Baillie Gifford US Growth (USA ) and stablemate Edinburgh Worldwide (EWI ) have turned around performance in recent months, but will it be enough to save their skins in the looming Saba Capital votes?

The trusts, which feature amongst the seven that have been requisitioned by Saba Capital in a bid to oust their boards and fund managers, have both seen performance improve ahead of general meetings next month where shareholders will determine their fate.

Edinburgh Worldwide has grown its net asset value (NAV) by 17.1% since the end of October, ahead of a 7.2% rise by the S&P Global Small Cap index. However, this may be too little too late for investors, given the small-cap fund’s disappointing NAV returns of 12.6% versus 21.6% by its benchmark over the year to the end of October.

Edinburgh Worldwide’s improved performance is unlikely to be enough for activist investor Saba, which has focused on longer time periods. For example, the portfolio’s NAV has declined 20% over the past three years, making it the worst performing trust in the five-strong global smaller companies sector. Over the same period its share price is down 21%.

Douglas Brodie (pictured), Svetlana Vieteva, and Luke Ward, the Baillie Gifford managers running the £737m trust, admitted they have overseen ‘three years of testing shareholders’ patience with returns that haven’t been good enough’.

They said the scale of the underperformance ‘hinted at systemic errors’ in their strategy. They have since responded by reducing the number of positions in the trust and increasing the size limit for new investments from $5bn (£4.1bn) to the largest constituent of the S&P Global Small Cap index.

The managers have moved around 8% of the portfolio to align with these changes to the strategy, reducing exposure to several healthcare and software companies and exiting positions ‘where a commercial inflection point remains far into the future’.

The team, whose performance was subject to a scathing review by Saba boss Boaz Weinstein (pictured below) in a webinar last week, maintain that despite their poor track record they suspect they are approaching a pivotal point for returns.

One reason they think this is because the portfolio’s top-line growth has re-accelerated.

‘Following a challenging 2023, many of our holdings have adapted to a more rigorous operating environment. At the same time, we’ve moved on from several holdings that weren’t delivering relative to our expectations,’ the managers explained.

They also point to the portfolio’s potential for growth, highlighting top holding SpaceX’s next generation of rockets which have the potential to ‘increase capacity and decrease costs for the future space economy’.

The managers say the trust has a greater proportion of financially developed, resilient businesses. For example, there are more than double the proportion of profitable, cash-generative holdings compared to 12 months ago.

They suspect portfolio valuations will remain undemanding after a turbulent few years and will be helped by falling interest rates.

‘We fully acknowledge that we’ve badly underperformed over the last few years,’ they said.

‘The changed investing environment is partly responsible, but we’ve also made mistakes.’

They feel optimistic now they have made changes to their process and have rebalanced the portfolio. 

USA claws back losses

Baillie Gifford US Growth, which is run by Gary Robinson and Kirsty Gibson, has fared better than Edinburgh Worldwide in its recovery, delivering an impressive 29.4% NAV return over the six months to the end of November, almost double the 15.3% gain by the S&P 500. 

Its shares have soared 40% over the same period, which narrowed the discount to just 3.3% at the end of November, although it has since widened to 10%.

Since the trust’s launch in 2018 up to the end of November, the NAV has grown  186.1% and the shares have risen 169.7%, just below the S&P 500’s 190.5% increase.

The fund’s top holding SpaceX was the best performer over the period. The managers also highlighted merchant software provider Shopify, which achieved ‘the difficult feat’ of maintaining strong top line growth while significantly improving its profitability.

Robinson and Gibson added five new holdings, four public and one unlisted, and sold three companies in the period.

They snapped up positions in SharkNinja, which is behind household appliance brands Shark and Ninja; temperature-controlled warehouse space provider Lineage; US nursing facilities operator Ensign Group; online US sports betting group DraftKings; and unlisted COSM Experience, which operates immersive entertainment venues.

Gibson and Robinson sold biotech tool maker 10X Genoimic, alongside US open course provider Coursera and infrastructure cloud company HashiCorp, after the latter received a bid from IBM.

They also significantly reduced the trust’s position in chipmaker Nvidia.

‘Our conviction in the disruptive potential of AI has not changed. If anything, it has gotten stronger. However, we believe that Nvidia’s share price is now discounting more of this large opportunity,’ the managers explained.

Even after the US market’s stellar run, the managers expect it will continue as it is leading the way in AI.

‘We think this new technology is consequential and will usher in a period of change on a scale that we haven’t seen since the industrial revolution,’ they said.

This will create vast opportunities for growth investors, the managers added.

‘As we face this critical juncture, we ask for your trust and backing, united by our shared goal of achieving exceptional, long-term growth and value creation,’ they concluded.