Investing flexibly during the crisis and beyond

2020 was characterised by significant volatility for investors, but the BlackRock Throgmorton Trust plc has the right tools to take advantage of tough conditions, says Portfolio Manager Dan Whitestone. It should continue to serve the Trust well in 2021, as ‘corporate Darwinism’ emerges.

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.

Despite 2020 being a tumultuous year, with violent markets drawdowns followed by sharp reversals, BlackRock Throgmorton Trust was able to navigate the volatility and deliver a positive NAV return of 13.2% (net of fees), which outperformed its benchmark by +8.2%1. This strong performance was certainly not a one off. Through its differentiated toolkit relative to other trusts in the peer group, and proven investment process which focuses on stock specific alpha generation rather than taking top down macro views, BlackRock Throgmorton Trust is the best performing Trust in its peer group over 5 years2, having returned 104.5%, which is +62.7% outperformance over the benchmark3.

Unlike many conventional funds or trusts which are limited to having up to 100% gross exposure to the market, BlackRock Throgmorton Trust has the ability to increase its exposure by an additional 30%, meaning that shareholders can benefit from this “gearing” (borrowing to invest), by having up to 130% exposure to the market. However, this is not what truly differentiates BlackRock Throgmorton Trust, as there are other trusts in our peer group that use gearing to increase market exposure. The difference really lies in the fact that while gearing for our competitors is limited to long positions (i.e. those that will benefit from rising share prices), BlackRock Throgmorton Trust, through the use of contract for differences (CFDs) can also take short positions (those that we believe the share price will fall).

This means that the Trust can not only capitalise on owning differentiated growth companies that see their share prices multiply over time, but also from shorts in companies that operate in challenged industries, with weak financial structures, that fall victim to industry change. Additionally, through a combination of long and short exposure, the Trust can flex its net exposure to the market through time, which can be particularly beneficial during times of volatility as we experienced in 2020.

Relative +8.2% +16.2% +5.2% +14.9% -1.0% +11.4%
Returns in GBP 31/12/19 to 31/12/20 31/12/18 to 31/12/19 31/12/17 to 31/12/18 31/12/16 to 31/12/17 31/12/15 to 31/12/16 31/12/14 to 31/12/15
Trust Return* 13.2% 38.4% -11.5% 34.0% 10.0% 22.0%
Numis Smaller Cos +AIM ex IT (Constraint index**) 4.9% 22.2% -16.7% 19.5% 11.1% 10.6%

The figures shown relate to past performance. 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. Smaller company investments are often associated with greater investment risk than those of larger company shares. 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.

*BlackRock assumed management: 1 July 2008. Source: BlackRock, Total return net of fees, 31 December 2020. ** Constraint index is Numis Smaller Companies +AIM Ex Investment Trusts since 22 March 2018, Numis Smaller Companies Ex Investment Trusts from 1 Dec 2013 to 22 March 2018 and Numis Smaller Companies +AIM Ex Investment Trusts from 1 Jul 2008 to 1 Dec 2013.

Agility in a crisis

Throughout the pandemic-induced volatility in 2020, the Trust dynamically used its toolkit to great effect. During the market sell-off in Q1, which saw our benchmark fall more than 32%, the Trust was able to protect shareholder capital and benefit from a material contribution from its short positions in companies that fell with the market. Much of these gains were locked in by closing many short positions immediately after the initial market falls in the belief that markets were oversold and would recover. The decision to lock in the gains from the short book early in the year, and subsequently increasing the long exposure to differentiated winners of the pandemic resulted in the Trust delivering both a positive absolute return, and significantly outperforming the benchmark by over +8%4.

Over the course of the second half of the year, the net exposure of the Trust was gradually increased, reflecting conviction in an improving global economic recovery, accommodative monetary and fiscal support, positive developments on vaccinations, a Brexit trade deal secured with Europe, and most importantly of all, our belief that the opportunity set for investing is the most compelling we have seen to date. The overall net exposure is now c.120%, the highest it has been during my tenure as Portfolio Manager.

Trends for 2021

Looking into 2021 and beyond, there are three significant trends we have identified that we believe BlackRock Throgmorton Trust is well positioned to benefit from:

  • The attractive and enduring runway of growth for many companies leading long-term secular growth trends points to a continued rapid increase in revenues and profits, specifically within digital payments, cloud video and audio communications, online education, and leading software-as-a-service disruptors.

  • An acceleration of profound seismic market share shifts intra-industry, which we think of as “Corporate Darwinism”, as the well-capitalised leaders benefit from a confluence of changing consumer and corporate behaviours as well as structural withdrawal of capacity as weakened peers exit the market. Across a range of industries, we have witnessed many differentiated businesses solidify their market position through accelerated organic market share gains or through acquisition e.g. omni-channel retailers, veterinary services, and component distribution.

  • The continued ability of differentiated companies with compelling product offerings to grow at impressive rates regardless of wider macro, political and economic disruption, just as witnessed from key contributors like Games Workshop, YouGov and Gamma Communications through 2020.

This really is an incredibly exciting time for this Trust. COVID-19 is causing long-term industrial changes that will lead to huge levels of dispersions across industries and stock markets. By understanding these dynamics at a company and industry level, BlackRock Throgmorton Trust can use its toolkit to help capitalise on those businesses that are the ultimate winners in this battleground, further enhanced by gearing on the long side, whilst also profiting from short positions in those companies that fail to adapt and see a permanent loss of value.

Risk: 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.

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 January 2021 and may change as subsequent conditions vary.

1BlackRock, December 2020
2AIC UK Smaller Companies sector
3Morningstar, Marten & Co, December 2020
4BlackRock, December 2020