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Investment trust has an excellent returns track record and ticks ESG boxes
Thursday 18 Nov 2021 Author: Steven Frazer

UK investors have witnessed a steady if unspectacular pandemic recovery for UK shares in the main. But some parts of the market have bounced further and faster, and the BlackRock Smaller Companies Trust (BRSC) is a great way to tap into the strength of the UK smaller company universe at a larger than usual discount to net asset value.

In 2021 the FTSE Small Cap index has risen 22% while the FTSE 250 is up nearly 15%. The FTSE 100, by contrast, has gained less than 12%.

BlackRock Smaller Companies Trust has an enviable long-term track record. It is in the top quartile for performance over the past five years, returning 156.7% versus 98% from the UK Smaller Companies sector.

Morningstar calculates that the trust’s shares have returned an average 18.8% a year over the past decade, versus the rough 14% of UK small cap stocks. Putting that into context, investors who put £5,000 into the trust in November 2011 would today own a stake worth £27,998, nearly £10,000 more than the £18,536 if spread across all UK small cap stocks.

Not all this performance is down to current manager Roland Arnold. He took over running the trust in May 2018, but he is developing a good name for himself given his returns so far.

Arnold’s success stems for a strict investment strategy that ensures his companies meet five key criteria. These primarily centre on quality and growth elements that the manager sees as largely symbiotic. He strongly believes that high quality management, for instance, is key in driving business growth, an opinion he shares with top-rated fund managers like Nick Train and Terry Smith, for example.

This is also a fund that ticks the right boxes for environmental, social and governance factors, with Arnold seeing ESG analysis as a natural extension of the trust’s investment process. The manager is particularly concerned with the sustainability of a company’s growth, and he works alongside the BlackRock Investment Stewardship team to assess this factor.

Despite the rigorous selection process the BlackRock Smaller Companies Trust is widely diversified. It typically has around 120 stocks from across the stock market sector spectrum. For example, luxury time piece seller Watches of Switzerland (WOSG) is its largest holding (at 30 Sep), followed by ESG investor Impax Asset Management (IPX:AIM) and Treatt (TET), the £680 million ingredients firm.

Stocks are drawn from the FTSE 250 to AIM, while fast-growing technology companies are also represented, including online auctions platform Auction Technology (ATG) and science tools maker Oxford Instruments (OXIG).

In June, shareholders voted in favour of the trust removing the limit on the level of AIM investments that could be held in the portfolio.

‘This change was prompted by the strong performance of the company’s AIM holdings over recent years which had resulted in an increase in the portfolio’s aggregate exposure to AIM to just under the previous limit of 50% of the portfolio by value,’ says BlackRock.

‘The board did not consider it to be in the best interests of stakeholders for the manager to be required to dispose of these AIM stocks solely as a result of movements in market value and was keen to ensure that the company had access to a full range of investment opportunities.’

The focus is very much on capital growth over the medium-term but that does not mean income is ignored.

The board has historically made clear that it recognises the role of dividends in boosting total return for shareholders and payouts have increased by 16.6% a year on average over the past decade.

That said, investors should be aware that the prospective dividend yield is just 1.65% so this is not really a fund for investors who rely on income.

Ongoing charges are currently 0.8% a year, which we think is reasonable for an actively managed fund. Kepler’s analysts believe the trust consistently adds value through stock selection and use of debt or gearing, as it is often called.

BlackRock Smaller Companies currently trades at a 6.5% discount to NAV compared to a 4.7% average over the past 12 months, according to Winterflood. Less than a year ago the trust briefly traded on a 2% premium to NAV, meaning that investors can currently snag a bargain price in both absolute and relative terms.

Investors buying now could see a double-whammy – they could benefit from portfolio’s discount narrowing and they could benefit if the fund manager picks the right stocks that help to grow the overall portfolio value.

This is a great play on the exciting UK small caps space for investors wanting a little hand holding from an expert.

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