BlackRock Throgmorton Trust 28 July 2021

BlackRock Throgmorton Trust (THRG) invests primarily in UK small and mid caps, with lead manager Dan Whitestone able to allocate to both long and short positions. Typically running gross portfolio exposure of c. 120–130%, with ordinary anticipated net exposure of c. 100–110%, the manager seeks to use the short book as an extra source of active stock differentiation.

As we discuss under Performance, THRG’s returns have been exceptionally strong in both the short term and over the past five years. Indeed, they are currently the strongest in the peer group over five years on a share price basis (and second strongest on an NAV total return basis). Perhaps as a result, THRG trades on a premium (as discussed under Discount). The board has been active in issuing shares to help to manage this whilst also growing the trust.

Presently THRG has net exposure of 119.8% (long positions minus short positions), which is above the typical anticipated operating range. As discussed under Portfolio and Gearing, this in part reflects Dan’s reluctance to short stocks into a generalised market rally such as that seen in the recovery from the sharp market contraction in Q1 2020. However, he believes the COVID-19 crisis has boosted pre-existing trends which will lead to increasing and accelerating divergences in fortunes amongst companies and he anticipates widespread ‘corporate Darwinism’. Accordingly, he expects to increase short exposure in the coming months on the expectation that the market will increasingly recognise the fundamental weaknesses of many companies which are being disrupted or are in financially straitened conditions.

Although the investment strategy is focussed on capital growth, the board has increased or maintained dividends every year for the past 11 financial years.

THRG’s shareholders have enjoyed outstanding returns in recent years, with astute stockpicking (shown by the consistently positive information ratio) and timely adjustments to net exposure seemingly the primary drivers. The decision to run elevated net exposure into a generalised market rally, and to avoid running significant short exposure at a time when many share prices were rallying on sentiment rather than fundamentals, has proven strongly beneficial, as has the pre-existing focus on ‘disruptors’. THRG saw a period of relative consolidation following the announcement around COVID-19 vaccines as value outperformed, a possibility we had warned about in our previous research note. However, absolute returns remained strong and THRG’s relative return profile has started to accelerate ahead of peers and the market once again as constituent companies continue to report. We also note that the manager is extremely bullish on his opportunity set, as shown by his high net exposure. Furthermore, Dan argues that the COVID-19 pandemic and lockdown policy responses are likely to leave many companies in a weakened position operationally. He believes this should offer shorting opportunities in due course, which THRG is notably better able to take advantage of in comparison to the broader peer group.

As government stimulus is withdrawn, we think companies with the balance sheet strength and ability to take the sort of market leadership which Dan insists on seem likely to prosper operationally. Meanwhile, the extensive resources available within the BlackRock team suggest to us that idea generation should remain fertile. The long/short structure and dynamic shifts to net exposure continue to see THRG offering a differentiated product, and it has been reassuring that the trust remained at a premium even as value styles came cyclically into favour over the end of 2020 and start of 2021.