We believe that many smaller companies have fallen too far amid the indiscriminate sell-off this year, and that there is real scope to pick up many well-run, high-quality business at knock-down prices.

One of the best ways to take advantage, in our view, is to buy the BlackRock Throgmorton Trust (THRG), one of the very best smaller company investment trusts available.

This is a multi-award-winning trust with peer-beating performance over many years. In a Shares analysis of the smaller companies trust space in December 2021, BlackRock Throgmorton came second out of 15 trusts over 10 years on a total returns basis with 599.2%, topping the peer group over both three and five-year periods (107.7% and 240.7%).

According to the trusts’ own data, it has outstripped its benchmark, the Numis Smaller Companies plus AIM (excluding Investment Companies) Index in each of the past five years on both share price and NAV (net asset value), by close on 50% last year (to 30 November 2021).

INVESTMENT DNA

Steered by manager Dan Whitestone, BlackRock Throgmorton invests primarily for long-run capital growth in small and mid-sized UK companies that are either driving innovation or benefitting from structural change. This might sound like another technology-themed fund but that’s not strictly true – industrial, consumer discretionary and financials are its three largest sector exposures representing 70% of assets, with technology forth worth 8.3% of the fund, based on 31 January 2022 data.

That said, Whitestone firmly believes that financially sound, well-managed companies with differentiated products that have a tailwind of secular trends are most likely to undergo exponential growth, and it’s true that embracing new technologies and online distribution methods plays a big role.

Watches of Switzerland  (WOSG) is a prime example of Whitestone’s approach. It is a retailer that has provided multiple strong updates with upgrades to forward guidance as it continues to benefit from the secular demand for luxury watches in a supply-constrained industry.

It has been able to achieve ‘record sales and profits despite most of their stores being closed through their financial year,’ said Whitestone. This was partly due to the strength of the category, but also because management have successfully navigated a difficult retailing environment by enhancing its business model through digital ‘clientelling’, in other words using software to enhance long-term relationships with their clients.

‘We firmly believe Watches of Switzerland has emerged from Covid-19 with a significantly enhanced market position and strengthened its relationship with the luxury brands, which leaves the company well placed to pursue its international expansion ambitions,’ said Whitestone in BlackRock Throgmorton’s full year results, released on 7 February 2022.

Other notable contributors to the trust’s performance last year included Tatton Asset Management (TAM:AIM), YouGov (YOU:AIM), Auction Technology (ATG), and IMIMobile, a the marketing and communications platform business which soared after the company agreed to a 595p per share takeover from US listed IT giant Cisco Systems, marking a five-fold increase in value since its initial public offering in 2014.

As discussed earlier, this is exactly the type of medium to longer-term investment opportunity that BlackRock Throgmorton strives to spot early, and it is a strategy that continues to deliver in spades for investors.

Stakes in Games Workshop (GAW) and Avon Protection (AVON) dragged on performance yet with 120-odd stocks in the portfolio, there is plenty of diversification.

TOOLS TO MAXIMISE RETURNS

Uniquely for a smaller companies trust, BlackRock Throgmorton also uses short positions in stocks to bet against firms that Whitestone believes are in a weak position. The short book provides a separate avenue for the manager to add value through stock selection skills, while the trust will also use gearing to maximise strong markets and limited downside during sticky patches.

Gearing (how much the trust has borrowed to invest) currently stands at 24% of net assets, demonstrating Whitestone’s firm belief that there is widespread value available in today’s stock markets.

BlackRock Throgmorton typically trades at a premium to net assets, such is its outstanding returns performance. Yet that premium has been whittled down to just 0.11%, as of 18 March 2022, below the 12 months 0.94% average, based on BlackRock data.

It’s worth noting that the trust’s fee structure is heavily skewed towards performance rather than the fixed management fees. The fixed ongoing charge stand of 0.6% a year, with performance fees only levied on outperformance of its benchmark. Last year annual fees were 1.38% versus 1.6% in 2020.

This means we would anticipate Whitestone continuing to use high levels of gross market exposure, shorting and to maintain conviction in his high-quality growth-led approach. That may not make the trust suitable for all investors, but those looking to take advantage of the deep smaller company sell-off, this is one of the very best options available.

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