Navigating the small-cap universe via an investment trust

With investors facing an income dilemma in the current ISA environment, Roland Arnold, Portfolio Manager, explains how investing in smaller companies can offer the potential for growth and income in your portfolio.

Capital at risk: The value of investments and the income from them can fall as well as rise and are not guaranteed. You may not get back the amount originally invested.

During such unprecedented and uncertain times, we believe it is more important than ever to take a long-term view. Our investment style of investing in quality growth smaller companies opportunities has demonstrably worked over the long term. Equally, during times of heightened volatility and panic, many open-ended small-cap funds risk having to realise losses in order to meet redemptions from nervous clients.

The benefit of a closed-ended company such as the BlackRock Smaller Companies Trust plc is that we are not forced to sell any of our underlying holdings in order to meet shareholder flows. This enables us to remain focused on the long term. We can use the current volatility to build a portfolio that we believe can thrive in coming years. For investors, this could present attractive buying opportunities.

The UK smaller companies sector is home to some of the most exciting businesses listed on the London market. These companies offer a long runway of growth potential as they develop new products or markets or are bought out and fundamentally shift their operations to capitalise on market opportunities.

Since 1995, the small-cap sector has consistently demonstrated greater earnings growth than its larger peers1, which has in turn manifested itself in greater long-term returns for shareholders. The small-cap story is particularly attractive in the UK, where investors may benefit from legal protections and accounting and listing standards greater than those available in many other equity markets globally.


Returns in GBP31/12/18 to 31/12/1931/12/17 to 31/12/1831/12/16 to 31/12/1731/12/15 to 31/12/1631/12/14 to 31/12/15
BlackRock Smaller Companies Trust plc * 32.5% -11.9% 33.3% 11.0% 19.0%
Numis Smaller Cos +AIM ex IT (Constraint index) ** 22.2% -15.8% 21.9% 12.0% 8.6%
Relative +10.4% +3.9% +11.4% -1.0% +10.4%

The figures shown relate to past performance. Past performance is not a reliable indicator of current or future results. Source: BlackRock as at 31 December 2019. Smaller company investments are often associated with greater investment risk than those of larger company shares. Source: BlackRock, *NAV Total return net of fees. Performance benchmark is Numis Smaller Companies Ex Investment Trusts + Alternative Investment Market. Index returns are for illustrative purposes only. Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index.

** Benchmark: FTSE SmallCap index (excluding investment companies) until 31/8/07; Numis Smaller Companies + AIM index (excluding investment companies) since 31/8/07.

None of this is in dispute, so how best can investors gain exposure to the opportunities available in UK small and medium sized companies?

Going it alone?

Direct investment sounds simple, but to find genuine opportunities individuals would need to conduct fundamental research into each of the companies in the investable universe, which is no easy task if you consider that there are over 1,500 companies in our benchmark. They would need to understand the potential each stock presents and build a portfolio of the best opportunities. This takes time and given that the smaller companies sector is an under-researched part of the market, getting adequate information is difficult. Then there is the cost of building a portfolio of well-diversified stocks, which is important if investors are to avoid exposure to individual company risk.

Essentially, it is difficult for individuals to invest in smaller companies and achieve appropriate diversification and adequate risk management.

Strength in numbers

An alternative to going it alone is to outsource the research and portfolio construction by investing in a fund which can also spread the cost.

Investing in a closed-end fund – or investment trust – in this way may have several possible benefits. An investment trust is a registered company and issues a fixed number of shares to investors. This means the portfolio managers do not have to worry about sudden inflows – or outflows – of money. It also means the manager can invest confidently in companies that might be harder to sell quickly – known as illiquid investments – which is vital with smaller companies since it can take time to get returns. Being closed-ended may also limit the potential challenges if the fund suddenly becomes flavour of the month since it cannot accept a sudden influx of investment. This can be an advantage over open-ended funds because they must invest new inflows even when the manager may find it difficult to identify suitable investment opportunities.

This structure also means that the trust does not need to hold a cash buffer to pay exiting investors. Instead, shareholders who want to exit can sell their shares to other investors through the secondary market. This means clients’ investments are always fully exposed to the market.

It’s a company

Investment trusts can also borrow. This means managers can invest even more in smaller companies on behalf of investors. Different trusts will adopt different levels of borrowing (usually referred to as ‘gearing’), and they can borrow more or less in the face of different market conditions. Clearly this can work against investors in falling markets, so understanding how different trusts borrow is key before committing any money. The current gearing level of the BlackRock Smaller Companies Investment Trust plc is 6%1.

Investment trusts also have a greater degree of flexibility over the size and frequency of dividend distributions when compared to open-ended funds. An open-ended fund has no choice over distributions and has to pay out all dividends received. An investment trust can retain up to 15% of revenues earned in each financial year which means that trusts can build up revenue reserves over time so, even in difficult markets, they can still make a smooth schedule of payments. The BlackRock Smaller Companies Trust has increased its dividend every year of the past 16 years and most recently grew the dividend by more than 20% in the year ending 28 February 20192.

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.

Additional safeguards

Importantly, investment trusts also provide investors with an additional layer of governance. Independent boards act on behalf of investors, ensuring the fund manager is adhering to the investment philosophy of the fund and, if necessary, the board can appoint a new manager if they are unhappy with performance.

Finally, the share price of an investment trust on the open market can often trade at a premium or a discount to the value of its assets. For instance, the BlackRock Smaller Companies Trust currently trades at a 2.3% discount, allowing you to buy £1.00 for £0.98p1, and who doesn’t like that?

1BlackRock, March 2020
2BlackRock, BlackRock Smaller Companies Trust plc NAV total return net of fees, March 2020

The opinions expressed are as of March 2020 from BlackRock and are subject to change at any time due to changes in market or economic conditions.

Risk Warnings

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.

Smaller companies risk: Smaller company investments are often associated with greater investment risk than those of larger company shares.

Important Information

Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: +44 (0)20 7743 3000. Registered in England and Wales No. 2020394. For your protection, telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

The Company is managed by BlackRock Fund Managers Limited (BFM) as the AIFM. BFM has delegated certain investment management and other ancillary services to BlackRock Investment Management (UK) Limited. The Company’s shares are traded on the London Stock Exchange and dealing may only be through a member of the Exchange. The Company will not invest more than 15% of its gross assets in other listed investment trusts. SEDOL™ is a trademark of the London Stock Exchange plc and is used under licence.

Net Asset Value (NAV) performance is not the same as share price performance, and shareholders may realise returns that are lower or higher than NAV performance.

The BlackRock Smaller Companies Trust plc currently conducts its affairs so that its securities can be recommended by IFAs to ordinary retail investors in accordance with the Financial Conduct Authority’s rules in relation to non-mainstream investment products and intends to continue to do so for the foreseeable future. The securities are excluded from the Financial Conduct Authority’s restrictions which apply to non-mainstream investment products because they are shares in an investment trust.

BlackRock has not considered the suitability of this investment against your individual needs and risk tolerance. To ensure you understand whether our product is suitable, please read the fund specific risks in the Key Investor Document (KID) which gives more information about the risk profile of the investment. The KID and other documentation are available on the relevant product pages at We recommend you seek independent professional advice prior to investing.

Any research in this material has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

This material is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

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