p |
(1.09p) |
27.54p |
26.45p |
|||
|
|
Revenue return per ordinary share is based on the net revenue loss after taxation of £2,555,000 (2019 - net revenue loss after taxation of £2,054,000) and on 243,286,434 (2019 - 188,466,423) ordinary shares, being the weighted average number of ordinary shares in issue during each period. Capital return per ordinary share is based on the net capital gain for the financial period of £140,740,000 (2019 - net capital gain of £51,904,000) and on 243,286,434 (2019 - 188,466,423) ordinary shares, being the weighted average number of ordinary shares in issue during each period. Total return per ordinary share is based on the total gain for the financial period of £138,185,000 (2019 - £49,850,000) and on 243,286,434 (2019 - 188,466,423) ordinary shares, being the weighted average number of ordinary shares in issue during each period. There are no dilutive or potentially dilutive shares in issue. |
||||||||
|
5. |
Ordinary dividends There are no dividends paid or proposed in respect of the financial year. There is no investment income available for distribution by way of dividend for the year to 31 May 2020 due to the revenue loss of £2,555,000 in the year (period to 31 May 2019 - revenue loss of £2,054,000). |
||||||||
Notes to the financial statements (Ctd)
|
6. |
Fair Value Hierarchy The fair value hierarchy used to analyse the fair values of financial assets is described below. The levels are determined by the lowest (that is the least reliable or least independently observable) level of input that is significant to the fair value measurement for the individual investment in its entirety as follows: Level 1 - using unadjusted quoted prices for identical instruments in an active market; Level 2 - using inputs, other than quoted prices included within Level 1, that are directly or indirectly observable (based on market data); and Level 3 - using inputs that are unobservable (for which market data is unavailable).
An analysis of the Company's financial asset investments based on the fair value hierarchy described above is shown below. Investments held at fair value through profit or loss |
||||
|
|
As at 31 May 2020 |
Level 1 £'000 |
Level 2 £'000 |
Level 3 £'000 |
Total £'000 |
|
|
Listed securities |
414,486 |
- |
- |
414,486 |
|
|
Unlisted ordinary shares |
- |
- |
6,407 |
6,407 |
|
|
Unlisted preference shares* |
- |
- |
50,134 |
50,134 |
|
|
Unlisted convertible promissory notes |
- |
- |
3,109 |
3,109 |
|
|
Total financial asset investments |
414,486 |
- |
59,650 |
474,136 |
|
|
|
||||
|
|
As at 31 May 2019 |
Level 1 £'000 |
Level 2 £'000 |
Level 3 £'000 |
Total £'000 |
|
|
Listed securities |
263,914 |
- |
- |
263,914 |
|
|
Unlisted ordinary shares |
- |
- |
3,174 |
3,174 |
|
|
Unlisted preference shares* |
- |
- |
29,346 |
29,346 |
|
|
Unlisted convertible promissory notes |
- |
- |
- |
- |
|
|
Total financial asset investments |
263,914 |
- |
32,520 |
296,434 |
|
|
* The investments in preference shares are not classified as equity holdings as they include liquidation preference rights that determine the repayment (or multiple thereof) of the original investment in the event of a liquidation event such as a take-over. During the year to 31 May 2020 investments with a book cost of £4,666,000 (period to 31 May 2019 - £2,286,000) were transferred from Level 3 to Level 1 on becoming listed.
|
||||
|
|
|
||||
|
Notes to the financial statements (Ctd) |
|
||
|
6. |
Fair Value Hierarchy (Ctd) |
|
|
|
|
The valuation techniques used by the Company as explained in the accounting policies Listed Investments The fair value of listed security investments is the last traded price on recognised overseas exchanges.
Unlisted Investments Unlisted investments are valued at fair value by the Directors following a detailed review and appropriate challenge of the valuations proposed by the Managers. The Managers' unlisted investment valuation policy applies techniques consistent with the International Private Equity and Venture Capital Valuation ('IPEV') Guidelines 2018.
The techniques applied are predominantly market-based approaches. The market-based approaches available under IPEV are set out below and are followed by an explanation of how they are applied to the Company's unlisted portfolio:
- Multiples; - Industry Valuation Benchmarks; and - Available Market Prices.
The nature of the unlisted portfolio currently will influence the valuation technique applied. The valuation approach recognises that, as stated in the IPEV Guidelines, the price of a recent investment, if resulting from an orderly transaction, generally represents fair value as at the transaction date and may be an appropriate starting point for estimating fair value at subsequent measurement dates. However, consideration is given to the facts and circumstances as at the subsequent measurement date, including changes in the market or performance of the investee company. Milestone analysis is used where appropriate to incorporate the operational progress of the investee company into the valuation. Additionally, the background to the transaction must be considered. As a result, various Multiples based techniques are employed to assess the valuations particularly in those companies with established revenues. Discounted cashflows are used where appropriate. An absence of relevant industry peers may preclude the application of the Industry Valuation Benchmarks technique and an absence of observable prices may preclude the Available Market Prices approach. All valuations are cross-checked for reasonableness by employing relevant alternative techniques.
The unlisted investments are valued according to a three monthly cycle of measurement dates. The fair value of the unlisted investments will be reviewed before the next scheduled three monthly measurement date on the following occasions: - at the year end and half year end of the Company; and - where there is an indication of a change in fair value as defined in the IPEV Guidelines (commonly referred to as 'trigger' events). |
|
|
|
7. |
Transaction costs Transaction costs incurred on the purchase and sale of investments are added to the purchase cost or deducted from the sale proceeds, as appropriate. During the year, transaction costs on purchases amounted to £20,000 (period to 31 May 2019 - £55,000) and on sales amounted to £18,000 (period to 31 May 2019 - £12,000). |
||
|
8. |
Borrowing facilities The Company entered into a US$25 million five year revolving credit facility with ING Bank N.V., London Branch on 1 August 2018. At 31 May 2020, there were drawings of US$18 million (sterling value of £14,560,000 as at 31 May 2020) at an interest rate of 2.26813% (2019 - US$15 million (sterling value of £11,901,000 as at 31 May 2019) at an interest rate of 4.10063%). The main covenants relating to the loan are that borrowings should not exceed 30% of the Company's adjusted net asset value and the Company's minimum adjusted net asset value shall be £70 million. The adjusted net asset value calculation includes the deduction of 100% of any unlisted securities. There were no breaches in the loan covenants during the year to 31 May 2020 (period to 31 May 2019 - none).
|
||
Notes to the financial statements (Ctd) | |||||||||||||||
8. | Borrowing facilities (Ctd) |
|
|
|
|
| |||||||||
| Analysis of change in net debt | At 31 May 2019 £'000 | Cash flows £'000 | Exchange movement £'000 | At 31 May 2020 £'000 |
| |||||||||
| Cash and cash equivalents | 5,952 | 9,725 | 412 | 16,089 |
| |||||||||
| Loans due within one year | (11,901) | (2,335) | (324) | (14,560) |
| |||||||||
| Total | (5,949) | 7,390 | 88 | 1,529 |
| |||||||||
9. | Share capital | 2020 Number | 2020 £'000 | 2019 Number | 2019 £'000 | ||||||||||
| Allotted, called up and fully paid |
|
|
|
| |||||||||||
| Ordinary shares of 1p each | 261,765,000 | 2,618 | 229,800,000 | 2,298 | |||||||||||
| On incorporation, the share capital of the Company was £50,000.01 represented by one ordinary share with a nominal value of 1p and 5,000,000 redeemable preference shares with a nominal value of 1p, which were held by Baillie Gifford & Co Limited to allow the Company to commence business and to exercise its borrowing powers. The redeemable preference shares were to be redeemed upon completion of the Company's initial public offering ('IPO') out of the proceeds of the IPO.
At its IPO on 23 March 2018, the Company issued 172,999,999 ordinary shares of 1p and raised gross proceeds of £173,000,000 which was used to finance the initial investments of the Company. The issue costs in respect of the IPO were £2,273,000, which were made up of set up costs of £453,000 and commission of £1,820,000.
On 26 June 2018 the Company, by special resolution, redeemed the redeemable preference shares as confirmed by an Order of the High Court of Justice, Chancery Division. At that date, as approved by a special resolution passed on 5 March 2018, the amount outstanding on the Company's share premium account immediately following the issue on 23 March 2018 was reduced by £168,942,000 in order to create distributable reserves which could be used for the repurchase of shares and to fund the payment of dividends.
The Company has authority to allot shares under section 551 of the Companies Act 2006. The Board has authorised use of this authority to issue new shares at a premium to net asset value in order to enhance the net asset value per share for existing shareholders and improve the liquidity of the Company's shares. In the year to 31 May 2020, the Company issued a total of 31,965,000 shares (nominal value £320,000, representing 13.9% of the issued share capital at 31 May 2019) on a non pre-emptive basis at a premium to net asset value (on the basis of debt valued at par value), raising net proceeds of £48,088,000 (in the period from the IPO, 23 March 2018 to 31 May 2019, the Company issued a total of 56,800,000 shares (nominal value £568,000, representing 32.8% of the issued share capital at 23 March 2018, raising net proceeds of £69,597,000), which has been invested in accordance with the Company's investment policy. Over the period from 31 May 2020 to 1 September 2020 the Company has issued a further 7,300,000 shares at a premium to net asset value, raising net proceeds of £14,623,000.
The Company's authority to buy back shares up to a maximum of 14.99% of the Company's issued share capital was renewed at the Annual General Meeting held on 27 August 2019. No shares were bought back in the year to 31 May 2020. At 31 May 2020 the Company had authority to buy back a further 34,941,690 ordinary shares. | ||||||||||||||
10. | The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 May 2020 or the period 7 February 2018 to 31 May 2019 but is derived from those accounts. Statutory accounts for the period to 31 May 2019 have been delivered to the Registrar of Companies, and those for the year to 31 May 2020 will be delivered in due course. The auditor has reported on those accounts; the reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006. | ||||||||||||||
11. | The Annual Report and Financial Statements will be available on the Managers' websitewww.bgusgrowthtrust.com‡ on or around 9 September 2020. | ||||||||||||||
Notes to the financial statements (Ctd) | |||||
| Glossary of Terms and Alternative Performance Measures ('APM')
An alternative performance measure ('APM') is a financial measure of historical or future financial performance, financial position, or cash flows, other than a financial measure defined or specified in the applicable financial reporting framework. The APMs noted below are commonly used measures within the investment trust industry and serve to improve comparability between investment trusts.
Total Assets The total value of all assets held less all liabilities (other than liabilities in the form of borrowings). Shareholders' Funds and Net Asset Value Shareholders' funds is the value of all assets held less all liabilities, with borrowings deducted at book cost. Net Asset Value (NAV) is the value of all assets held less all liabilities, with borrowings deducted at either fair value or par value as described below. Per share amounts are calculated by dividing the relevant figure by the number of ordinary shares in issue. Borrowings at Par Value (APM) Borrowings are valued at nominal par value. Borrowings at Fair Value (APM) Borrowings are valued at an estimate of their market worth. Net Liquid Assets Net liquid assets comprise current assets less current liabilities (excluding borrowings). Discount/Premium (APM) As stock markets and share prices vary, an investment trust's share price is rarely the same as its NAV. When the share price is lower than the NAV per share it is said to be trading at a discount. The size of the discount is calculated by subtracting the share price from the NAV per share and is usually expressed as a percentage of the NAV per share. If the share price is higher than the NAV per share, this situation is called a premium. Total Return (APM) The total return is the return to shareholders after reinvesting any dividend on the date that the share price goes ex-dividend. Ongoing Charges (APM) The total recurring expenses (excluding the Company's cost of dealing in investments and borrowing costs) incurred by the Company as a percentage of the average net asset value (with debt at fair value).
Ongoing Charges Calculation | ||||
|
| 31 May 2020 £'000 | 31 May 2019 £'000 | ||
| Investment management fee |
| 2,206 | 1,893 | |
| Other administrative expenses |
| 380 | 359 | |
| Total expenses |
| 2,586 | 2,252 | |
| Total expenses annualised | (a) | 2,586 | 1,890* | |
| Average daily cum-income net asset value | (b) | 344,838 | 244,760 | |
| Ongoing charges | (a ÷ b) | 0.75% | 0.77% | |
| * The total expenses above cover the period 23 March 2018 to 31 May 2019, a period of 435 days. | ||||
Notes to the financial statements (Ctd)
|
| |
| Glossary of Terms and Alternative Performance Measures ('APM') (ctd)
Gearing (APM) At its simplest, gearing is borrowing. Just like any other public company, an investment trust can borrow money to invest in additional investments for its portfolio. The effect of the borrowing on the shareholders' assets is called 'gearing'. If the Company's assets grow, the shareholders' assets grow proportionately more because the debt remains the same. But if the value of the Company's assets falls, the situation is reversed. Gearing can therefore enhance performance in rising markets but can adversely impact performance in falling markets. Potential gearing is the Company's borrowings at par expressed as a percentage of shareholders' funds. Invested gearing is the Company's borrowings at par less cash and brokers' balances expressed as a percentage of shareholders' funds. | |
| Leverage (APM) For the purposes of the Alternative Investment Fund Managers Directive, leverage is any method which increases the Company's exposure, including the borrowing of cash and the use of derivatives. It is expressed as a ratio between the Company's exposure and its net asset value and can be calculated on a gross and a commitment method. Under the gross method, exposure represents the sum of the Company's positions after the deduction of sterling cash balances, without taking into account any hedging and netting arrangements. Under the commitment method, exposure is calculated without the deduction of sterling cash balances and after certain hedging and netting positions are offset against each other. Active Share ( APM) Active share, a measure of how actively a portfolio is managed, is the percentage of the portfolio that differs from its comparative index. It is calculated by deducting from 100 the percentage of the portfolio that overlaps with the comparative index. An active share of 100 indicates no overlap with the index and an active share of zero indicates a portfolio that tracks the index. | |
None of the views expressed in this document should be construed as advice to buy or sell a particular investment.
‡ Neither the contents of the Managers' website nor the contents of any website accessible from hyperlinks on the Managers' website (or any other website) is incorporated into, or forms part of, this announcement.
3 September 2020
For further information please contact:
Alex Blake, Baillie Gifford & Co
Tel: 0131 275 2859 or 07773 246035
James Budden, Baillie Gifford & Co
Tel: 0131 275 2816 or 07507 201208
Mark Knight, Four Communications
Tel: 0203 697 4200 or 07803 758810
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