Plans for Baillie Gifford to replace Schroders as investment manager on the Schroder UK Growth investment trust have been met with a positive response from analysts in the space. 
Last week, the board of the £274.9m trust announced that it had decided to terminate the appointment of Schroders as its investment manager and plans to appoint Baillie Gifford in its place, subject to regulatory approval.
The trust has been managed by Schroders’ Philip Matthews since October 2010. Prior managers from the asset management house include Julie Dean and Richard Buxton.
An announcement to the stock exchange noted: “The board believes in the benefit of active management delivered with a long-term horizon and accordingly believes investment management performance should be measured over the long term.
Performance of trust vs sector and index over 20yrs
Source: FE Analytics
“It is disappointing to note that the company's long-term investment performance is considerably below the board's expectation and has lagged the benchmark since inception. Further, despite its ongoing share buyback policy, the company has struggled with a persistent and wide discount to NAV [net asset value].
“Accordingly, the board has concluded that, in order to provide the best investment outcome for existing investors and to position the company to attract new investors, it should make the change to implement a new, ‘best ideas’ investment approach managed by Baillie Gifford, an established manager of investment trusts with a long-term track record in achieving capital growth from UK equities.”
Under Baillie Gifford, the trust would be managed by Iain McCombie and Milena Mileva, who will build the portfolio from their highest conviction ideas. The managers will focus on high quality companies with strong competitive positions which they believe have the prospect of delivering strong earnings growth over the long run.
Although the trust’s investment objective and policy will not change, Baillie Gifford will realign the portfolio to invest in this bespoke ‘best ideas’ portfolio of approximately 40 stocks, which will offer shareholders a UK-focused, high-growth investment proposition. The name will also change to Baillie Gifford UK Growth.
Simon Elliott, head of research at Winterflood Investment Trusts, said the move is a “positive development” for Schroder UK Growth’s shareholders. He added that the decision is not entirely surprising given the underperformance of the trust.
“That said, we have some sympathy with the outgoing manager. In our opinion, there was a mismatch between his investment approach and the fund’s growth mandate,” Elliott said.
“For those shareholders who were attracted to the fund by Richard Buxton’s high alpha style, this was an issue and many were surprised when Schroders retained the mandate following a beauty parade in 2014 triggered by the departure of Julie Dean, the fund’s previous manager.”
Looking at the changes, he added that Baillie Gifford is arguably “the pre-eminent investment trust provider at present”, thanks in part to the strong performance of its growth-biased investment approach. FE Analytics shows McCombie has outperformed his peer group composite by a wide margin over the past five years.
Performance of manager vs peer group composite over 5yrs
Source: FE Analytics
Winterflood does point out some potential issues with the change, however. One is the fact that shareholders in Schroders’ savings schemes account for 24 per cent of the trust’s register; in similar circumstances, shareholders have been given the option to switch their holding into other funds on the same savings scheme platform or receive their shares directly and this has led to some stability in trusts’ shareholder base.
Further, the analyst noted that the future direction of Schroder UK Growth’s dividend policy is “unclear”. The trust’s yield is currently 3.1 per cent but under Baillie Gifford it is likely to fall to around 2.5 per cent, although the board has not commented on the dividend.
“While it is early days and we have yet to meet the new management team, we believe that Baillie Gifford UK Growth will be a welcome addition to the investment trust universe. The fund will be differentiated from its peer group by its concentrated, growth investment approach and the closed-ended fund structure will allow its portfolio to be exposed to all the segments of the UK market,” Elliot said.
“While its discount could be potentially impacted by selling from the Schroders savings scheme over the next six months, we believe that the fund has the potential to be re-rated, particularly if the new investment management team can establish a credible track record with this fund.”
Analysts at Numis Securities also have a positive view of the change and have added Schroder UK Growth to the broker’s recommended list because of it. They argued that the trust has become a ‘trading opportunity’.
“The change is positive for shareholders, in our view, and it could be argued that it is long overdue,” they said.
Numis pointed out that trust had a good track record under Buxton and his growth approach, but the adoption of a business cycle approach under Dean after the manager left for Old Mutual Global Investors proved to be “ill-timed”. While current manager Matthews has a good track record, it failed to shine since he took over the portfolio following Dean’s departure to Sanditon Asset Management.
Trust's discount/premium over 5yrs
Source: FE Analytics
“The fund’s discount has narrowed from 13 per cent to circa 9.8 per cent following the announcement of the management change. The share register includes some value investors, notably 1607 Capital Partners which holds a stake of 15.3 per cent,” they concluded.
“However, we believe that the new mandate will be popular with private wealth managers, and see potential for the fund to trade close to NAV once the change in management is completed (the timing remains unclear, but three months’ notice has been served to Schroders).”