BlackRock Smaller Companies Trust plc

About this investment trust

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.

The Company aims to achieve long-term capital growth for shareholders through investment mainly in smaller UK quoted companies.

Why choose it?

We aim to find the ‘hidden gems’ within the small cap universe, investing in high-quality growth companies that are able to shape their own futures regardless of the wider economic environment. As active managers, we believe this area presents us with an attractive hunting ground: these companies are often under-researched, and pricing is inefficient. This gives us great opportunities to generate returns for our clients over the long term.

Suited to…

Investors looking for carefully selected opportunities among the UK’s vibrant small cap sector for long-term capital growth. Investors need to be able to tolerate variation in their capital.

Morningstar Rating: Since January 2012.
Awards/Ratings have not been superseded to date.

The Morningstar Analyst Rating is subjective in nature and reflects Morningstar’s current expectations of future events/behaviour as they relate to a particular fund. Because such events/behaviour may turn out to be different than expected, Morningstar does not guarantee that a fund will perform in line with its Morningstar Analyst Rating. Likewise, the Morningstar Analyst Rating should not be seen as any sort of guarantee or assessment of the creditworthiness of a fund or of its underlying securities and should not be used as the sole basis for making any investment decision.

Past performance is not a reliable indicator of future results and should not be the sole factor of consideration when selecting a product or strategy.

What are the risks?

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

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ESG Integration

The fund noted above does not commit to sustainable criteria nor does it have a sustainable investment objective.

BlackRock considers many investment risks in our processes. In order to seek the best risk-adjusted returns for our clients, we manage material risks and opportunities that could impact portfolios, including financially material Environmental, Social and/or Governance (ESG) data or information, where available. See our Firm Wide ESG Integration Statement for more information on this approach and fund documentation for how these material risks are considered within this product, where applicable.

Fund manager commentary

31 August 2024

Comments from the Portfolio Manager

Please note that the commentary below includes historic information on the Company’s NAV performance and index performance.

The figures shown relate to past performance. Past performance is not a reliable indicator of future results.

During August, the Company’s NAV per share returned -2.0% to 1,684.48p on a total return basis, while our benchmark index (Deutsche Numis Smaller Companies plus AIM (excluding Investment Companies) Index) returned -1.2%.¹

Equity market volatility remained a feature during August. Early in the month, markets around the world saw sharp declines in response to a combination of disappointing economic data out of the US and an interest rate hike by the Bank of Japan. Market sentiment improved during the second half of the month as investors found reassurance in the potential interest rate cuts by the Federal Reserve (Fed), especially following comments made by Powell at the economic symposium at Jackson Hole, as well as a robust Q2 earnings season. As a result, most markets were able to recover their losses and end the month in positive territory, however despite the second half pullback, UK small and mid-caps ended the month down.

During the month, The Bank of England (BoE) cut the base interest rate by 0.25 percentage points to 5%, marking the first reduction since the pandemic. The BoE also upgraded its growth forecast for 2024 to 1.25%. Additionally, the Office for National Statistics reported that the UK economy grew by 0.6% in the second quarter of 2024, all of which contributed to the upshift and stabilization of the markets.

The Company’s performance during the month was somewhat disappointing, as positive updates from our holdings far outweighed any negative stock specific developments. However, there are sometimes months where the overall portfolio performance is more impacted by what we don’t own than what we do. August was one of those months where four of the top five detractors to performance were shares that we do not own; Bank of Cyprus, Playtech, Plus500 and Just Group all saw double digit share prices, causing a significant headwind to relative performance. Shares in 4imprint drifted lower after the company reported H1 results with a slightly more cautious tone. Although the company continued to grow revenue and profits, while maintaining a double-digit operating margin, management highlighted ongoing softness in industry demand, with recession, interest rates and inflation, weighing on their customers budgets.

The largest positive contributor during the month was specialist business advisory firm, FRP Advisory. The company recently reported solid full year results to the end of April, highlighting excellent growth in both revenues and profits, with all five of its key pillars making a positive contribution. Strong organic growth across the group has been supplemented by targeted acquisitions, and the company maintains a net cash balance sheet with healthy M&A pipeline, which was further demonstrated post month-end with the acquisition of WlliamsAli Corporate Finance. Other notable contributors included Gamma Communications, which has seen a steady increase in its share price through the course of the year, and Baltic Classifieds which continued to appreciate following solid full-year results in July.

In summary, and as we have highlighted for a long period of time now, the current valuation of the UK market, and in particular UK small and mid-cap, is about as attractive as we have ever seen. Meanwhile, the economic backdrop is certainly improving. Unemployment remains low, balance sheets remain strong, inflation is falling, consumer confidence and PMIs are improving. This backdrop gives confidence that the earnings outlook for our businesses is broadly supportive for an earnings recovery. Meanwhile, Labour’s victory in the General election could now mark the end of the persistent investor aversion from the UK and stem the outflows from UK small and mid-caps. Labour’s business friendly policies and some much-needed stability in government, should provide a more positive backdrop for businesses to start investing with some level of certainty and investors to once again look to the UK market for an attractive return. Furthermore, the first interest rate cut announced by the BoE could be a catalyst for equity market leadership to broaden beyond US mega cap tech, which should begin to filter down into the UK SMID (small and mid cap) universe. In this scenario, we could see an environment where small and mid-caps, and in particular the holdings in this portfolio, could move a long way on limited liquidity.

As ever, we remain focused on the micro, industry level change and stock specific analysis and the opportunities we are seeing today in our universe are as exciting as ever. Historically, periods of heightened volatility have been followed by strong returns for the strategy and presented excellent investment opportunities.

We thank shareholders for your ongoing support.

¹Source: BlackRock as at 31 August 2024

Unless otherwise stated all data is sourced from BlackRock as at 31 August 2024.

Any opinions, forecasts represent an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research, investment advice or a recommendation.

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.

Portfolio manager biography

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.

Roland Arnold is manager of BlackRock Smaller Companies Trust plc and a member of the UK Equity Team. Mr Arnold has been co-manager of the BlackRock UK Special Situations Fund since August 2012, and manager of Small & Mid Cap UK Equity Portfolios since 2006. Roland’s service with the firm dates back to 2000, including his years with Merrill Lynch Investment Managers (MLIM), which merged with BlackRock in 2006.

Board of directors

All of the Directors are independent of the management company and are members of the Management Engagement Committee. With the exception of the Chairman all Directors are members of the Audit Committee.

Ronald Gould (Chairman) was appointed to the Board in April 2019 and became chairman of the Company in June 2019. He is currently Chairman of Henderson Far East Income Trust plc, Think Alliance Asia and was previously Chairman of Credo Capital Partners AB, Compliance Science Ltd and a Non-Executive Director of the JPMorgan Asian Investment Trust plc. He was also previously Managing Director and Head of the Promontory Financial Group in China, CEO of Chi-X Asia Pacific, Senior Adviser to the UK Financial Services Authority, CEO of investment bank ABG Sundal Collier and Vice Chairman of Barclays Bank asset management activities.

Susan Platts-Martin (Senior Independent Director) appointed on 21 April 2016, is the Chairman of Baillie Gifford China Growth Trust plc and formerly sat on the Advisory Board of the Barings Targeted Return Fund. She previously acted as Protector of Power to Change Trust. A qualified chartered accountant with 26 years' experience in financial services, she was the first head of investment trusts at Fidelity International, responsible for establishing and growing a successful investment trust business. She has experience of both open and closed ended funds having also been director of product development and head of fund accounting at Fidelity.

Mark Little (Chairman of the Audit Committee) was appointed to the Board on 1 October 2020. He is a non-executive director and also chairs the audit committees of the Majedie Investment Trust Plc and Securities Trust of Scotland Plc and is a non-executive Director and audit committee chairman designate of the Abrdn Equity Income Trust plc. He was also previously Investment Director at Seven Investment Management and a non-executive director (and audit committee chairman) of Sanditon Investment Trust plc as well as a non-executive director for the start-up business UWI Technology and the charity Winning Scotland Foundation. Mr Little has a wealth of experience in the financial services sector, and began his career as a fund manager with Scottish Widows Investment Management after qualifying as a chartered accountant with Price Waterhouse in 1991. He subsequently worked as Global Head of Automotive Research for Deutsche Bank and joined Barclays Wealth in 2005, where he became Managing Director of Barclays Wealth (Scotland and Northern Ireland).

James Barnes was appointed to the Board on 31 July 2021. He is a Non-Executive Director and is also currently the Chairman of Vestey Holdings, the Horticultural Trades Association, Thirlstane Castle Trust and the Crieff Food Company and was previously a Director and Chairman of Dunedin Smaller Companies Trust plc. Mr Barnes was also previously a Director of Dobbies Garden Centres plc; he was instrumental in growing the business and leading its sale to Tesco in 2007. Mr Barnes has a wealth of experience in the financial services and UK smaller companies sector and began his career in corporate finance and investment banking.

Helen Sinclair was appointed to the Board on 1 March 2022. She began her career in investment banking and spent nearly eight years at 3i plc focusing on management buy-outs and growth capital investments. She later co-founded Matrix Private Equity (which became Mobeus Equity Partners) in 2000 and subsequently became Managing Director of the company before moving to take on a number of non-executive director roles. She is a non-executive director of WH Ireland Group plc, Shire Income plc and Sherborne Investors (Guernsey) C Limited and Chairman of Octopus Future Generations VCT PLC. Ms Sinclair was previously Chairman and non-executive director of British Smaller Companies VCT and a non-executive director of Mobeus Income & Growth 4 VCT plc and The Income & Growth VCT plc.

Dunke Afe was appointed to the Board on 1 January 2024 as a Non-Executive Director. She is an accomplished global marketing executive with extensive experience in raising brand awareness, delivering high-impact portfolio strategies and omni-channel marketing campaigns to drive business growth. She has previously worked with top blue chip multinationals including Unilever, Kimberly Clark and Estee Lauder. Ms Afe is also a Non-Executive Director of CT UK Capital and Income Investment Trust plc.