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BlackRock
Updated 31 Mar 2023
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Disclaimer

This is a non-independent marketing communication commissioned by BlackRock. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Picking the strongest companies is always important, but it is particularly important in the difficult economic environment that faces investors as they make their ISA choices this year. While weaker companies might be able to limp on in more robust economic conditions, they will be exposed in a tougher climate. What are the key criteria for a company that can thrive across different market conditions?

There are important differences between a strong and weak economic environment that can have a real impact for companies’ profitability. Interest rates, for example, will make a significant difference. If interest rates are low, it allows companies with high debt to stay in business. The cost of repaying that debt is lower.

As interest rates rise, that debt becomes more expensive and takes up a larger share of the company’s costs. This is often one of the biggest risks factors for companies in a weaker economic environment. Their profits drop, they cannot pay their debts and eventually, they go bankrupt. As Warren Buffet said: “With long-term debt, increases in interest rates can drastically affect company profits and make future cash flows less predictable.”1

Pricing power

It is a similar situation with pricing power. Pricing power is the ability for companies to raise prices of their products and services. They may be able to do this because they have a strong brand, or their products are in high demand, or, as in the case of areas such as healthcare, their product is unique. Pricing power is always important, but it becomes particularly important at a time of rising costs.

A lot of companies are facing this problem today. Energy costs are rising, alongside higher agricultural prices. Rental costs may also be increasing and staff are demanding salary rises to match inflation. If they can’t pass those additional costs onto consumers, it will hurt their profitability. Equally, during tough economic conditions, the pie gets smaller. If customers don’t have a compelling reason to buy a product, they won’t. Against this backdrop, pricing power becoming more and more important.

Capitalising on tough times

Companies that go into a tough climate in a strong financial position can capitalise. Their indebted, weaker competitors may go bust. This may allow them to build market share, buy their competitors or the assets they leave behind, at a cheaper price. Good companies will often emerge from difficult conditions in a stronger position than they went in.

This is also where a strong management team can be vitally important. A good, experienced management team will understand how to adapt the business to changing conditions, to make strategic acquisitions or sales, which areas to prioritise and where to cut back. They will understand how to put the company in prime position for the recovery when it arrives.

The problem for investors is that these strong, well-run companies can be expensive. Investors see their qualities and the share price may be bid higher. No matter how good a company, if investors pay too much for it, it won’t be a good investment. However, in turbulent market conditions, share prices will often be lower. This can make it a good moment to buy into strong companies at a lower cost.

Our approach

A strong analytical team is a significant asset in a difficult environment. Fund managers need to have the resources to look at a company from all sides, talk to its competitors, its suppliers and its management team. The fund managers across BlackRock’s range of investment trusts can call on a deep global analyst team, with specialists across every sector and in every region.

Competition for capital is a feature of all our portfolio. We run high conviction portfolios and are not swayed by the benchmark weighting of an individual stock. The bar for entry into the BlackRock portfolios is high.

In building these high conviction, stock-picking portfolios, the investment trust structure is helpful. The closed-ended structure of an investment trust means the underlying portfolio isn’t skewed by the need to manage inflows and outflows. The portfolio will always reflect the fund managers’ best ideas, rather than being constrained by the need to buy or sell in a hurry. This can be particularly important in holding the shape of a portfolio in the face of difficult markets.

The final consideration is risk management. Again, this is particularly important at a time of weaker economic conditions when companies may be vulnerable to specific threats. We strive to understand where our risk positions are at any given time – exposure to interest rates, to the oil price, to volatility – and have significant risk resources at our disposal.

Although there may be concerns about the outlook for 2023 – and a temptation to play it as safe as possible with this year’s ISA choices - good companies can thrive in all market conditions. The key is finding them. At BlackRock, we have built the infrastructure to find those opportunities wherever they may lie.

112/12/22 - https://www.azquotes.com/quote/709461

Risk Warnings

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

Important Information

Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

BlackRock has not considered the suitability of this investment against your individual needs and risk tolerance. To ensure you understand whether our product is suitable, please read the fund specific risks in the Key Investor Document (KID) which gives more information about the risk profile of the investment. The KID and other documentation are available on the relevant product pages at www.blackrock.co.uk/its. We recommend you seek independent professional advice prior to investing.

The Company is managed by BlackRock Fund Managers Limited (BFM) as the AIFM. BFM has delegated certain investment management and other ancillary services to BlackRock Investment Management (UK) Limited. The Company’s shares are traded on the London Stock Exchange and dealing may only be through a member of the Exchange. The Company will not invest more than 15% of its gross assets in other listed investment trusts. SEDOL™ is a trademark of the London Stock Exchange plc and is used under licence.

Net Asset Value (NAV) performance is not the same as share price performance, and shareholders may realise returns that are lower or higher than NAV performance.

Any research in this material has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

This material is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

© 2023 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS and iSHARES are trademarks of BlackRock Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.

ID: MKTGH1222E/S-2647939

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