BlackRock Throgmorton Trust plc (LON:THRG) has announced its final results for the year ended 30 November 2021.
To learn more about the BlackRock Throgmorton Trust plc please follow this link: blackrock.com/uk/thrg
PERFORMANCE RECORD
| As at 30 November 2021 | As at 30 November 2020 | |
| Net assets (£’000)1 | 935,148 | 596,215 |
| Net asset value per ordinary share (pence) | 921.91 | 681.24 |
| Ordinary share price (mid-market) (pence) | 935.00 | 682.00 |
| Benchmark Index2 | 18,968.77 | 15,232.31 |
| Premium to cum income net asset value3 | 1.4% | 0.1% |
| Average premium to cum income net asset value for the year3 | 1.2% | 0.2% |
| ————— | ————— | |
| Performance (with dividends reinvested) | ||
| Net asset value per share3 | +37.0% | +9.1% |
| Ordinary share price3 | +38.8% | +8.2% |
| Benchmark Index2 | +24.5% | +3.8% |
| ========= | ========= |
| For the year ended 30 November 2021 | For the year ended 30 November 2020 | Change % | |
| Revenue | |||
| Net revenue profit after taxation (£’000) | 11,446 | 5,379 | +112.8% |
| Revenue return per ordinary share (pence)4 | 12.15 | 6.57 | +84.9% |
| ————— | ————— | ————— | |
| Dividends per ordinary share (pence) | |||
| Interim | 2.50 | 2.50 | +0.0% |
| Final | 8.00 | 7.70 | +3.9% |
| ————— | ————— | ————— | |
| Total dividends paid and payable | 10.5 | 10.20 | +2.9% |
| ========= | ========= | ========= |
1 The change in net assets reflects market movements, dividends paid and share issues during the year.
2 The Company’s Benchmark Index is the Numis Smaller Companies plus AIM (excluding Investment Companies) Index.
3 Alternative Performance Measures, see Glossary contained within the Annual Report and Accounts.
4 Further details are given in the Glossary contained within the Annual Report and Accounts.
CHAIRMAN’S STATEMENT
YEAR’S HIGHLIGHTS
• Strong investment performance maintained in the year to 30 November 2021:
- NAV outperformed the Benchmark Index over one year by 12.5% and the share price outperformed the same index over one year by 14.3%
- NAV has outperformed the Benchmark Index by 46.4% over three years, by 88.4% over five years and by 251.5% over ten years
- Share price has outperformed the Benchmark Index by 74.8% over three years, by 159.8% over five years and by 372.7% over ten years
- The Company is one of the strongest performers in its peer group over all time periods
• Share price has remained close to NAV through most of a challenging year. The 12-month average premium as at 30 November 2021 was 1.2% (average premium 2020: 0.2%)
• Promoted to the FTSE 250 during the financial year
• 13.9m new shares raising £125.0m have been issued
• Final dividend declared of 8.00p per share (2020: 7.70p)
OVERVIEW
After last year’s extremes of volatility, a more sedate year might have been anticipated; however, this was not to be. Although stock markets started the financial year flush with the optimism of several successful vaccine trials, few would have predicted that we would end it in the grip of another new variant with all the attendant uncertainty and disruptions to activity and supply chains this entails. January 2021 saw markets retract as the rates of COVID-19 infections rose sharply and lockdown measures were tightened and extended. However, the UK market then returned seven consecutive months of positive performance as the success of the vaccine roll-out in the UK started to take effect and market sentiment improved. More recently, a surge in inflation and the prospect of higher interest rates had added to the mood of uncertainty, something the Portfolio Manager says more about in his report below.
Despite the turmoil, it has been another extremely successful year for your Company, reinforcing the long-term strategy of the BlackRock Emerging Companies team to focus on high quality, differentiated growth companies capable of disrupting existing markets and driving industry change. The pandemic has reinforced the strength of this approach by accelerating trends already underway and polarising the prospects of companies with strong and weak franchises. Resolution to the Brexit discussions at the end of 2020 also helped by removing some of the Brexit related scepticism which has blighted UK equities in recent years.
It has also been encouraging that this outperformance has occurred in a period when cyclical ‘value’ shares have made much of the running. While in the short term the market remains vulnerable to sharp reversals and spikes in volatility, as we have seen in recent weeks, we remain convinced that our Manager’s strategy, of owning high quality, dynamic and advantaged growth companies for the long term, continues to be attractive.
Your Company was one of very few investment companies in the sector trading on a premium during the year and issued a total of 13.9m new ordinary shares, raising total gross proceeds of £125m in the twelve months to 30 November 2021.
I am also pleased to report that the issue of new shares in response to market demand, accompanied by strong investment performance, resulted in the Company becoming a constituent of the FTSE 250 Index in September 2021.
MARKET BACKGROUND
The financial year to 30 November 2021 has once again been overshadowed by the continuing disruption caused by the COVID-19 pandemic. The UK market nonetheless generated strong returns as the economy was supported by Government stimulus, a successful vaccine roll-out and, at the start of the year, the conclusion of a trade and co-operation agreement with the EU.
Although UK small and mid-cap companies generally performed well during the period, we witnessed a pronounced rotation from growth to cyclical value stocks in response to the economic reopening. Despite our emphasis on growth, it was pleasing to see the Company outperform its Benchmark Index in both the first and second half of the year, testament to the diversity and resilience of the portfolio and of the underlying portfolio companies’ ability to make headway despite the macroeconomic challenges.
Another key feature of the year under review was the surge in inflation as fuel, energy and commodity prices spiked, amid COVID-19 related supply chain bottlenecks, which threatened to derail the recovery. Although some market commentators believe this increase in UK inflation is transitory, annual inflation reached 5.1% in November, significantly above the Bank of England’s 2% target. In December 2021 the Bank’s monetary policy committee took the decision to raise interest rates marginally from 0.10% to 0.25%.
PERFORMANCE
Over the twelve months to 30 November 2021, the Company’s NAV returned 37.0%, compared with a total return of 24.5% from the Company’s Benchmark Index, the Numis Smaller Companies plus AIM (excluding Investment Companies) Index. This outperformance of the Benchmark Index by 12.5% is a considerable achievement given the challenging economic and political backdrop during the period. The share price returned +38.8% delivering an outperformance of 14.3% during the year as the Company’s premium to NAV rose slightly from a premium of 0.1% to a premium of 1.4%.
Since the year end, interest rate uncertainty and the tensions in Ukraine have weighed upon sentiment in recent months with the effect that the NAV has decreased by 8.4% to the close of business on 2 February 2022 compared to the Benchmark Index which has decreased by 2.8% (all figures in Sterling terms with dividends reinvested). The share price over the same period has decreased by 9.1%. Further information on post year end performance can be found in the Investment Manager’s report below.
As a result, the Company retains one of the strongest long-term track records in the UK smaller companies investment trusts sector with NAV outperforming the Benchmark Index by 46.4% over three years, by 88.4% over five years and by 251.5% over ten years. The share price outperformed the Benchmark Index by 74.8% over three years, 159.8% over five years and 372.7% over ten years.
A recent piece of research produced by Kepler Partners, who also write research commissioned by BlackRock on behalf of the Company, also highlights the Company’s consistency of returns. Commenting on what they term the ‘batting average’, essentially a measure of how often an investment manager beats the benchmark over certain rolling time periods, they note the Company’s consistent strong performance, as demonstrated by the chart below.
| WINDOW | PERIODS | WON | LOST | WIN RATE | AVG. EXCESS RETURN (%) |
| 1 month | 159 | 100 | 59 | 63% | 0.6 |
| 3 months | 157 | 125 | 32 | 80% | 1.9 |
| 1 year | 148 | 140 | 8 | 95% | 8.4 |
| 3 years | 124 | 124 | 0 | 100% | 30.0 |
| 5 years | 100 | 100 | 0 | 100% | 63.3 |
Data: 01/07/2008 to 30/09/2021. Source: Morningstar, Kepler Partners.
Past performance is not a reliable indicator of future results.
As I reported last year, the Company’s strong performance has once again been recognised through industry awards. I am very pleased to report that the Company won the AJ Bell Online Personal Wealth Award 2021 – Best Investment Trust for Growth, and the AJ Bell Investment Trust Award 2021 in the UK Smaller Companies Active category for the second year in a row. The Company was also awarded Kepler’s growth rating which is based on long-term, risk adjusted performance and is awarded to the investment trust Kepler view as ‘best in class’.
All of which means that our Portfolio Manager, Dan Whitestone, and his team, are to be congratulated once again on what has been another impressive year, particularly given the challenging circumstances.
Further information on portfolio performance, positioning and the outlook for the forthcoming year can be found in the Investment Manager’s report which follows below.
PERFORMANCE RECORD TO 30 NOVEMBER 2021 (WITH DIVIDENDS REINVESTED)
| 1 year change % | 3 year change % | 5 year change % | |
| NAV per share | 37.0 | 86.0 | 142.4 |
| Share price | 38.8 | 114.4 | 213.8 |
| Benchmark Index | 24.5 | 39.6 | 54.0 |
SHARE PRICE DISCOUNT/PREMIUM
During the year to 30 November 2021 the Company’s share price discount/premium to NAV ranged between a discount of 3.2% and a premium of 2.9% and ended the year at a premium of 1.4% (30 November 2020: premium of 0.1%). The 12-month average premium as at 30 November 2021 was 1.2% (average premium 2020: 0.2%) versus the AIC UK Smaller Companies investment trust sector average discount of 8.4%.
As at 2 February 2022 the Company’s shares were trading at a premium of 0.6%.
Despite what has been a challenging and volatile year it is pleasing to note that the Company’s premium has been relatively stable and shares have traded within a tight range for most of the year.
Further information in relation to the discount can be found within the Annual Report and Accounts.
SHARE ISSUANCE
The Board believes that it is in shareholders’ interests that the share price does not trade at an excessive discount or premium to Net Asset Value. While the Company has not needed to buy back shares during the year to avoid an excessive discount from arising, it has, where deemed to be in shareholders’ long-term interests, exercised its powers to issue shares. This has not only avoided an excessive premium developing but also benefits shareholders because all such share issuance was carried out at a premium to Net Asset Value, the fixed costs of the Company are spread over a larger asset base and the increased size of the Company should improve the liquidity in the Company’s shares.
We believe that the Company’s ability to raise capital in the current challenging market conditions is further evidence of shareholders’ ongoing support of, and investors’ interest in, each of the Company’s investment proposition, the BlackRock Emerging Companies team and investment processes, and our Portfolio Manager.
This demand necessitated calling a General Meeting of the Company’s shareholders on 4 October 2021 to renew the Board’s authority to sell shares from treasury and/or to issue new shares, on a non-pre-emptive basis representing up to 10% of the Company’s issued share capital and also to seek an additional authority to allot up to a further 10% of the Company’s issued share capital. Resolutions renewing these powers were supported by the vast majority of shareholders with an excess of 94% of votes in favour of the resolutions.
Your Board, in conjunction with the Portfolio Manager, regularly reviews whether the Company is of a size, or growing at a pace, which could negatively impact the ability of the Manager to generate performance. The current view remains that there is capacity to grow the share capital of the Company to the level for which authority was approved in October 2021; allowing for issuance since October 2021, this represents an increase of approximately 15% of the Company’s current issued share capital.
In recent years issuance has exceeded the 10% authority requested at the AGM and we have therefore had to convene special General Meetings to request further authority. To minimise the cost to shareholders, the Company is, as in October 2021, seeking shareholder authority at the forthcoming Annual General meeting to issue and allot new shares for all the remaining capacity, in this case 15%. These issuance and allotment authorities are, as in October 2021, structured as four separate resolutions; two seek to renew the Board’s power to sell shares from Treasury and/or to issue new shares, and do so on a non-pre-emptive basis, up to 10% of the Company’s issued share capital, with two equivalent resolutions for a further 5%.
It should be noted that these powers, if approved, will be in substitution of, and not in addition to, the authority given to issue shares at the General Meeting in October 2021 meaning that, if approved, shareholders will be enabling the Company to grow to approximately the same size as was planned in October 2021. As always, any shares issued will be a premium to the NAV per share.
The Board believes these resolutions are in shareholders’ best interests and therefore, once again, encourages shareholders to support them.
The extent and speed of further issuance, especially given the recent volatility in markets, will be kept under review. There can therefore be no certainty that issuance will continue at the same level; this in turn means that, while the Board continues to believe it is in shareholders’ interests that the share price does not trade at an excessive discount, it accepts that shareholders may be best served in the future with less new issuance, something that could result in the Company’s shares trading at a higher premium to net asset value.
The Board however continues to believe that it is in shareholders’ interests that the share price does not trade at an excessive discount to net asset value. Therefore, where deemed to be in shareholders’ long-term interests, it may exercise its powers to buy back shares with the objective of ensuring that an excessive discount does not arise.
REVENUE RETURN AND DIVIDENDS
The revenue return per share for the year amounted to 12.15 pence per share, compared with 6.57 pence per share for the previous year. This represents an impressive increase of 84.9% versus the prior year and results from increases in both ordinary and special dividends received during the period compared to the depressed levels of a COVID-19 impacted 2020. In 2019, the last full year before portfolio companies were impacted by COVID-19, the revenue return per share amounted to 8.56p, an increase of 41.5%.
The Board recognises that, although the Company’s objective is capital growth, shareholders value consistency in the dividends paid by the Company; the Directors are therefore pleased to declare a proposed final dividend of 8.00 pence per share for the year ended 30 November 2021 (2020: 7.70p). This, together with the interim dividend of 2.50 pence per share paid on 27 August 2021, would give a total dividend for the year of 10.50 pence per share, increasing the total dividend distributed to shareholders in the prior financial year. This dividend will be paid on 31 March 2022, subject to shareholder approval at the forthcoming AGM, to shareholders on the Company’s register on 18 February 2022.
CORPORATE GOVERNANCE
The Board takes its governance responsibilities very seriously and follows best practice requirements as closely as possible. The revised UK Code of Corporate Governance (the UK Code), published in 2018, requires enhanced disclosure setting out how we, as Directors, have fulfilled our duties in considering the wider interests of stakeholders in promoting the success of the Company. Details of these are included below and within the Annual Report and Accounts.
The Board is pleased to see your Company continue to grow during the year and in September 2021 it became a constituent of the FTSE 250 Index as a result of the growth in its market capitalisation. This is a significant milestone for the Company and brings with it some additional corporate governance obligations. Having considered the provisions and application of the UK Code as it does each year, and as announced in the half yearly report, the Board resolved to appoint an existing Director, Louise Nash, as the Company’s Senior Independent Director and establish a new Remuneration Committee to be chaired by Angela Lane. The appointment of a Senior Independent Director and the establishment of the Remuneration Committee became effective from 1 February 2021.
Further information on the duties and responsibilities of the Remuneration Committee and the Senior Independent Director can be found in the Directors’ Report contained within the Annual Report and Accounts.
OUR APPROACH TO ESG INTEGRATION
Environmental, Social, and Governance (ESG) issues have remained at the forefront of industry debate this year and funds with an ESG focus have dominated fund flows. BlackRock remains at the centre of many these debates, stressing that portfolio companies should clearly articulate their strategies to achieve net zero carbon emissions by 2050, and through their regular engagement, to encourage strong corporate governance and social responsibility.
At BlackRock, consideration of ESG issues is built into the investment process and climate risk is considered to be a key part of investment risk, an approach your Board supports. The style of our Portfolio Manager naturally steers away from extractive industries, where innovative and disruptive business models are rare, although it should be noted that the Company does not have an explicit mandate for sustainable, ESG or impact-focused investment, nor has it adopted exclusionary screens. The Portfolio Manager’s integration of ESG factors in his analysis is though an important lens through which to identify long term winners, just as poor ESG outcomes provide a useful tool in establishing candidates for the short book.
BOARD COMPOSITION
The Board currently consists of six independent Non-Executive Directors. The Board’s policy on Director tenure and succession planning can be found in the Corporate Governance Statement contained within the Annual Report and Accounts.
Further details of all the Directors can be found in their biographies contained within the Annual Report and Accounts.
INVESTMENT POLICY
The Company’s exposure to private investments has in the past been made indirectly through holding a UK listed investment company. To date, the Board has agreed with the Investment Manager that any direct private investments may only be made if approved by the Board.
The Board recognises that a number of growth companies of the type favoured by the Portfolio Manager appear to be staying private for longer, a trend that could continue. In addition, the Board is aware that by participating in a pre-IPO (Initial Public Offering) round as opposed to say up to two years’ later in an IPO, the Portfolio Manager is often more likely to get both the size of holding sought and at a more reasonable valuation.
Your Board is also aware that BlackRock has significant investment capabilities to make private investments and that it is seeing an increasing number of attractive opportunities in this area and wants the Portfolio Manager, in the best interests of shareholders, to be able to include these in the portfolio if he chooses so to do. It should be noted that the timescales and confidentiality requirements of private fundraising often make it impractical for the Portfolio Manager to seek prior Board approval for such direct private investments.
The Board has accordingly given the authority, with effect from the date of publication of the Annual Report, for the Portfolio Manager to make direct private investments, based in any jurisdiction, of up to 2.5% of net assets at the time of investment without prior approval from the Board. The Board has also agreed that the Company may invest more than 2.5%, but no more than 3.75%, of its net assets (both measured at the time of investment), in direct unquoted securities in circumstances where such investment is in an existing investee company and, in the Portfolio Manager’s opinion, a failure of the Company to make such ‘follow on’ investment would have a material adverse effect on the value of the Company’s investment in such investee company.
This proposed change therefore will not alter the nature of the companies the Company can invest in but will ensure that the Portfolio Manager can, in the best interests of shareholders, respond to opportunities BlackRock finds to make investments where the company is private and the investment is best made directly.
Principally due to the percentage restrictions described above, the Board do not deem this to be a material change in investment policy; shareholder approval is therefore not required. Full details are set out in the Amended Investment policy section in the Strategic report below and contained within the Annual Report and Accounts.
The Board stresses that there are no immediate plans to make such investments but wants to ensure that the Portfolio Manager is able to take such opportunities if and when they present themselves.
DIRECTORS’ REMUNERATION
As I mentioned in my statement in the half yearly report, having now entered the FTSE 250 and in light of the increasing governance and regulatory responsibilities of a Company of our size and complexity, the Board appointed two additional non-executive Directors during the year.
Having reviewed the Directors’ fees the Board is therefore seeking shareholder approval to increase the maximum limit on aggregate Directors’ fees payable in any one year. This will ensure that there is sufficient headroom to accommodate the additional Directors. The change proposed is set out in more detail in the Directors’ Report contained within the Annual Report and Accounts.
ANNUAL GENERAL MEETING
The Board is pleased to announce that it is its intention that the Company’s Annual General Meeting will be held in person on Thursday, 24 March 2022 at 11.00 a.m. at the offices of BlackRock at 12 Throgmorton Avenue, London, EC2N 2DL. Details of the business of the meeting are set out in the Notice of Annual General Meeting contained within the Annual Report and Accounts.
At present UK Government restrictions on public gatherings are no longer in force in connection with COVID-19 and the AGM can be held in the normal way with physical attendance by shareholders. However, shareholders should be aware that it is possible that such restrictions could be reimposed prior to the date of the AGM.
Shareholders who intend to attend the AGM should ensure that they have read and understood the requirements for entry to the AGM. These requirements, along with further information on the arrangements for the AGM, can be found in the Directors’ Report, contained within the Annual Report and Accounts.
In the absence of any reimposition of restrictions, the Board very much looks forward to meeting with shareholders at the AGM.
OUTLOOK
The COVID-19 pandemic has continued to have a negative impact on the global economy and stock markets in which we invest. Despite a successful vaccine roll-out in the UK, market sentiment has continued to be heavily influenced by fluctuating infection levels, driven by the emergence of new variants and the ever-present threat of a reimposition of more stringent government restrictions. Supply constraints have also pushed inflation to levels not seen in recent years, with considerable uncertainty as to how long this will persist. The duration of the pandemic is of course difficult to predict, although what is clear is that the longer-term impact on how we live our lives, how businesses and public services operate and how governments will seek to regain equilibrium in their finances will affect us all for many years to come.
However, as the world seeks to establish some form of normality, and as we learn to live with and adapt to the ongoing COVID-19 related disruption, your Portfolio Manager believes that UK small and mid-sized companies will continue to provide a great number of exciting investment opportunities. In fact, in many cases the innovative and flexible companies within our portfolio have benefitted from the accelerated rate of change during the pandemic.
As you will read in Dan Whitestone’s report which follows, he is optimistic about the outlook for the portfolio and believes strongly that a focus on stock and industry specifics can triumph over the current challenging macroeconomic conditions, COVID-19 related or otherwise, over the long term, as proved to be the case this year.
Your Portfolio Manager therefore continues to seek out exciting, high quality, companies with strong management teams, differentiated products and services, and those with strong and dominant market positions. He is also focused on identifying companies leading industry change, the “disruptors”.
In a time when COVID-19 is accelerating corporate digitalisation and changes to consumption, we continue to believe that our Portfolio Manager’s investment approach offers significant opportunity for the medium to long-term investor. The Board is confident that, in Dan Whitestone and BlackRock, we have a team which has the resources, investment processes, insights and capability to continue to deliver on the Company’s investment objective as we move into 2022 and beyond.
CHRISTOPHER SAMUEL
Chairman
4 February 2022
INVESTMENT MANAGER’S REPORT
MARKET REVIEW AND OVERALL INVESTMENT PERFORMANCE
Global stock markets have made strong progress over the past 12 months as the announcement of effective vaccines at the end of 2020 fuelled optimism around an economic recovery. During the year countries around the world began lifting the restrictions that had impacted so many businesses across a raft of industries throughout 2020 and the world started to return to a new level of normality. In truth, the equity market rise over the full year masks the path the market has taken during 2021. The recovery has not been linear, and there have been bouts of extreme market volatility. Investor sentiment has jumped continuously between optimism about the recovery, to fears of new variants of COVID-19 and the potential impact on the global economy. This occurred first with the emergence of the Delta variant and more recently the highly contagious Omicron variant where transmission accelerated over the Christmas period, a time of year that is so crucial to many businesses including pubs, restaurants and retailers that rely on a seasonal boost from Christmas shoppers.
To add to the COVID-19 debate logistics issues, supply chain disruption, labour shortages, and rising inflation have all contributed to higher intra-month volatility during the year, with investors constantly grappling with the duration and impact of these factors on economic growth and corporate profitability. These factors are important inputs that determine therefore the likely path for monetary policy in the near future and this has led to some sharp factor/style rotations within equity markets. Fortunately, within the small and mid-cap space, which we believe is home to some excellent and differentiated companies, these rotations have presented us with some fantastic opportunities throughout the year.
PERFORMANCE REVIEW
The Company has had another strong year and successfully navigated the challenging environment returning a total return of 37.0%. This is a significant outperformance of its Benchmark Index of +12.5% net of fees. While performance has predominantly been driven by the long book, it has been pleasing to see a positive contribution from the short book which is especially hard to achieve in a strongly positive market. We believe this result once again reflects the power of stock specifics in generating outperformance for our clients and ultimately stems from a rigorous investment approach based on core beliefs, and an approach which remains consistent over time despite swings in newsflow and short-term sentiment.
Once again the largest contributors to performance came from a broad range of companies across different industries, many of which have delivered for this Company for several years but still outperform against their financial objectives and in many cases upgrade their future year guidance for profits.
Watches of Switzerland was the top contributor during the year. This 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. They have been able to achieve record sales and profits despite most of their stores being closed through their financial year. This was achieved in part due to the strength of the category, but also due to this management team who have successfully navigated a difficult retailing environment by enhancing its business model through digital “clientelling” – 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.
Impax Asset Management continued to deliver impressive growth in assets under management and this growth looks well set to continue given the strength of its franchise, market leading investment performance and the structural growth/interest in sustainability which underpins the company’s investment philosophy. Electrocomponents has delivered strong results through the year, achieving double digit organic revenue growth from a combination of market share gains and end market recovery. Importantly, we believe Electrocomponents is another company that has strengthened its market position during COVID-19 and is well placed to accelerate market share gains in the coming years. Other notable contributors during the period included Tatton Asset Management, YouGov, Auction Technology Group, and IMIMobile, a leading player in communications software, which soared after the company agreed to a takeover approach from US listed IT giant Cisco Systems.
It is worth noting that despite running with far fewer shorts than we would under more normal market conditions, the short book continued to deliver stock specific alpha, particularly towards the end of the year. This is demonstrated by our short position in a UK listed CFD trading business which contributed positively when the shares fell after the company issued a profit warning driven by lower activity levels as customer trading behaviour normalises post the pandemic.
Detractors during the year have thankfully been limited and in many cases just reflect some mean reversion in share price performance after a particularly strong 2020, for instance Games Workshop. It is worth noting that we experienced two stock-specific disappointments during the year, namely US listed Chegg and the UK listed engineering business Avon Protection (formerly Avon Rubber). Chegg fell sharply after announcing that the current year sign-ups to its educational service had deteriorated and therefore profits would be considerably lower due to the operational gearing of the company. Many reasons for this sudden deterioration in trading have been provided, from lower than anticipated US college enrolments to changes in mix. This negative development certainly caught us (and management) off guard, and the position is currently under review as we assess whether this problem is transitory in nature. We discussed Avon Protection at length in the half-year report. The shares initially fell on the news that one of their products needed to be re-certified and then disappointed further when the company warned that a short-term slowdown in defence spending would impact sales. While disappointing, we initially continued to believe in the long-term attractions of the business, as there was no change in Avon’s competitive position and pricing power. We maintained the position; even though as an operationally geared business the impact on the shares was particularly negative. We changed our view in the final month of the year when the company announced that it was initiating a strategic review of its body armour business after the US Army contract was delayed again, following a failure in the testing process. At this point we became concerned that the long-term thesis for owning the shares had changed and as a result the position has been exited completely.
PORTFOLIO POSITIONING AND OUTLOOK
Whilst market volatility has increased recently due to rising COVID-19 infections and specific supply chain and cost challenges that have affected some companies, our overall view remains positive for the outlook of the portfolio. It is our belief that many of our investments can thrive despite these issues, as the last two years have proved. Ultimately, this relates to the strong underlying demand for the products and services that our portfolio companies produce and the pricing power they command. It also reflects strong financial structures and years of investment in their products, plants, and people, which have strengthened their core proposition and enhanced their market position.
We have long argued that stock and industry specific outcomes are the most important driver of returns for our investment philosophy and this Company, and we can think of no better evidence to support this than the achieved outperformance in 2020 and 2021. In summary, the current market dynamics are not something to be fearful of and should be viewed as an opportunity for this Company and its stated investment strategy in seeking out the differentiated from the average in the pack.
The net market exposure of the portfolio at around 118% remains comfortably above the long-term average but has come down a few percentage points in recent weeks as the Company enters more short positions. Despite our small positive gain in the short book in 2021, it has generally been an unrewarding experience for much of the last year as markets recovered and investors were more willing to look through disappointments. However, the rising tide of the stock market has lifted the valuations of many companies with unattractive business models that continue to face long-term structural pressures, and where more recently the twin headwinds of cost inflation and supply challenges create additional difficulties for such low margin ‘undifferentiated’ companies with limited pricing power. There is also a small, but growing, list of companies that “over-traded” through 2020 and we are now seeing a sharp reversal in trading patterns not currently reflected in analysts’ forecasts. This is another area exercising our attention and where we have focused some of our short exposure.
Ultimately, we believe this will herald a period for more dispersion in our investment universe between winners and losers driven by increased bifurcation in financial outcomes and in turn share price performance. To clarify, the Company’s overall net exposure of 118% should not be interpreted as a call on the stock market but, instead, a reflection of the conviction we have in our long book and the returns we consider our investments can generate. We simply believe that the opportunities ahead for well financed differentiated growth companies which continue to deliver on their long-term strategies and are exposed to attractive long-term secular trends are extremely attractive regardless of the wider stock market environment.
As mentioned in the half yearly report, we believe firmly that COVID-19 has driven an acceleration of profound seismic market share shifts intra-industry, which we think of as “Corporate Darwinism”. Well capitalised leaders benefit from a confluence of changing consumer and corporate behaviours as well as a structural withdrawal of capacity as weakened peers exit the market. We referred to notable beneficiaries of this earlier, such as Watches of Switzerland and Electrocomponents and there are many other examples encompassing a broad variety of industries including omni-channel retailers, and veterinary services.
We have also commented on our ongoing belief that COVID-19 has accelerated many long-term structural trends, most notably Digital Transformation as corporates continue to invest in their digital capabilities to drive demand and win market share, adapt to changes in customer behaviour, and remove costs and complexity from their operations. We have deliberately sought exposure to these trends in recent years and have increased our exposure recently, as in our view the growth outlook has improved, notably in digital payments, software-as-a-service, and cloud enabled audio and visual communications.
2022 has got off to a difficult start for equity markets. There have been some large moves in share prices in the ‘growth’ and ‘value’ categories and this has disproportionately impacted many of our growth-oriented UK listed mid-cap companies, some of which have fallen between 15 and 30%. Moves such as this, whilst painful, are alas not uncommon, and the severity of moves can be significantly exacerbated at times of lower liquidity (such as during the holiday season) or when there is a backdrop of limited corporate news flow. Indeed, where there has been corporate news we have generally found it to be very reassuring and for the most part it has confirmed our investment views; the companies themselves are often trading well with ongoing positive momentum in forecasts.
The reason for these large moves is due to market concerns of rising inflation and interest rates, which in some cases have the potential to erode corporate profitability. We believe this risk is centred firmly on low margin businesses with limited pricing power and volume growth and where we have already seen evidence of pressure on profit forecasts. As discussed many times, these are businesses or industries we seek to avoid or short. Inflation can be accommodated more easily in businesses with high margins, volume growth and pricing power. These are exactly the companies we look to invest in, and while investors will inevitably worry about all companies for a while, we do expect our holdings to fare better in due course.
As to the impact of inflation on the interest rate curve, we acknowledge the relationship between interest rates and the discount rate, but this we believe is a much bigger problem for loss making, “jam-tomorrow” speculative companies. This has never been our area of focus but has indeed been the source of profitable shorts. The last few weeks have reaffirmed how indiscriminate the market can be at times, as there has been little distinction in the share price falls of ’jam-tomorrow’ loss making speculative investments and the fast growing, highly cash generative companies priced at what we believe to be attractive valuations. Fortunately, this is the opportunity of equity markets.
Whilst we acknowledge the market’s immediate focus on inflation and its potential impact on interest rates, we think January is nothing more than a painful but temporary mark-to-market exercise in response to a more hawkish Fed rather than a permanent loss of capital for our clients. We are firm believers in our holdings and, whilst we acknowledge that in any given year we will make mistakes in individual holdings, and that not all our investments will deliver as planned, we also believe the majority will prosper. The valuations of many of our investments have fallen back in the last few weeks to levels we believe offer significant value, at a time when in many cases their market position and outlook has improved. Corporate results continue to reassure us and we think this bodes well for the months to come.
In summary, 2021 has been a successful year for the Company and our shareholders; the performance of the Company against the backdrop of multiple macro and political headwinds, most notably the market’s preference for “value” over “growth”, continues to demonstrate evidence for our belief that, over the long term, stock and industry specifics can triumph over macro factors. We thank shareholders for their ongoing support and enter 2022 with real optimism and conviction in the outlook for the Company.
DAN WHITESTONE
BLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED
4 February 2022
To learn more about the BlackRock Throgmorton Trust plc please follow this link: blackrock.com/uk/thrg
PORTFOLIO OF INVESTMENTS
1 + Electrocomponents (2020: 29th)
Support Services
Market value: £32,274,0001
Share of net assets: 3.5% (2020: 1.4%)
Distributor of industrial and electronic products.
2 + Watches of Switzerland (2020: 3rd)
Personal Goods
Market value: £30,419,000
Share of net assets: 3.3% (2020: 2.8%)
Retailer of luxury watches.
3 + Gamma Communications* (2020: 4th)
Mobile Telecommunications
Market value: £29,356,0001
Share of net assets: 3.1% (2020: 2.5%)
Provider of communication services to UK businesses.
4 + Impax Asset Management* (2020: 9th)
Financial Services
Market value: £26,843,000
Share of net assets: 2.9% (2020: 2.1%)
Provider of asset management services.
5 + IntegraFin (2020: 10th)
Financial Services
Market value: £25,305,0001
Share of net assets: 2.7% (2020: 2.0%)
UK savings platform for financial advisors.
6 + Oxford Instruments (2020: 14th)
Electronic & Electrical Equipment
Market value: £25,013,0001
Share of net assets: 2.7% (2020: 1.8%)
Designer and manufacturer of tools and systems for industry and research.
7 + Auction Technology Group (2020: n/a)
General Retailers
Market value: £24,759,0001
Share of net assets: 2.7% (2020: n/a)
Operator of marketplaces for curated online auctions.
8 = Dechra Pharmaceuticals (2020: 8th)
Pharmaceuticals & Biotechnology
Market value: £23,486,000
Share of net assets: 2.5% (2020: 2.2%)
Developer and supplier of pharmaceuticals and other products focused on the veterinary market.
9 – Games Workshop (2020: 1st)
Leisure Goods
Market value: £22,710,0001
Share of net assets: 2.4% (2020: 3.4%)
Developer, publisher and manufacturer of miniature war games.
10 – YouGov* (2020: 2nd)
Media
Market value: £21,458,000
Share of net assets: 2.3% (2020: 2.9%)
Provider of survey data and specialist data analytics.
* Traded on the Alternative Investment Market (AIM) of the London Stock Exchange.
1 Includes long derivative positions.
| # | Company | £’000 | % | Description |
| 11 | SigmaRoc* Construction & Materials | 18,313 | 2.0 | Buy-and-build group targeting construction materials assets in the UK and Northern Europe |
| 12 | CVS Group* General Retailers | 18,232 | 1.9 | Operator of veterinary surgeries |
| 13 | Pets at Home General Retailers | 18,1061 | 1.9 | Retailer of pet supplies |
| 14 | Treatt Chemicals | 17,195 | 1.8 | Developer and manufacturer of ingredients for the flavour and fragrance industry |
| 15 | Breedon* Construction & Materials | 17,1561 | 1.8 | Supplier of construction materials |
| 16 | Dunelm Group General Retailers | 17,1181 | 1.8 | Retailer of homeware products |
| 17 | Baltic Classifieds Group Software & Computer Services | 16,3591 | 1.8 | Operator of online classified businesses in the Baltics |
| 18 | Computacenter Software & Computer Services | 16,2031 | 1.7 | Computer services |
| 19 | Sirius Real Estate Real Estate Investment & Services | 16,117 | 1.7 | Owner and operator of business parks, offices and industrial complexes in Germany |
| 20 | Ergomed* Pharmaceuticals & Biotechnology | 15,8261 | 1.7 | Provider of pharmaceuticals services |
| 21 | Workspace Group Real Estate Investment Trusts | 14,7711 | 1.6 | Supplier of flexible workspace to businesses in London |
| 22 | Tatton Asset Management* Financial Services | 14,703 | 1.6 | Provider of discretionary fund management services to the IFA market |
| 23 | Grafton Group Support Services | 14,634 | 1.6 | Builders merchants in the UK, Ireland and Netherlands |
| 24 | WH Smith General Retailers | 14,057 | 1.5 | British retailer of books, stationery, magazines, newspapers and confectionery |
| 25 | 4imprint Group Media | 13,973 | 1.5 | Supplier of promotional merchandise in the US |
| 26 | DiscoverIE Electronic & Electrical Equipment | 13,8601 | 1.5 | International designer, manufacturer and supplier of customised electronics |
| 27 | OSB Group Financial Services | 13,696 | 1.5 | Specialist lending business |
| 28 | Spectris Electronic & Electrical Equipment | 13,651 | 1.5 | Supplier of productivity enhancing instrumentation and controls |
| 29 | Mattioli Woods* Financial Services | 13,3881 | 1.4 | Provider of wealth management services |
| 30 | XP Power Electronic & Electrical Equipment | 12,912 | 1.4 | Leading provider of power solutions |
| 31 | Next Fifteen Communications* Media | 12,868 | 1.4 | Provider of digital communication products and services |
| 32 | Learning Technologies* Software & Computer Services | 12,585 | 1.3 | Provider of e-learning services |
| 33 | Spirent Technology Hardware & Equipment | 12,243 | 1.3 | Multinational telecommunications testing |
| 34 | Safestore Real Estate Investment Trusts | 12,213 | 1.3 | Provider of self-storage units |
| 35 | Liontrust Asset Management Financial Services | 12,029 | 1.3 | Provider of asset management services |
| 36 | Euronext Financial Services | 11,6971 | 1.3 | European stock exchange |
| 37 | Bytes Technology Software & Computer Services | 11,438 | 1.2 | Specialist in software, security and cloud services |
| 38 | Robert Walters Support Services | 10,829 | 1.2 | Provider of specialist recruitment services |
| 39 | Diploma Support Services | 10,8081 | 1.2 | Supplier of specialised technical products and services |
| 40 | Morgan Sindall Construction & Materials | 10,2981 | 1.1 | Supplier of office fit out, construction and urban regeneration services |
| 41 | Howden Joinery Group General Retailers | 9,7001 | 1.0 | Kitchen and joinery product supplier |
| 42 | Genuit Group Construction & Materials | 9,575 | 1.0 | Manufacturer of plastic piping systems |
| 43 | Greggs Food & Drug Retailers | 9,239 | 1.0 | Bakery chain |
| 44 | Draper Esprit Financial Services | 8,879 | 1.0 | Technology focused venture capital firm |
| 45 | Luceco Electronic & Electrical Equipment | 8,646 | 0.9 | Supplier & manufacturer of high quality LED lighting products |
| 46 | Boku* Support Services | 8,615 | 0.9 | Digital payments platform |
| 47 | Team17* Leisure Goods | 8,3051 | 0.9 | Video game developer and publisher |
| 48 | Cranswick Food Producers | 7,886 | 0.8 | Producer of premium, fresh and added-value food products |
| 49 | SThree Support Services | 7,7321 | 0.8 | Provider of specialist professional recruitment services |
| 50 | Axon Enterprise Support Services | 7,7281 | 0.8 | US based provider of technology and weapons products |
| 51 | Alliance Pharma* Pharmaceuticals & Biotechnology | 7,717 | 0.8 | Distributor of pharmaceutical and healthcare products |
| 52 | Xero Software & Computer Services | 7,6451 | 0.8 | Software company specialising in accounting for small businesses |
| 53 | Chrysalis Investments Financial Services | 7,556 | 0.8 | Closed end investment company investing in later stage private companies with long-term growth potential |
| 54 | GB Group* Software & Computer Services | 7,550 | 0.8 | Developer and supplier of identity verification solutions |
| 55 | Future Media | 7,485 | 0.8 | Multi-platform media business covering technology, entertainment, creative arts, home interest and education |
| 56 | Londonmetric Property Real Estate Investment Trusts | 7,3581 | 0.8 | Investor in, and developer of property |
| 57 | Young & Co’s Brewery* Travel & Leisure | 7,217 | 0.8 | Owner and operator of pubs mainly in the London area |
| 58 | Medpace Holdings Healthcare Equipment & Services | 7,1311 | 0.8 | Clinical research organization (CRO) conducting global clinical research for the development of drugs and medical devices |
| 59 | Masimo Healthcare Equipment & Services | 7,0771 | 0.8 | Developer and manufacturer of noninvasive patient monitoring technologies |
| 60 | Clarkson Industrial Transportation | 6,864 | 0.7 | Provider of shipping services |
| 61 | Polar Capital Holdings* Financial Services | 6,839 | 0.7 | Provider of investment management services |
| 62 | S4 Capital Media | 6,787 | 0.7 | Digital advertising and marketing services business |
| 63 | Qinetiq Group Aerospace & Defence | 6,740 | 0.7 | Provider of scientific and technological services to the defence, security and aerospace markets |
| 64 | The Pebble Group* Media | 6,671 | 0.7 | Designer and manufacturer of promotional goods |
| 65 | Johnson Service Group* Support Services | 6,655 | 0.7 | Provider of textile services |
| 66 | Vistry Group Household Goods & Home Construction | 6,649 | 0.7 | UK housebuilder |
| 67 | Craneware* Software & Computer Services | 6,589 | 0.7 | Provider of financial business software for US hospitals |
| 68 | Alfa Financial Software Software & Computer Services | 6,564 | 0.7 | Provider of software to the finance industry |
| 69 | Tyman Construction & Materials | 6,552 | 0.7 | Supplier of engineered components and access solutions to the construction industry |
| 70 | MongoDB Software & Computer Services | 6,379¹ | 0.7 | Global cloud-based database |
| 71 | Dart Group* Travel & Leisure | 6,313 | 0.7 | Low cost tour operator and airline |
| 72 | Kainos Group Software & Computer Services | 6,0991 | 0.7 | Provider of digital technology solutions |
| 73 | Serco Group Support Services | 6,064 | 0.7 | Provider of public services across health, transport, immigration, defence, justice and citizen services |
| 74 | Marshalls Construction & Materials | 6,003 | 0.6 | British construction materials group |
| 75 | Fevertree Drinks* Beverages | 5,9691 | 0.6 | Developer and seller of soft drinks and mixers |
| 76 | Domo Software & Computer Services | 5,8981 | 0.6 | US based operator of mobile, cloud-based operating systems |
| 77 | Accesso Technology* Software & Computer Services | 5,8111 | 0.6 | Provider of ticketing and virtual queuing solutions |
| 78 | NCC Group Software & Computer Services | 5,801 | 0.6 | Cyber security business |
| 79 | TT Electronics Electronic & Electrical Equipment | 5,719 | 0.6 | Global manufacturer of electronic components |
| 80 | Restore* Support Services | 5,707 | 0.6 | Records management business |
| 81 | Judges Scientific* Electronic & Electrical Equipment | 5,384 | 0.6 | Designer and producer of scientific instruments |
| 82 | Advanced Medical Solutions Group Healthcare Equipment & Services | 5,3811 | 0.6 | Developer and manufacturer of advanced wound care solutions |
| 83 | Moonpig General Retailers | 5,1321 | 0.6 | Internet based provider of personalised cards and gifts |
| 84 | 888 Travel & Leisure | 5,060 | 0.6 | Operator and platform for online gaming |
| 85 | Hemnet Real Estate Investment & Services | 4,9531 | 0.5 | Online property portal operating in Sweden |
| 86 | Genus Pharmaceuticals & Biotechnology | 4,947 | 0.5 | Animal genetics company |
| 87 | Joules* General Retailers | 4,935 | 0.5 | Clothing retailer inspired by British country lifestyles |
| 88 | Zotefoams Chemicals | 4,8351 | 0.5 | Manufacturer of polyolefin foams used in sport, construction, marine, automation, medical equipment and aerospace |
| 89 | Balfour Beatty Construction & Materials | 4,8001 | 0.5 | Multinational infrastructure group |
| 90 | Moneysupermarket.com Software & Computer Services | 4,7871 | 0.5 | Price comparison website specialising in financial services |
| 91 | Eckoh* Software & Computer Services | 4,753 | 0.5 | Global provider of secure payments products |
| 92 | GlobalData* Media | 4,6681 | 0.5 | Data analytics and consulting |
| 93 | Anpario* Pharmaceuticals & Biotechnology | 4,667 | 0.5 | Manufacturer and distributor of natural animal feed additives for animal health, nutrition and biosecurity |
| 94 | Porvair Industrial Engineering | 4,582 | 0.5 | Specialist filtration and environmental technology |
| 95 | Hill & Smith Holdings Industrial Metals & Mining | 4,576 | 0.5 | Supplier of infrastructure products and galvanizing services |
| 96 | RVRC Holding General Retailers | 4,5631 | 0.5 | Active clothing retailer under the RevolutionRace brand |
| 97 | Redrow Household Goods & Home Construction | 4,543 | 0.5 | UK housebuilder |
| 98 | Hollywood Bowl Group Travel & Leisure | 4,4861 | 0.5 | Operator of ten-pin bowling services |
| 99 | Clipper Logistics Support Services | 4,4371 | 0.5 | Retail logistics business |
| 100 | Kier Group Support Services | 4,361 | 0.5 | UK construction, services and property group |
| 101 | Animalcare Group* Pharmaceuticals & Biotechnology | 4,300 | 0.5 | Veterinary pharmaceuticals business |
| 102 | Helios Towers Mobile Telecommunications | 4,267 | 0.5 | Provider of telecommunications infrastructure |
| 103 | Aptitude Software Software & Computer Services | 4,106 | 0.4 | Provider of specialist finance software and technology |
| 104 | AJ Bell Financial Services | 4,056 | 0.4 | UK savings platform for financial advisors & individual investors |
| 105 | Activeops* Software & Computer Services | 4,028 | 0.4 | Provider of management process automation solutions |
| 106 | Five9 Software & Computer Services | 4,0261 | 0.4 | Provider of cloud-based contact centre software |
| 107 | AB Dynamics* Industrial Engineering | 3,577 | 0.4 | Developer and supplier of specialist automotive testing systems |
| 108 | MaxCyte* Pharmaceuticals & Biotechnology | 3,494 | 0.4 | Clinical-stage global cell-based therapies and life sciences company |
| 109 | Shoals Technologies Support Services | 3,4431 | 0.4 | Provider of electrical balance of system solutions |
| 110 | Renishaw Electronic & Electrical Equipment | 3,226 | 0.3 | Engineering and scientific technology company |
| 111 | Gooch & Housego* Electronic & Electrical Equipment | 3,212 | 0.3 | Designer and manufacturer of advanced photonic systems |
| 112 | ASOS* General Retailers | 3,154 | 0.3 | British online fashion and cosmetic retailer |
| 113 | Essensys* Software & Computer Services | 3,089 | 0.3 | Provider of software to flexible workspace landlords |
| 114 | Chegg General Retailers | 2,8741 | 0.3 | Provider of education related services |
| 115 | AbCellera Biologics Pharmaceuticals & Biotechnology | 2,8451 | 0.3 | Pharmaceutical research and development business |
| 116 | TI Fluid Systems Automobiles & Parts | 2,8131 | 0.3 | Manufacturer of fluid storage systems |
| 117 | MarketAxess Financial Services | 2,2991 | 0.3 | International electronic trading platform for institutional credit markets |
| 118 | Restaurant Group Travel & Leisure | 2,236 | 0.2 | Operator of restaurants and pubs |
| 119 | Avon Protection Aerospace & Defence | 1,661 | 0.2 | Producer of safety masks |
| 120 | Chapel Down† Beverages | 1,601 | 0.2 | UK producer of sparkling and still wines, and Curious beers and ciders |
| ————— | ————— | |||
| Long investment positions (excluding BlackRock’s Institutional Cash Series plc – Sterling Liquid Environmentally Aware Fund) | 1,134,772 | 121.4 | ||
| ————— | ————— | |||
| Short investment positions | (24,925) | (2.7) | ||
| ========= | ========= |
1 Includes long derivative positions.
* Traded on the Alternative Investment Market (AIM) of the London Stock Exchange.
† Traded on NEX exchange.
Percentages shown are the share of net assets.
At 30 November 2021, the Company held equity interests in five companies comprising more than 3% of a company’s share capital as follows: Tatton Asset Management (4.2%), SigmaRoc (3.4%), Anpario (3.2%), Eckoh (3.1%) and Activeops (3.1%).
FAIR VALUE AND GROSS MARKET EXPOSURE OF INVESTMENTS AS AT 30 NOVEMBER 2021
The Company uses gearing through the use of long and short CFD positions. Gross and Net Gearing as at 30 November 2021 were 124.1% and 118.7% respectively (2020: 122.6% and 118.8% respectively). Gross and Net Gearing are Alternative Performance Measures, see Glossary contained within the Annual Report and Accounts.
1 Fair value is determined as follows:
- Listed and AIM quoted investments are valued at bid prices where available, otherwise at published price quotations.
- The sum of the fair values of the long and short investment positions above is determined based on the difference between the purchase or transaction price and value of the underlying shares in the contract (in effect the unrealised gains/(losses) on the exposed positions). The cost of purchasing the securities held through long derivative positions directly in the market would have amounted to £223,144,000 at the time of purchase, and subsequent market falls in prices have resulted in unrealised losses on the long derivative positions of £9,576,000, resulting in the value of the total market exposure to the underlying securities decreasing to £213,568,000 as at 30 November 2021.
- The notional price of selling the securities to which exposure was gained via the short derivative positions would have been £25,785,000 at the time of entering into the contract, and subsequent price rises have resulted in unrealised gains on the short derivative positions of £860,000 and the value of the market exposure of these investments decreasing to £24,925,000 at 30 November 2021. If the short derivative positions had been closed on 30 November 2021, this would have resulted in a gain of £860,000 for the Company.
2 Market exposure in the case of equity investments is the same as fair value. In the case of long and short derivative positions it is the market value of the underlying shares to which the portfolio is exposed via the contract.
3 The gross market exposure column for cash and cash equivalents has been adjusted to assume the Company traded direct holdings rather than exposure being gained through long and short investment positions.
DISTRIBUTION OF INVESTMENTS AS AT 30 NOVEMBER 2021
Sector | % of long portfolio | % of short portfolio | % of net portfolio |
| Chemicals | 2.0 | (0.1) | 1.9 |
| Industrial Metals & Mining | 0.4 | 0.0 | 0.4 |
| Basic Materials | 2.4 | (0.1) | 2.3 |
| ——– | ——– | ——– | |
| Aerospace & Defence | 0.8 | 0.0 | 0.8 |
| Construction & Materials | 6.6 | 0.0 | 6.6 |
| Electronic & Electrical Equipment | 8.3 | 0.0 | 8.3 |
| Industrial Engineering | 0.7 | 0.0 | 0.7 |
| Industrial Transportation | 0.6 | 0.0 | 0.6 |
| Support Services | 11.1 | 0.0 | 11.1 |
| Industrials | 28.1 | 0.0 | 28.1 |
| ——– | ——– | ——– | |
| Beverages | 0.7 | 0.0 | 0.7 |
| Food Producers | 0.7 | 0.0 | 0.7 |
| Household Goods & Home Construction | 1.0 | 0.0 | 1.0 |
| Personal Goods | 2.7 | 0.0 | 2.7 |
| Consumer Staples | 5.1 | 0.0 | 5.1 |
| ——– | ——– | ——– | |
| Healthcare Equipment & Services | 1.7 | (0.3) | 1.4 |
| Pharmaceuticals & Biotechnology | 6.1 | 0.0 | 6.1 |
| Health Care | 7.8 | (0.3) | 7.5 |
| ——– | ——– | ——– | |
| Automobiles & Parts | 0.3 | 0.0 | 0.3 |
| Consumer Services | 0.0 | (0.1) | (0.1) |
| Food & Drug Retailers | 0.8 | 0.0 | 0.8 |
| General Retailers | 11.0 | (0.3) | 10.7 |
| Leisure Goods | 2.8 | 0.0 | 2.8 |
| Media | 6.7 | 0.0 | 6.7 |
| Travel & Leisure | 2.3 | 0.0 | 2.3 |
| Consumer Discretionary | 23.9 | (0.4) | 23.5 |
| ——– | ——– | ——– | |
| Banks | 0.0 | (0.2) | (0.2) |
| Closed End Investments | 0.0 | (0.3) | (0.3) |
| Financial Services | 13.3 | (0.2) | 13.1 |
| Non-life Insurance | 0.0 | (0.1) | (0.1) |
| Financials | 13.3 | (0.8) | 12.5 |
| ——– | ——– | ——– | |
| Real Estate Investment & Services | 1.9 | 0.0 | 1.9 |
| Real Estate Investment Trusts | 3.1 | (0.1) | 3.0 |
| Real Estate | 5.0 | (0.1) | 4.9 |
| ——– | ——– | ——– | |
| Software & Computer Services | 12.6 | (0.4) | 12.2 |
| Technology Hardware & Equipment | 1.1 | (0.2) | 0.9 |
| Technology | 13.7 | (0.6) | 13.1 |
| ——– | ——– | ——– | |
| Mobile Telecommunications | 3.0 | 0.0 | 3.0 |
| Telecommunications | 3.0 | 0.0 | 3.0 |
| ——– | ——– | ——– | |
| Total Investments | 102.3 | (2.3) | 100.0 |
| ===== | ===== | ===== |
The above percentages are calculated on the net portfolio as at 30 November 2021. The net portfolio is calculated as long equity and derivative positions, less short derivative positions as at 30 November 2021.
ANALYSIS OF THE PORTFOLIO
Market capitalisation as at 30 November 2021
| Long Positions1 % | Short Positions % | |
| £2.5bn+ | 28.1 | -0.5 |
| £2bn – £2.5bn | 5.3 | -0.6 |
| £1.5bn – £2bn | 23.5 | -0.3 |
| £1bn – £1.5bn | 17.1 | -0.2 |
| £500m – £1bn | 18.4 | -0.3 |
| £0m – £500m | -0.4 | 9.9 |
1 The above investments may comprise exposures to long equity and long derivative positions.
Source: BlackRock.
Position size as at 30 November 2021
Market value | Long Positions* | Short Positions |
| £25m+ | 6 | 0 |
| £20m – £25m | 4 | 0 |
| £15m – £20m | 10 | 0 |
| £10m – £15m | 20 | 0 |
| £5m – £10m | 44 | 0 |
| £0m – £5m | 36 | -15 |
* The above investments may comprise exposures to long equity and long derivative positions.
Source: BlackRock.
GROSS BASIS1 WITHIN THE NUMIS SMALLER COMPANIES PLUS AIM (EXCLUDING INVESTMENT COMPANIES) INDEX3
| % | |
| Held in Benchmark | 63.9 |
| Other | 36.1 |
NET BASIS2 WITHIN THE NUMIS SMALLER COMPANIES PLUS AIM (EXCLUDING INVESTMENT COMPANIES) INDEX3
| % | |
| Held in Benchmark | 62.9 |
| Other | 37.1 |
Source: BlackRock.
1 Long exposure plus short exposure as a percentage of the portfolio in aggregate excluding investment in BlackRock’s Institutional Cash Series plc – Sterling Liquid Environmentally Aware Fund.
2 Long exposure less short exposure as a percentage of the portfolio excluding investment in BlackRock’s Institutional Cash Series plc – Sterling Liquid Environmentally Aware Fund.
3 Holdings included within the Benchmark Index as at 30 November 2020 were 60.6% on a Gross Basis and 61.0% on a Net Basis.
STRATEGIC REPORT
The Directors present the Strategic Report of the Company for the year ended 30 November 2021.
PRINCIPAL ACTIVITY
The Company is a public company limited by shares which carries on business as an investment trust and its principal activity is portfolio investment.
OBJECTIVE
The Company’s objective is to provide shareholders with long term capital growth and an attractive total return through investment primarily in UK smaller and mid-capitalisation companies traded on the London Stock Exchange.
STRATEGY, BUSINESS MODEL, INVESTMENT POLICY AND INVESTMENT PROCESS
The Company invests in accordance with the objective given above. The Board is collectively responsible to shareholders for the long-term success of the Company and is its governing body. There is a clear division of responsibility between the Board and the Manager, BlackRock Fund Managers Limited (BFM). Matters for the Board include setting the Company’s strategy, including its investment objective and policy, setting limits on gearing (both bank borrowings and the effect of derivatives), capital structure, governance, and appointing and monitoring of performance of service providers, including the Manager.
The Company’s business model follows that of an externally managed investment trust; therefore the Company does not have any employees and outsources its activities to third party service providers, including the Manager who is the principal service provider.
The management of the investment portfolio and the administration of the Company have been contractually delegated to BFM. The Manager, operating under guidelines determined by the Board, has direct responsibility for the decisions relating to the day-to-day running of the Company and is accountable to the Board for the investment, financial and operating performance of the Company.
Other service providers include the Depositary and the Fund Accountant, The Bank of New York Mellon (International) Limited, and the Registrar, Computershare Investor Services PLC. Details of the contractual terms with third party service providers are set out in the Directors’ Report contained within the Annual Report and Accounts.
AMENDED INVESTMENT POLICY
The Company’s performance is measured against the Numis Smaller Companies plus AIM (excluding Investment Companies) Index (the Benchmark Index). The Investment Manager, BlackRock Investment Management (UK) Limited (BIM (UK)), may invest in companies outside the Benchmark Index without restriction, subject to the following limits.
The Company may hold up to 15% of its gross assets, at the time of acquisition, in securities of companies which are listed or traded on a stock exchange outside the UK.
In addition to the normal long only portfolio, the Company will likely hold a mixture of long and short contracts for difference (CFDs) and/or comparable equity derivatives that would result in a typical net market exposure of between 100% and 115%. In extremis, the Company could deploy the full 30% of permissible leverage into short CFDs and/or comparable equity derivatives, thereby reducing its overall net market exposure to 70%.
With effect from the publication of this report, the following amendment will be incorporated into the Company’s investment policy. Please see the Chairman’s Statement above for further details.
The Company may also invest up to 2.5% of its net assets (measured at the time of investment) in unquoted securities, including securities issued by companies incorporated outside the United Kingdom. However, the Company may invest more than 2.5%, but no more than 3.75%, of its net assets (both measured at the time of investment), in unquoted securities in circumstances where such investment is in an existing investee company and, in the Investment Manager’s opinion, a failure of the Company to make such investment would have a material adverse effect on the value of the Company’s investment in such investee company.
In addition, the Company is permitted to employ leverage up to 30% of net assets, which it does primarily through the use of CFDs and/or comparable equity derivatives, rather than bank borrowings, therefore enabling the Company to have a maximum net market exposure of 130%.
In normal circumstances the Company will likely hold a mixture of long and short CFDs and/or comparable equity derivatives that would result in a typical net market exposure of between 100% and 115%*. In extremis, the Company could deploy the full 30% of permissible leverage into short CFDs and/or comparable equity derivatives, thereby reducing its overall net market exposure to 70%.
Portfolio risk will be mitigated by investment in a diversified portfolio of holdings. No more than 5% of the Company’s gross assets, at the time of acquisition, may be invested in any one single holding, excluding holdings in cash or money market funds, where up to 10% of the Company’s gross assets may be held. The Company may also invest in collective investment vehicles. However, the Company will not invest more than 10% of its gross assets, at the time of the acquisition, in other listed closed-ended investment funds, unless such companies have a stated investment policy not to invest more than 15% of their gross assets in other listed closed-ended investment funds, in which case the limit is 15% of gross assets.
The Board’s policy is that net gearing, borrowings less cash, should not exceed 20% of gross assets. The Company expects to employ any leverage primarily through its use of CFDs and/or comparable equity derivatives.
No material change will be made to the investment objective and policy without shareholder approval.
* The AIC measures gearing at gross level, rather than net market exposure level (i.e. gearing is calculated as borrowings + long CFDs and/or comparable equity derivatives + short CFDs and/or comparable equity derivatives) and therefore the published gearing figures will be higher than the typical net market exposure of between 100% and 115%.
INVESTMENT PROCESS
A unique feature of the Company is that it has the ability to go both long and short up to approximately 30% of the Company’s net assets.
Notwithstanding recent positive returns from UK small and mid-capitalisation companies, the sector has demonstrated considerable volatility over the past 20 years. Such an environment provides an attractive opportunity to add value via derivatives: instruments which can exploit share price moves whether up or down. As the maximum short portfolio exposure through derivatives is 30% of net assets, the Company will at all times retain a significant exposure to the market. In the course of their research the Portfolio Manager comes across companies which they judge are likely to underperform; the ability to take short positions therefore significantly enhances the opportunity to make money for shareholders. This is not possible in a conventional or long only portfolio.
When markets are expected to rise in the medium term, the long/short strategy is used to generate additional market exposure through ensuring that the long exposure exceeds the short exposure in a range between 0% to 15% of the net assets of the Company. Rising or ‘bull’ markets have historically (in the UK) persisted for longer than falling or ‘bear’ markets. A typical net market exposure might therefore be between 100% and 115%. This is lower than the ‘gross exposure’, which is the combination of the long equity positions, plus the net of long and short derivative positions expressed as a percentage of net assets. In a recessionary environment the Portfolio Manager has the flexibility to reduce market exposure to – at the maximum of its ‘least exposed’ level – around 70%. If successfully implemented this strategy would provide some cushioning of the Company’s performance in falling markets.
ESG INTEGRATION
The Manager defines Environmental, Social and Governance (ESG) integration as the practice of incorporating material ESG information and consideration of sustainability risks into investment decisions in order to enhance risk-adjusted returns Inclusion of this statement does not imply that the Company has an ESG-aligned investment objective, but rather describes how ESG information is considered as part of the overall investment process.
Of course, ESG information is not the sole consideration for investment decisions; instead, the Manager assesses a variety of economic and financial indicators which include ESG considerations in combination with other information in the research phase of the investment process to make investment decisions appropriate to their client’s objectives. This may also include relevant third party insight, as well as internal engagement commentary and input from BlackRock Investment Stewardship (BIS) on governance issues. The Portfolio Manager conducts regular portfolio reviews with the BlackRock Risk and Quantitative Analysis (RQA) team. These reviews include discussion of the portfolio’s exposure to material ESG risks, as well as exposure to sustainability-related business involvements, climate-related metrics, traditional financial risks and other factors.
The Manager’s approach to ESG integration is to broaden the total amount of information its investment professionals consider in order to improve investment analysis, seeking to meet or exceed economic return and financial risk targets. ESG factors can be useful and relevant indicators for investment purposes and can help portfolio managers with their decision-making through identifying potentially negative events or corporate behaviour. The Portfolio Manager works closely with BIS to assess the governance quality of companies and investigate any potential issues, risks or opportunities. The Manager’s evaluation of ESG data may be subjective and could change over time in light of emerging sustainability risks or changing market conditions.
The Manager’s research team monitors differing levels of risk throughout the process and believes that avoiding major downside events can generate significant outperformance over the long term. Inputs from the RQA team are an integral part of the investment process. The RQA team analyse market and portfolio risk factors including stress tests, correlations, factor returns, cross-sectional volatility and attributions. The Manager’s evaluation procedures and financial analysis of the companies within the portfolio also take into account environmental, social and governance matters and other business issues.
The Company does not meet the criteria for Article 8 or 9 products under the EU Sustainable Finance Disclosure Regulation (“SFDR”) and the investments underlying this financial product do not take into account the EU criteria for environmentally sustainable economic activities.
Further information on the Manager’s approach to ESG and sustainability can be found in the report on Responsible Investing contained within the Annual Report and Accounts.
PERFORMANCE
The Investment Manager’s report above includes a review of the main developments during the year, together with information on investment activity within the Company’s portfolio.
RESULTS AND DIVIDENDS
The results for the Company are set out in the Statement of Comprehensive Income below. The total profit for the year, after taxation, was £223,334,000 (2020: a profit of £50,795,000) of which the revenue return amounted to £11,446,000 (2020: £5,379,000) and a capital profit of £211,888,000 (2020: profit of £45,416,000).
Details of the dividends declared in respect of the year are set out in the Chairman’s Statement above.
KEY PERFORMANCE INDICATORS
At each Board meeting, the Directors consider a number of performance measures to assess the Company’s success in achieving its objectives. The key performance indicators (KPIs) used to measure the progress and performance of the Company over time, and which are comparable to those reported by other investment trusts, are set out in the table below. These KPIs fall within the definition of ‘Alternative Performance Measures’ (APMs) under guidance issued by the European Securities and Markets Authority (ESMA), and additional information explaining how these are calculated is set out in the Glossary contained within the Annual Report and Accounts.
The Board monitors the KPIs at each meeting. Additionally, it regularly reviews a number of indices and ratios to understand the impact on the Company’s relative performance of the various components such as asset allocation and stock selection. This includes an assessment of the Company’s performance and ongoing charges against its peer group of investment trusts with similar investment objectives.
| Year ended 30 November 2021 | Year ended 30 November 2020 | |
| Net asset value total return1,2 | 37.0% | 9.1% |
| Share price total return1,2 | 38.8% | 8.2% |
| Benchmark Index total return3 | 24.5% | 3.8% |
| Premium to cum income net asset value2 | 1.4% | 0.1% |
| Revenue return per share | 12.15p | 6.57p |
| Total dividend per share | 10.50p | 10.20p |
| Ongoing charges2,4 | 0.57% | 0.60% |
| Ongoing charges including performance fees2,5 | 1.38% | 1.60% |
1 This measures the Company’s share price and NAV total return, which assumes dividends paid by the Company have been reinvested.
2 Alternative Performance Measures, see Glossary contained within the Annual Report and Accounts.
3 The Company’s Benchmark Index is the Numis Smaller Companies plus AIM (excluding Investment Companies) Index.
4 Ongoing charges represent the management fee and all other operating expenses, excluding the performance fee, finance costs, direct transaction costs, custody transaction charges, VAT recovered, taxation and certain non-recurring items as a % of average daily net assets.
5 Ongoing charges represent the management fee, performance fee and all other operating expenses, excluding finance costs, direct transaction costs, custody transaction charges, VAT recovered, taxation and certain non-recurring items as a % of average daily net assets.
SHARE PRICE DISCOUNT/PREMIUM
The Directors recognise that it is in the long-term interests of shareholders that the Company’s shares do not trade at an excessive discount or premium to their prevailing NAV for any material length of time. In the year under review the discount/premium to NAV of the ordinary shares on a cum income basis has ranged between a discount of 3.2% and a premium of 2.9%, with the average being a premium of 1.2%. The shares ended the year at a premium of 1.4% on a cum income basis. As at 2 February 2022 the premium was •%.
Your Board believes that the best way of ensuring that the Company’s shares trade at as close to NAV as possible over the longer term is to continue to generate good performance and to create demand for the Company’s shares in the secondary market through effective communication of the Company’s unique structure to existing and potential shareholders. The Board will also be seeking to renew the authority from shareholders at the AGM to buy back shares.
PRINCIPAL RISKS
As required by the 2018 UK Code of Corporate Governance, the Board has in place a robust, ongoing process to identify, assess and monitor the principal and emerging risks of the Company, including those that they consider would threaten its business model, future performance, solvency or liquidity. The COVID-19 pandemic has given rise to unprecedented challenges for businesses across the globe and the Board has taken into consideration the risks posed to the Company by the crisis.
A core element of this process is the Company’s risk register, which identifies the risks facing the Company and the likelihood and potential impact of each risk, together with the controls established for mitigation. A residual risk rating is calculated for each risk, which allows the effect of any mitigating procedures to be reflected in the register. The current risk register includes a range of risks spread between investment performance risk, income/dividend risk, legal & regulatory risk, counterparty risk, operational risk, market risk, political risk and financial risk.
The risk register, its method of preparation and the operation of key controls in the Manager’s and third party service providers’ systems of internal control are reviewed on a regular basis by the Audit Committee. In order to gain a more comprehensive understanding of the Manager’s and other third party service providers’ risk management processes and how these apply to the Company’s business, the Audit Committee periodically receives presentations from BlackRock’s Internal Audit and Risk & Quantitative Analysis teams. Where produced, the Audit Committee also reviews summaries of the Service Organisation Control (SOC1) reports from the Company’s service providers.
The principal risks and uncertainties faced by the Company during the financial year, together with the potential effects, controls and mitigating factors, are set out in the table below.
| Principal Risk | Mitigation/Control |
| An inappropriate policy or strategy may lead to: | To manage these risks the Board:regularly reviews the Company’s investment mandate and long term strategy;has set, and regularly reviews, the investment guidelines and has put in place appropriate limits on levels of gearing and the use of derivatives;receives from the Investment Manager a regular explanation of stock selection decisions, portfolio gearing and any changes in gearing and the rationale for the composition of the investment portfolio;receives from the Investment Manager regular reporting on the portfolio’s exposure through derivatives, including the extent to which the portfolio is geared in this manner and the value of any short positions;monitors the maintenance of an adequate spread of investments in order to minimise the risks associated with particular sectors, based on the diversification requirements inherent in the Company’s investment policy; andmonitors the share price discount or premium to NAV. |
| Market risk Market risk arises from changes to the prices of the Company’s investments. It represents the potential loss the Company might suffer through holding investments and derivatives. Market risk includes the potential impact of events which are outside the scope of the Company’s control, such as the UK’s decision to leave the European Union and the impacts of climate change. | The Board carefully considers the diversification of the portfolio, asset allocation, stock selection, unquoted investments and levels of gearing on a regular basis and has set investment restrictions and guidelines which are monitored and reported on by the Investment Manager. The Board monitors the implementation and results of the investment process with the Investment Manager, and key market risk factors are discussed. The Board also recognises the benefits of a closed-end fund structure in extremely volatile markets such as those experienced with the COVID-19 pandemic. Unlike open-ended counterparts, closed-end funds are not obliged to sell-down portfolio holdings at low valuations to meet liquidity requirements for redemptions. During times of elevated volatility and market stress, the ability of a closed-end fund structure to remain invested for the long-term enables the Portfolio Manager to adhere to disciplined fundamental analysis from a bottom-up perspective and be ready to respond to dislocations in the market as opportunities present themselves. |
| Income/dividend risk The amount of dividends and future dividend growth will depend on the performance of the Company’s underlying portfolio holdings. Changes in the composition of the portfolio and any change in the tax treatment of the dividends or interest received by the Company may reduce the level of dividends received by shareholders. | The Board monitors this risk through the receipt of detailed income forecasts and considers the level of income at each meeting. The Company also has a revenue reserve and powers to pay dividends from capital which could potentially be used to support the Company’s dividend if required. |
| Financial risk The Company’s investment activities expose it to a variety of financial risks that include market risk, foreign currency risk and interest rate risk. At 30 November 2021, the Company had approximately 29.3% of its gross asset value invested in AIM traded equity securities and 12.4% of its gross assets in international markets, and, by the very nature of its investment objective, largely invests in smaller companies. Liquidity in these securities can from time to time become constrained, making these investments difficult to realise at or near published prices. | The Company is not materially exposed to foreign currency and interest rate risk. For mitigation of market risk, see above. There are also risks linked to the Company’s use of derivative transactions including long and short investment positions. Details are disclosed in note 11 of the Annual Report and Accounts, together with a summary of the policies for managing and controlling these risks in note 16 contained within the Annual Report and Accounts. |
| Operational risk In common with most other investment trust companies, the Company has no employees. The Company therefore relies upon the services provided by BlackRock (the Manager and AIFM) and The Bank of New York Mellon (International) Limited (the Depositary and Fund Accountant) who maintain the Company’s accounting records. Failure by any service provider to carry out its obligations to the Company could have a material adverse effect on the Company’s performance. Disruption to the accounting, payment systems or custody records, as a result of a cyber-attack or otherwise, could impact the monitoring and reporting of the Company’s financial position. The security of the Company’s assets, dealing procedures, accounting records and maintenance of regulatory and legal requirements, depend on the effective operation of these systems. | The Board reviews the overall performance of the Manager, Investment Manager and all other third party service providers and compliance with the investment management agreement on a regular basis. The Fund Accountant’s and the Manager’s internal control processes are regularly tested and monitored throughout the year and are evidenced through their Service Organisation Control (SOC 1) reports, which are subject to review by an Independent Service Assurance Auditor. The SOC 1 reports provide assurance in respect of the effective operation of internal controls. The Company’s financial instruments held in custody are subject to a strict liability regime and in the event of a loss of such financial instruments held in custody, the Depositary must return assets of an identical type or the corresponding amount, unless able to demonstrate that the loss was a result of an event beyond its reasonable control. The Board considers succession arrangements for key employees of the Manager and the Board also considers the business continuity arrangements of the Company’s key service providers on an ongoing basis and reviews these as part of its review of the Company’s risk register. In respect of the unprecedented and emerging risks posed by the COVID-19 pandemic in terms of the ability of service providers to function effectively, the Board has received reports from key service providers setting out the measures that they have put in place to address the crisis, in addition to their existing business continuity framework. Having considered these arrangements and reviewed service levels since the crisis has evolved, the Board are confident that a good level of service has and will be maintained. The Board also receives regular reports from BlackRock’s internal audit function. |
| Legal and regulatory risk The Company has been approved by HM Revenue & Customs as an investment trust, subject to continuing to meet the relevant eligibility conditions, and operates as an investment trust in accordance with Chapter 4 of Part 24 of the Corporation Tax Act 2010. As such, the Company is exempt from capital gains tax on the profits realised from the sale of its investments. Any breach of the relevant eligibility conditions could lead to the Company losing its investment trust status and being subject to corporation tax on capital gains realised within the Company’s portfolio. In such event the investment returns of the Company may be adversely affected. Any serious breach could result in the Company and/or the Directors being fined or the subject of criminal proceedings or the suspension of the Company’s shares which would in turn lead to a breach of the Corporation Tax Act 2010. Risk of regulatory change Amongst other relevant laws and regulations, the Company is required to comply with the provisions of the Companies Act 2006, the Alternative Investment Fund Managers’ Directive (as retained and onshored in the UK), the Market Abuse Regulation (also as retained and onshored in the UK), the UK Listing Rules and the Disclosure Guidance and Transparency Rules. | The Investment Manager monitors investment movements, the level of forecast income and expenditure and the amount of proposed dividends, if any, to ensure that the provisions of Chapter 4 of Part 24 of the Corporation Tax Act 2010 are not breached, and the results are reported to the Board at each meeting. Following authorisation under the Alternative Investment Fund Managers’ Directive as retained and onshored in the UK (AIFMD), the Company and its appointed Alternative Investment Fund Manager (AIFM) are subject to the risks that the requirements of the AIFMD are not correctly complied with. The Board and the AIFM also monitor changes in government policy and legislation which may have an impact on the Company. Compliance with the accounting standards applicable to quoted companies and those applicable to investment trusts are also regularly monitored to ensure compliance. The Company Secretary and the Company’s professional advisers monitor developments in relevant laws and regulations and provide regular reports to the Board in respect of the Company’s compliance. The Market Abuse Regulation came into force across the EU on 3 July 2016 and this has been retained and onshored in the UK following Brexit. The Board has taken steps to ensure that individual Directors (and their Persons Closely Associated) are aware of their obligations under the regulation and has updated internal processes, where necessary, to ensure the risk of non-compliance is effectively mitigated. |
| Counterparty risk The potential loss that the Company could incur if a counterparty is unable (or unwilling) to perform on its commitments. The Company’s investment policy also permits the use of both exchange-traded and over-the-counter derivatives (including contracts for difference). | Due diligence is undertaken before contracts are entered into and exposures are diversified across a number of counterparties. The Board reviews the controls put in place by the Investment Manager to monitor and to minimise counterparty exposure, which include intra-day monitoring of exposures to ensure that these are within set limits. The Depositary is liable for restitution for the loss of financial instruments held in custody, unless it is able to demonstrate that the loss was due to an event beyond its reasonable control. |
VIABILITY STATEMENT
The Directors have assessed the prospects of the Company over a longer period than the 12 months referred to by the “Going Concern” guidelines.
The Board conducted this review for the period up to the AGM in 2027, being a five-year period from the date that this Annual Report will be approved by shareholders. This is generally the investment holding period investors consider while investing in the smaller companies’ sector. In making this assessment the Board has considered the following factors:
• the Company’s principal risks as set out above;
• the impact of a significant fall in UK equity markets on the value of the Company’s investment portfolio in the light of the heightened volatility resulting from the impact of the ongoing COVID-19 pandemic;
• the ongoing relevance of the Company’s investment objective; and
• the level of demand for the Company’s shares.
The Directors have also considered the Company’s revenue and expense forecasts and the fact that expenses and liabilities are relatively stable. The Company also has a portfolio of investments which provides a level of cash receipts in the form of dividends and which are considered to be relatively realisable if required.
The Directors reviewed the assumptions and considerations underpinning the Company’s existing going concern assertion (please see the disclosure in the Directors’ Report contained within the Annual Report and Accounts), which are based on:
• processes for monitoring costs;
• key financial ratios;
• evaluation of risk management and controls;
• compliance with the investment objective;
• the Company’s ability to meet its liabilities as they fall due;
• portfolio risk profile;
• share price discount to NAV;
• gearing;
• counterparty exposure and liquidity risk in the light of the ongoing COVID-19 pandemic;
• the operational resilience of the Company and its key service providers and their ability to continue to provide a good level of service for the foreseeable future; and
• the effectiveness of business continuity plans in place for the Company and key service providers.
The Company has a relatively liquid portfolio and largely fixed overheads (excluding any applicable performance fees) which comprise a very small percentage of net assets (0.57% excluding performance fees, 1.38% including performance fees). The effective performance fee cap in the event that the NAV return exceeds the Benchmark Index return over the performance period is 0.90% of the average gross assets over the two years and the applicable percentage to be applied to the outperformance of the NAV total return over the Benchmark Index return is 15%. In addition, the maximum cap on total management and performance fees is 1.25% of average gross assets (measured over a rolling two-year period). Therefore, the Board has concluded that the Company would be able to meet its ongoing operating costs as they fall due.
On 30 December 2020, the UK and the EU signed the UK/EU Trade and Cooperation Agreement (“UK/EU Trade Agreement”), applied from 1 January 2021 and sets out the foundation of the economic and legal framework for trade between the UK and the EU. The UK’s exit from the EU is expected to result in additional trade costs and disruptions in this trading relationship. While the UK/EU Trade Agreement provides for the free trade of goods, it provides only general commitments on market access in services together with a “most favoured nation” provision which is subject to many exceptions. Furthermore, there is the possibility that either party may impose tariffs on trade in the future in the event that regulatory standards between the EU and the UK diverge. The terms of the future relationship may cause continued uncertainty in the global financial downgrading markets, and adversely affect the performance of the Company. Volatility resulting from this uncertainty may mean that the returns of the Company’s investments are affected by market movements, the potential decline in the value of Sterling or Euro, and the potential downgrading of UK sovereign credit rating.
The Directors have also considered the impact of potential changes in law, regulation and taxation and the matter of foreign exchange risk. They have determined that although there are a number of new potential risks associated with the legal, fiscal and regulatory landscape they do not believe that this represents a material threat to the Company’s strategy and business model, nor do they believe that the Investment Manager will be materially impeded in achieving the Company’s investment objective. The longer-term process of implementing the political, economic and legal framework that is to be agreed between the UK and the EU is likely to lead to ongoing uncertainty and periods of exacerbated volatility in both the UK and in wider European markets.
Based on the results of their analysis, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment.
SECTION 172 STATEMENT: PROMOTING THE SUCCESS OF BLACKROCK THROGMORTON TRUST PLC
The Companies (Miscellaneous Reporting) Regulations 2018 require directors to explain more fully how they have discharged their duties under Section 172(1) of the Companies Act 2006 in promoting the success of their companies for the benefit of members as a whole. This enhanced disclosure covers how the Board has engaged with and understands the views of stakeholders and how stakeholders’ needs have been taken into account, the outcome of this engagement and the impact that it has had on the Board’s decisions.
As the Company is an externally managed investment company and does not have any employees or customers, the Board considers the main stakeholders in the Company to be the shareholders and the key service providers (being the Manager and Investment Manager, the Custodian, Depositary, Registrar and Broker). The reasons for this determination, and the Board’s overarching approach to engagement, are set out in the table below:
Stakeholders
| Shareholders | Manager and Investment Manager | Other key service providers |
| Continued shareholder support and engagement are critical to the continued existence of the Company and the successful delivery of its long-term strategy. The Board is focused on fostering good working relationships with shareholders and on understanding the views of shareholders in order to incorporate them into the Board’s strategy and objectives in delivering long-term growth and income. In turn, portfolio holdings are ultimately shareholders’ assets, and the Board recognises the importance of good stewardship and communication with investee companies in meeting the Company’s investment objective and strategy. | The Board’s main working relationship is with the Manager, who is responsible for the Company’s portfolio management (including asset allocation, stock and sector selection) and risk management, as well as ancillary functions such as administration, secretarial, accounting and marketing services. The Manager has sub-delegated portfolio management to the Investment Manager. Successful management of shareholders’ assets by the Investment Manager is critical for the Company to successfully deliver its investment strategy and meet its objective. The Company is also reliant on the Manager as AIFM to provide support in meeting relevant regulatory obligations under the AIFMD and other relevant legislation. | In order for the Company to function as an investment trust with a listing on the premium segment of the official list of the FCA and trade on the London Stock Exchange’s (LSE) main market for listed securities, the Board relies on a diverse range of advisors for support in meeting relevant obligations and safeguarding the Company’s assets. For this reason, the Board considers the Company’s Custodian, Depositary, Registrar and Broker to be stakeholders. The Board, either directly or through the Manager, maintains regular contact with its key external providers and receives regular reporting from them through the Board and Committee meetings, as well as outside of the regular meeting cycle. |
A summary of the key areas of engagement undertaken by the Board with its key stakeholders in the year under review and how Directors have acted upon this to promote the long-term success of the Company are set out in the table below:
| Area of Engagement | Issue | Engagement | Impact |
| Investment mandate and objective | The Board is committed to promoting the role and success of the Company in delivering on its investment mandate to shareholders over the long term. The Board also has responsibility to shareholders to ensure that the Company’s portfolio of assets is invested in line with the stated investment objective and in a way that ensures an appropriate balance between spread of risk and portfolio returns. | The Board works closely with the Investment Manager throughout the year in further developing our investment strategy and underlying policies, not simply for the purpose of achieving the Company’s investment objective but in the interests of shareholders and future investors. The Manager’s approach to the consideration of ESG factors in respect of the Company’s portfolio, as well as its engagement with investee companies, is to encourage the adoption of sustainable business practices which support long-term value creation. The Board is kept advised in respect of the Manager’s consideration of ESG factors as part of the investment process; a summary of BlackRock’s approach to ESG matters is set out within the Annual Report and Accounts. | Details regarding the Company’s NAV and share price performance can be found in the Chairman’s Statement and in the Strategic Report above. The portfolio activities undertaken by the Manager can be found in the Investment Manager’s Report above. |
| Management of the share rating | The Board believes that the best way of addressing the discount over the longer term is to continue to generate good performance and to create demand for the Company’s shares in the secondary market through broadening awareness of the Company’s unique structure. The Board believes that it is in shareholders’ interests that the share price does not trade at an excessive premium or discount to NAV. Therefore, where deemed to be in shareholders’ long-term interests, it may exercise its powers to issue shares or buy back shares with the objective of ensuring that an excessive premium or discount does not arise. | The Manager reports total return performance statistics to the Board on a regular basis, along with the portfolio yield and the impact of dividends paid on brought forward distributable reserves. The Board reviews the Company’s discount/premium to NAV on a regular basis and holds regular discussions with the Manager and the Company’s broker regarding the discount/premium level. The Board believes that the best way of maintaining the share rating at an optimal level over the long term is to create demand for the shares in the secondary market. To this end the Investment Manager is devoting considerable effort to broadening the awareness of the Company, particularly to wealth managers and to the wider retail shareholder market. The Manager provides the Board with feedback and key performance statistics regarding the success of the Company’s marketing initiatives. Notwithstanding the issues posed by the ongoing COVID-19 pandemic, in normal operating conditions shareholders may attend the Company’s Annual General Meeting where formal questions may be put to the Board around the management of any premium/discount. | The average premium for the year to 30 November 2021 was 1.2%. During the year the Company’s share price has traded at a maximum discount of 3.2% and a maximum premium of 2.9%. Market demand for the Company’s shares has been strong and between 1 December 2020 and the date of this report the Company has issued 13,917,035 shares for proceeds of £125 million, improving the Company’s liquidity and resulting in a lower operating charges ratio. |
| Service levels of third party providers | The Board acknowledges the importance of ensuring that the Company’s principal suppliers are providing a suitable level of service including: the Manager in respect of investment performance and delivering on the Company’s investment mandate; the Depositary in respect of its duties towards safeguarding the Company’s assets; the Registrar in its maintenance of the Company’s share register and dealing with investor queries and the Company’s Brokers in respect of the provision of advice and acting as a market maker for the Company’s shares. | The Manager reports to the Board on the Company’s performance on a regular basis. The Board carries out a robust annual evaluation of the Manager’s performance, their commitment and available resources. The Board performs an annual review of the service levels of all third party service providers and concludes on their suitability to continue in their role. The Board has received updates in respect of business continuity planning from the Company’s Manager, Depositary, Fund Administrator, Brokers, Registrar and Printers, and is confident that arrangements are in place to ensure that a good level of service will continue to be provided despite the impact of the COVID-19 pandemic. In light of the challenges presented by the ongoing COVID-19 pandemic to the operation of business across the globe, the Board has continued to work closely with the Manager to gain comfort that relevant business continuity plans are operating effectively for all of the Company’s service providers. | Performance evaluations were performed on a timely basis and the Board concluded that all third party service providers, including the Manager, Depositary and Fund Administrator were operating effectively and providing a good level of service. |
| Board composition | The Board is committed to ensuring that its own composition brings an appropriate balance of knowledge, experience and skills, and that it is compliant with best corporate governance practice under the UK Corporate Governance Code, including guidance on tenure and the composition of the Board’s committees. | Over recent years the Board undertook a review of succession planning arrangements and identified the need for action to ensure that the composition of the Board was appropriate and that there was an ongoing process of refreshment, bringing in new ideas and different perspectives. The Board, through its Nomination Committee, agreed the selection criteria and the method of selection, recruitment and appointment. Board diversity, including gender, was taken into account when establishing the criteria. All Directors are subject to a formal evaluation process on an annual basis (more details and the conclusions in respect of the 2021 evaluation process are given within the Annual Report and Accounts). All Directors stand for re- election by shareholders annually. Shareholders may attend the AGM and raise any queries in respect of Board composition or individual Directors in person or may contact the Company Secretary or the Chairman using the details provided within the Annual Report and Accounts if they wish to raise any issues. | On 21 December 2020 the Board announced the appointment of a new non-executive Director, Nigel Burton. Jean Matterson retired as a Director at the conclusion of the AGM on 24 March 2021. Merryn Somerset Webb was appointed as a new non-executive Director on 24 March 2021, further strengthening the Board. The Directors are not aware of any issues that have been raised directly by shareholders in respect of Board composition in 2021. Details for the proxy voting results in favour and against individual Directors’ re-election at the 2021 AGM are given on the Company’s website at www.blackrock.com/ uk/thrg. |
| Shareholders | Continued shareholder support and engagement are critical to the continued existence of the Company and the successful delivery of its long-term strategy. The dividend is funded out of current year revenue and, where deemed appropriate, may be supported from revenue reserves if current year revenue is insufficient. The Company does not have a policy of seeking income, however, the portfolio has, to date, continued to deliver a level of income such that the Board is able to pay an attractive dividend. | The Board is committed to maintaining open channels of communication and to engaging with shareholders. Notwithstanding the challenges posed by the COVID-19 pandemic, in normal operating circumstances the Company welcomes and encourages attendance and participation from shareholders at its Annual General Meetings. Shareholders therefore have the opportunity to meet the Directors and Investment Manager and to address questions to them directly. The Annual Report and half yearly financial report are available on the BlackRock website and are also circulated to shareholders either in printed copy or via electronic communications. In addition, regular updates on performance, monthly factsheets, the daily NAV and other information are also published on the website at www.blackrock. com/uk/thrg. The Board also works closely with the Manager to develop the Company’s marketing strategy, with the aim of ensuring effective communication with shareholders in respect of the investment mandate and objective. Unlike trading companies, shareholder meetings usually take the form of a meeting with the Portfolio Manager as opposed to members of the Board. As well as attending regular investor meetings the Portfolio Manager holds regular discussions with wealth management desks and offices to build on the case for, and understanding of, long-term investment opportunities in the UK smaller companies’ sector. However, the Board is ultimately responsible for communication with shareholders and all substantive matters arising from such communication are referred to the Board. The Manager also coordinates public relations activity, including meetings between the Portfolio Manager and relevant industry publications to set out their vision for the portfolio strategy and outlook for the UK equity market. The Manager releases the daily NAV and monthly portfolio updates to the market to ensure that investors are kept up to date in respect of performance and other portfolio developments and maintains a website on behalf of the Company that contains relevant information in respect of the Company’s investment mandate and objective. If shareholders wish to raise issues or concerns with the Board, they are welcome to do so at any time. The Chairman is available to meet directly with shareholders periodically to understand their views on governance and the Company’s performance where they wish to do so. He may be contacted via the Company Secretary whose details are provided within the Annual Report and Accounts. | The Board values any feedback and questions from shareholders ahead of and during Annual General Meetings in order to gain an understanding of their views and will take action when and as appropriate. Feedback and questions will also help the Company evolve its reporting, aiming to make reports more transparent and understandable. Feedback from all substantive meetings between the Investment Manager and shareholders will be shared with the Board. The Directors will also receive updates from the Company’s broker on any feedback from shareholders, as well as share trading activity, share price performance and an update from the Investment Manager. The Portfolio Manager attended professional investor meetings and held discussions with a range of different wealth management desks and offices in respect of the Company during the year under review. Investors were also impressed with the wide pool of resource available through BlackRock’s Emerging Companies team, and the rigorous ‘bottom-up’ investment approach. |
| Responsible Investing | More than ever, consideration of material Environmental, Social and Governance (ESG) information and sustainability risk is a key factor in making investment decisions. Climate change is becoming a defining factor in companies’ long-term prospects across the investment spectrum, with significant and lasting implications for economic growth and prosperity. | The Board believes that responsible investment and sustainability are integral to the longer-term delivery of the Company’s success. The Board works closely with the Investment Manager to regularly review the Company’s performance, investment strategy and underlying policies to ensure that the Company’s investment objective continues to be met in an effective, responsible and sustainable way in the interests of shareholders and future investors. The Investment Manager’s approach to the consideration of ESG factors in respect of the Company’s portfolio, as well as the Investment Manager’s engagement with investee companies to encourage the adoption of sustainable business practices which support long-term value creation, are kept under review by the Board. The Investment Manager reports to the Board in respect of its ESG policies and how these are integrated into the investment process; a summary of BlackRock’s approach to ESG integration is set out within the Annual Report and Accounts. The Investment Manager’s engagement and voting policy are detailed within the Annual Report and Accounts. | The Investment Manager believes there is a positive correlation between good ESG practices on the part of portfolio companies and investment performance. Details of the Company’s performance in the year are given in the Chairman’s Statement above and the Performance Record contained within the Annual Report and Accounts. |
THE BOARD’S APPROACH TO ESG
Environmental, Social and Governance (ESG) issues can present both opportunities and threats to long-term investment performance. The Company does not have an ESG mandate (and accordingly does not have an ESG or impact focused investment strategy and has not adopted any exclusionary screens) but our Portfolio Manager does take ESG factors into account as part of the investment process as these elements can significantly influence a company’s valuation. These ESG issues are a key focus of the Board, and the Board is committed to a diligent oversight of the activities of the Manager in these areas. The Board is aware of the Company’s long term underweight position in extractive industries, where innovative and disruptive business models are rare and the non-participation in some capital raises where ESG factors have been a concern.
The Board believes engagement and dialogue with management is, in most cases, the most effective way of driving meaningful change in the behaviour of investee company management. This is particularly true for our Manager given the extent of BlackRock’s shareholder engagement. The Board also believes that voting and engagement are important tools to generate change. During the year to 30 November 2021, the Investment Manager, through its investment stewardship team, engaged 44 times with 32 individual portfolio companies (representing 31.4% of the portfolio by value) on ESG matters. It also voted on 1,742 proposals at 126 general meetings on behalf of the Company. In addition, our Portfolio Manager held a total of 384 meetings with investee companies during the financial year as part of his investment and research activity. Further detail of how our Manager has voted and engaged with the companies in our portfolio can be found within the Annual Report and Accounts.
As well as the influence afforded by its sheer scale, the Board believes that BlackRock is well placed as Manager to fulfil these requirements due to its approach to ESG integration and its application of this to the Company’s investment processes, the emphasis it places on sustainability, its collaborative approach in its investment stewardship activities and its position in the industry as one of the largest suppliers of sustainable investment products in the global market. More information on BlackRock’s approach to sustainability and investment stewardship is set out within the Annual Report and Accounts.
Future prospects
The Board’s main focus is on the achievement of capital growth and the future of the Company is dependent upon the success of the investment strategy. The outlook for the Company is discussed in the Chairman’s Statement and in the Investment Manager’s Report above.
Social, community and human rights issues
As an investment trust, the Company has no direct social or community responsibilities. However, the Company believes that it is in shareholders’ interests to consider human rights issues, and environmental, social and governance factors when selecting and retaining investments. Details of the Company’s approach to socially responsible investment is set out above and within the Annual Report and Accounts.
Modern Slavery Act
As an investment vehicle the Company does not provide goods or services in the normal course of business and does not have customers. Accordingly, the Directors consider that the Company is not required to make any slavery or human trafficking statement under the Modern Slavery Act 2015. The Board considers the Company’s supply chain, dealing predominantly with professional advisers and service providers in the financial services industry, to be low risk in relation to this matter.
Directors, gender representation and employees
The Directors of the Company on 30 November 2021, all of whom, with the exception of Nigel Burton and Merryn Somerset Webb, who were appointed on 21 December 2020 and 24 March 2021 respectively, held office throughout the year, are set out within the Annual Report and Accounts. The Board recognises the importance of having a range of experienced Directors who, both individually and collectively, possess a suitable balance of skills, knowledge, independence and diversity to enable it to fulfil its obligations. As at 30 November 2021, the Board consisted of three men and three women, resulting in 50% female representation. The Company has no employees, and all of its Directors are non-executive. Therefore, there are no disclosures to be made in respect of employees.
The Chairman’s Statement and the Investment Manager’s Report above form part of this Strategic Report.
The Strategic Report was approved by the Board at its meeting on 4 February 2022.
BY ORDER OF THE BOARD
KEVIN MAYGER
FOR AND ON BEHALF OF BLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED
Company Secretary
4 February 2022
To learn more about the BlackRock Throgmorton Trust plc please follow this link: blackrock.com/uk/thrg
