Smaller companies have shown their mettle through the pandemic. This is no accident, says Roland Arnold, portfolio manager of the BlackRock Smaller Companies Trust plc (LON:BRSC), these are dynamic and nimble businesses, that use capital effectively to drive innovation and deliver sustainable long-term growth.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
As investors focused on investing in UK small & mid-capitalisation (cap) companies,¹ we will naturally and unashamedly always talk about the benefits and attractions of investing in UK smaller companies. Essentially UK smaller companies offer investors exposure to an outperforming area of the market, having delivered returns of +4% more than large caps over time.²
Where does this performance come from? It is our view that smaller companies are dynamic and nimble businesses that often demonstrate higher levels of organic growth and operational leverage as their capital light, high returning business models adapt quickly to changing market environments and new and emerging industrial trends. These factors have resulted in the small-cap sector consistently demonstrating greater earnings growth than larger peers, which has in turn manifested itself in greater long-term returns for shareholders.
What’s more, in our view small cap companies are largely under-researched, which we believe means that many market participants may fail to truly understand the growth potential that some of these businesses can offer to long-term investors. This dynamic creates a fruitful environment for us as dedicated small cap managers to add significant alpha (excess return) for our clients.
Making a difference
But there’s more to investing in small caps. Investing in stocks is more than just red and green numbers flashing on a screen, hoping someone else will be willing to buy it for a higher price at a later date. These are businesses and shareholders become part-owners of said business.
To truly understand this though, we really need to remember what the purpose of the stock market is. Essentially the stock market is a mechanism that connects entrepreneurs requiring capital to start and grow businesses to investors that are willing to provide capital in exchange for a proportion of the ownership of that company, and ultimately participate in the success of that business through dividends and an increasing value of the company over time.
Why is this more relevant to smaller companies than perhaps large? Well, we would argue that the small cap end of the market is a truly active part of the capital markets. This is not to say initial public offerings (IPOs) and capital raising (companies raising additional money) don’t occur at the larger end of the market, but it is far less frequent and typically makes less of a difference to the investment case. In some cases, the capital required can be for more defensive reasons, for example to protect a company with falling demand because its industry is going backwards.
Financing growth
In contrast, in the small cap space we see many more new and exciting businesses looking to take themselves public to finance expansion and growth, or perhaps raise money for new and exciting acquisitions that enable a company to follow through with its long-term strategy and drive growth for years to come. Take Auction Technology Group as an example, an innovative business leading the digitisation within the auction industry which IPO’d in early 2021 with a market cap of around £600m (yes that is small).³ Then later in 2021 it came back to shareholders to raise additional capital to finance an acquisition⁴ which accelerates its global expansion. Naturally, given we think this is a phenomenal business, we were happy to participate and gave the company additional capital for this deal. This is just one example of which there are many more and as small cap investors, we are able to provide the much-needed growth capital to these businesses.
Reference to Specific Stocks: Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy, and should not be construed as investment advice or investment recommendation of those companies.
The stock market’s ability to match investors with corporates to provide capital is also about more than just an individual company making money. The ability of investors to supply entrepreneurial companies with capital is key to bringing revolutionary ideas to life, making an entrepreneur’s dream become a reality and essentially has had a positive impact on global growth over many decades.
What’s more, as an equity investor, and therefore part-owner of a business, we have a seat at the corporate table. Investors are able to hold management teams to account, and through our engagements and votes, we can evoke change and best practices in behaviour when it comes to Environmental, Social and Governance (ESG) practices. We have to be clear though, ESG is not about scores from a rating agency. It is about real people, having a real voice.
So why invest in smaller companies? This is an active part of the capital markets that provides entrepreneurial businesses the opportunity to drive innovation. And when you find fantastic businesses, you can share in some of that long-term success along the way. This is how we aim to deliver value on the BlackRock Smaller Companies Trust plc.
This material is not intended to be relied upon as a forecast, research or investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are from BlackRock as of June 2022 and may change as subsequent conditions vary.
To learn more about the BlackRock Smaller Companies Trust plc please follow this link: blackrock.com/uk/brsc
¹ Market cap – or market capitalisation refers to the total value of all a company’s shares or stock. It is calculated by multiplying the price of a stock by its total number of outstanding shares
² Source: Datastream, UK Equity Large Cap Total Return Index and Numis Smaller Companies Index + AIM ex. Investment Trusts Total Return Index, 31 December 2021.
³ Source: BlackRock, London Stock Exchange, 26 February 2021
⁴ Source: BlackRock, London Stock Exchange, 2 September 2021
Risk Warnings
Smaller Companies risk
Smaller company investments are often associated with greater investment risk than those of larger company shares.
Reference to Investments
Reference to individual investments mentioned in this communication is for illustrative purposes only and should not be construed as investment advice or investment recommendation.
Equity Risk
The value of equities and equity-related securities can be affected by daily stock market movements. Other influential factors include political, economic news, company earnings and significant corporate events.
ESG Investment Statements
This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any security in particular. This is for illustrative and informational purposes and is subject to change. It has not been approved by any regulatory authority or securities regulator.
Capital at risk
The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.
Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.
Trust Specific Risks
Liquidity risk: The Trust’s investments may have low liquidity which often causes the value of these investments to be less predictable. In extreme cases, the Trust may not be able to realise the investment at the latest market price or at a price considered fair.
Gearing risk: Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.
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