BlackRock Throgmorton’s (THRG) annual results to 30 November 2020 saw it deliver a NAV total return of 9.1%, which was well ahead of the benchmark return of 3.8%. THRG’s market return was 8.2%, in another strong year for the UK smaller companies fund.
Ability to short a defining feature but strong performance led by long positions
THRG’s short book contributed 2.5% to relative performance. The ability to take short positions is a defining feature of THRG. Nevertheless, the top 10 contributors to performance over the annual results period were all long positions.
Here is Dan Whitestone, THRG’s manager, recapping performance attribution: “Despite the positive contribution from the short book, the top 10 largest contributors for the financial period were all long positions. As we discuss further below, these are very different businesses operating in different markets. The common theme is that these are all differentiated companies with compelling product offerings that in many cases have been able to leverage the power of technology to enhance their digital offerings. A great example of this is Games Workshop which was the largest positive contributor to performance during the year. This is a share that we discussed at length in the half-yearly financial report, but since then the company has continued to grow its sales and profits through this crisis, with three upgrades to guidance, and all despite having to close operations completely at the beginning of the pandemic. It has been very successful in investing in its product offering, expanding its digital capabilities, and attracting increasing levels of new customers, which we believe will lead to a higher volume of repeat ordering. Games Workshop has undoubtedly had a stellar 2020 but we think the outlook is very positive and it remains the largest position in the portfolio.
YouGov, another long-term holding has continued to deliver strong growth in revenues and profits. The company continues to deliver on its strategy to monetise its online panel data across an increasing array of industries seeking data insights. Indeed, we expect strong and enduring demand for digital marketing and data analytics and believe YouGov’s differentiated and compelling offering is well placed to benefit. Shares in Avon Rubber performed well, with the business demonstrating resilience during the Coronavirus crisis. The company delivered strong organic revenue and profit growth throughout, and its long-term contracts provide a high level of earnings visibility. In addition, the sale of its dairy business has enabled greater focus on the protection business, and has strengthened its balance sheet, providing the business with the firepower for value-enhancing acquisitions to aid growth. Shares in specialist sustainable investing fund manager, Impax Asset Management were strong as the business has continued to generate strong inflows, benefiting from top performing strategies and increasing investor demand for sustainable products.
The company’s ability to invest in non-UK listed shares has once again helped deliver outperformance to shareholders, with three of the top 10 contributors coming from international holdings: Masimo, Chegg and Xero. Masimo, a US listed medical device company has delivered strong revenue growth through the year, with upgrades to guidance. Chegg, as discussed in the half yearly financial report is an online educational platform that has seen subscriber growth accelerate as a result of COVID-19 as well as delivering increasing success in monetising its offering through study “bundles”. Chegg benefits from a subscription-based model providing high levels of recurring revenues, and we think is well placed to continue to monetise the virtual education environment over the coming years. Xero, the Australian-listed, cloud-based accounting software business, has continued to trade extremely well with strong subscriber additions across multiple geographies. What’s more, the capital-light business model and high gross margin ensures an accelerating drop through of revenues to profits and with the large and growing addressable market for cloud-based accounting software, we believe the multi-year opportunity for this business remains significant.
The largest detractors have been companies most heavily impacted during the early stages of the pandemic, notably within Consumer Services. As a result of lockdowns, travel bans and social distancing measures, several companies that we own/owned were mandated to suspend operations which had a significant financial impact. To hold ourselves to account, with hindsight we were too slow to reduce our exposure here in aggregate. The largest two detractors in this area were WH Smith and Jet2, both of which were victims of airline travel disruption. The inability to predict the duration of route closures for Jet2 or concession/shop closures in transportation hubs for WH Smith, and what the longer-term impact will be on air passenger volumes, has created enormous uncertainty over the profit outlook and cash drain on both businesses. Both businesses we believe are well managed companies with strong track records of value creation that have proved themselves as good operators and market share winners. However, due to the increased uncertainty facing these industries in the medium-term we have exited the position in Jet2 and significantly reduced the holding in WH Smith. Other detractors which have been similarly affected by pandemic related disruption include IWG, Vistry and JD Wetherspoon.”
‘The Brexit resolution is the removal of a huge cloud of uncertainty that has significantly impacted valuations’
“The economic outlook remains highly uncertain, however, we remain very excited about the opportunities ahead.
The Brexit resolution is the removal of a huge cloud of uncertainty that has significantly impacted valuations across the small and mid-cap universe, and so it would not surprise us at all to see more inflows into this universe. If anything, COVID-19 really should illustrate the attractions of investing in UK small and medium-sized companies as so many businesses have performed so strongly through the pandemic, reflecting the strength of their offering and the global universe they serve.
Both of these make us think this rising tide should lead to a re-rating in valuations for many of our holdings. Furthermore the UK is leading the charge on rolling out its vaccinations, and while there is clearly potential for spikes in cases of the virus in the short-term, a viable vaccine provides light at the end of the tunnel for the world to emerge from the pandemic and return to normality.
History has shown that crises accelerate industrial trends, market share shifts, and changes in consumer behaviour. We thought this would be the case with COVID-19, but we have been surprised by the sheer speed and scale of the level of dispersion of financial performance that it has created across industries and companies. Some companies have been hit hard while others have been able to take market share at an accelerated rate. We remain of the firm belief that there are sizeable opportunities for companies that can differentiate themselves and/or are exposed to long-term secular trends, while the pressure on balance sheets and cashflows for struggling companies is intensifying. This dispersion of returns between sectors and intra-sectors is likely to persist.
Going forward, we expect two major trends to dominate at the stock and industry level. First is our belief in the acceleration of many secular trends catalysed by COVID-19, e.g. digital transformation, and as we have discussed in this report we believe we own many companies well placed to benefit from this. Second is our belief in the “Corporate Darwinism” unfolding across many industries as the differentiated and financially strong take market share at an accelerated rate from the weak and solidify their market-leading positions. In fact we can already see growing evidence of this across retail, veterinary services, electrical component distribution, building materials to name just a few. What has been remarkable about this crisis is the level of dispersion of financial performance that it has created across industries and companies.
In summary, we remain very excited about the opportunities ahead. We think that the dispersion we have already seen is likely to be enduring because it is causing actual changes at the industry level: changes in market share and changes to profits and cashflow.”
[It is great to see BlackRock Throgmorton going from strength to strength. Right now, it is the best-performing conventional UK small cap trust over the past 12 months (setting aside the micro cap focused companies which have staged a remarkable recovery this year, and Odyssean, which has had a few successes within its very concentrated portfolio). The trust seems able to maintain its premium rating and this is allowing it to grow by issuing new shares. This is good news for investors, who should see an already competitive ongoing charges ratio continue to fall as well as increased liquidity in the trust’s shares.]
THRG: BlackRock Throgmorton has an excellent year