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Baillie Gifford UK Growth and Fidelity China Special Situations look beyond the stock market to generate better returns

Despite the many thousands of stocks listed around the world, a rising number of investment trusts are looking to add or increase their exposure to unlisted companies as more businesses stay private for longer.

Baillie Gifford UK Growth (BGUK) is one such trust, and in August will seek shareholder approval to invest up to 10% of its portfolio in unquoted stocks which have a valuation of £500 million or more.

In total 22 investment trusts on the London Stock Exchange, not including ones which focus exclusively on private equity, offer some exposure to unquoted stocks, including household names like Scottish Mortgage (SMT), Lindsell Train (LTI) and F&C Investment Trust (FCIT).

In outlining its decision to add unlisted exposure the Baillie Gifford trust says: ‘We see the private company space as potentially an interesting area to find exciting growth companies to invest in that we believe can help us in our objective of generating total returns in excess of the FTSE All-Share index.’

It adds that any unlisted stock added to the portfolio would have to ‘offer something that cannot be accessed in the listed space’, and points out there is a trend for private businesses in the UK, and more globally, to stay private for longer than in the past, with the permanent capital structure of an investment trust making them the ‘ideal vehicle’ to own such businesses.

The trust’s managers also stress adding unquoted stocks doesn’t mean a change in investment philosophy nor that they’d be investing in ‘small, early stage venture capital style businesses.’

Further evidence of a shift to private market investing

Asset manager BlackRock says its portfolio advisory business is moving away from the traditional model of 60% equities, 40% bonds to 50% public equity, 30% bonds and 20% unlisted assets.

Fidelity China Special Situations (FCSS) has proposed to boost its maximum exposure to unlisted stocks from 10% of net asset value plus gearing to 15% of NAV.

The trust was a notable beneficiary of being an early investor in Chinese tech giant Alibaba, generating a large gain after the firm’s record-breaking $25 billion stock market float in 2014. It says the unlisted space in China has ‘expanded quite markedly and offers some excellent opportunities for patient, long-term investors.’

Like Ballie Gifford UK Growth, the Fidelity trust also points out the period from investment in a company to a stock market float has lengthened as unlisted companies are finding it possible to fulfil their capital needs with more rounds of capital raising before becoming a listed business.

Despite the enthusiasm on the part of trusts to broaden their investment universe, investors should note key risks including lower liquidity for unquoted holdings and more difficulty in accurately valuing them.

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