BlackRock Throgmorton Trust 23 December 2020
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by BlackRock Throgmorton Trust. 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 Throgmorton Trust (THRG) aims for long-term capital growth and an attractive total return through investment in UK small- and mid-cap companies. The manager, Dan Whitestone, allocates to both long and short positions, with the short book a key differentiator from its peers.
As we discuss under Performance, THRG’s returns have been exceptionally strong in both the short term and over the past five years, in fact the strongest in the peer group over five years. Perhaps as a result of these returns, THRG trades close to a premium (as discussed under Discount). The board has been active in issuing shares to help to manage this, recently placing 2.68m shares with institutional investors.
Dan believes the broader factors that have driven outperformance of many of his holdings are not only durable, but in fact accelerating, as we discuss under Portfolio. Following the COVID-19 pandemic and related policy responses, he anticipates significant ‘corporate Darwinism’. In this context, companies with robust balance sheets and market leading products can often look to consolidate and extend their intra-industry leads. Yet other areas are more prone than ever, in his view, to disruption from technology heavy, capital-light businesses with significant operational flexibility.
Long holdings are initiated with a typical timeframe of between 3-5 years, with Dan looking to identify companies which fall within one (or both) of two buckets. These are companies with quality differentiators, and industry disruptors. At present Dan believes there are significant opportunities for companies falling within both buckets.
Although the investment strategy is focussed on capital growth, the board has increased dividends every year for the past ten financial years.
Following the spread of the COVID-19 pandemic, and the policy responses that followed, UK equity markets largely followed their global peers in bifurcating sharply between assumed beneficiaries and victims of the ‘new’ environment. This played well to the existing strategy within THRG, with its emphasis on identifying both disruptors and the disrupted, and an emphasis on financial and operational robustness. The manager is clearly excited by the opportunities that have already arisen from this environment, and his belief that we are only at the start of sustained shifts in behaviours which will drive the companies held within THRG is compelling in its logic.
A perception of ‘normalisation’ back to pre-COVID models (and intra-market rotations to ‘value’), may have been expected to pose a short-term headwind to THRG, yet precisely such an environment has not impeded the relative return profile in recent weeks. In the longer-term, the focus on an alliance of balance sheet strength and disruptive, innovative business models seems likely to us to yield significant opportunities more or less irrespective of wider market conditions, but should the manager’s envisaged environment come to pass it would very likely prove a further tailwind to the strategy. Clearly insolvency risks remain elevated across global markets, yet little risk seems to be implied in many instances. This should, in our view, continue to offer complimentary opportunities on both the short and long book for THRG.
|Very strong track record of absolute and relative performance
|Some underlying holdings could be vulnerable to profit-taking in a market rotation
|Highly exposed to long-term industry change and secular trends accelerating as a result of COVID-19
|Net market exposure tends to be structurally in excess of 100%, exacerbating downside as well as amplifying upside
|Focus on balance sheet strength provides exposure to accelerated ‘corporate Darwinism’
|Currently trading on a premium to NAV