BlackRock Smaller Companies Trust opportunities as “exciting as ever”

BlackRock Smaller Companies Trust plc (LON:BRSC) has announced its latest portfolio update.

All information is at 30 November 2023 and unaudited.

To learn more about the BlackRock Smaller Companies Trust plc please follow this link: blackrock.com/uk/brsc

Performance at month end is calculated on a Total Return basis based on NAV per share with debt at fair value 

Sources:  BlackRock and Datastream

At month end

1. Includes net revenue of 20.75p
2. Yield calculations are based on dividends announced in the last 12 months as at the date of release of this announcement and comprise the first interim dividend of 15.00 pence per share (announced on 26 October 2023, ex-dividend on 2 November 2023, and paid on 4 December 2023) and the final dividend of 25.50 pence per share (announced on 05 May 2023, ex-date on 18 May 2023, and paid 27 June 2023).
3. Includes current year revenue.
4. The Company’s ongoing charges are calculated as a percentage of average daily net assets and using the management fee and all other operating expenses excluding finance costs, direct transaction costs, custody transaction charges, VAT recovered, taxation and certain non-recurring items for year ended 28 February 2023.
5. Excludes 1,741,231 ordinary shares held in treasury.

Commenting on the markets, Roland Arnold, representing the Investment Manager noted:

During November the Company’s NAV per share rose by 4.5% to 1,418.88p on a total return basis, while our benchmark, the Numis Smaller Companies plus AIM (excluding Investment Companies) Index, returned 5.9%. For comparison the large-cap FTSE 100 Index lagged small & mid-caps, returning 2.3%.

November proved a strong market for equity markets as continued falls in inflation, combined with further normalisation in the jobs market, resulted in a rapid and stark change in narrative from higher for longer to peak rates and an imminent central bank pivot. Lower energy prices saw UK inflation fall sharply to 4.6%. In addition, business activity in the country expanded for the first time since July as the Purchasing Managers’ Index climbed to 50.1. The UK market rose during the month with Technology, Industrials and Financials as top performing sectors, and in a stark contrast to much of the last two years, small & mid-caps outperformed large caps.

Shares in Watches of Switzerland rallied in response to a positive Q2 trading update which highlighted continued robust demand for luxury watches. The company also reiterated full year guidance and updated investors on its five-year plan, with a target to double profits by 2028. The news was taken well by the market and helped to alleviate concerns over and potential change in strategy from Rolex post their acquisition of Bucherer. Shares in City Pub Group rose after Youngs, which we also own in the Trust, agreed to buy the business for £162m, adding 50 high quality pubs to the Youngs estate. As we move into 2024 we believe we could see a pickup in this type of strategic corporate activity, rather than the Private Equity led transactions that we have seen so far this year, as companies begin to leverage the strength of their own balance sheets to enhance market positions into any recovery. YouGov continued to rise in November, having reported in-line results in October, without the profit warning which the market had been expecting, and reiterating full year guidance.

Shares in video game developer Team17, fell after the company issued a profit warning during the month. This is one of the only game developers in the market that hasn’t missed on revenues. In fact, revenues came in modestly ahead of expectations, however profits have been impacted by poor cost controls and project overspends. We have reduced the position size in the portfolio but retain a smaller holding as the shares now trade on less than 10x earnings. We will be monitoring the position closely for further developments. The second largest detractor was 4imprint, which despite confirming another upgrade to FY23, fell on commentary that the company had noticed more volatility in order patterns in recent weeks. While the share price reaction was disappointing, we do not believe this is anything more than an observation from the management team, and the long-term dynamics for this market share winner remain as attractive as ever. Shares in Qinetiq fell in response to interim results which showed profits in-line with expectations, however there was a slowdown in its recently acquired US business which disappointed the market.

Since the end of 2021, rising interest rates have been weighing on the valuations of long-duration, higher growth shares in the stock market. As a result, UK small & mid-cap companies have continued to underperform large cap companies and we are now in the deepest and longest cycle of underperformance in recent history; worse than the Global Financial Crisis, COVID, Brexit, Tech sell-off or Black Monday. Against this backdrop, the question remains, what is the catalysts for this trend to change? Unfortunately, there is no simple answer. While there are many headwinds to the UK SMID market; economic uncertainty, political uncertainty, the structural flow issues in the UK market, the risk of more pervasive inflation, to name a few, we remind ourselves and take comfort in the fact that many of our holdings continue to deliver against their objectives. Furthermore, we believe we are closer to the end of monetary tightening and at some point, we are confident that investors will decide the balance of probabilities is in favour of the opportunities, that the risks are more than adequately priced in, and that an increased allocation to UK Small and mid-caps is warranted.

As ever, we remain focused on the micro, industry level change and stock specific analysis and the opportunities we are seeing today in our universe are as exciting as ever. Historically, periods of heightened volatility have been followed by strong returns for the strategy and presented excellent investment opportunities.

We thank shareholders for their ongoing support.

     ¹Source: BlackRock as at 30 November 2023

To learn more about the BlackRock Smaller Companies Trust plc please follow this link: blackrock.com/uk/brsc