Throgmorton – 10 years on and we are as optimistic as ever

As the BlackRock Throgmorton Trust Plc celebrates its 10-year anniversary, Portfolio Manager Dan Whitestone reflects on its evolution and the opportunities that lie ahead.
There really has been very little change to the Trust over the past 10 years, which has always focussed on investing in quality UK small and medium-sized businesses that we believe have the potential to become much larger over time. We are passionate believers that we are fishing in a very attractive pond. UK small and medium-sized companies have outperformed larger companies by around 4% per annum* over time, which compounded over time has led to significant returns from this area of the market. It is important to remember that 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.
Not only is this an outperforming area of the market, but it is also an area where we believe it pays to be active. Dispersions of returns in UK small and medium companies is high, companies that get it right can see their market values (shares) go up 1, 3, 5 10, even 20 times, and losers can see their share prices collapse and even fall to zero. The bottom line, the rewards for success can be large!

An enhanced toolkit

We believe this trust has a completely unique proposition for exploiting the high dispersion of returns in the UK small and mid-cap universe. As we often highlight, when smaller companies go wrong things can unwind very quickly. Thankfully this trust also has the ability to ‘short’ shares (i.e. profit if the share price falls), as well as buy shares (“long”). We short shares by using contracts for difference (CFDs), synthetic instruments that track the movement of the underlying shares. This allows us to gain exposure to companies that are under structural or cyclical pressures where we think earnings and balance sheets are under pressure, and profit if the shares fall. Meanwhile the ability to short also allows the Trust to vary our overall net exposure (long holdings – short holdings) to the market over time depending on our view of the overall stock market. This gives us potential to protect against the downside, meaning if the market falls, we can hopefully fall less than the market. We feel that this structure offers us as investors an enhanced toolkit to seize the opportunities offered by this area of the market.

Until recently (February 2018) we ran a dual structure with the CFD portfolio operating as a separate portfolio alongside the long only portfolio, previously run by Mike Prentis. While this worked well for us, we recognised the benefits of having a sole manager arrangement and I – now manage the entire Throgmorton Trust – having previously managed the CFD portfolio. I believe this gives greater consistency, clarity and simplicity.

New manager bringing a little something different from the last 10 years

Under my sole management the Trust will focus on two types of investment, which I believe will drive long term value for shareholders. The first type will be the same as what has driven performance over the last 10 years, something we call “Quality Differentials”, simply put these are differentiated long-term growth investments. These we would characterise as companies that have strong management teams, with a protected market position, a unique and compelling product offering with an attractive route to market, maybe benefitting from structural growth, and that are well financed. These types of companies have been the foundation of the Trust since BlackRock took over management.

The second type and where shareholders will see something different from history, is targeting those companies that are leading industry change, “disruptors”, and shorting those that are the victims, the “disrupted”. Think of the industry change that we have witnessed during the 10-year life of Throgmorton. The smartphone didn’t exist when BlackRock took on the Trust, now think of all the apps on our phones which have completely change the way we do things from ordering taxis, getting a takeaway delivered or watching television. These are just a few examples, but there isn’t an industry that isn’t facing some sort of disruption, and it really is a fascinating and exciting time for an investor. We are currently drawn to distribution and how technology is changing consumer behaviour, creating opportunities for dynamic, disruptive businesses and undermining legacy business models. This is a key battleground that is creating winners and losers, something that the Trust is designed to capitalise on. However, as we have alluded to in the past, industry disruption is not limited by geography and therefore we introduced the ability for the Trust to now invest up to 15% in companies not listed in the UK which provides further opportunity to identify exciting growth companies that are driving change and disrupting their end markets.

At the same time, restrictions on the amount we could invest in AIM-listed stocks was lifted, broadening our investment universe still further, and more importantly this means we are no longer forced sellers of some of our top performing AIM shares due to an arbitrary limit on the amount that the trust is able to hold.

Ready for the future

Above all, it is the Trust’s (and the BlackRock Team’s) dedication to understanding, researching and connecting with the small and medium sized companies’ universe that we believe contributes to our performance. We have owned some incredible small companies on their way up, one notably up more than 25x since we purchased it, but we were also able to use short positions to deliver additional performance from businesses on their way down. We have held two shorts where the shares have fallen to zero in the last 12 months!

As we enter the next few years, we are excited by the opportunities that we face. We think the UK is home to many compelling investment opportunities where the revenues and profits are generated outside the UK and the companies have a leading differentiated competitive offering. The outlook for these investments is notably tied to the global economy which we believe remains robust.

It has been a great decade for Throgmorton and, following recent changes, we are excited by the future and feel well prepared for whatever it may bring.

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

*BlackRock/DataStream, since the inception of the Numis Smaller Companies Index to 30 June 2018, Numis Smaller Companies against the FTSE All Share Index.

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