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.
UK small caps – and domestic companies in particular – have been through their longest bear market in history1. The reasons behind this weakness have been well-rehearsed: from the sluggish UK economy, to the instability of its politics, to higher interest rates. Investors have turned away from investing in UK markets and small caps have been notably out of favour. The share price weakness has been near-universal, affecting the majority of sectors and businesses.
This has left valuations looking low on every measure – relative to earnings, relative to international peers, and relative to their own history2. For the majority of companies, the feared weakness from a more sluggish environment has not materialised, particularly among the type of low debt, high quality businesses in which BlackRock Throgmorton Trust (THRG) invests. These companies have, for the most part, continued to grow their earnings and pay dividends. It is worth noting that the yield on the FTSE Small Cap is now higher than that on the FTSE 1003.
While operational performance and earnings hold up, sentiment has remained poor, it has meant that these companies continue to get cheaper. In particular, the premium for higher quality businesses has all but disappeared.
Small cap catalysts
While we do not believe that valuation is, of itself, a catalyst for a reappraisal of the smaller companies sector, there are a number of factors coming together that appear to be prompting investors to look again at UK Smaller companies.
The interest rate environment is shifting. Inflation may not be coming down as quickly as hoped, but it is past the peak and the most recent CPI reading was 2%4, in line with the Bank of England’s target. This gives some flexibility for the central bank to cut later in the year. Bond markets are now more realistic on interest rate cuts, which is giving businesses and households greater visibility and stability. Smaller companies have tended to fare better as rates fall.
M&A activity is picking up strongly, with international corporate and private equity buyers taking a growing interest in UK companies5, 6, 7. A variety of buyers recognise that these companies are being mispriced by the market and are seizing the opportunity to snap them up at lower prices. Companies are buying back equities and those buybacks are helping absorb some of the flow coming out of smaller companies. While the giant buybacks from larger companies have captured the headlines, it is very much a phenomenon in smaller companies as well.
The definite result in the General Election may usher in an era of greater stability in British politics. The incoming government recognises that action needs to be taken to improve how the UK’s capital markets function. At the moment, action has been relatively piecemeal – the British ISA, for example – but it shows the direction of travel. Further plans are likely to emerge over the next few months, as the new government beds down.
The market is ripe for reappraisal. Even a small reversal in the outflows from the sector would make a significant difference. Equally, any revival in the IPO market would reinvigorate the market and bring a new opportunity set. In the very short-term, we have started to see investors recognise the opportunities in British smaller companies. We believe this is set to continue.
1 Fidelity - FTSE Small Cap performance - May 2024
2 MSCI - MSCI UK Small cap performance - April 2024
3 Financial Times - World Markets at a Glance - May 2024
4 Consumer price inflation - UK - May 2024
5 City AM - Hargreaves Lansdown shares surge after bid from private equity giants - May 2024
6 The Guardian - US investor Elliott ends bid to buy UK retailer Currys - March 2024
7 The Sun - Royal Mail ready to accept £3.5bn takeover bid - May 2024
Risk Warnings
Investors should refer to the prospectus or offering documentation for the funds full list of risks.
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.
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.
Trust-specific risks
BlackRock Throgmorton Trust plc
Complex Derivative Strategies, Counterparty Risk, Financial Markets, Counterparties and Service Providers, Gearing Risk, Liquidity Risk
Description of Fund Risks
Complex Derivative Strategies
Derivatives may be used substantially for complex investment strategies. These include the creation of short positions where the Investment Manager artificially sells an investment it does not physically own.
Derivatives can also be used to generate exposure to investments greater than the net asset value of the fund / investment trust. Investment Managers refer to this practice as obtaining market leverage or gearing. As a result, a small positive or negative movement in stockmarkets will have a larger impact on the value of these derivatives than owning the physical investments. The use of derivatives in this manner may have the effect of increasing the overall risk profile of the Funds.
Counterparty Risk
The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.
Financial Markets, Counterparties and Service Providers
The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.
Gearing Risk
Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.
Liquidity Risk
The Fund's investments may have low liquidity which often causes the value of these investments to be less predictable. In extreme cases, the Fund may not be able to realise the investment at the latest market price or at a price considered fair.
Important Information
In the UK: this is issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.
UK Investment Trust Funds: This document is marketing material. 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.
The investment trusts in this document currently conduct their affairs so that their securities can be recommended by IFAs to ordinary retail investors in accordance with the Financial Conduct Authority’s rules in relation to nonmainstream investment products and intend to continue to do so for the foreseeable future. The securities are excluded from the Financial Conduct Authority’s restrictions which apply to non-mainstream investment products because they are securities issued by investment trusts. Investors should understand all characteristics of the funds objective before investing. For information on investor rights and how to raise complaints please go to https://www.blackrock.com/corporate/compliance/investor-right available in local language in registered jurisdictions.
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.
Any research in this document 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 document 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.
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