As with any investment, capital is at risk.
The UK stock market has seen a revival in interest from investors thanks to the FTSE All-Share’s sparkling performance over the past 18 months.
But while the leading index hit a series of record highs, before conflict in the Middle East knocked markets off course, much of that has been driven by a relatively small number of large companies.
This means that there are still undervalued opportunities among growth companies that have not seen the full benefit of the rally, argues Milena Mileva, co-manager of the Baillie Gifford UK Growth Trust.
She highlights what investors need to know and outlines a trio of stocks that the trust invests in.
> Watch the full interview with Milena Mileva
Milena Mileva, co-manager of the Baillie Gifford UK Growth Trust, shares her views on how investors can pick the best of British stocks
Is the UK stock market too concentrated?
The first thing to note is that the UK market had a wonderful year. That’s the starting point, 2025 was a great year for UK investors. It was one of the top-performing global equity markets, as the FTSE All-Share rose 24 per cent.
Underneath that is very significant concentration in terms of the companies that were driving this return. Two-thirds of the market gains were from just ten companies. Those were in a narrow set of sectors: banking, defence, and pharmaceuticals.
Clearly, the banking sector was especially striking with the likes of HSBC and Lloyds, NatWest, and Barclays all rising 60 per cent to 90 per cent last year. This was an incredible outcome.
The UK market has always been a pretty concentrated benchmark, but the level of concentration is now relatively extreme in a historical context. For passive investors, future returns are increasingly reliant on a narrow set of companies.
Many of those companies have obviously enjoyed some extremely favourable macro-economic tailwinds. The banks are one obvious example. Clearly in terms of their earnings and their capital return, they’ve benefitted a lot from the rapid and significant increase in interest rates.
As long-term investors in quality growth companies, the natural question that comes from that would be: to what extent is this share price performance reflecting a sustained and meaningful improvement in long-term fundamentals? Or has it been driven by a specific cyclical backdrop, which may or may not be sustainable?
Clearly, active portfolios can look across the whole investing universe and in the case of Baillie Gifford UK Growth, look for companies where there’s genuine conviction in long-term sustained growth.
Concentration doesn’t necessarily have to be a risk. The point for me is that concentration needs to be grounded in a forward-looking judgement around sustainability of growth when it comes to investing. I think in the index that’s just not there.
Why are you optimistic on growth companies?
Growth, quality, and valuation are three things that are aligned as a very compelling set-up for outperformance.
In the case of our portfolio, for example, I look at what type of growth the companies are delivering. Over the past five years, they’ve comfortably grown earnings at double the benchmark rate. Importantly, obviously, the future matters more than the past.
When you think about inflection points, you need to think, is that growth sustainable or not? That needs to be grounded in analysis: why should these companies be able to continue delivering these levels of growth?
Quality is the other important factor I look at and think about, because for growth to be valuable it needs to be able to endure over significant periods of time and it needs to be high returning.
Our portfolio is very well positioned in that sense, as reflected in high returns on invested capital. However, you need to understand what’s driving this. Why are the returns so high? Importantly, why are they sustainable? That’s what we try to do day-in and day-out.
Then, finally, valuation. What’s the starting point from here? When I look at it, you can expect a portfolio like ours to trade at a premium to the benchmark given its characteristics. But that premium has narrowed very materially.
You’ve got growth and quality and valuations all aligning together in a quite compelling fashion at the minute.
How do UK growth stocks compare on valuation terms?
For this, I think you can use a range of forward-looking metrics. The good old price to earnings multiple is as good a starting point as any to think about these things.
If I look at the BGUK portfolio, we would expect it to be at a premium to the benchmark, given the growth and the quality of the businesses we invest in. That premium has come down significantly from about 45 percent five years ago to around 20 per cent.
There’s clearly been a material valuation headwind both in our portfolio and across a lot of other growth businesses in the UK. The market as a whole has emphasised short-term certainty over the long-term growth.
Several companies in the portfolio are trading closing to the bottom of their historical valuation ranges, and I believe this provides a compelling opportunity for long-term investors.
Moonpig
Moonpig is an online greetings card retailer and it has fantastic business economics. This company is very compelling, very cash generative, very capital light. It’s growing very nicely. It’s certainly outgrowing the UK economy.
I think there’s real structural growth in this company. A lot of it comes from investments in technology and data science, for example, which drive improvements in the customer proposition and that drives growth and engagement in customer behaviour and monetisation.
Games Workshop
Games Workshop is an incredibly durable and high-quality franchise. The leadership team has shown consistently that they prioritise long-term value creation and resisted a temptation to over-commercialise. It’s the company that is the creator of Warhammer, which is a fantasy universe, and makes a tabletop game.
This company has a very passionate community of customers, and they spend a lot of time and a lot of money on their hobby. Increasingly, it’s starting to live outside of that tabletop gaming in other areas of media and entertainment by licensing its intellectual property.
Autotrader
Autotrader is the leading UK digital marketplace connecting car dealers and buyers, underpinned by powerful network effects that drive its dominant consumer reach and engagement.
The company leverages technology to enhance value on both sides of the marketplace and is increasingly evolving from a listings-based advertising model toward a more transactional platform – improving the customer experience while helping dealers operate more efficiently.
> Find out more about the Baillie Gifford UK Growth Trust
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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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