Results analysis: BlackRock Throgmorton

• BlackRock Throgmorton (THRG) has released its financial results for the year ending 30/11/2023. During a challenging period for the asset class, the trust NAV total return outperformed the Numis Smaller Companies AIM (ex IT) Index benchmark by 3.7%, with an NAV total return of -2.3% versus the benchmark which declined -6%.
• THRG’s share price total return outperformed the benchmark by 5.2% (falling slightly over the year in absolute terms by -0.8%), reflecting a challenging period for UK small and mid-cap companies more generally.
• Performance remains strong over the longer term; the NAV has outperformed the Benchmark Index by 17% over five years (the share price by 29.0%) and by 72.5% over 10 years (the share price by 95.8%).
• THRG’s ongoing charges figure (OCF) excluding performance fees is unchanged at 0.54%. However, the outperformance of the benchmark has led to an increase in the OCF including performance fees from 0.54% to 0.87%.
• THRG’s discount narrowed to 3.6% from 5% at the start of the year, averaging 5.2% over the period. During the financial year the board bought back a total of 5,286,703 shares. Subsequently, THRG’s discount has widened slightly to 6.9% as of 02/02/2024.
• Total dividends increased to 14.75p per share over the year, representing a total dividend year-on-year increase of 32.9%. Revenue return per share rose to 16.56p per share, which is an increase of 27.9% on 2022 and a reflection of the robust sales growth and earnings for many of the portfolio companies.
• Board Chairman Christopher Samuel said: “Despite the challenging backdrop, our portfolio manager is optimistic about the future. He highlights what he believes is a significant mispricing of UK Small cap companies, evidenced by the disconnect between corporate sales and earnings and valuations ascribed by the market.” He also noted “… given the macroeconomic backdrop of falling inflation, rising consumer confidence and strong wage growth, these factors may well serve as a potential catalyst for a re-rating of the sector. Therefore, the outlook for the asset class may be brighter than many recognize.”

Kepler View

Over the long-term BlackRock Throgmorton (THRG) manager Dan Whitestone, has built an excellent track record of generating alpha by identifying companies which demonstrate disruptive business models or capitalise on structural growth themes. His focus on the small and mid-cap area of the market has proven to provide plenty of opportunities. However, macroeconomic uncertainty and rising interest rates has resulted in a prolonged period of risk aversion to growth equities. Combined with the negative sentiment that has clouded UK small and mid-cap companies over the past couple of years - November 2023 marked the 28th consecutive month of outflows in UK small and mid-caps - this has resulted in a significant mispricing within UK small and mid-caps. This is reflected in low price-to-earnings ratios, and the relative performance of the FTSE 250 versus the FTSE 100 now experiencing the longest period of underperformance on record, far exceeding the Global Financial Crisis. The tangible value on offer has resulted in portfolio holdings receiving cash offers from private equity firms; for example, the trust’s largest contributor to returns during the year was Ergomed, which announced a recommended cash offer from the private equity firm Permira at a 28% premium to the previous day’s closing price.

In addition, Dan reports that the underlying fundamentals including sales growth, margins, balance sheet strength and free cash generation of many of the portfolio companies are robust, and company updates overall have proven more resilient than many had predicted. Companies such as Computacenter reported a 24% year-on-year increase in organic gross invoice income at their interims, and others such as Tatton Asset Management, Games Workshop, Baltic Classified Group, and Hill & Smith all delivered successive positive updates. This has been reflected through the significant increase in revenues and, despite the strategy’s growth focus, the total dividend over the year. In our view, this provides a useful addition to shareholder total returns in a lower growth environment, but also highlights the portfolio’s stability and strong cash balances. We note the short book has delivered a slight positive return of 0.4% over the financial year, which is evidence of how THRG can offer an alternative source of returns compared to other strategies in the sector.

The pickup in performance over the second half of the financial year and into the start of 2024, has begun to reflect the expectations of easing macroeconomic conditions and the pricing in of a monetary policy reversal in the second half of this year. Although market volatility is likely to remain a feature in 2024, the outlook for THRG’s strategy may be more positive than compared to the headwinds of the past couple of years. Inflation continuing to fall, strong employment and increasing consumer confidence may pave the way for a re-rating of the AIC UK Smaller Companies sector, which is currently trading at low absolute and relative valuations. Dan focuses on identifying high-quality companies with strong and growing market share that offer the potential to deliver multi-year growth. Dan’s gradual increase in gearing and THRG’s current discount of 6.9% may present an attractive long-term opportunity, and both offer the potential of a kicker to returns should investor sentiment improve.

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