RNS Announcement: USA Results

Baillie Gifford US Growth Trust plc ('USA')

Legal Entity Identifier: 213800UMIOUWXZPKE539

Regulated Information Classification: Notice of Results.

Results for the year ended 31 May 2022

During the financial year to 31 May 2022, the Company's share price and net asset value ('NAV' after deducting borrowings at fair value) returned -45.5% and -35.3% respectively. This compares with a total return of 12.2% for the S&P 500 Index* (in sterling terms). During the period from 23 March 2018, launch date, to 31 May 2022, the Company's share price and NAV (after deducting borrowings at fair value) returned 67.2% and 95.6% respectively. This compares with a total return of 93.0% for the S&P 500 Index* (in sterling terms).

¾  Turnover remains low, consistent with our five year plus time horizon.

¾  We added a few listed holdings, participating in the IPOs of Rivian Automotive, HashiCorp and Duolingo.

¾  We sold Zillow, Vroom, Glaukos and Lyft, which had veered off track from their forward-looking hypotheses.

¾  We made seven additional private company investments: BillionToOne, Blockstream, Databricks, Discord, Faire Wholesale, Snyk and Solugen.

¾  Three of our existing private company holdings, Aurora Innovation, Ginkgo Bioworks and Warby Parker, went public during the period.

¾  As at the end of May, we held twenty-four private company investments which collectively comprised 36.4% of total assets.

¾  We are currently seeing a significant dislocation between share prices and fundamentals but the prospects for the innovators that are driving change remain bright.

Baillie Gifford US Growth Trust plc seeks to invest predominantly in listed and private 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 bgusgrowthtrust.com‡.

Baillie Gifford US Growth Trust is managed by Baillie Gifford, the Edinburgh based fund management group with around £254 billion under management and advice in active equity and bond portfolios for clients in the UK and throughout the world (as at 5 August 2022).

Investment Trusts are UK public limited companies and are not authorised or regulated by the Financial Conduct Authority.

*  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.

‡ 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.

9 August 2022

For further information please contact:

Alex Blake, Baillie Gifford & Co  

Tel: 0131 275 2000

Jonathan Atkins, Four Communications

Tel: 020 3920 0555 or 07872 495 396

The following is the results announcement for the year to 31 May 2022 which was approved by the Board on 8 August 2022.

Chairman's Statement

Dear Shareholders

In last year's report, with all our lives still impacted significantly by the Covid-19 pandemic, I wrote about equity markets experiencing some of the most significant instability in living memory. A year later, it feels like the same phrase still rings true, with the valuations of growth stocks particularly hard hit in recent months.

During the financial year to 31 May 2022, the Company's share price and net asset value total returns, calculated by deducting borrowings at fair value, were -45.5% and -35.3% respectively. This compares with a total return of 12.2% 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, calculated by deducting borrowings at fair value, were 67.2% and 95.6% respectively compared to a total return of 93.0% for the S&P 500 Index* (in sterling terms).

As we said last year when reporting very strong one year performance numbers, 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 Kirsty Gibson, in their Managers' Review.

Share Issuance and Buy-backs

The Company's shares moved from a premium of 4.0% last year to a discount of 12.3% at 31 May 2022 as sentiment turned against the Company's growth investing style. The Company issued 525,000 shares in the first half of the financial year at a premium to net asset value, raising £1.8 million. During the second half of the financial year, the Company bought back 2,206,300 shares, to be held in treasury, at a total cost of £3.6 million.

The authority to issue shares obtained at launch is due to expire in March 2023. With this in mind the Directors are therefore seeking shareholders' approval at the Annual General Meeting to obtain new authorities for issuance and disapplication of pre-emption rights. These authorities will be in substitution to the authorities obtained on 5 March 2018.

The Company will be seeking to renew the buy-back authority at the forthcoming Annual General Meeting.

Gearing

The Company has two loan facilities in place with ING Bank N.V., London Branch. The first is a US$25 million five year revolving credit facility which expires on 1 August 2023 and the second is a US$25 million three year fixed rate facility which expires on 23 October 2023. As at 31 May 2022, the facilities had been drawn down in full (31 May 2021 - US$37.5 million). Net gearing increased from 1% to 6% over the course of the year.

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 2022 was a negative 1.88p (year to 31 May 2021, a negative 1.78p). 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.

Private Company (Unlisted) Investments

As at the Company's year end, the portfolio weighting in private company (unlisted) investments stood at 36.4% of total assets, invested in twenty-four companies (2021 - 16.5% invested in twenty companies). There were seven new purchases in the year and three stocks, Aurora Innovation, Ginkgo Bioworks and Warby Parker, listed. There is commentary on the new holdings in the Managers' Review and Review of Investments below. Your portfolio managers remain alert to further special and high potential opportunities not widely accessible through public markets.

Environmental, Social and Governance ('ESG')

The Company's Managers believe that sustainability is inextricably linked to being a long-term investor. The Managers pursuit of long-term growth opportunities typically involves investment in entrepreneurial, disruptive and technology-driven businesses. These companies are often capital-light with a low carbon footprint.

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, 16 September 2022. Our current expectation is that a physical meeting will be possible. All shareholders are invited to attend, and the Board looks forward to welcoming you. The meeting will be followed by a presentation from the Managers. Should regulations relating to the Covid-19 pandemic change, the intention to hold a physical meeting will be reviewed and, if necessary, an announcement will be made on the Company's website at bgusgrowthtrust.com and the London Stock Exchange regulatory news service. I encourage shareholders to submit their votes by proxy before the applicable deadline ahead of the meeting and to submit any questions for the Board or Managers in advance by email to [email protected] or by calling 0800 917 2112 (Baillie Gifford may record your call).

Outlook

We continue to live in unusually uncertain times. Whilst your company has no direct exposure to Russia or Ukraine, the indirect consequences continue to unsettle markets and investors globally. Whilst we cannot yet predict the long-term impact of the war or the opening of economies as we come out of the Covid-19 crisis, we can continue to focus on our mission: to be long-term, supportive shareholders to some of the highest potential and most ambitious companies in the United States. We regularly review underlying performance and speak with management teams and our companies continue to perform strongly and are delivering their strategic ambitions. My Board colleagues and I remain confident that many market verticals are ripe for disruption and that the company is excellently placed to benefit from these changes over the long term. All that being the case, the Board and the Managers remain confident in our outlook.

Tom Burnet

Chairman

8 August 2022

* 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

During the period from 23 March 2018, launch date and first trade date, to 31 May 2022, the Company's share price and net asset value (after deducting borrowings at fair value) returned 67.2% and 95.6% respectively. This compares with a total return of 93.0% for the S&P 500 Index* (in sterling terms).

It is easier to be long-term when things are going well. It is during periods of weakness that conviction is truly tested. Bear markets cause emotions to bubble to the surface which urge one to act. It can be cathartic to do something, but decision making under stress increases the chances of errors. Stress also influences our attitude towards risk and our ability to assess probabilities. Humans are prone to the affect heuristic - the tendency to take mental shortcuts when emotions are running high. Such quick decision-making conferred evolutionary advantages at earlier points in human history. But careful decision-making trumps speed when dealing with complex-adaptive systems like the stock market.

It is critical that we maintain a long-term perspective during challenging times like these. The first step is to be prepared. Each year in this report we re-publish our investment principles. This year they are included below, again unaltered. Our second principle begins: '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.' By acknowledging the inevitability of volatility up front, one can be better prepared for it when it happens. The last few years have been particularly volatile and challenging, but this has not undermined our confidence in the philosophy and process, or in our underlying holdings.

Our organisational structure is also aligned with our long-term time horizon. Baillie Gifford is a private partnership, wholly owned by 51 partners who work in the firm. This private ownership structure enables us to run our business for the long term, without the distractions that come with being a public company. Long-termism pervades everything we do, from how we treat our employees, to how we service our clients, to how we run our clients' portfolios. It is core to our shared beliefs and is ingrained in our culture.

Last but certainly not least, there is the structure of this investment vehicle. Baillie Gifford US Growth Trust is a fixed pool of permanent capital; a stable structure that is well suited to our long-term investment approach.

We invest for the long term because it can take years for the characteristics of exceptional growth companies to be fully reflected in share prices. From our investment principles, again: '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.' For example, as the chart‡ below shows, over five-year periods, companies which grow their revenues and EPS the fastest perform the best.

Fundamentals are therefore the best guide to the underlying health of the portfolio. On this measure the Company scores well. In the twelve months to the end of the last reported quarter, almost 60% of the listed holdings in the portfolio grew revenues over 25% year on year. This is a comparable proportion to the prior twelve- month period. And top-line performance at our private company holdings has also been very strong. In the last twelve-month period, the median revenue growth rate was 78% year on year.

From a process standpoint, one of the tools that we use to track fundamental performance are our forward-looking hypotheses. The forward-looking hypotheses set out the key elements of each investment case and provide a benchmark to reference when conducting incremental research or assessing incremental developments. We have been monitoring progress relative to these forward-looking hypotheses and in aggregate the picture remains encouraging. Most businesses are still growing strongly, however there are some exceptions. In situations where the forward-looking hypothesis is off track, we have bucketed these stocks into those where we believe the issues are cyclical and temporary and those where there are potential structural factors at play.

One example from the latter category is connected fitness equipment maker Peloton. The company wrongly extrapolated pandemic-level demand and now has an inappropriately large cost base. It is working to address this issue and has brought in a new CEO with previous experience at Netflix and Spotify. Netflix too has faced weaker demand as it has exited the pandemic. Its subscriber base shrank in the first quarter of 2022 for the first time in a decade. It is unclear to what extent this is a cyclical versus structural phenomenon, but we suspect the weaker macro environment is a contributory factor.

The pandemic has transformed the scale of many companies in the portfolio, and these companies are emerging in much stronger shape than they went in. Take Shopify, the provider of software for merchants, as an example. Its gross merchandise value and revenues have tripled since the start of the pandemic, and 10% of all e-commerce sales in the US now flow through the platform. This scale has enabled Shopify to increase its investments and broaden out its product offering. It has also made Shopify the default choice not only for online merchants, but also for marketplaces that are looking to integrate e-commerce into their offerings. For example, Shopify now has partnerships with Facebook and Instagram Shops, TikTok and JD.com. This is driving a powerful flywheel effect. The more partner integrations that Shopify has, the more attractive it becomes to merchants. And the more merchants Shopify has, the more attractive its platform is to marketplace partners. Shopify has been one of the weakest performing stocks in the portfolio recently, but the business is as strong as ever.

Moderna, the mRNA therapeutics company, has also grown in both in scale and scope since the start of the pandemic. The company has become a household name on the back of its Covid-19 vaccine but that is not what first attracted us to invest. We participated in the IPO, long before Covid-19, because we were excited by the broad range of diseases that we thought its mRNA technology platform could address. As we entered the pandemic Moderna did not have any drugs on the market and was consuming cash. The Covid-19 vaccine has accelerated the company's path to market and to profitability. The business is now highly cash-generative, and it has billions of dollars of cash on the balance sheet. This financial strength has enabled it to invest more in R&D and broaden out its pipeline. The company is now working on developing treatments for a vast range of diseases including cancer, cardiovascular disease and HIV.

There are many sectors of the economy which are undergoing technology-led change. The pandemic served to accelerate this. However, these structural shifts were underway long before the pandemic and we believe they are likely to continue long after the pandemic. In sectors ranging from retail to healthcare to finance to education, digital adoption remains early. We are currently seeing a significant dislocation between share prices and fundamentals but the prospects for the innovators that are driving change remain bright. We are confident that the fundamental strengths of these companies will be reflected in share prices in time.

Portfolio Changes

Since launch turnover has been low and consistent with the five-year plus time horizon we outline in our investment principles.

We added a few new listed holdings to the portfolio over the last year. We participated in the IPOs of Rivian Automotive, HashiCorp and Duolingo. Rivian Automotive is the most interesting electric vehicle manufacturer that we have come across since Tesla. HashiCorp provides tools to automate the management of cloud infrastructure. The company is the leading provider in an area that should see powerful secular tailwinds for many years. Duolingo is an education company that uses machine learning and data to make learning fun and engaging. Its language teaching app is the most downloaded education app globally.

There were several holdings which veered irreparably off track from their forward-looking hypotheses. We sold real estate technology company Zillow following the announcement that it was exiting the institutional home buying and selling market. This initiative formed a key part of our upside case for Zillow and without it we could not justify owning the shares. We sold online used car dealer Vroom due to concerns about its competitive position relative to Carvana, which we also own in the portfolio. We also sold Glaukos, the maker of treatments for eye diseases, and Lyft, the ride-sharing company, on competition concerns.

We made seven additional private company investments in the last twelve months: BillionToOne, Blockstream, Databricks, Discord, Faire Wholesale, Snyk and Solugen. These investments straddle a wide range of industries. We have stated in previous reports that we believe the current wave of innovation is speeding up and spreading out. The breadth of business models and market opportunities that these private companies address is indicative of this widening opportunity set. We have included a description of each of these new private company holdings below.

Three of our existing private company holdings, Aurora Innovation, Ginkgo Bioworks and Warby Parker, went public during the period. The net result was that, at the end of May, we held twenty-four private company investments which collectively comprised 36.4% of total assets. Taking into account companies which were previously private company investments, but which are now public, this figure rises to 42.2%. The weighting in private companies has risen since last year. This is partly due to the deployment of additional capital into private companies. However, for many of our private company holdings we own preference shares, which provide downside protection in the event of a sale or liquidation. This results in private company valuations falling more slowly than their listed counterparts during market drawdowns.

Outlook

It has been a difficult year. We are in a period of heightened geopolitical and economic uncertainty and the short-term outlook is unclear. We do not believe there is value in us making macro predictions. This is not where our core skill set lies. We do not know what inflation or GDP growth this year will be or next. And even if we did, we're not convinced it would help us make better long-term decisions. What we remain focused on is trying to identify and own the exceptional growth companies in America. Exceptional growth companies address large market opportunities, and it is their ability to capture these opportunities, rather than economic cycles, which will be the primary determinant of long-term outcomes.

In our principles, we say: '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.' In keeping with this principle, we thought it might be helpful to reiterate the convictions that undergird our investment philosophy and approach. We mentioned earlier our contention that share prices follow fundamentals over the long term. Here are some other contentions:

The US will remain the best hunting ground for exceptional growth companies globally. The US has all the ingredients necessary for a healthy innovation ecosystem. It has the best academic research institutions in the world. It has a strong talent pool, supplemented by immigration. It is still the country of choice for talented individuals who want to start a business. It has a well-developed venture capital system. There is strong IP protection and a relatively stable political backdrop and friendly business environment. There is a large and relatively homogenous domestic market. And finally, there is a culture of optimism and ambition and a willingness to accept failure. The country has been moving in the wrong direction on some of these traits over the last decade and it cannot afford to take its position for granted but there is currently no other country that comes close.

We are in the middle of a once-in-a-generation wave of technology-led change. This wave of change is being driven by the internet, which has increased connectivity, mobile, which has increased availability, and AI, which has made machines smarter. In the Interim Report, we introduced the work of Carlota Perez, an academic who has studied the history of technological revolutions. The current technological revolution is the fifth such revolution that Perez identified, and it is following a similar pattern to previous waves. We believe we are in the phase that Perez calls the 'turning point', where the new technologies transition from being deployed narrowly in a few select sectors and geographies and start to transform legacy sectors and the wider economy. Over the course of the next decade almost all sectors of the economy will be reshaped, and it is the innovative companies which are driving this change that will thrive.

Many of the structural changes that were underway prior to the pandemic, and which were accelerated by the pandemic, will continue after the pandemic. These shifts are not broken, and most are still early. Commerce and education will continue to shift online. The transportation and energy sectors will continue to shift to cleaner technologies. The healthcare sector will continue to become more personalised, driven by geonomics. The volatility created by the aftermath of the pandemic may cause temporary fluctuations in some of these trends, for example the recent resurgence of fossil fuels, but this is just noise temporarily masking these more powerful underlying structural shifts.

Stock market returns will continue to be described by power laws rather than normal distributions. Over the long term stock market returns are dominated by a small number of outlier companies that do exceptionally well. We believe the asymmetry in stock returns will be at least as pronounced over the next decade as in prior decades. The power laws in equity investing occur because success begets success. The more a company grows, the stronger it gets, the more share it takes. The world has become increasingly digital, increasingly networked and increasingly global. These factors are leading to even more powerful economies of scale and network effects than in the past. These conditions are a precursor to winner-take-most market conditions and asymmetric outcomes.

Technology is the single most important driver of progress. During the pandemic, it was Moderna's mRNA vaccine that accelerated our path out of the crisis. Today, climate change represents one of the biggest challenges facing humanity. We believe technology, rather than de-growth, is our best path forward. And recent signs are very encouraging in this regard. For example, over the last ten years solar prices have declined by almost 90% and battery costs have fallen by almost two-thirds. These technologies are following a classic learning curve where the more of them we produce, the cheaper they get. There are many problems left to solve and technology represents our best hope. Whenever we find solutions to existing problems, new problems emerge. Our willingness to continue to tackle these iteratively with innovative ideas is at the heart of progress.

The last few years have been tough, but we remain optimistic about the future. We are facing short-term headwinds, but we believe we will come through these as we always have done. The structural forces of change - from Moore's Law in semiconductors, to Wright's Law in clean energy and Flatley's Law in healthcare - continue unabated. We are on a path towards abundance. The path may not be smooth, but we are convinced that the future holds promise and that the innovative companies that have the potential to drive us there will be the outliers that drive stock markets for the next decade. We understand that weak performance is challenging for shareholders to endure but we can assure you that we remain confident in, and committed to, our approach. We are hugely appreciative of your ongoing support and patience.

The US Equity Team

‡   The chart referenced here will be included in the Annual Report and Financial Statements to be published on the Company's page of the Managers' website (bgusgrowthtrust.com) on or around 16 August 2022.

* 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.

Valuing Private Companies

We aim to hold our private company investments at 'fair value', i.e. the price that would be paid in an open-market transaction. Valuations are adjusted both during regular valuation cycles and on an ad hoc basis in response to 'trigger events'. Our valuation process ensures that private companies are valued in both a fair and timely manner.

The valuation process is overseen by a valuations group at Baillie Gifford, which takes advice from an independent third party (S&P Global). The valuations group is independent from the investment team with all voting members being from different operational areas of the firm, and the investment managers only receive final valuation notifications once they have been applied.

We revalue the private holdings on a three-month rolling cycle, with one-third of the holdings reassessed each month. For investment trusts, the prices are also reviewed twice per year by the respective boards and are subject to the scrutiny of external auditors in the annual audit process.

Beyond the regular cycle, the valuations committee also monitors the portfolio for certain 'trigger events'. These may include changes in fundamentals, a takeover approach, an intention to carry out an Initial Public Offering ('IPO'), company news which is identified by the valuation team or by the portfolio managers, or changes to the valuation of comparable public companies. Any ad hoc change to the fair valuation of any holding is implemented swiftly and reflected in the next published net asset value ('NAV'). There is no delay.

The valuations committee also monitors relevant market indices on a weekly basis and updates valuations in a manner consistent with our external valuer's (S&P Global) most recent valuation report where appropriate. When market volatility is particularly pronounced the team does these checks daily.

Recent market volatility has meant that recent pricing has moved much more frequently than would have been the case with the quarterly valuations cycle.

* Data reflecting period from 1 January 2022 to 31 May 2022 being the period of increased valuations due to market volatility.

Year to date, most revaluations have been decreases. A handful of companies have raised capital at an increased valuation. The average movement in both valuation and share price for those which have decreased in value is shown below.

* Data reflecting period from 1 January 2022 to 31 May 2022 being the period of increased valuations due to market volatility.

Share prices have decreased less than headline valuations because Baillie Gifford typically holds preference stock, which provides downside protection. The share price movement reflects a probability-weighted average of both the regular valuation, which would be realised in an IPO, and the downside protected valuation, which would be normally be triggered in the event of a corporate sale or liquidation.