Acclerating outperformance: BlackRock Throgmorton Trust

THRG has performed well over the past year, with outperformance accelerating in recent months…by Nicholas Todd

Overview

BlackRock Throgmorton Trust (THRG) offers investors an exposure to the small- and mid-cap UK equity market through a strategy employed by portfolio manager Dan Whitestone that is unapologetically focused on generating long-term capital growth. As discussed in Portfolio, THRG offers an extension to traditionally long only equity strategies, since Dan is afforded the flexibility to short stocks he believes are being left behind or are victims of industry change. Short positions are held using contracts for difference (CFDs), which are also used as the preferred method for gearing, increasing exposure via long positions on preferred companies. The pressures on valuations across the small- and mid-cap universe over the past couple of years have meant Dan has reduced the short book to a below-average 3.2% of net assets, whilst gradually increasing the long exposure, meaning THRG’s net market exposure has risen to 114.7% (see Gearing).

Dan is able to pull a variety of levers in an effort to generate alpha. However, the focus on identifying high-quality, fundamentally strong companies has been the ultimate driver of long-term performance, with THRG outperforming the Deutsche Numis Smaller Companies Plus AIM (ex ICs) Index by 13.9 percentage points over the past five years (see Performance).

Since the start of 2022 the tough macroeconomic environment has made it more challenging for growth strategies. However, THRG outperformed over 2023, with relative performance accelerating in the last few months as SMID-caps and growth stocks rallied sharply on expectations that interest rates had peaked. Additionally, Dan notes that the underlying holdings displayed operational resilience throughout the year, evidencing the quality he looks for. Although investor sentiment may have improved slightly, this is yet to be reflected in THRG’s 10.5% discount which is wider than its five-year average of 2.5%.
 

Analyst’s View

Market volatility is likely to remain a feature in 2024; however, we think the outlook for THRG’s strategy is improving. In an environment of lower inflation, relatively strong employment, and with an easing of interest rates expected towards the end of this year, we think we may see an increase in consumer confidence and a re-rating for the small-cap sector. Higher interest rates and negative sentiment have weighed heavily on the UK’s small- and mid-cap equities and have led to a range of opportunities in cheap valuations. We would argue this has been reflected in the increase in corporate activity, including buybacks and M&A, in addition to increasing interest from private equity from which THRG may continue to benefit.

Dan’s ability to identify quality companies that are able to capitalise on structural-growth themes and industry change has delivered superior long-term performance characteristics. In our view, this resilience has been demonstrated over 2023 and contributed to THRG’s rebound in performance. Given that THRG has traded at a premium to NAV in the past, we also believe the current discount and Dan’s optimistic approach to gearing should also provide an added kicker to returns, should sentiment improve.

Bull

• Strong long-term performance record
• Operational resilience of holdings has led to an improved dividend
• Discount may offer an attractive entry point

Bear

• May underperform if macroeconomic conditions remain tighter for longer
• Gearing can enhance losses, but can also boost upside returns
• Some may not like performance fee, although it does align the interests of manager and shareholder

 
See the latest research on THRG here >

 
_{This is a non-independent marketing communication commissioned by BlackRock. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.}