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Opportunities in fast-growing small companies for your ISA

PARTNER CONTENT by BLACKROCK

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Roland Arnold, Portfolio Manager of the BlackRock Smaller Companies Trust plc, explores reasons to consider UK equities in 2021 and why he believes that innovative and nimble UK smaller companies can navigate the current market challenges, whatever is thrown at them.

Is 2021 likely to be a better time for UK equities? 

With the UK ahead in its vaccine rollout we are cautiously optimistic around the pace of reopening in the UK and the potential for economic recovery. There are many reasons to be cheerful in fact. Government policy has supported individuals and industries, and whilst sadly unemployment and corporate insolvency will rise, we still expect a strong recovery in domestic consumption this year. However, UK equities are about much more than just UK consumption, the UK is home to many world leading growth businesses, and with much of the Brexit uncertainty now behind us, we expect government policy to focus on supporting and attracting those businesses.   

You’re more diversified than most of your peer group: what’s the reason and how has this helped you in volatile markets?

 We have always believed that the best way to manage risk within the portfolio is through position sizing and suitable diversification. One of the core attractions of our universe is the sheer number of fantastic growth companies which are available to us, and there is never a shortage of potential ideas for inclusion in the portfolio. By maintaining a well-diversified portfolio, we can appropriately size new positions that might be less liquid, and as we see evidence of our investment thesis playing out, allow positions to grow organically over time as they become core holdings. Importantly we ensure we are not overly exposed to single stock disappointments, because as we all know with smaller companies, things can, and often do go wrong and by maintaining a well-diversified portfolio we ensure that the outcome of the Trust won’t be dictated by one stock. 

Do smaller companies demonstrate any competitive advantage in these more extreme market conditions?

 We have often argued that one of the key attractions of investing in small and mid-caps is their ability to adapt quickly to change. The outbreak of COVID-19 and disruption caused to many industries has been unlike anything that many businesses will have ever experienced. Smaller companies tend not to demonstrate the organisational inertia of their larger cousins; there are fewer layers of decision making, managers are often the owners, there is a strong entrepreneurial spirit and often there is less capital employed. We have seen in lockdown how a number of our businesses have rapidly adapted to new distribution or have responded to shifting customer requirements. Coronavirus has changed many industries, but often these changes are an acceleration of existing trends, and the companies that were leading that change pre-COVID-19, are the ones that are benefitting now. 

In a secular low growth environment, once ‘normality’ resumes, can smaller companies continue to grow their earnings? 

 Smaller companies have typically grown their earnings at a greater rate than larger companies, by something in the order of 3% pa over the last thirty years. But that excess growth isn’t uniform, typically in tougher years the immature business models can be impacted more than the diverse mature revenue streams of larger companies. If we are predicting a secular low growth world I would expect to see a return to smaller companies leading the charge as the attractive characteristics of their businesses return to the forefront; their ability to develop new markets and adapt to change whilst agitating and disrupting existing markets.

What are the advantages to investing in small caps via an investment trust structure?

There are several advantages. The first is the ability to utilise leverage to augment the investment returns, amplifying the already attractive return characteristics of the SMID sector. The BlackRock Smaller Companies Trust has the ability to gear (borrow to invest) up to 15%.

The second benefit relates to liquidity. The closed-ended nature of an investment trust means the manager doesn’t have to worry about outflows, reducing fund liquidity as a consideration and allowing the manager to invest with confidence in less liquid companies. This can be vital with smaller companies, where it can take time to get the potentially substantial returns. 

An investment trust structure allows a proportion of the dividend income received to be retained in a revenue reserve. This means in times when companies may be holding back on the cash they return to shareholders, the Trust has more options with regards to dividend policy.

Finally, it is often possible to buy investment trusts when they trade at a discount to their net asset value, and who doesn’t like that?

To invest in this type of investment, it may also be worth holding it in an ISA, making the most of your tax-free ISA allowance and sheltering it from income and capital gains tax. You can also use an ISA as a regular way to save rather than putting a lump sum in the market in one go. ISAs allow up to £20,000 to be sheltered from income and capital gains tax.  Much like an open-ended fund, you can also buy shares in the Trust through most online platforms or through a stockbroker.

For more information on BlackRock Smaller Companies Trust, and how to access the potential opportunities presented by smaller companies, please visit www.blackrock.com/uk/brsc

Risk Warnings

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. 

Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time. 

Trust Specific Risks

Liquidity risk: The Trust’s investments may have low liquidity which often causes the value of these investments to be less predictable. In extreme cases, the Trust may not be able to realise the investment at the latest market price or at a price considered fair.  

Gearing risk: Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.

Smaller companies risk: Smaller company investments are often associated with greater investment risk than those of larger company shares.

Important Information 

Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

BlackRock has not considered the suitability of this investment against your individual needs and risk tolerance. To ensure you understand whether our product is suitable, please read the fund specific risks in the Key Investor Document (KID) which gives more information about the risk profile of the investment. The KID and other documentation are available on the relevant product pages at www.blackrock.co.uk/its. We recommend you seek independent professional advice prior to investing.

The Company is managed by BlackRock Fund Managers Limited (BFM) as the AIFM. BFM has delegated certain investment management and other ancillary services to BlackRock Investment Management (UK) Limited. The Company’s shares are traded on the London Stock Exchange and dealing may only be through a member of the Exchange.  The Company will not invest more than 15% of its gross assets in other listed investment trusts. SEDOL™ is a trademark of the London Stock Exchange plc and is used under licence. 

Net Asset Value (NAV) performance is not the same as share price performance, and shareholders may realise returns that are lower or higher than NAV performance.

The BlackRock Smaller Companies Trust plc currently conducts its affairs so that its securities can be recommended by IFAs to ordinary retail investors in accordance with the Financial Conduct Authority’s rules in relation to non-mainstream investment products and intends to continue to do so for the foreseeable future. The securities are excluded from the Financial Conduct Authority’s restrictions which apply to non-mainstream investment products because they are shares in an investment trust. 

Any research in this material has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy. 

This material is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer. 

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