BlackRock Throgmorton Trust (THRG) has released its annual results for the financial year ending 30 November 2022
- Over the 12 month period THRG reported a NAV total return of -31.1%, and share price total return of -35.5%. This compares to the -17.5% return of its benchmark index the Numis Smaller Companies plus AIM (excluding Investment Companies) Index.
- THRG’s underperformance came primarily in the first half of its financial year, where it underperformed its benchmark by 16.9%, a victim of the painful growth-stock rotation we saw across the globe. In the second half of the year THRG reversed that trend, outperforming its benchmark by 2.4%
- The major positive contributors were 4imprint Group, and Ergomed, while the major detractors were IntegraFin, Impax Asset Management, and Dechra Pharmaceuticals.
- The board was proactive in managing THRG’s discount, which traded at an average discount of 3.5% throughout its financial year. 1,773,900 new shares were issued for a total consideration of £16,550,000 and 2,051,000 ordinary shares were bought back into treasury for a total consideration of £11,544,000.
- THRG has declared a final dividend of 8.5p per share, a 0.5p increase on the prior year’s.
THRG’s investment manager, Dan Whitestone, commented:
“It is disappointing to report a negative return for the company and underperformance of the benchmark over this period. Many of our investments have been caught up in the market turbulence and fallen sharply regardless of the strength of their underlying operations and financial results. To be clear, we do make mistakes at the individual company level (the consequences of which are often very painful) but this is not a year where our poor performance can be attributed to lots of profit warnings or negative developments to investment theses. The underperformance has been driven by our style bias towards growth – and the market devaluation of growth businesses. This is particularly frustrating as whilst we understand and agree with the logic to devalue loss-making and cash-consumptive speculative businesses as interest rates rise, many profitable and differentiated businesses have been unfairly punished too.
“Furthermore, it is with a sense of real irony that many companies with strong pricing power and no debt have fared far worse than peers who have inferior balance sheets and weaker track records of volume growth and margin expansion. Indeed, it is the latter that are far more exposed to inflationary cost pressures and higher interest charges eroding profitability and cashflows. We have continued to apply our robust investment process and most of our companies have continued to execute well operationally and financially through the year. Their share price falls reflect a change in valuation as the market reassesses the appropriate price ‘to pay’ for these type of businesses, in context of greater economic uncertainty and rising interest rates.
“The primary driver of underperformance was the rotation from higher growth companies, and a broad de-rating across the UK small and mid-cap market. Extraordinarily we have had fewer company specific disappointments than usual but in the short-term share prices are also influenced by additional factors, including the macro and political environment, the discount rate, liquidity, and investor sentiment and flows which can override strong company specifics. It is these factors that have hurt. Over the longer-term, we believe growth in absolute value is all about the growth of cash-backed earnings and we take comfort that by continuing to focus on differentiated and profitable growth companies, that continue to meet and beat expectations, our patience will be rewarded with significant share price recoveries in these holdings.
“Whilst we are always open to adding new short positions to the portfolio, we continue to believe the best value in the market today remains in well-financed companies with enduring long term organic growth prospects that will use this period to enhance their position to win more share. Industrials and Consumer Services are two of the sectors where we think some of the most differentiated and interesting investments reside and where we continue to deploy capital even though they are in the eye of the storm, so to speak, as investors grapple with headwinds to consumption and industrial activity.”
[It is encouraging to see that Throgmorton’s performance picked up in the second half of 2022. Logic might suggest that in an environment of faltering economic growth, investors would prize businesses with strong, defensible market positions operating in areas of the economy that are experiencing secular growth.]