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Investment Trusts

Finding companies on
the up - and down

Finding companies on the up is the goal for any fund manager, but identifying struggling businesses also has the potential to add value in an investment trust that invests in smaller companies by using contracts for difference (CFDs). BlackRock Throgmorton Trust co-manager Dan Whitestone explains the benefits of a long/short CFD portfolio where the managers invest in companies’ shares that they believe will rise as well as fall in price.

What is a CFD?

A CFD is an instrument that allows the investor to take a view on the direction of a company’s share price without actually owning shares in that company in the conventional sense. A CFD is a tradeable instrument that mirrors the movements of the underlying asset. If the fund manager believes the share price will go up, we can enter into a ‘long’ CFD. This means that they will profit if the share price goes up. Also, we can set up a ‘short’ CFD. This is more complicated, but means that they will profit if the share price goes down. If the price is lower, they will have made a profit, if it is higher, they will have made a loss. Please be aware that CFDs are high risk and increase the risk profile of the BlackRock Throgmorton Trust plc. The use of CFDs offers investors the potential to benefit from market rises and to limit the impact of falls. All 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. Please refer to the trust-specific risks at the end of this article.

Why does the Trust include a contract for difference long/short portfolio?

We think the UK small and medium-sized companies offer some fantastic opportunities for long-term investors. Not only have small and medium-sized companies outperformed their larger counterparts by 4%1 a year, but it is also an area where the gap between the best and worst performing companies is very high. Some companies see their market value multiply several times over, while others have seen their market value collapse, even to zero. Please remember that past performance is not a guide to future performance and the value of an investment and the income from it can fall as well as rise. Smaller company investments are often associated with greater investment risk than those of larger company shares.
 

As part of our in-depth research process, we are able to identify companies that we want to invest in for the long term. At the same time we can identify companies which may be under structural pressures or facing challenges in the current market environment, and often with too much debt. These problems could result in a fall in share prices. We think the long/short portfolio is a key differentiator for Throgmorton, as it allows us ‘short’ companies i.e. we take a position in the belief that the company share price will fall. We can also use CFDs to increase our exposure to companies we really like and want to own for the long-term.

Therefore, we’ve structured this Trust in the aim to adapt to different market environments. 100% of the Trust’s net assets are managed by Mike Prentis as a long only portfolio (i.e. buying shares in companies where we believe their share prices will rise), which aims to beat the benchmark each year. In addition to this, 30% of the Trust’s net assets are managed in a separate long/short portfolio, managed by Dan Whitestone, which aims to deliver a positive return over a rolling 12-month basis. Therefore, the Company can have gross exposure of 130% of net assets, albeit that some of this exposure may represent short positions. The aim of the long/short portfolio therefore is to enhance the Trust’s overall returns.

How does market uncertainty help create opportunities for the long/short portfolio?

The unexpected result of the general election has undoubtedly increased the uncertainty around Brexit negotiations, which may impact business investment decisions and could damage consumer confidence. However, the long/short portfolios focus on what we know about the companies themselves rather than putting the emphasis on macro events, creating interesting opportunities to short industries and businesses that are over-earning and facing structural or cyclical pressures.

What have been the key drivers of returns this year for the long/short portfolio?

The UK stock market has continued its positive performance into the first half of this year despite the uncertainty around the UK general election result and Brexit negotiations. The long/short portfolio continued to perform well, contributing to the Trust’s outperformance against its benchmark for the first half of its financial year ending May 2017.

Annual performance
(%)
to last quarter
end
(GBP)
30/06/16-
30/06/17
30/06/15-
30/06/16
30/06/14-
30/06/15
30/06/13-
30/06/14
30/06/12-
30/06/13
BlackRock Throgmorton Trust plc Net Asset Value 45.21 -4.95 16.98 19.12 29.87
Benchmark: Numis Smaller Companies ex AIM ex Investment Companies TR GBP 29.11 -6.58 10.35 20.29 31.80
Numis Smaller Companies TR GBP (incl Investment Companies) 28.34 4.17 10.00 17.99 28.63
FTSE All Share TR GBP 18.12 2.21 2.60 13.12 17.93

Source: BlackRock, as at June 2017. BlackRock performance figures are calculated on a total return basis with net income reinvested including management & operating charges and any performance fees.

Past performance is not indicative of current or future results and should not be the sole factor of consideration when selecting a product. It is not possible to invest directly into an index. 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.

Despite the strong market return, which can make life challenging for the short positions it was encouraging to see that one of the top three positive contributors to the performance of the total Trust’s return was from one of our short positions.

In our long positions we have benefited from a number of our core holdings, which proved to have strong operations, generating solid organic growth despite high levels of market uncertainty and the difficult economic environment.

Where do you see opportunities for the long/short portfolio?

In our long positions – companies where we believe their share prices will rise – we are sticking with those companies that we think can deliver consistent performance despite fluctuations in market conditions. In our short positions we continue to look for companies that are over-earning and/or operating in industries undergoing structural pressures. The portfolio has remained largely unchanged for some time and that reflects our conviction in our holdings.

As has been the case for some time, our short book holds many companies vulnerable to weakening business confidence and consumer spending, particularly in the UK. Only in recent weeks have these shown signs of deterioration, with some high profile profit warnings amongst a selection of UK domestic businesses. We believe the recent election outcome will increase pressures given further uncertainty.

We are therefore targeting shares within UK Consumer Services that are either facing cyclical pressures such as weakening demand, or rising costs that will impact corporate profit margins, and/or face structural pressures, digital disruption or low-cost competitors.

The technology sector is also an area that could present opportunities because IT budgets may be vulnerable to falling business confidence.


1 BlackRock/DataStream, since the inception of the Numis Smaller Companies index (incl Investment Companies) in 1955 to 31 August 2016 against the FTSE All Share index. Please refer to the annual performance table included in this article for index returns.

Trust specific risks: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss. Derivatives may be used substantially for complex investment strategies. These include the creation of short positions where the Investment Manager artificially sells an investment it does not physically own. Derivatives can also be used to generate exposure to investments greater than the net asset value of the fund / investment trust. Investment Managers refer to this practice as obtaining market leverage or gearing. As a result, a small positive or negative movement in stock markets will have a larger impact on the value of these derivatives than owning the physical investments. The use of derivatives in this manner may have the effect of increasing the overall risk profile of the Funds. Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall. 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.

To find out more about the BlackRock Throgmorton Trust, visit here.

 

Important information
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 Key Features document and the Annual and Half Yearly Reports available at blackrock.com/uk/thrg for more information where you can find a full explanation of these types of investment techniques and more information about the risk profile of the investment. We recommend you seek independent professional advice prior to investing.

Past performance is not indicative of future results. 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. It is not possible to invest directly into an index. NAV performance is not the same as share price performance, and shareholders may realise returns that are lower or higher than NAV performance.

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 as at June 2017 and may change as subsequent conditions vary.

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

The BlackRock Investment Trusts ISA and BlackRock Investment Trusts Savings Plan are managed by BlackRock Investment Management (UK) Limited. All the trusts are traded on the London Stock Exchange and dealing may only be through a member of the Exchange. The Trust has appointed BlackRock Investment Management (UK) Limited as Investment Manager. It 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.

The Company currently conducts its affairs so that its securities can be recommended by IFAs to ordinary retail investors in accordance with the FCA’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 FCA’s restrictions which apply to non-mainstream investment products because they are shares in an investment trust.

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