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Get cheap UK small-cap growth with BlackRock

Investors have an opportunity to buy into this smaller companies trust at a big discount.
September 18, 2014

If you're looking for some cheap small-cap exposure for your portfolio, you are likely to be having a tough time as a number of quality investment trusts are trading on premiums.

IC TIP: Buy
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points
  • Wide discount
  • Strong long-term track record
  • Reasonable TER
Bear points
  • Key manager has been on a sabbatical
  • Uses complex derivatives

BlackRock Throgmorton Trust (THRG) has a strong long-term performance record but has suffered recently, causing it to trade on a wide discount. If you're planning on holding it for the long term, we think now could be a good time to buy.

As a result of its recent weaker performance, the trust is on a 16 per cent discount to net asset value (NAV), compared with a 12-month average of 11 per cent, according to Morningstar data (to 16 September 2014). This is one of the most attractive ratings that BlackRock Throgmorton has traded on over the past 12 months.

The trust has a market capitalisation of £203m and merges two of BlackRock's UK small- and mid-cap investment strategies; 100 per cent of the fund's gross NAV exposure is invested in a long-only equity portfolio, which is similar in make-up to the BlackRock UK Smaller Companies Investment Trust (BRSC).

The Throgmorton Trust also incorporates a contracts for difference (CFD) portfolio, which uses derivatives. The CFD portfolio is effectively the best ideas of BlackRock team's offshore hedge fund, the BlackRock UK Emerging Companies Hedge Fund (BHUE).

Over five years the trust has stormed ahead of its benchmark, returning 157 per cent compared with the Numis Securities Smaller Companies Excluding Investment Trusts Plus AIM index, which produced 83 per cent over the same period. And over three years it returned 70 per cent, compared with 54 per cent from the benchmark index.

Over one year it has still beaten its benchmark with an 8 per cent return, compared with 6 per cent from the benchmark, but according to analysis from Killik & Co, relative performance against rival smaller companies investment trusts so far in 2014 has been weak. This is possibly due to its co-manager, Richard Plackett, who usually runs the trust's contracts for difference (CFD) portfolio, has been on a six-month sabbatical from 1 April 2014.

In his place, BlackRock's Ralph Cox, who joined the fund house following a merger with MLIM in 2006, has assumed full responsibility for the trust's CFD portfolio during Mr Plackett's absence, supported by Dan Whitestone, a senior member of BlackRock's UK small/mid-cap equity team. Meanwhile, Mike Prentis has remained manager of the BlackRock Throgmorton Trust's long-only portfolio.

Mr Prentis has a strong track record and is also the manager of BlackRock's Smaller Companies Trust (BRSC). Prior to joining BlackRock in 2005, he worked at 3i in both its asset management and private equity businesses. Within the BlackRock Throgmorton Trust, he manages the trust's long-only portfolio. He says high-quality companies in the FTSE 250 have been affected by sustained profit-taking, following a major sell-off in US technology shares.

On an individual company level, the managers look for five key characteristics that signal whether a company will realise its potential - these are: successful management teams, strong balance sheets, a reliable record of revenue growth, a competitive market position, and an ability to return cash to shareholders.

The trust's managers believe that small and mid caps show the most strength during times of economic recovery, signalling that now could be a good time to buy as the UK economy appears to be recovering steadily.

The BlackRock Throgmorton Trust is going through a rough patch in the absence of one of its key co-managers, Mr Plackett, but BlackRock has confirmed that he is due to return in early October, which looks like good news for the fund's future performance. And with a wide discount to NAV, as well as reasonable ongoing charges of 1.1 per cent, now could be a good time to buy a quality investment trust while it's still cheap. Buy.

 

BlackRock Throgmorton Trust key facts

PRICE:GBX 278.25
AIC SECTOR:UK Smaller CompaniesNAV:£329.8
FUND TYPE:Investment trustPRICE DISCOUNT TO NAV:15.8%
MARKET CAP:£203.5m1-YEAR PRICE PERFORMANCE:8.3%
No OF HOLDINGS:1681-YEAR  BENCHMARK PERFORMANCE:5.7%
SET-UP DATE: December 19623-YEAR  PRICE PERFORMANCE:70.0%
ONGOING CHARGE:1.11%3-YEAR  BENCHMARK PERFORMANCE:53.8%
YIELD:1.4%5-YEAR PRICE PERFORMANCE:157.2%
GEARING:27%5-YEAR  BENCHMARK PERFORMANCE:l83.3%
More details:blackrock.com

Source: Morningstar. Performance data as at 15 September 2014

Sector breakdown as at 31 July 2014Allocation (%)
General industrials29.5
Consumer services18.3
Finance - general17.0
Materials8.3
Technology8.3
Healthcare6.9
Consumer goods5.9
Oil & gas3.6
Telecommunications2.3
Cash & cash equivalent-0.1

Asset allocation

Top 10 holdings as at 31 July 2014Allocation (%)
Workspace2.5
Senior2.4
Elementis 1.9
Ted Baker1.9
Bodycote International1.9
Restaurant Group1.8
Optimal Payments1.8
Rathbone Brothers1.7
Kellan1.7
Avon Rubber1.7