BlackRock Throgmorton Trust 07 August 2023

The manager of BlackRock Throgmorton Trust (LON:THRG) focusses on UK mid and small-cap companies in the UK, with a preference for companies with long-term growth prospects, or those which are innovative industry disruptors. Manager Dan Whitestone has built one of the most successful track records in the peer group since he joined the team, first as co-manager in 2015 and then as lead manager in 2018. As we discuss in the Performance section, 2022 marked a very difficult year for growth and smaller companies’ strategies in the face of rising interest rates, and THRG’s NAV declined by over 30%. However, long-term performance remains ahead of the benchmark and peer group.

THRG is primarily a vehicle for capital return and portfolio decisions are not influenced by dividends. Nevertheless, THRG has a good record of progressively increasing its dividend, with 2020 the only recent example of the dividend being held. There is over a year’s worth of revenue reserve and the current yield is c. 1.9% .

Dan uses CFDs, rather than debt, to gear THRG. More unusually, he uses CFDs to short a small number of stocks. In the last two or three years, this facility has been used sparingly, with a c. 3% short book. Against this, CFDs are also used to increase long exposure and the overall net exposure . As we discuss in the Gearing section, this closely equates to conventional gearing of c. 112%, equivalent to 8% net gearing. Meanwhile the gross exposure, i.e. the total of long and short, is currently c. 115%.

THRG’s discount is c. 8%, which is narrower than the peer group average of c. 12%. Historically, THRG’s board has issued shares when the NAV has traded at a premium. More recently, the board has taken the reverse action, and in 2022 and 2023 has made active use of share buybacks. As well as enhancing NAV, buybacks enhance revenue reserves per share and may have a limiting effect on discount widening.

The manager of THRG, Dan Whitestone, has built a strong long-term track record of identifying companies which demonstrate disruptive business models or capitalise on structural growth themes. 2022 saw a sea change in market conditions, with rising interest rates leading to growth equities being particularly hard hit. Smaller-company shares usually suffer in periods of risk aversion, as investors look to reduce exposure to what is deemed a riskier asset class. This can lead to a certain amount of indiscriminate selling, putting companies with strong operating results in the same boat as weaker companies in terms of their stock-market performance. Dan believes that THRG’s portfolio continues to strengthen through market share gains and organic growth, and that the market just needs to work through its current risk-aversion phase in order to start seeing the portfolio’s strong operating performance be rewarded in share-price terms.

Long-term investment requires patience and, while investors work through this phase, we highlight that THRG’s low base management fees are very attractive. Dan and the team are very aligned with shareholders through the capped performance fee, outlined in the Charges section. The board has also been buying shares back during this phase, which we discuss in the Discount section. We think that, while THRG’s current discount of c. 8% is narrower than its peer group average of 12%, this reflects not just the share buyback, but also the long-term record. The evidence shows that THRG can trade above NAV at times when risk appetite is high, meaning there is still an opportunity to benefit from discount-narrowing as sentiment improves.