BlackRock Throgmorton Trust remain optimistic about prospects

BlackRock Throgmorton Trust plc (LON:THRG) has announced its portfolio update.

All information is at 31 July 2023 and unaudited.

To learn more about the BlackRock Throgmorton Trust plc please follow this link: blackrock.com/uk/thrg

Performance at month end is calculated on a cum income basis

Sources: BlackRock and Datastream

*With effect from 22 March 2018 the Numis Smaller Companies plus AIM (excluding Investment Companies) Index replaced the Numis Smaller Companies excluding AIM (excluding Investment Companies) Index as the Company’s benchmark. The performance of the indices have been blended to reflect this.

1. Calculated using the 2022 final dividend of 8.50p declared on 10 February 2023 and paid on 31 March 2023, together with the Interim Dividend of 3.30p declared on 27 July 2023 to be paid on 1 September 2023 (the ex-dividend date is 3 August 2023).

2. Includes current year revenue and excludes gross exposure through contracts for difference.

3. Long exposure less short exposure as a percentage of net asset value.

4. Excluding 3,692,579 shares held in treasury.

5. The Company’s ongoing charges are calculated as a percentage of average daily net assets and using the management fee and all other operating expenses, excluding performance fees, finance costs, direct transaction charges, VAT recovered, taxation and certain other non-recurring items for the year ended 30 November 2022.
6. With effect from 1 August 2017 the base management fee was reduced from 0.70% to 0.35% of gross assets per annum. The Company’s ongoing charges are calculated as a percentage of average daily net assets and using the management fee and all other operating expenses, including performance fees, but excluding finance costs, direct transaction charges, VAT recovered, taxation and certain other non-recurring items for the year ended 30 November 2022.

7. Effective 1st December 2017 the annual performance fee is calculated using performance data on an annualised rolling two-year basis (previously, one year) and the maximum annual performance fee payable is effectively reduced to 0.90% of two year rolling average month end gross assets (from 1% of average annual gross assets over one year). Additionally, the Company now accrues this fee at a rate of 15% of outperformance (previously 10%). The maximum annual total management fees (comprising the base management fee of 0.35% and a potential performance fee of 0.90%) are therefore 1.25% of average month end gross assets on a two-year rolling basis (from 1.70% of average annual gross assets).

Commenting on the markets, Dan Whitestone, representing the Investment Manager noted:

The Company returned 2.4% in July, which was slightly behind the Numis Smaller Companies +AIM (excluding Investment Companies) benchmark, which returned 2.9%.

Markets continued to be strong in July as macro data, particularly around inflation and unemployment continues to be supportive of markets. US headline CPI (Consumer Price Index) fell to 3%, and even the UK saw some welcome news on inflation, with June data coming in below expectations but still remaining at a lofty 8%. We think there is further good news to come, UK energy costs only pass on oil and gas prices with a lag, so utility bill prices were still being re-set downwards in July, which should knock c.100bps off the next inflation figure. The June data provided some welcome relief to domestic assets which have been under pressure from continued misses on inflation, seeing the FTSE 250 Index outperform the FTSE 100 Index by 1.8%.

A short in a UK listed software company was the biggest contributor in the month. After a meteoric rise, fuelled by news flow about very large contract wins, the shares were suspended earlier this year upon the detection of a fraud. After an independent investigation, it turns out most of those contract wins did not exist and 90% of bookings were fake. Revenues, rather than growing, were actually falling. Management has totally changed, and a new team are in place to try to save the business. After coming within days of running out of cash, the company completed a restructuring and rescue fund raising in July. We closed out our short in the placing 96% below the suspension price. Watches of Switzerland was the second biggest contributor for the month. The company had results which highlighted continued resilient trading. The shares had been weak into the statement and the company has become something of a battleground stock, so no change to guidance was taken positively by the market. We have written many times about our view that this is a market share winning route to market in a highly attractive category, a view we think is supported by this set of results. We think the valuation, at c.13x PE (price to earnings ratio) after the recent rally, remains highly attractive especially when you factor in a net cash balance sheet. We retain a significant holding. The third biggest contributor was our long position in Grafton, which rallied following a robust trading statement and stronger UK macro data. Despite fears around its end markets, particularly the UK, sales in H1 were flat (with Q2 better than Q1) and EBITA (earnings before interest, taxes and depreciation) guidance for the year re-affirmed.  We think the company is very undervalued, its operating results continue to be both resilient and obviously positively differentiated from peers, the balance sheet is very strong, with a large percentage of the market capital in net cash and the valuation remains at trough levels. Management appears very well aligned with shareholders and have a long track record of disciplined and value accretive capital allocation. In the past 12 months the company has bought back nearly 10% of its equity. We retain a significant holding.

OSB, the UK bank, fell after a profit warning highlighted a change in customer behaviour in one of its mortgage products which meant customers are refinancing much earlier than previously and are therefore less profitable for OSB. The vagaries of IFRS 9 accounting means that the hit of this change all has to be taken up front (even though the cash impact is felt only over the next few years), and as such, this resulted in large downgrades to 2023 earnings expectations. There should be no material change to FY24 expectations, but management credibility has certainly been dented. We reduced the holding as a result, but now trading on 3.5x 2024 PE and 0.6x book, we are reluctant to sell it all as we think the shares are undervalued. Other detractors during the month included Oxford Instruments and 4imprint. Both companies have been positive contributors year to date, and both gave back some recent performance despite no negative newsflow.

We remain optimistic about the prospects for the Company. We feel we are still getting more right than wrong when it comes to the fundamentals and in most cases that is being rewarded in share prices. This year, we have talked a lot about the opportunities we see in our UK mid-cap holdings. The performance this month, after one inflation print which undershot estimates by a paltry 20bps demonstrates how extreme positioning around the UK and the mid-cap in particular has been. The good news is that most of our mid-cap holdings remain extremely cheap when compared to history and we have retained large positions to benefit from any recovery. We are not getting carried away on the back of one month of data but we feel more optimistic that when the economic clouds do eventually lift we will be rewarded with a re-rating in these shares. The net exposure of the portfolio finished the month at around 106% and the gross exposure was c.117%.

¹Source: BlackRock as at 31 July 2023

24 August 2023

To learn more about the BlackRock Throgmorton Trust plc please follow this link: blackrock.com/uk/thrg