With a new sole portfolio manager in charge of the investment decisions and a discount that has narrowed from 15.7% at as 30 November to 6.3% at the time of writing, Shares believes this is an exciting time for shareholders in the BlackRock Throgmorton Trust (THRG).

Often overlooked, despite boasting the best ten-year share price total return performance record in the Association of Investment Companies’ UK Smaller Companies sector, Throgmorton offers investors exposure to a compelling combination of differentiated long-term growth investments and companies that are leading industry change.

BlackRock Throgmorton has long-lived in the shadow of the BlackRock Smaller Companies Trust (BRSC), but the fund is now getting the oxygen it deserves following the adoption of a revised investment objective and policy in March this year.

Dan Whitestone assumed sole responsibility for the portfolio in February, allowing the seasoned Mike Prentis to focus on other funds including BRSC.

Key changes to the objective and policy included the removal of the previous 35% restriction on AIM market exposure, a change of the benchmark to one which includes AIM and a new power to permit the energetic Whitestone to hold up to 15% of the company’s gross assets in non-UK listed shares.

THE LONG & THE SHORT OF ‘THROGS’

Throgmorton provides shareholders with long term capital growth and attractive total return through investment in UK-listed small and mid caps in the main.

As well as holding long positions, the trust can employ leverage up to 30% of net assets, which Whitestone does primarily through the use of contracts for difference (CFDs) and/or comparable equity derivatives, rather than bank borrowings.

This can be deployed into either long or short CFDs and/or comparable equity derivatives, therefore enabling the company to have a maximum net market exposure of 130%.

Growth-focused Throgmorton is performing strongly too. Half year results (26 Jul) showed net asset value per share for the six months to end-May up 11.6% with dividends reinvested versus a 2.4% return from the benchmark Numis Smaller Companies plus AIM (ex Inv Co’s) index.

TWO STRUCTURAL CHANGES

Changes to the structure of the fund have given Whitestone more tools to generate compelling long-term returns
for his shareholders.

Having been forced to sell AIM investments in the past even if the fundamentals still stacked up Whitestone is pleased the board has now removed the AIM limit.

‘This is not about going out and buying some mining company in Namibia. It is about owning things like Fevertree Drinks (FEVR:AIM) and ASOS (ASC:AIM), phenomenally high quality companies growing very fast with truly differentiated business models and/or doing something disruptive that want to stay on the AIM market.’

‘The second thing I asked for the ability to invest in international shares,’ he adds. ‘We can now put up to 15% of our gross exposure in shares not listed in the UK.’

Two new international purchases are companies where distribution within their respective industries has been driven by the advent of cloud computing.

Xero is a high-growth Australian listed software company specialising in accounting for small businesses, while French-listed video games developer Ubisoft is benefitting not only from strong content releases, but also from how that content is distributed,
i.e. a shift to direct distribution to the consumer via the cloud rather than a CD in a box sold in the shops.

THE WHITESTONE WAY

Avoiding cyclical and capital intensive industries or those with much regulatory interference, Whitestone looks for well-funded firms that have built an economic moat around their business and boast pricing power.

Whitestone says: ‘I don’t believe in mean reversion. I believe that winners, when they win, can win big. And they can go up three, five, ten, fifteen, twenty, fifty times and the losers can go bust. Fevertree has gone up 28 times since we’ve owned it.

‘We’ve had two shorts this year that have gone to zero. What this demonstrates is the dispersion of returns that’s available in the universe of small and mid sized companies.’

BOOSTING THE BOOK

During the half to May, the long book’s largest positive contributor was financial advisor’s savings platform Integrafin (IHP), Fevertree performed strongly and veterinary pharma manufacturer Dechra Pharmaceuticals (DPH) also delivered.

The short book’s biggest contributor was from a position in Conviviality, the disgraced UK alcoholic drinks wholesaler which went into administration earlier this year.

‘Some great shorts are companies who continually have a big difference between what their cash flows telling you and what their profit and loss statement is telling you,’ says Whitestone later in our discussion, not naming any names.

Significantly, unlike many peers, he doesn’t start with valuation. ‘The first thing I start with is management teams – the most important driver of value creation or destruction. I fundamentally do not believe Amazon would have been what it is today if it wasn’t for Jeff Bezos.’

Two ‘quality differentials’ with best-in-class management held in the trust are the aforementioned Fevertree and Renishaw (RSW), the precision engineer Whitestone dubs ‘one of the world’s greatest companies of all time’. Management’s ‘vision, ability to execute and long term thinking has seen Renishaw grow from a real small cap to a plus £4bn company, all organically, over many, many years,’ he enthuses. (JC)

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