On 9 June 2022, Portfolio Manager, Roland Arnold shared the case for investing in UK smaller companies and provided an update on the performance of the Trust, portfolio positioning and the outlook for the year ahead.
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.
Key insights:
- The BlackRock Smaller Companies (BRSC) investment trust seeks to identify long-term compounding growth companies.
- Smaller companies aim to outperform over time. Over the long term, smaller companies have outperformed large caps.
- The BRSC process is bottom up. The investment managers meet as many companies as possible - usually between 700 and 800 a year. This has increased during the pandemic.
- There are five characteristics we believe are key when identifying smaller companies that will be successful over the long term: a strong market position, a track record of growth, cash generation, a strong balance sheet and sound management.
- Through COVID, effective management teams have been able to change business direction very quickly to take advantage of market conditions and circumstances. Spending time with management teams is a fundamental concept of the BRSC investment philosophy.
- The core positions in the portfolio continue to do well: Watches of Switzerland, Next 15, Oxford Instruments, Bloomsbury Publishing, YouGov and Tatton Asset Management.
- The portfolio has seen some benefit from merger and acquisition activity, including Sanne, Codemasters, Vectura and Scapa.
- Weaker holdings have included Joules, a retailer vulnerable to the difficult conditions on the high street.
- It's been a difficult year for equity markets and sentiment has been extremely negative for smaller companies in particular: worse than Brexit, the global financial crisis and the dotcom sell off.
- The manufacturing sector is still seeing a supportive environment, but consumer confidence has seen a sharp contraction.
- A recessionary environment looks likely, but it should be relatively shallow.
- The trust’s positioning has changed over the last 12 to 18 months, moving away from consumer-facing areas.
- The investment managers are still relatively positive on the industrial cycle in spite of the economic risks. There is significant investment in supply chains coming in Western economies given the difficulties of sourcing in China.
- The rise of wage inflation means there will need to be investment in productivity. Corporates will still invest in marketing, data, digital and efficiency tools.
- Inflationary pressures remain. The trust’s focus remains on businesses that provide essential services or products and those that have pricing power in growing markets.
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 of June 2022 and may change as subsequent conditions vary.
