Impressive returns from BlackRock Throgmorton – Over the year ended 30 November 2019, BlackRock Throgmorton Trust delivered an NAV return of 24.4%, three times the 8.0% return on its benchmark index, the Numis Smaller Companies plus AIM (excluding Investment Companies) Index. The share price returned an even more impressive 42.8% during the year as the discount narrowed from 12.0% at the start of the year, to a premium of 0.9% as at the financial year end.
Since the year end and up to the close of business on 3 February 2020, the NAV has increased by 7.6% compared to the benchmark index return which increased by 4.7%.
The trust is managed to produce capital growth rather than income, nevertheless the board has decided to dip into reserves a little to pay an increased dividend of 10.2p, 2% higher than last year.
Extract from Dan’s manager’s report
“2019 has been a successful year, with the Company’s NAV rising by 24.4% and outperforming our benchmark by 16.4%, with dividends reinvested. This level of outperformance has certainly exceeded our expectations, particularly given the volatile economic and political backdrop. However, we believe this result supports our belief that stock and industry specifics can triumph over macroeconomic factors, particularly during times of uncertainty. Encouragingly, the Company has delivered many positive stock specific results across both long and short positions. Whilst returns during the year have been predominantly driven by the long book, the short book has also delivered a significant and positive outcome, contributing close to 1% in absolute performance, which is very encouraging considering the backdrop of rising equity markets.
The largest positive contributor to performance came from our holding in JD Sports Fashion. We discussed the holding at length in the half-yearly report, however the shares have continued to rise during the second half of the year after the company delivered its third upgrade in earnings in the space of twelve months. Incredibly, this differentiated retailer continued to deliver high single digit like-for-like sales growth in-store in the UK. We highlight this because it goes to show that differentiated businesses can outperform peers, and company statements about ‘weather’ and ‘weak macroeconomics’ should not always be taken at face value. Shares in JD Sports Fashion are up more than 125% during the period and contributed 1.85% to relative performance.
Industrial software engineer Aveva was the second largest contributor to performance during the period. The company has been trading well on a consistent basis and has seen organic revenue growth accelerate more recently, driven in part by their customers’ desire to spend on the digital transformation and through multi-year contracts. We believe that digital transformation will continue to be a key secular growth driver of capital expenditure in the coming years as corporates invest in their digital journey and seek to drive market share or remove costs and complexity from their operations. With specific regard to Aveva, we believe this company is well placed as a market leader, with a compelling product offering to help enable their customers to embrace the “digital twin”. 4imprint Group, another long-term core holding, remained a top contributor for the full year as the business continued to deliver organic top-line growth. Shares in specialist media publisher Future rose in response to an underlying earnings upgrade, while also announcing a significant accretive acquisition of TI Media, the publisher of titles such as Marie Claire UK and Country Life.
Other notable contributors included Xero, Dechra Pharmaceuticals and Workspace Group which rose towards the end of the period as UK domestic assets performed strongly in response to polling data that leaned towards a Conservative majority in the election. The names mentioned above are merely a snapshot of some of the largest contributors to performance during the year. There were many other companies that contributed. The common theme amongst these holdings, in most cases, was the underlying businesses exceeding expectations and raising forward guidance.
We continue to believe that the ability to short stocks is a key differentiator of our Company compared to most other investment companies in our universe. It is therefore pleasing when the short book not only adds to relative performance, but also when short positions, which are typically smaller than longs, feature in the top ten contributors to performance, representing stock specific ‘alpha’, or outperformance. This year we have had two shorts which have been top ten contributors to performance, each falling more than 70% and each contributing more than 0.6% to relative returns. The largest was a UK contractor that we have mentioned in many of our monthly updates. Despite an emergency fund raise and a series of negative updates, the company issued a significant profit warning in June, resulting in the share price collapsing. Despite the share price weakness, we had been adding to this short position in the months ahead of the warnings, a decision that proved to be profitable. It is all too tempting to close short positions after material share price falls, particularly when they may appear “cheap” and with so many people who want to tell you they are “cheap”, but there are times when real conviction is required, and the resolve to maintain or add to the short. The other material short contributor was from a position in a listed Investment Trust which has fallen as the NAV has continued to be revised down as many of that Trust’s listed companies have delivered material profit warnings (some of which this Company has been short directly) whilst some of the private investments have seen their value written down as they have failed to deliver.
The largest detractor from performance was veterinary medicine producer, Eco Animal Health Group, which fell after the company issued a profit warning in November in response to a sharp slowdown in sales in China. Demand has fallen heavily in response to the African Swine Fever epidemic that has significantly reduced the pig herd and where the impact on revenues was far greater than we had anticipated. The company’s decision to maintain the cost base so they are well placed to benefit from the recovery in demand once the outbreak is contained, meant the reduction in revenues had a disproportionate impact on profitability. We have subsequently reduced the position, but maintain a holding as we see its long-term competitive position unchanged.
The next largest detractor was Craneware, a UK listed software company focused on the US healthcare market, which fell in response to a profit warning earlier in the year. The business has a very high percentage of recurring revenues, so the shortfall versus expectations was related to a reduction in new contract wins, which was attributed to poor sales execution rather than any change in the competitive landscape. We discussed this with management at the time. The issues appear to be transient and remedial actions are in place. Therefore, we believe this should have little impact on the long-term earnings power of the company. However, we reduced the holding as a result.”
[Readers of our notes on the trust will not be surprised by the extent of the outperformance that Dan delivered in 2019 but we should register our congratulations to him and his team. In the immediate aftermath of the Conservative election victory, UK equity funds of all varieties jumped in value. However, a focus on company fundamentals should continue to stand stock pickers such as Dan in good stead over the year to come.]
THRG : Impressive returns from BlackRock Throgmorton