BlackRock Throgmorton Trust (THRG) aims for long-term capital growth and an attractive total return through investment in UK small- and mid-cap companies. Uniquely in the sector, THRG has both a long and a short book, meaning manager Dan Whitestone can capitalise on opportunities, regardless of the wider market environment.
The ability to short has been beneficial over the past few years, when Dan has achieved significantly stronger returns than peers, as we discuss in the Performance section. In fact, in each of the past ten years the trust has outperformed the benchmark, and has achieved the fourth-highest returns in the sector.
In the long book, Dan owns two types of investment. The first are high-quality differentiated long-term-growth companies, and the second are companies which are leading industry change – ‘disruptors’. For Dan, high-quality businesses have strong management teams and a protected market position. They also possess a unique and compelling product offering with an attractive route to market which perhaps benefits from structural growth, and they are well financed. He aims to short those businesses with the opposite characteristics, i.e. the victims of industry change (‘the disrupted’), as well as companies with commoditised product offerings and weak financial structures, which are facing structural or cyclical industry pressures. The trust invests primarily in the UK small- and mid-cap market; however, Dan also has the flexibility to hold up to 15% outside the UK.
The trust’s discount has narrowed since the post-referendum lows, and the board has been able to issue a large number of shares to investors over the past year. Currently the trust is trading on a slight premium of 0.4%.
Reliability of returns is a key pillar of THRG’s appeal. Over the past decade the trust has outperformed the benchmark in each calendar year, delivering one of the highest returns of any in the sector. This has been achieved at relatively low levels of volatility, and over the past five years THRG has the fourth-highest Sharpe ratio in the sector.
A vital contributor to this has been Dan’s ability to short stocks, which means he is able to generate alpha in ways other managers simply cannot. In the current volatile environment this is particularly useful, with the trust not necessarily relying on general macroeconomic conditions changing. Alongside this, the diversified approach to risk that Dan employs has helped to protect capital while not appearing to impact performance during bull markets. In the financial year ending November 2019, for example, the short book delivered 1% in absolute performance. This is a strong result considering the backdrop of a rising market during the period, and highlights the trust’s ability to generate stock-specific alpha on the short side.
Given the trust’s strong track record and defensive characteristics, it is unsurprising that it has spent a great deal of time trading at a premium. The trust moved to a discount in the midst of the market volatility during Q1 2020; however, this was short-lived and market participants soon took advantage of the opportunity, with the trust moving back to a premium in recent weeks.
|Exceptional track record of outperforming peers and the benchmark||Smaller companies are typically a difficult space during a downturn|
|Short book diversifies sources of alpha and gives downside-protection potential||The UK continues to lack positive investor sentiment|
|Trading on a discount to recent history||The bias to mid caps means it is not a purely small-cap exposure