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Dan Whitestone sole manager of BlackRock Throgmorton

Dan Whitestone sole manager of BlackRock Throgmorton – alongside the publication of its results, BlackRock Throgmorton has announced some changes to its management arrangements.  During the year ended 30 November 2017 the fund’s NAV returned 33.9% on a total return basis, compared with a total return of 21.3% from the benchmark index, the Numis Smaller Companies excluding AIM (excluding Investment Companies) Index. A total dividend for the year of 9.0 pence per share represents an increase of 20.0%.

Proposed changes to management arrangements and investment restrictions

A number of changes to the portfolio management and investment policy are being proposed. First, the benefits arising from the ability to vary market exposure and establish short positions through derivatives will now be achieved through a combined portfolio with a single manager, rather than in two separate portfolios. It has been agreed that Dan Whitestone, who has worked alongside Mike Prentis on the fund since March 2015 and who heads the UK smaller companies team at BlackRock, will become the sole portfolio manager following publication of the 2017 Annual Report. Mike remains a key member of BlackRock’s UK Small Cap team which collectively conducts investment research and shares ideas, and this team-based approach will continue to be a feature of the investment management of the Company. Collectively the four-strong BlackRock UK smaller companies team have 60 years’ experience of investing in smaller companies.

In a move that it is not anticipated will materially change the overall source of revenues or profits made collectively by companies in the portfolio, the Board is proposing that, in order to better reflect the evolving nature of the listing environment for UK smaller companies, in which an increasing number of high quality companies are choosing initially to list (and thereafter remain listed) on AIM, the Company will seek shareholder approval to remove the current restriction on the percentage of the portfolio permitted to be invested in AIM, and also to change the benchmark index to one which includes AIM.

Additionally, the Board is conscious that the geographical location of a company’s listing can often reflect where the best valuations can be achieved at IPO and subsequently, and not necessarily where a company’s business is located or where most of its turnover is derived. In order to provide further flexibility, the Board are therefore also requesting shareholder approval that up to 15% of the gross assets may be invested in non UK-listed securities which will allow the portfolio manager to benefit from specific opportunities in the small cap space that may be listed or conduct their operations in countries other than the UK. They anticipate that these would be predominately European smaller companies where they see a more encouraging outlook. Other mandates managed by the portfolio manager have similar flexibility, and this change may allow the company to take advantage of particular opportunities previously not available.

Extract from the managers’ report

The managers’ report says that the largest positive contributor to performance during the financial year was Keywords Studios, the leading international technical services provider to the global video games industry which has seen its share price more than double during the period. Keywords’ most recent results showed strong growth in revenues and profits, which increased by 50% and 60% respectively, driven by continued organic growth as well as positive contributions from acquisitions. The company has been taking advantage of the significant market fragmentation and the shift of the big games companies to outsource more of their requirements, and continues to expand its capabilities and geographical presence through M&A. Copper producer Kaz Minerals reported interim results showing earnings and costs better than expected helped by a higher copper price, whilst the company also raised production guidance for the full year. Driven by successful new projects, Kaz remains the fastest growing and one of the lowest cost copper miners in the world. Veterinary products manufacturer Dechra Pharmaceuticals continued to deliver strong organic growth ahead of consensus whilst higher synergies from acquisitions has resulted in broker upgrades to forecasts. Ticketing and virtual queuing solutions provider Accesso has been another top contributor during the year. Accesso is a great example where we see an opportunity for long-term compounding growth, as the company is benefiting from a shift towards electronic and mobile commerce in the attractions market, where their market leading technology is becoming increasingly central to their customers’ propositions, leveraging software and data to improve guest experience while driving operator profitability.

Whilst the short book cost money in absolute terms, losing less than 2% against our benchmark which appreciated by over 23% we think is a good outcome. 2017 has been a positive year for delivering stock specific successes from short positions, and our approach of targeting over-leveraged or capital intensive business, and companies facing structural or cyclical pressures has been rewarded throughout the year. In fact the second largest contributor to performance of the total trust return was from one of our short positions in a UK construction company that has fallen more than 90% on the back of reduced financial guidance, increased contract provisions and rising net debt. This is a company that we have been short for a long period of time, operating in a highly commoditised and capital intensive industry, with no pricing power, and this year our patience and disciplined approach certainly paid off.

The largest stock specific detractor during the period was the UK’s leading veterinary practitioner CVS Group. This was a disappointing result as CVS, a core holding across our team, had been a strong contributor to performance for most of the financial year, delivering consistent profit and revenue growth, acquiring surgeries at attractive valuations whilst also benefiting from structural underlying growth in veterinary spending. However the shares fell sharply on the last day of November (our financial year end) after the company released a trading statement flagging that like-for-like sales grew at only 1.5% (versus last year’s growth of over 6%) and that recent sales patterns had been more volatile. The circa 20% fall in the share price has since proved to  be an overreaction to the 3% earnings downgrade for a quality business that we believe has a long runway of growth as they continue to consolidate the veterinary market and the shares have subsequently rallied.

Elsewhere plastic packaging engineer RPC fell as the market grew concerned around the company’s acquisition strategy following the announced acquisition of Letica for $490m funded by a 1 for 4 rights issue.

THRG : Dan Whitestone sole manager of BlackRock Throgmorton

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