A modest allocation to overseas stocks, including three US tech companies, failed to boost half-year returns at BlackRock Smaller Companies (BRSC) as the trust continues to suffer from poor investor sentiment to its asset class.
Although boosted by its merger in April with stablemate BlackRock Throgmorton, the now £632m investment trust had a disappointingly flat six months to 31 August with net asset value up just 0.3% or 3.2% with the now quarterly dividends included.
Hit by a profits warning from mobile payments company Boku, which saw its shares crash by a third in July, BRSC underperformed the 4.3% gain in the Deutsche Numis Smaller Companies plus AIM index.
Shareholders saw a total return of just 1.7% as the share price discount widened despite ongoing buybacks by the board. The shares currently trade 14% below net asset value.
Roland said Boku’s problems were caused by a “delayed customer roll out, compounded by the suspension of two contracts in one market. We have reduced the position to 1% whilst awaiting clarity on both these issues, but continue to believe the core product offering significantly simplifies the payment journey for their customers. The most recent trading update suggests no worsening of the situation,” he said.
As a result of the Throgmorton merger, BRSC can invest in non-UK stocks of which it has 8%.
Arnold highlighted three US companies providing exposure he cannot find easily in the UK: SPX Technologies, a supplier of heating, ventilation and air conditioning, and Advanced Energy Industries, a provider of power solutions, both of which have seen increased business with data centres.
He also bought into VSE Corporation, a provider of aftermarket distribution and maintenance, repair and overhaul services to the aviation sector.
Unfortunately, shares in all three have fallen in the past six months and they now account for 0.9%, 0.8% and 0.9% respectively of the portfolio.
In the UK Arnold remains frustrated by the market’s unwillingness to reward the progress of his quality growth stocks. He complained again that while his top ten holdings had all increased earnings forecasts, five shares had underperformed the market and six had “de-rated”, although Polar Capital had advanced on the fund group’s growth in assets under management.
In February extended a standstill agreement with activist hedge fund Saba to 30 June 2030. This does not prevent the US firm buying the trust’s shares but it cannot vote against the board. It ends after the conditional 100% exit BRSC will have to offer if it underperforms in the three years to 30 June. Currently, the trust is underperforming its index over one, three and five years though the manager remains hopeful that the rise in M&A and bids will eventually cause a turnaround in the asset class.
Our view
David Batchelor, senior analyst at QuotedData, said: “There is a disconnect between the underlying performance of BRSC’s portfolio companies and the returns being delivered to shareholders. The manager points to earnings upgrades across all ten of the largest holdings, while continued takeover activity reinforces the argument that UK smaller companies are undervalued.
“The merger with BlackRock Throgmorton has nevertheless delivered tangible benefits, with the enlarged asset base helping to reduce annualised operating charges from 0.8% to 0.63%. The additional investment flexibility is also beginning to make a difference, with overseas holdings accounting for almost 8% of the portfolio in October, providing exposure to growth opportunities that are harder to access through UK-listed companies. Meanwhile, £19.3m of buybacks during the period have provided some NAV accretion.”
