Join our community of smart investors

Recession-proof UK smaller companies fund

This fund is underweight in UK smaller companies, making it an idea play for those keen on small-cap investing, but eager to avoid economic uncertainty at home
May 10, 2012

With the UK heading back into recession your inclination may be to avoid investing in companies that are most exposed to the domestic economy. Historically, this has been UK small caps. But, over the past 10 years, these have become more exposed to the global economy. This means investors looking for long-term growth do not need to avoid UK smaller companies, which tend to outperform larger companies over longer time periods.

IC TIP: Buy at 526p
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points
  • Strong performance
  • Opportunity to buy at a discount
  • Lower domestic exposure
  • Strong growth prospects
Bear points
  • Performance fee
  • No discount control mechanism

Of course, this is not the case for all UK smaller companies, so picking the right ones is crucial and a good active fund really comes into its own here. BlackRock Smaller Companies investment trust derives just 45 per cent of its total revenue from the UK, despite being invested mainly in UK smaller quoted companies. The trust is underweight in more domestically-focused sectors such as retailers, pub companies, food producers and suppliers to the government. Instead it has significant exposure to electronics, software, engineering, healthcare, chemicals and media.

The trust's manager, Mike Prentis, concentrates on good-quality growth companies that can maintain organic growth and margins, have unique products, are well managed and have strong balance sheets with net cash. The companies he favours have also proved to be resilient, particularly during the financial crisis when many actually increased market share.

"Many small and mid-cap stocks have excellent growth prospects and generally are no more highly rated than large-cap stocks," adds Mr Prentis.

BlackRock Smaller Companies' share price and net asset value (NAV) have outperformed the FTSE Small Cap Ex Investment Trust Index according to Morningstar, and the trust beats most of its UK small-cap investment trust peers over three and five years, in line with its objective of long-term capital growth. The current share price is 526p, compared with 385p when we tipped the trust as a buy in September 2010.

Read our last tip

"One of the keys to constructing a long-term record is not to give back outperformance when markets enter choppy waters," says Alan Brierley, director for investment companies at Canaccord Genuity. "BlackRock Smallers has done that in the past year and it remains our core recommendation for investors looking for growth-oriented small-cap exposure. These attractions are compounded by a discount that remains stubbornly wide (15.31 per cent) and does not reflect the achievements of the manager. In a lower-for-longer environment, we like the focus on companies that can deliver sustainable earnings growth, and have a proven track record, relatively good marketability and a highly regarded management team."

The discount is much wider than the 6.38 per cent discount on Standard Life UK Smaller Companies (the other smaller companies investment trust that makes strong returns).

Read more on smaller companies funds and growth opportunities

Mr Brierley also points out that, since 2004, when BlackRock started to manage the trust, the annualised shareholder total return is 15.5 per cent, ahead of the 8.1 per cent and 6.9 per cent recorded by its investment trust peer group and benchmark (Numis Smaller Companies plus AIM excluding Investment Companies Index) respectively.

The investment trust levies a performance fee of 10 per cent of the annualised excess performance relative to the benchmark in the two previous financial years. Despite this, the trust still has a low total expense ratio of 0.73 per cent. The performance fee is also capped at 0.25 per cent.

Although the discount is wide, the trust's board has not yet announced a share buyback strategy, so it remains to be seen how much it can tighten.

But with an excellent performance record and exposure to growing companies and regions, BlackRock Smaller Companies investment trust remains a buy.

BLACKROCK SMALLER COMPANIES TRUST (GB0006436108)

PRICE526pGEARING109%
AIC SECTOR UK Smaller CompaniesNAV625.38p
FUND TYPEInvestment trustPRICE DISCOUNT TO NAV15.31%
MARKET CAP£253.29m1-YEAR PRICE PERFORMANCE2.23%
YIELD1.59%3-YEAR PRICE PERFORMANCE145.09%
SET UP DATEMay 19065-YEAR PRICE PERFORMANCE38.79%
TOTAL EXPENSE RATIO0.73%MORE DETAILSwww.blackrock.co.uk

Source: Morningstar.

Performance data as at 2 May 2012.

 

Top 10 holdings as at 31 March 2011

Aveva Group
Bellway
Booker
Fidessa group
Hargreaves Services
ITE Group
Oxford Instruments
Senior
Victrex
Yule Catto

 

Sector breakdown

Support Services9.9
Oil & Gas Producers8.8
Industrial Metals & Mining8.5
Electronic & Electrical Equipment8.3
Software & Computer Services8
Financial Services5.8
Chemicals5.7
Media5.3
General Retailers5.2
Household Goods & Home Construction4.5
Other30