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Why boohoo "is the type of entrepreneurial business we need in the UK"

Baillie Gifford UK Growth manager Iain McCombie tells Mary McDougall why he thinks boohoo is a great success
November 18, 2021

 

  • Despite underperformance, Baillie Gifford UK Growth manager Iain McCombie continues to hold growth companies for the long term
  • The trust has significant exposure to investment and brokerage services because he thinks that there is a growing need for financial advice
  • He believes that online retailer boohoo has sufficiently addressed issues relating to staff working conditions

Baillie Gifford UK Growth Trust (BGUK) has significantly underperformed some of its peers over the past 12 months because, since the announcement of a successful Covid-19 vaccine last November, value stocks have made the largest price gains in the UK. But Iain McCombie, lead manager of Baillie Gifford UK Growth Trust, is sticking to his policy of buying companies that he believes have the best long-term growth prospects and owning them over such timescales. 

This trust's holdings have a very low turnover of 5 to 10 per cent a year, with only a handful of names being added and sold each year. “Sometimes what you own is far more interesting than something that looks new, shiny and different,” explains McCombie. 

He has only sold two companies out of the trust since its year-end in April. McCombie says that marine engineering services provider James Fisher & Sons (FSJ) was disposed of because “the growth story wasn't really panning out as we'd hoped”. And defence company Ultra Electronics (ULE) was sold on valuation grounds following significant price gains due to a takeover bid. 

When McCombie looks for companies to invest in, he tries to picture where they will be in years to come. He says that the important questions are: does the management have the vision and ambition to grow the business? Where will the business be in five or 10 years' time, and can it finance that?

 

Listen to our interview with Iain McCombie on the IC podcast channel

 

Baillie Gifford UK Growth Trust’s largest holding at the end of September was Genus (GNS), a company that uses animal genetics to help farmers breed pigs and cattle that make better meat and milk. “There’s no other company like it in the world,” says McCombie.

While some analysts view the company as hard to value, McCombie argues that there is an acute need, particularly in emerging markets, for better quality meat, and Genus is an important part of the solution. 

Baillie Gifford UK Growth also has significant exposure to investment and brokerage services, its largest sector weighting. McCombie holds St James's Place (STJ), the trust’s second-largest holding at the end of September, because he thinks that there is a growing need for financial advice. “The problem for this country is we don't have enough advisers,” he says.

While McCombie acknowledges that St James’s Place is “a bit controversial to some people”, he believes that it will be part of the solution to helping people navigate an “ever more complicated” investment landscape.

St James’s Place has been criticised in recent years for having high fees and poor fund performance. In March, research firm Yodelar published a report that found eight out of 10 St James's Place funds have consistently underperformed. McCombie argues that while that company's fees look high compared with non-advised platforms, advice has to be paid for. 

Baillie Gifford UK Growth also holds do-it-yourself investment platforms Hargreaves Lansdown (HL.), AJ Bell (AJB) and IG (IGG).

“There's a definite demand for savings and it makes a lot of sense to have them on a platform,” says McCombie. The trust holds all three because he believes that they are doing something slightly different to each other.

And he’s not worried about the threat posed to Hargreaves by flat-fee or lower-cost rivals. “People have been worried about Hargreaves’ pricing for a while as it is not the cheapest in the market, but [it] continues to take market share,” explains McCombie. He observes that brand recognition and ease of use are more important to many customers than price. 

McCombie is very pleased by Boohoo's (BOO) management's efforts to investigate and clean up supply chain issues. Its suppliers had been accused of paying staff illegally low wages and exposing them to unnecessary Covid-19 risks. “Everyone lines up to criticise boohoo but we should be saying this is the type of entrepreneurial business we need in the UK,” argues McCombie.

boohoo has also been hit by supply chain issues this year, leading to its share price falling 45 per cent over the year to 8 November. “The fact is that it's still growing at 20 to 25 per cent and most businesses would kill to have that kind of growth rate,” says McCombie. "It's a great British success story." 

With rising inflation, companies with pricing power are likely to prove more resilient, although as a long-term investor, inflation expectations are of little significance to McCombie's investment decisions. He notes that one of the trust's 10 largest holdings, clean air solutions producer Volution (FAN), has managed to introduce three price increases in the past 12 months, all of which have stuck. 

Baillie Gifford UK Growth doesn’t hold any unquoted investments. But earlier this year it obtained permission from its shareholders to invest up to 10 per cent of its assets in private companies.

McCombie says: “Watch this space. What we've always said to shareholders is that we don't see private as being different – we're trying to find the same types of businesses we're already investing in. We're not suddenly going to lurch into early-stage, highly speculative businesses.”

 

Iain McCombie is co-manager of Baillie Gifford UK Growth Trust, and the Baillie Gifford Managed, Baillie Gifford Global Stewardship and Baillie Gifford UK Equity Core funds. 

He became a partner at Baillie Gifford in 2005. 

McCombie was appointed head of UK Mid and Small Caps in July 2001. 

He started managing funds in 1997 after joining Baillie Gifford in 1994.

Before this, he spent three years at Hall Morrice Accountants

McCombie has an MA in accounting from the University of Aberdeen.