Schroder UK Growth Fund to replace Schroders with Baillie Gifford

Philip Matthews has managed the trust since October 2014 when he took over from well-regarded manager Julie Dean. Over three years to 13 April, the day the manager change was announced, its NAV and share price total returns were respectively 15 per cent and 14 per cent, below the 17 per cent return of its benchmark, the FTSE All-Share index, according to Winterflood. And its return since launch in 1994 fails to beat that of the FTSE All-Share index over that period.  

Schroder UK Growth will be renamed Baillie Gifford UK Growth Fund (BGUK), and co-managed by Iain McCombie and Milena Mileva. Mr McCombie has been chief of Baillie Gifford's investment staff since 2013 and is co-manager of Baillie Gifford Managed Fund (GB0006010168). Ms Mileva joined Baillie Gifford in 2009 and has been an investment manager within its UK equity team since 2012.

The trust will continue to have a growth objective and invest in UK equities, but its new managers will change its focus to high-growth quality companies that can deliver strong earnings growth over several years. They plan to run a concentrated portfolio of around 40 of their best investment ideas.

Baillie Gifford will be paid an annual management fee of 0.5 per cent of NAV, which is the same as the current fee. But Baillie Gifford will waive £732,000, which is equivalent to around six months' fees, to offset any costs resulting from the termination of Schroders' contract and implementing changes, such as the portfolio transition costs and stamp duty. The trust currently has an ongoing charge of 0.63 per cent.

Schroder UK Growth's share price rose from 172p at close on 12 April to 180p at close on 17 April. The discount to NAV tightened from 11.9 per cent to 8.3 per cent over that period.

"We are not surprised that the board has sought to make a substantial change to the management of [Schroder UK Growth], given its dull performance and persistent discount," said analysts at broker Numis. "Baillie Gifford currently manages eight investment companies, with combined net assets of £10bn. We believe the board would have been attracted by the group's impressive performance over the longer term, and strong investor following."

They added that the new managers' high-growth focus and the fact that this will be Baillie Gifford's first UK-focused investment trust, will help to differentiate it from its peers in the Association of Investment Companies UK All Companies sector.

Analysts at Winterflood said the move was positive for shareholders as the trust has the potential to re-rate. "That said, we have some sympathy with the outgoing manager," they added. "There was a mismatch between his investment approach and the fund's growth mandate."

Mr Matthews' value-focused style has been out of favour with the market most of the time for several years. And some analysts think that while changing manager may be necessary, it is too soon to change the trust's investment style.

"I think it's unfortunate for the shareholders of Schroder UK Growth as they may be selling out at the wrong time and reinvesting in growth stocks that have already done well," said David Liddell, chief executive of online investment service IpsoFacto Investor. "They have suffered underperformance from holding [value-type] stocks but won't benefit from a bounce-back – if there is one."

The change of focus also raises questions about whether the trust will maintain its dividend policy. The trust has a yield of 3.2 per cent, but Winterflood analysts estimate that this will fall to around 2.5 per cent when it adopts its high-growth focus.

Mr Liddell suggests that investors who want to sell the trust because they prefer the current value style or want more income sit tight for now and let the discount tighten further before they sell.

Schroder UK Growth Fund performance