BULL POINTS:
■ Top performance record and respected management
■ Third-lowest rating in its sector
■ Strong exposure to emerging markets
■ Big enough to attract institutional interest
BEAR POINTS:
■ No catalyst to narrow the discount
■ Uses gearing
Smaller-companies funds among the UK's investment trusts have a record of growing their net assets faster than average, yet their sector is unloved. The trust that epitomises this conundrum most is BlackRock Smaller Companies investment trust.
Its manager, Mike Prentis, is highly regarded in the industry and the trust's track record is impressive - it has outperformed its benchmark over each of the past seven years. Indeed, over the past five years BlackRock's net asset value (NAV) has risen 63 per cent; over the past three years it has risen 10 per cent, and 33 per cent over the past year. It is the second best-performing trust over all these periods and puts its benchmark index, the Hoare Govett Small Cap index ex investment trusts, in the shade.
| IC TIP RATING | |
|---|---|
| Tip style | Growth |
| Risk rating | High |
| Timescale | Long term |
| What do these mean? Find out in our | |
Yet shares in BlackRock Smaller Companies languish at 17 per cent below NAV. This compares with an average 14 per cent discount for the 11 trusts that comprise the UK Smaller Companies group. As such, the BlackRock fund is the third most lowly rated.
| BLACKROCK SMALLER COMPANIES (BRSC) | |||
|---|---|---|---|
| PRICE | 385p | NAV | 465p |
| GROSS ASSETS | £248m | DISCOUNT TO NAV | 17.2% |
| No OF HOLDINGS: | 49 | 1-YEAR PRICE PERFORMANCE | 31% |
| SET UP DATE | May 1906 | 3-YEAR PRICE PERFORMANCE | 1% |
| MANAGER START DATE | September 2002 | 5-YEAR PRICE PERFORMANCE | 50% |
| YIELD | 1.5% | TOTAL EXPENSE RATIO | 1.2% |
| GEARING | 11% | MORE DETAILS | http://www.blackrock.co.uk/IndividualInvestors/FundCentre/Prices/InvestmentTrusts/index.htm |
| Top 10 holdings |
|---|
| Abcam |
| Aveva |
| City of London Investment |
| Domino Printing |
| Fidessa |
| Hutchison China Meditech |
| ITE |
| Rotork |
| Spirax-Sarco Engineering |
| Victrex |
| Sector allocation | Percentage |
|---|---|
| Software & Computer Services | 10.8 |
| Oil & Gas | 10.4 |
| Industrial Metals & Mining | 10.0 |
| Financial Services | 8.0 |
| Electronic & Electrical Equipment | 7.7 |
| Industrial Engineering | 7.1 |
| Support Services | 6.6 |
| Pharmaceuticals & Biotechnology | 5.4 |
| Technology Hardware & Equipment | 5.2 |
| Media | 5.1 |
A reason cited for wide discounts on shares in smaller companies trusts is that the market value of these trusts is often less than £100m. This makes them too small to attract interest from institutional investors and, as a result, it is difficult to deal in the shares. However, BlackRock is one of only three trusts in the sector with a market value comfortably above the £100m mark.
Gearing - the use of debt to enhance performance - can be regarded as a reason for a wide discount as gearing also increases losses when investments go wrong. The BlackRock trust uses gearing in the form of a £15m debenture and can draw on a £10m overdraft. But, despite the gearing, the 57 per cent fall in the trust's NAV during the bear market of 2007-09 was still below the fall in the FTSE Small Cap index ex investment trusts, which dropped 66 per cent. And whatever pain was experienced on the way down was more than made up for by the turbo charged nature of the recovery - BlackRock's NAV rocketed 87 per cent in 12 months after the market bounced from its low point.
Mr Prentis has achieved his enviable track record by investing in growth stocks. About half of the portfolio is made up of what he considers to be long-term core holdings, while the rest comprises stocks that capture exciting themes and which could eventually become core. He is part of a well resourced smaller-companies team, which says it can produce in-depth research into about 500 “investable” smaller companies, including face-to-face meetings with their bosses.
His current investment plan splits into five aims: getting exposure to high-growth overseas markets; finding companies that effectively use the internet; seeking revenue visibility; finding intellectual property; and avoiding exposure to UK consumers and to government spending. The focus on growth overseas is a key reason why oil and mining stocks make up 20 per cent of the portfolio.
