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BlackRock Smaller Companies Trust plc

One for the ISA shopping list

Roland Arnold discusses why he believes UK smaller companies present the greatest long-term opportunity to generate returns for clients.

One for the ISA shopping list

When it comes to investing in the UK, the first thing that comes to the mind of most investors will be the FTSE 100. When you hear comments on the radio or on the news in the evening relating to the “stock market”, the comments will almost always be in relation to the FTSE 100 being up/down x number of points. However, while the £2 trillion+ FTSE 100, a collection of the largest 100 companies listed in the UK, is an important component, it certainly isn’t the entire UK market.

The high levels of accounting and legal standards in the UK, but few barriers to corporate activity, means that the UK market is an attractive place that many leading global businesses choose to call home. As a result, there are a further 1500+ companies that are listed on the UK market beyond the largest few that everyone has heard of, that are well diversified across a broad range of sectors and geographies. It is in this space, particularly the smaller companies, that we believe presents us with the most attractive hunting ground as active managers, and therefore the greatest opportunity to generate returns for our clients over the long term.

Please remember that your capital may be 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.

Why do you believe UK smaller companies present the
greatest opportunity?

We believe that the UK small-cap market is home to some of the most exciting companies listed on the London market, businesses which may offer the prospect of a long runway of growth as they develop new products or markets or can enter into corporate activity and fundamentally shift their operations to capitalise on market opportunities. It is important to highlight though that smaller company investments are often associated with greater investment risk than those of larger company shares. The small-cap sector has consistently demonstrated greater earnings growth than larger peers1, which has in turn manifested itself in greater long-term returns for shareholders. We therefore believe that UK smaller companies are a great asset class for investors, and as a result of the above, this is an area of the market that has historically outperformed large caps by +4% per annum2.

However, this is an area of the market where the dispersion of returns can be very high. For those companies that get it right, they can see their market caps multiply several times over, but those businesses that get it wrong can go bust. Therefore, this is really an area of the market where active management is crucial, and as a team we are looking to find the ‘hidden gems’ within the under-researched small cap universe. When selecting companies for inclusion in our portfolios our focus is, and has always been, dedicated towards finding high quality, cash generative companies, with strong management teams, that are able to manufacture their own growth regardless of the wider economic environment.

Are investors currently avoiding UK equities?

Yes this is true, however one common misconception is that investors often assume that exposure to UK companies, particularly smaller companies, is exposure to the UK economy. This is simply not the case. Companies in the mid-cap FTSE 250 universe generate around half of their revenues from overseas, and even the small-cap universe generates around 30% of revenues from overseas. Therefore, active managers can quite easily build very globally diverse portfolios, which is exactly what we have done in our portfolios, with only around 50% of our portfolios revenues being generated in the UK. This is not a recent change to portfolio positioning in response to the increased uncertainty and political turmoil facing the UK economy right now. We held a preference for international businesses over domestic for a number of years and have been using market volatility and the pessimism towards UK shares to add to many global businesses at attractive valuations. Our largest holding for example is a marketer of promotional products which despite being listed in the UK, generates all of its revenues in the US and has been a strong contributor to portfolio returns in recent years.

Do you invest in IPOs (Initial Public Offerings)?

Yes. One of the benefits of managing the BlackRock Smaller Companies Trust plc is often having more opportunities in the IPO space than those available to funds that invest in larger companies. Companies that we are able to purchase at IPO have been extremely strong contributors to performance for more than a decade. When it comes to purchasing IPOs we are as selective as we are with investing in businesses that are already listed. We like to identify businesses that demonstrate strong organic growth, with strong management teams, a protected market position and sound financials. Historically companies that we have purchased at IPO have often been able to demonstrate some of the strongest organic growth; these can be the purest examples of the type of companies that we look to invest in.

Investing in small-caps

To invest in this type of investment, it may also be worth holding it in an ISA, making the most of your tax-free ISA allowance and sheltering it from income and capital gains tax. You can also use an ISA as a regular way to save rather than putting a lump sum in the market in one go. ISAs allow up to £20,000 to be sheltered from income and capital gains tax. Much like an open-ended fund, you can also buy shares in the Trust through most online platforms or through a stockbroker.

1 The case for SMID, Bloomberg, Fact Set, September 2018
2 Source: BlackRock, 28 February 2019

Capital at risk: All financial investments involve an element of risk. Therefore, the value of your investment and the income from it will vary and your initial investment amount cannot be guaranteed.

For more information on BlackRock Smaller Companies Trust, and how to access the potential opportunities presented by smaller companies, please visit www.blackrock.com/uk/brsc

BlackRock have not considered the suitability of this investment against your individual needs and risk tolerance. To ensure you understand whether our products are suitable, please read the Key Investor Documents (KIDs) and the Annual and Half Yearly Reports available at blackrock.co.uk/its which detail more information about the risk profiles of the investments. We recommend you seek independent professional advice prior to investing.

Trust specific risks

Smaller companies are high 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. Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.

Important Information

Non-mainstream pooled investment products status: The Company currently conducts its affairs so that its securities can be recommended by Independent Financial Advisers to ordinary retail investors in accordance with the Financial Conduct Authority (FCA) 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 FCA's restrictions which apply to non-mainstream investment products because they are shares in an investment trust.

Any research in this document 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.

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. 

Issued by BlackRock Investment Management (UK) Limited (authorised and regulated by the Financial Conduct Authority). Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Registered in England No. 2020394. Tel: 020 7743 3000. For your protection, telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited.

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