BlackRock Smaller Companies 05 April 2022
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.
BlackRock Smaller Companies (BRSC) aims to deliver long term capital growth to shareholders by investing in high quality UK smaller companies with superior growth prospects. Managed by Roland Arnold since 2018, BRSC is part of a suite of strategies run by the five strong Emerging Companies team at BlackRock.
As discussed in the Portfolio section, Roland invests across the market capitalisation spectrum, from AIM listed companies with market caps of c. £100m to mid-caps up to £2bn market cap looking for best in class companies with the potential for sustained, compounding earnings growth. The focus on high quality, cash generative companies has had the pleasant side effect of driving strong dividend growth. As noted in the Dividend section, the payout of the trust has grown by c. 14% p.a. over the last five years.
Structural Gearing and exposure to the smaller end of the market cap spectrum has resulted in BRSC exhibiting higher volatility than the benchmark however, as discussed in the Performance section, investors have to date been amply rewarded for this higher risk with consistent absolute and risk-adjusted outperformance versus peers and benchmark over both the long and short term. The consistency of excess returns has been achieved by building a balanced, diversified portfolio of c. 120 stocks such that relative returns are driven by stock-picking decisions rather than out-sized bets on sector or style.
BRSC is cost effective versus peers (see the Charges section) and is, at the time of writing, trading at a relatively wide Discount versus its own history (c. 12.4% as at the time of writing versus one year average of 5.5%).
BRSC is the second largest trust by size in the AIC UK Smaller Companies peer group, with total assets just over £1bn at the time of writing. Its success is built on a long-term track record of consistent outperformance versus peers and benchmark, relatively low costs, a readily understandable and clear investment approach, and strong dividend growth.
A number of factors have helped Roland deliver strong returns, including active stock-picking in a sector with low analyst coverage, the inherent high earnings growth potential of smaller companies and BRSC’s access to low-cost gearing. Given these advantages, Roland takes the position that it is not necessary to take out-sized bets on styles and sectors to boost returns, dampening down the effects of market swings between value and growth via portfolio construction. Our view is that this is a sensible approach given the trust is already a ‘high beta’ strategy given the exposure to the smaller end of the market cap spectrum and the use of gearing which makes BRSC more volatile than the benchmark.
At the time of writing, the war in Ukraine and inflationary pressures are very much to the forefront of investors’ minds, but for those with a long time horizon the valuation multiple compression that has occurred year to date coupled with the current discount level of BRSC could provide an attractive entry point. Additionally, if there are tough times ahead for the UK economy, being positioned in high quality companies most likely to survive is a relatively attractive place to protect capital in the long term.
- Strong, consistent long term track record of outperformance and dividend growth
- Current discount wide versus recent history
- Significantly lower OCF than peer group average
- Structural gearing can exacerbate downside, as well as upside
- Higher beta fund, tends to underperform in volatile markets
- Small-cap market segment vulnerable to sell-off in liquidity crunch