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Investment trusts come in all shapes and sizes, allowing investors to get exposure to different sectors and geographies in their portfolios. Here, I’ll highlight one from the FTSE 250 that I think is well worth a closer look right now.
A differentiated strategy
Baillie Gifford US Growth Trust (LSE: USA) focuses on US-listed growth stocks, but what I like is that it doesn’t simply own all the Big Tech names many others do. For example, it doesn’t have Apple or Microsoft — the largest two US firms by market cap — or Google parent Alphabet in the portfolio.
Instead, we see smaller-sized firms like Shopify, DoorDash, Duolingo (NASDAQ: DUOL), and Cloudflare in the top 10 holdings. The trust’s managers think these have the potential to be big long-term winners in the digital age.
Duolingo is one pick I wasn’t convinced about at first, but I’ve turned bullish on the language learning platform. It ended 2024 with over 40m daily active users, its largest-ever number of paid subscribers, and a 42% free cash flow margin.
Subscriber growth and engagement is being fuelled by Duolingo Max, its highest-tier offering that has generative AI-powered features. One is the ability for learners to have real-time conversations with one of the platform’s characters, Lily, who ‘remembers’ key details about past conversations.
However, this does open up the risk that associated AI costs might spiral. Specifically, if Lily must track growing volumes of user data across millions of conversations, storage and processing demands could rise. Over time, this may weigh on Duolingo’s margins.
Longer term though, I’m upbeat about this innovative company’s growth potential, given that around 2bn people worldwide are learning a foreign language. As we’ve seen with Netflix (another Baillie Gifford US holding) and Spotify, online platforms that can capture a sizeable portion of a massive market can become very large indeed.
I think both Duolingo and Netflix will do well for Baillie Gifford US Growth Trust shareholders in future.
SpaceX and Stripe
Additionally, the FTSE 250 stock has the ability to invest up to 50% of assets in private companies. Indeed, the largest two holdings today are reusable rocket giant SpaceX and internet payments firm Stripe.
SpaceX continues to dominate the global rocket launch market, while Stripe is a powerful play on the internet economy. In 2024, Stripe’s total payment volume rose 38% year on year to $1.4trn, equivalent to around 1.3% of global GDP.
So these are extremely high-quality private holdings. Again, this separates the trust from most others knocking about, I feel.
Pullback
In the six months to 30 November, the trust reported a 29.4% increase in net assets and a 40.9% surge in share price, easily outperforming the S&P 500‘s 15.3%. Therefore, recent reported performance has been strong.
Unfortunately though, the share price has fallen 20% since the start of January. The reasons range from disrupted global trade, unpredictable US government policies, and the elevated risk of a recession across the pond.
This toxic combination of factors might weigh on growth stocks in the near term, and therefore the trust’s share price. However, the pullback leaves it trading at a 9.5% discount to underlying net asset value, so some of these risks might already be priced in.
My view here is that this discounted stock is worth considering by long-term investors at 225p.
