BlackRock Smaller Companies 29 September 2021
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.
BlackRock Smaller Companies (BRSC) invests in a portfolio of UK small and mid-cap companies. The manager, Roland Arnold, seeks to identify high-quality companies with strong growth prospects.
BRSC has an enviable long-term record of outperforming both the benchmark and the peer-group average, consistently outperforming its benchmark since 2004. A by-product of this has been a consistently positive information ratio, indicating the consistent success of the manager’s active decisions. Despite the complications of the pandemic and the volatility in markets, BRSC has again generated strong outperformance, as we discuss in the Performance section.
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 the quality of management, for example, is key in driving business growth). The result is a portfolio of c. 120 stocks which Roland believes offer strong growth potential.
Whilst the investment strategy is focussed on capital growth, the board has historically made clear that it recognises the role of dividends in boosting total return for shareholders. Accordingly, BRSC has a strong dividend record, with ten-year annualised dividend growth of c. 16.6% p.a. As we note under Dividend, this has been reflective of near-equally strong growth in revenue returns achieved. BRSC currently yields c. 1.6%. BRSC trades on a Discount of c. 3.3%.
BRSC has delivered very strong performance on both an absolute and relative basis for many years, outperforming the index in 17 of the last 18 calendar years. Past performance is obviously no guarantor of future returns, but we believe the possible return to a market environment where stock-specific performance differentiation is driven more by operational developments and less by style alignment should favour BRSC’s approach going forwards. Whilst the strategy is focussed on high-quality companies and growth opportunities, the cognisance of the manager of variations in the market cycle and willingness to dampen stylistic headwinds by selective exposure to more cyclical parts of the market helped the trust outperform even as value outperformed following the announcements around the successful developments of COVID-19 vaccines.
Whilst the investment strategy is growth-focussed, the board has exhibited progressive dividend policies over a number of years. Drawing down revenue reserves has been necessary to maintain dividends this financial year, but we find this reassuring. BRSC targets growth opportunities and 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.
| bull | bear |
| Strong, consistent track record of performance, and risk-adjusted returns |
Many of the structural growth stories favoured within BRSC are now more highly valued |
| Stock picking appears to have historically been the main driver of relative returns |
Gearing can exacerbate downside, as well as amplify upside |
| Board has proven supportive on progressive dividend policy |
Small-cap share prices often react disproportionately to newsflow relative to actual operational impact |
Fund History
