As with any investment, capital is at risk.
Investor sentiment on the UK stock market is on the up and starting to reflect the growth opportunity that lies in some of its best companies, says Baillie Gifford UK Growth Trust’s co-manager Iain McCombie.
He says that the UK’s smaller to mid-cap sized companies represent a potentially fruitful hunting ground for investors who want to search out stocks that can deliver many years of growth but are often overlooked.
As an example of how some of those companies can deliver growth, one of the trust’s major shareholdings Games Workshop, is now listed in the FTSE 100, after its shares climbed 46 per cent in the year to 24 February 2025.
‘The UK market’s performance has actually been improving and I think that’s because it’s starting to reflect the fundamentals,’ says McCombie.
‘Despite what you might always hear about the UK, there are innovative companies and there’s some really good news stories.’
Baillie Gifford UK Growth Trust’s managers state that this type of investing involves taking a risk and that they may not always get it right on every company they back. It can also include periods of underperforming the wider market.
Here, McCombie explains how it invests and highlights some of the companies it holds.
Baillie Gifford UK Growth Trust’s co-manager Iain McCombie says the UK stock market contains some real gems
Games Workshop
Games Workshop is a 50-year-old British firm that has become the largest and most successful hobby miniatures company in the world.
It sells its Warhammer and other brand name models and miniatures around the globe, including in the US, China and Japan. Some 70 per cent of Games Workshop’s sales now come from outside the UK.
McCombie says that it is a great example of an innovative British growth company that has capitalised on its success.
He says: ‘One of our biggest holdings is Games Workshop which people think is a niche business. A hobby business and yet, actually, it’s a very rich IP (intellectual property) business.
McCombie says Baillie Gifford UK Growth Trust has backed Games Workshop due to the quality of the business, combined with its very high margins and really attractive growth potential.
He adds: ‘It’s now listed in the FTSE 100, which is pretty amazing when you think about it and there’s opportunities for it to continue to expand its addressable market.
‘It’s just signed a deal for Amazon to develop a TV series for some of its characters. It’s got 30-plus years of very rich IP, which is really exciting. I think that can only be good news for the company.’
Games Workshop is now listed on the FTSE 100 after strong growth in recent years
AutoTrader
AutoTrader has transformed itself from a second-hand car listings magazine to a cutting edge digital business, which is 10 times bigger than the number two player in the online car sales market, says McCombie.
He highlights the quality of the management and the desire to innovate and improve the customer experience and make it easier for car buyers. An element of this currently involves helping buyers find finance. The fund manager describes this as still in its early days, ‘but intuitively it looks quite exciting’.
He says: ‘Often, one of the problems for people buying cars is the financing falls through. They’ve found the car on the website, but then they can’t get the finance to do it. What Auto Trader is doing is trying to help that process and take a little cut from it. They’re not lending money, just to be clear. They’re just taking a commission by getting people pre-approved effectively, for finance.
‘Somebody can go into a dealer and say, I want to buy this car knowing that they’ve got finance preapproved, which is good for everyone. Certainly, very good for Auto Trader. That’s just new revenues for them.
‘That’s what we like about Auto Trader, they’re always looking for opportunities to grow their market and use that dominance to help consumers.’
AutoTrader is 10 times bigger than the number two player in the online car sales market
Kainos
Kainos is a software company with two main segments – digitising public sector systems and implementing HR software, Workday. It is one of the leading contractors engaged in the digitisation of government services, including the Department of Transport. Kainos technology has helped to digitise its system, which enables people to quickly and easily look up their MOT online. Tests are now available on the Gov.UK website almost immediately.
Now the FTSE 250-listed technology company is using artificial intelligence to help organisations improve how they work.
McCombie highlights the MOT testing system as an example. He says: ‘What they’ve used AI to do is to help with some of the testing for MOTs. You may not know this, but every mechanic will tell you that the MOT system is actually incredibly complicated. There are huge guides of what you can and can’t do.
‘What Kainos do is allow the mechanic to talk to their iPad about some query on MOT and it will find the relevant section in the MOT handbook so that the mechanic can then see it, rather than having to flick through the book trying to find the right section.’
Why now is a good time to invest in UK growth companies
McCombie highlights that the Baillie Gifford UK Growth Trust invests in companies on their individual merits.
It wants to find businesses with a competitive advantage and edge, where it believes the management can really capitalise.
It looks to hold a concentrated portfolio of great growth businesses that can do well over the long-term regardless of the economic backdrop – and reap the rewards as they succeed.
However, the fund manager adds that growth investing should now benefit as interest rates come down, after it suffered headwinds as the Bank of England, US Federal Reserve and European Central Bank hiked rates substantially between 2022 and 2024.
He says: ‘That hurt growth investing, not just in the UK, but everywhere. We’re now in a cycle where that is starting to reverse a little bit.’
But even if interest rates do not come down by as much as forecast, McCombie says the trust’s portfolio should perform.
He says: ‘We’re very much bottom-up stock pickers, but what I can say is that we’ve not predicated our investments on the fact that we think interest rates are going to go down or anything like that.
‘We want to find businesses that we think can grow through the cycle over the long-term.’
He adds: ‘If interest rates come down further, that’s the icing on the cake for us. That’s not our base case for why we own our growth investments. We just think that our portfolio’s going to grow faster than the market in terms of its earnings and shareholders will be rewarded for that.’
| 2020 | 2021 | 2022 | 2023 | 2024 | |
|---|---|---|---|---|---|
| Baillie Gifford UK Growth Trust plc | 12.7% | 8.2% | -29.9% | 2.3% | 11.1% |
| FTSE All-Share Index | -9.8% | 18.3% | 0.3% | 7.9% | 9.5% |
Source: Morningstar, FTSE. Share price, total return in sterling. Returns reflect the annual charges but exclude any initial charge paid.
Past performance is not a guide to future returns.
Important information
This article does not constitute, and is not subject to the protections afforded to, independent research. Baillie Gifford and its staff may have dealt in the investments concerned. The views expressed are not statements of fact and should not be considered as advice or a recommendation to buy, sell or hold a particular investment.
Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA).
Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority (FCA). The investment trusts managed by Baillie Gifford & Co Limited are listed on the London Stock Exchange and are not authorised or regulated by the FCA.
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