BlackRock Smaller Companies 10 February 2021
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by BlackRock Smaller Companies. 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 for long-term capital growth through investment in UK small-cap or AIM-listed companies. The manager, Roland Arnold, seeks to identify high-quality companies with strong growth prospects.
As we discuss under Performance, BRSC has generated consistently strong returns in recent years, consistently outperforming and generating positive risk-adjusted returns (as measured by the information ratio). Whilst much of 2020 proved relatively challenging, the trust still ended up outperforming over the calendar year and has achieved nearly double the average NAV total returns of the peer group average over the previous five years.
Roland looks to ensure his companies meet five key criteria, as discussed under Portfolio. These primarily centre on quality and growth considerations, the two often being symbiotic (Roland believes quality of management, for example, is key in driving business growth). The result is a portfolio of typically c. 120 stocks which Roland believes offer strong growth potential.
The investment strategy is focussed on capital growth, however the trust also has a strong dividend record, with ten-year annualised dividend growth of c. 18.2% p.a. As we note under Dividend, this has been reflective of near-equally strong growth in revenue returns achieved. BRSC currently yields c. 1.9%.
BRSC currently trades on a discount to NAV of c. 6.1% (as at 04/02/2021), having rapidly narrowed towards the end of 2020. As we discuss under Discount, it was not surprising to us that the discount should narrow rapidly on a more positive market attitude towards UK equities, given BRSC is amongst the largest trusts in the UK small cap sector with liquid shares and a highly diversified shareholder register.
BRSC has demonstrated outstanding performance over a number of years. Although 2020 proved more challenging in the most part, a recovery in absolute and relative performance ensued. Past performance is obviously no guarantor of future returns; however, we can observe an internal risk process which seeks to isolate and maximise the contribution to relative returns of stock specific factors. This gives us confidence previous outperformance has been a consequence of stock selection, and not exogenous, variable macro or style factors. A depth in analytical resources and significant experience, in a universe of thinly researched stocks, offers the potential for identifying underappreciated stock opportunities. Rallies in commodities may pose some headwinds relative to the benchmark but this is true for essentially all active UK small-cap strategies, and Roland’s management of sector risk, we believe, can reduce any headwinds this may pose.
Allied to a strong growth profile BRSC has a history of strong dividend growth. Whilst drawing down revenue reserves has been necessary to maintain dividends this financial year, we are in some ways oddly reassured by the implications of this. BRSC targets growth opportunities; given the economic environment, we believe there are likely to be better long-term uses of excess cash flow for small companies at this time than returning it to shareholders via dividends, such as capex or M&A. A reduction in dividends received would suggest to us that BRSC’s philosophy is very much reflected in the current portfolio.
|Strong, consistent track record of absolute and relative performance, and risk-adjusted returns
|A sharp commodity rally could prove headwind to returns relative to benchmark
|Stock picking appears the main driver of relative returns
|Gearing can exacerbate downside, as well as amplify upside
|Board has proven supportive on progressive dividend policy
|Little to no discount opportunity currently