Baillie Gifford European Growth Trust : interim report - 31 March 2023

The Board believes that investment in European growth companies provides the opportunity for long-term capital growth. It further considers that the structure of the Company as a UK listed investment trust, with an independent Board, is well suited to meeting this aim.

The Company is invested in a diversified portfolio of between 30 and 60 European companies.

The Company may not invest more than 10% of total assets in any one individual stock at the time of investment.

The Board recognises that investment in some European countries can be riskier than in others. Investment risks are diversified through holding a wide range of securities in different countries and industrial sectors. The Company has the ability to invest in securities that are listed in countries which are not included in the FTSE Europe ex UK Index, where these securities have a meaningful connection with continental Europe.

The Board has the authority to hedge the Company's exposure to movements in the rate of exchange

of currencies, principally the euro, in which the Company's investments are denominated, against sterling, its reporting currency.

Up to 20% of total assets, as measured at the time of initial investment, can be invested in unlisted investments.

The level of gearing within the portfolio is agreed by the Board and the absolute amount of any gearing should not exceed 20% of net assets at time of drawdown, excluding any unlisted investments in the calculation of net assets.

No more than 10% of the total assets of the Company may be invested in other listed investment companies (including investment trusts) except in those that have stated that they will invest no more than 15% of their total assets in other listed investment companies. In this case, the limit is 15%.

The Investment Manager's compliance with the limits set out in the investment policy is monitored by the Board and the Alternative Investment Fund Manager (the 'AIFM').

Six Months Total Return Performance*

(figures plotted on a monthly basis and rebased to 100 at 30 September 2022)

130

120

110

100

• For a definition of terms see Glossary of Terms and Alternative Performance Measures on page 25.
  † Source: Refinitiv, Baillie Gifford and relevant underlying data providers. See disclaimer on page 26.

Share price

NAV (borrowings at fair value)

FTSE Europe ex UK Index

(in sterling terms)†

Total Return Performance since 29 November 2019*#

(figures plotted on a monthly basis and rebased to 100 at 29 November 2019)

250

• For a definition of terms see Glossary of Terms and Alternative Performance Measures on page 25.
  † Source: Refinitiv, Baillie Gifford and relevant underlying data providers. See disclaimer on page 26.
  # Baillie Gifford & Co Limited were appointed Managers and Secretaries on 29 November 2019.

Share price

NAV (borrowings at fair value)

FTSE Europe ex UK Index

(in sterling terms)†

Interim Management Report

One of the trickiest parts of our job as managers is separating important signals from noise. This is made especially difficult at times like these. Markets are volatile, geopolitics feels unusually unpredictable, and many of the variables once benign (like inflation and interest rates) are wreaking havoc across the economy. With so many reasons to be worried, attention is often transfixed by tabloid style developments. There is a natural human predisposition to pay more attention to bad news than good. As Hans Rosling once put it: 'the fears that once kept our ancestors alive today keep journalists employed.'

This is not to say that short-term headwinds don't matter. The key question is whether they matter more than the long-term forces driving companies' success. In most cases they do not. Navigating this tension is crucial for us. There is little advantage to be gained by competing against the many voices opining on short-term matters. If we have any advantage at all, it is that we choose to compete against the many fewer voices talking about the next 5-10 years. Amazon's Jeff Bezos outlines this concept eloquently: 'if everything you do needs

to work on a 3-year time horizon, then you're competing against a lot of people. But if you're willing to invest on a 7-year time horizon, you're now competing against a fraction of those people.'

Few of our holdings embody this dichotomy better than ultra-low-cost airlines Ryanair and Wizz. When the COVID pandemic struck Europe in early 2020, both companies quickly found their entire fleets grounded for extended periods. To state the obvious, if planes aren't flying, they're not making money. Panic ensued. European governments began bailing out legacy carriers unable to survive on their own thanks to their bloated cost structures and inefficient operations. There was an inevitable focus on cash, covenants and, ultimately, survival. These were probably the right things to worry about for the likes of Lufthansa, Air France and KLM, but for Ryanair and Wizz such preoccupations missed the more important signals.

Take Ryanair. Never one to waste a crisis, CEO Michael O'Leary set about taking full advantage of the situation. Not only did he continue growing Ryanair's fleet but he signed a major deal with

Boeing, acquiring a number of 737-MAX planes at steep discounts at a time when they were struggling to find customers. Wizz made a similar move with Airbus but also opened several new bases at a time when most other airlines were closing them down. Paraphrasing Buffett, both were greedy while others were fearful. But this wasn't just about contrarian expansion. Both businesses were investing in structurally lower unit costs, as these new planes come with higher fuel efficiency, higher seat counts, and lower cost of ownership. Ryanair and Wizz enhanced their competitive advantages while others were struggling to remain solvent.

Now to the present day. Both businesses are thriving. As the only two airlines in expansion mode, they have been able to move into the gaps vacated by retrenching competition. Ryanair, for example, has grown its market share in Italy from 30% to 40% after the third collapse of Alitalia (national carriers seldom die once). Its ex-fuel unit costs have fallen versus their pre-pandemic level putting it in an even stronger position to gain more share as most other players have seen their unit costs rise. Not only that, but O'Leary has signed a contract to keep him around until 2028. As for Wizz, there have been a few hiccups - particularly the decision to abandon fuel hedging as jet fuel prices exploded - but progress is very much back on track. In March it announced that, despite the fleet being 60% larger, its load factor was an astonishing 92%.

Two examples of similar opportunities spring to mind: Polish ecommerce platform Allegro and meal kit business HelloFresh.

• Allegro's share price is down over 60% since its
  IPO in October 2020. More recently Shopee, one of its main competitors, has exited the market, while its more serious competitor - the behemoth Amazon - appears to have gained little traction since it formally entered the market two years ago. Not content with its current moat, Allegro has continued to invest in its offering, building a financial services arm and an advertising business. These are both strategies which have been proven to work in similar businesses as far apart as China and Latin America. It also nearly doubled its addressable market with the acquisition of Mall, which opened new markets