Throgmorton’s 2024 financial year highlights

Outperformed its benchmark by 2.2%.

BlackRock Throgmorton Trust (THRG) has recently released its annual results for its 2024 financial year, covering the 12 months to 30 November 2024 – which can be read here. It marked Dan Whitestone’s ninth financial year of out-performance against its benchmark, with Dan having just celebrated his 10-year anniversary as manager of THRG, having been a named manager on the trust since March 2015.

• Over the 12-month period, THRG reported a NAV total return of 16.3%, outperforming its benchmark by 2.2%. We cover the major contributors to THRG’s returns on page 13.

• THRG’s NAV outperformance was achieved against a background what was, in Dan’s opinion, a weakening UK economy; with the second half of THRG’s financial year being a particularly difficult time. We describe the market backdrop in more detail on pages 4 to 7.

• THRG also reported a share price total return of 5.0%, reflecting its discount widening from 3.6% to 13.2% by year-end. However, THRG’s board was proactive in defending its share price, having repurchased 8.6m shares for a total consideration £52.1m.

• THRG’s board has proposed a final dividend of 14.25p per share, making the total dividend 18.0p per share over the year, fully covered by the revenues generated over the period.

• There has been a subtle change to THRG’s investment guidelines, whereby the board has removed the 12-month divestment requirement for companies which enter into the FTSE 100, so long as such holdings do not exceed 5% of THRG’s gross assets.

Fund profile

Further information about THRG is available at the investment manager’s website. Please click here

THRG aims to generate capital growth and an attractive total return by investing primarily in UK smaller companies and mid-capitalisation companies traded on the London Stock Exchange. It uses the Deutsche Numis Smaller Companies Index (plus AIM stocks but excluding investment companies) as a benchmark for performance purposes, but the index does not influence portfolio construction.

UK smaller and mid-capitalisation companies tend to outperform large companies over longer timeframes. In addition, the focus on smaller and mid-capitalisation companies offers exposure to a less-efficient and less-well-researched area of the market, which creates opportunities for an actively-managed fund to add value. Dan also has permission to invest up to 15% of the portfolio in stocks listed on exchanges outside the UK.

Both long and short positions

THRG’s unique approach includes taking both long and short positions within the portfolio

Uniquely among listed UK smaller companies trusts, THRG’s portfolio may include a meaningful allocation to short as well as long positions in stocks. Up to 30% of the portfolio may be invested in CFDs, both long and short. Under normal market conditions, the net market exposure will account for 110–115% of net assets.

The manager

Dan Whitestone has been sole manager of the trust since 12 February 2018

BlackRock Investment Management (UK) Limited was appointed manager of the trust in July 2008. Dan Whitestone, head of the emerging companies team at BlackRock, has been sole manager of the trust since 12 February 2018 (he had been co-manager, alongside Mike Prentis, since March 2015). Dan heads a team of four. All members of the team manage portfolios, and between them they manage or advise on a variety of different funds. The team share research responsibilities between them.

Market backdrop – the valuation opportunity continues to improve

THRG’s results are set against the backdrop of an increasingly cheap UK market, arguably now the cheapest major small-cap market globally. This has partially influenced THRG’s asset allocation, as we describe on page 7. The declining valuations of certain UK stocks present investment opportunities atypical for a “quality growth” manager to consider, with the UK’s discount at its lowest level in Dan’s 10 years as manager.

UK small caps versus the world

UK small caps have recently been dubbed the ‘most unloved’ stocks globally. This is illustrated by the UK small-cap sector’s forward price-to-earnings ratio falling materially below its long-term average compared to others, as shown in Figure 1.

Figure 1: % difference in current forward PE ratio versus 10-year average

Source: Bloomberg

THRG’s portfolio offers investors a similar valuation opportunity, albeit through the lens of a quality-growth portfolio. This style bias makes THRG an even more attractive opportunity by certain metrics, thanks to the earnings potential of Dan’s holdings.

Figure 2: THRG valuations versus UK and world

As can be seen in Figure 2, whilst THRG does command a higher forward P/E ratio than the UK small-cap market, it still trades at a lower valuation than that of the wider global market. However, THRG’s arguably most attractive valuation opportunity lies in its price-to-earnings-growth ratio. This ratio is a measure that allows analysts to compare the valuations of companies that have differing growth trajectories. It effectively provides a measure of how much extra is being paid to achieve higher-than-average earnings growth, with THRG also having the highest long-term earnings growth expectations of the three (with earnings growth calculated as the market’s expectation of average annual earnings growth over a three-to-five-year period).

What turns the tide?

The trigger for a reversal of the UK market’s fortunes remains unclear. Dan suggests that a fall in UK interest rates could be the primary catalyst – the UK economy having shown increased signs of weakening in recent months, which may prompt further rate cuts.

Dan’s recent commentary around the UK market over THRG’s financial year has been a tale of two halves. Dan has highlighted the improving outlook to the UK over the first six months, commenting on the “robust UK macro data” and improving borrowing rates. This momentum would stall, however, due to the UK’s Autumn budget, with the CITI Economic surprise index moving from a peak of +50 to a trough of -34 over THRG’s financial year.

Dan noted the increased tax burden from changes to the National Insurance threshold as being a particularly sore outcome from the budget – with employment likely to suffer as a consequence. UK bond yields have been rising despite the Bank of England’s cutting rates by 0.25% in February to 4.5%, moving contrary to the rate cuts, as seen in Figure 3, steepening the yield curve.

Figure 3: UK 10-year treasury yield versus base rate

Source: Bloomberg, as of 31/03/2025

Dan’s concerns have been echoed by some members of the BoE committee, which has a mixed outlook for UK monetary policy after citing a mix of inflationary and deflationary pressures in the UK economy. Examples of these include higher-than-expected wage growth and sluggish economic growth, with the BoE expecting only a 0.75% growth in UK GDP in 2025, down from the 1.5% it forecasted in November.

Another consequence of this negativity has been further selling pressure in the UK market, with investors continuing to pull money from UK funds (although November was a notable month of positive inflows following the budget, across UK equity funds in aggregate, this was an exception to the norm). As Dan has highlighted, such selling pressure can have a disproportionate impact on the small-cap market, given its inherently lower liquidity.

However, if the net impact ends up being deflationary, thus promoting further interest rate cuts, then history has shown UK mid-caps to have on average generated attractive long-term returns of c.45% over the subsequent five years, and in excess of the wider UK market as well. Dan has also highlighted that a weakening UK can lead to a weakening sterling, which will be a tailwind for companies who book a large portion of their earnings in overseas currencies. He also notes that despite the UK weakness, its fundamentals still remain relatively attractive having reports better economic metrics than Europe – such as PMI data.

M&A taking the lead

In the face of low valuations, companies are buying back more of their shares. For example, the mention of buybacks by FTE 250 and FTSE small-cap companies in their annual reports increased c. 300% and 400% respectively over 2024 (compared to the c. 8% rise by the S&P 500) between July 2023 and July 2024. This has led to an increase in the shareholder yield of the FTSE 250 (the combination of dividend and buybacks) to rise to c.5% at the end of 2024 – 50% more than those of the S&P 500, an index renowned for its share buybacks.

Private equity firms have also taken an increased interest in the UK market, with private equity activity remaining high throughout 2024, relative to its historic average. Private equity transaction volumes in the UK are up 4.4% during 2024 with total deal values increasing by 12%. Whilst total transaction values remain below their pre-COVID peak, total deal volumes remain elevated, up 4.4% over 2024 when compared to 2023, and above their pre-COVID levels.

However, as Dan points out, increased M&A activity can be a double-edged sword for THRG. Although this can be an immediate boon to THRG’s NAV returns, it can take attractive companies out of the market at prices that do not reflect their true long-term value. On the other side, increased buyouts have also been a headwind for Dan’s short book, which is focused on companies with weak business models or those operating in structurally challenged sectors – with M&A costing THRG 300bps in relative returns over its 2024 financial year. Low valuations mean that sometimes even these companies get snapped up. Dan is also conscious about a possible broad-based uplift in UK markets that could result from a cut in interest rates.

Portfolio

As we mentioned on page 5, Dan has made adjustments to THRG’s allocation to account for the realities of the current UK market. This has led him to reduce THRG’s exposure to UK domestic companies, which he believes have interest rate sensitivity that is not reflected in their valuations. The result has been a decrease in THRG’s exposure to certain technology and consumer discretionary stocks.

Dan has also increased exposure to what he sees as significant valuation opportunities presented by the UK SMID market, with select companies providing him with greater upside potential compared to some of the typical “quality growth” stocks that have historically characterised THRG’s portfolio.

Notable examples include Dan’s investments in select real estate companies, such as Great Portland Estates (see page 10), which are trading at significant discounts to their asset value. Dan also believes that the housing sector is one part of the market that the Labour Party may strongly support by encouraging property demand. Dan continues to maintain similar exposure to companies with a heavy international presence, such as Hill and Smith, as well as his allocation to US firms, reflecting the tailwinds from a weaker sterling.

Figure 6: THRG quarterly market exposure

Source: BlackRock

When assessing THRG’s total market exposure, investors should be aware of both its long and short positions. As seen in Figure 6, Dan’s short exposure remains modest, reflecting the concerns that we discussed above.

Dan has, however, increased his short positions in retailers that source their products in US dollars and those with large labour force requirements, and in technology companies that he believes will be impacted by the recent budget.

Top 10 holdings

There have been noticeable changes to THRG’s top 10 holdings since our last note – with four new names added to the list. This is more than we typically report in our notes, and is a combination of Dan’s aforementioned trading activity and also the timing of our last note’s data. As of the 31 March 2024 (the date used in our previous note) Dan’s largest investment was a FTSE 250 tracker. This was effectively capital earmarked for new investments, which have now been allocated accordingly, with the tracker exposure no longer present in THRG’s portfolio.

Figure 7: THRG’s 10 largest holdings as at 28 February 2025

Of the five new entrants, three are financial services firms, IntegraFin, Tatton Asset Management, and XPS Pensions; and two are property-related companies: Great Portland Estates and Bellway. Of these new positions, only XPS is a new entrant in THRG’s portfolio, with the inclusion of the others resting from strong relative performance as well as Dan’s trading activity (IntegraFin, Tatton Asset Management, Great Portland Estates and Bellway have all been long-term investments for THRG).

IntegraFin

Figure 8: IntegraFin (GBp)

Source: Bloomberg

IntegraFin (integrafin.co.uk) is the holding company for Transact, the UK’s largest investment platform, as well as financial adviser management software. Its most recent its financial results, for the fiscal year ending 30 September 2024, demonstrated the extent of the company’s growth – and its continued dominance of the UK investment space. The company achieved a 17% increase in assets, reaching £64bn, up from £54.8bn in the previous year. The Transact platform now serves over 235,000 clients and collaborates with 8,000 advisers. In the first quarter of the new fiscal year, IntegraFin reported record net inflows of £920m, a notable rise from £268m in the same period the previous year. This growth reflects the company’s investment in digitalisation and the platform’s appeal to clients and advisers.

Tatton Asset Management

Figure 9: Tatton Asset Management (GBp)

Source: Bloomberg

Tatton Asset Management (tattonassetmanagement.com) is a financial services firm focused on providing investment and operational services to financial advisers, predominantly in the UK.

Tatton reported positive results in its most recent announcement, for the six months to 30 September 2024, with the company reporting the highest level of net inflows of any six-month period. Tatton’s assets grew by 13% over the period (and 35% year on year) to £20bn – with Tatton’s management highlighting its progress to its target of £30bn in assets by 2029, though mindful of the impact of the recent budget on UK investors – with net inflows possibly normalising in the subsequent months (relative to the recent record highs). Tatton’s growth has been reflected in the earnings, with profit of its fund management business (the largest component of the company) growing 30% to £11.7m, and profit margins increasing to 63%. Total revenues increased 24% year on year to £21.7m, with operating profits increasing 22.8% to £10.9m, with overall profit margins largely stable at 50%.

XPS Pensions

Figure 10: XPS Pensions (GBp)

Source: Bloomberg

XPS Pensions (xpsgroup.com) is a pensions consultancy and administration firm, and a new addition to THRG’s portfolio. In the first half of its 2025 financial year (the six months ending 30 September 2024), XPS reported strong revenue and profit growth, increasing by 23% and 27%, respectively. Revenue growth partly reflects broader structural drivers in the pensions industry, including higher interest rates improving pension scheme funding and elevated inflation enabling fees to be increased. Regulatory changes have also benefited certain business segments, with XPS’s administration services posting an impressive 40% year-on-year growth.

XPS Pensions’ management noted that profit growth has been supported by increased uptake of higher-margin services, such as risk transfer advisory, and improved operational leverage – the company’s ability to convert revenue growth into proportionally higher profits.

Whilst management had anticipated a more challenging market environment in the second half of the financial year, it now expects full-year results to show 15–16% year-on-year revenue growth, supported by sustained demand continuing into the latter half of the year.

Great Portland Estates (GPE)

Figure 11: Great Portland Estates (GBp)

Source: Bloomberg

Great Portland Estates (GPE.co.uk) is a FTSE 250-listed real estate development firm, with a focus on central London commercial property. Its management aims to deliver superior returns by unlocking what it believes to be overlooked potential in central London commercial real estate.

The company’s most recent results (for the six months to September 2024) showed a slight recovery in property valuations, with the portfolio valuation increasing by 0.8% over the period to £2.5bn. This uplift was supported by a 1.1% increase in rental values during the same period, aligning with management guidance of 3% – 6% rental growth for the full year.

While Great Portland Estates reported growth in valuations and rentals, earnings fell 41% to £8.5m due to costs associated with around 40% of the portfolio currently under construction. Management views its development pipeline as a key attraction, noting a “severe” shortage of Grade A office space in London – estimating that an additional 68% of new supply is required to meet demand – with 100% of the company’s assets in prime locations. Dan believes that the market has excessively discounted the portfolio, with Great Portland Estates trading at approximately a 42% discount to its last reported NAV.

Bellway

Figure 12: Bellway (GB)

Source: Bloomberg

Bellway (bellwayplc.co.uk) is a FTSE 250-listed house builder, primarily building residential properties across the country. Although Bellway reported negative earnings over its 2024 financial year (ending July 2024), its management believes that its results showed resilience in what it described as a challenging housing market – performing in line with its expectations. Revenue decreased by 30% to £2,380m, primarily due to a lower initial order book and challenging market conditions. The number of homes sold decreased to 7,654 from 10,945 in 2023, while the average selling price saw a slight decline to £307,900 from £310,300. As a result, profitability also declined, with operating margins falling to 11.0% from 16.0% in the prior year.

Bellway’s management remains positive on its future, however, highlighting its cost control measures and initiatives made to improve its pipeline of new developments. This positivity has already been reflected in the first half of its 2025 financial year, with new housing developments up 12% over the period, and average selling prices marginally increasing. Its order book has increased even more, up 19%, with a pipeline of new homes worth £1.3bn. Given the positive momentum, Bellway’s management believes that this momentum will continue into the second half and maintain its full-year outlook of 8,5000 homes built over the year, with margins increasing to 11.0%. Dan has already begun to average down his position in Bellway as it now trades at higher price-to-book valuations than when he initiated his position, currently trading at 0.8 times.

Performance

Figure 13: THRG NAV total return performance relative to benchmark1 and peer group2 to 31 March 2025

Source: Morningstar, Marten & Co. Note: 1) THRG has a benchmark that is the Deutsche Numis Smaller Companies Index (plus AIM stocks but excluding investment companies). 2) The peer group is defined on page 15.

Figure 14: Cumulative total return performance over periods ending 31 March 2025

THRG’s performance has lagged behind its benchmark the Deutsche Numis Small Cap ex Investment Companies plus AIM over the last five years, as per Figure 13. However, THRG has historically had a history of annual outperformance, based on its financial year calendar (ending 30 November). As illustrated by Figure 13, THRG’s five-year underperformance primarily occurred from September 2021 to June 2022. This was due to headwinds Dan’s quality-growth style faced with the global post-COVID sell-off of growth stocks, reflecting rising inflationary pressures and higher interest rate expectations that negatively impacted their demand.

Over the longer term, 10-year figures show THRG generating more than double the returns of its benchmark, generating a NAV total return of 104.8% compared to its benchmark’s 47.7%, and also surpassing its peer group’s NAV total return of 87.8%.

THRG’s recent relative performance mirrors the wider trends in UK small-cap growth investing. The MSCI UK Small Cap Value index has outperformed the MSCI UK Small Cap Growth index over the last 12 months, returning 1.8% an (0.2%) respectively.

However, as we pointed out on page 7, the potential impact of further interest rate cuts may be a powerful catalyst for THRG’s relative performance. We note that at the end of December 2021, the last month that preceded the inflation-driven selloff, THRG had reported the highest NAV returns of any UK investment trust over the previous five years.

2024 financial year contributors to returns

We have been provided with a breakdown of THRG’s return drivers for its 2024 financial year, which ended on 30 November 2024. Generally speaking, THRG’s 2024 financial year performance was driven predominantly by movements during the first six months of the year, capitalising on increased optimism around the UK economy and stronger economic data – with the top three contributors in Figure 15 having generated most of their returns in that period. IntegraFin was covered on page 10.

Figure 15: Largest positive contributions to relative returns, twelve months ended 30 November 2024

Gamma Communications

Figure 16: Gamma Communications (GB)

Source: Bloomberg

Gamma Communication (gammagroup.com) is a UK distributor of communications and data services to the corporate market. While Gamma Communications share price performance rallied continually over much of THRG’s financial year, it saw its largest rally on 10 September 2024, rising 13% on one day, following a positive earnings announcement.

Over the first half of its 2024 financial year (the six months to 30 June 2024), Gamma Communications reported a 10% increase in revenues and 11% in profits, while retraining its c.50% gross profit margin, and 100% cash conversion ratio. Its management contributed this growth to strong demand for its cloud services, significant new client contracts, and the performance of its recently acquired companies. Gamma’s results came in at the top end of the market’s expectations and its management expects similar results for its full financial year. It is also considering listing on UK’s main market, as it currently trades on the AIM market.

Morgan Sindall

Figure 17: Morgan Sindall (GB)

Source: Bloomberg

Morgan Sindall (morgansindall.com) is a UK construction company servicing a range of industries, including house building, infrastructure, and regeneration. Morgan Sindall’s share price reflects its management having reported its best set of results for its 2024 financial year (ending 31 December 2024). It reported £4.5bn revenues, up 10% YoY, pre-tax profits up 19% at £173m, and EPS up 13% at 278.8p per share. Of its six divisions, “Fit Out” was the standout performer (and largest division by earnings), with its operating profits up 38% YoY, thanks to more favourable contract terms taken out over the year. Infrastructure and construction were also noteworthy performers, with infrastructure reporting a 18% increase in revenues and construction reporting a 19% increase in operating profits, with these two divisions being the second- and third-largest sources of revenues, respectively.

Morgan Sindall’s management remains bullish on the future and has increased its targets for four of its six divisions for 2025, expressing confidence in their ability to meet the market’s expectations for the firm in 2025. They justify their increase by highlighting what they believe is strong order book growth across divisions and earnings generated by its long-term partnership contracts. Dan has also noted that more favourable market dynamics for Morgan Sindall, after the bankruptcy of its largest competitor, ISG (due to a combination of loss-making legacy contracts, low margins, and inability to source new funding).

2024 financial year detractors

THRG’s main detractors over the period are shown in Figure 18, with brief descriptions of the top three following it. Note that Dan has sold THRG’s position in YouGov since THRG’s financial year end.

Figure 18: Largest negative contributions to relative returns, 12 months ended 30 November 2024

YouGov

Figure 19: YouGov (GB)

Source: Bloomberg

YouGov (yougov.co.uk) is a market research and data analytics firm. Its shares plummeted by 46% in a single day in June after issuing a profit warning, revising its 2024 revenue forecast down by 6% and profit expectations by 36%. Despite the downgrade, YouGov still projected year-on-year revenue growth and later softened the extent of the revision in the weeks following the announcement. In a further effort to improve its outlook, the company recently appointed a new CEO. However, its shares have yet to recover.

SIG

Figure 20: SIG (GB)

Source: Bloomberg

SIG (sigplc.com) is a supplier of insulation, roofing, and other specialist construction products. SIG’s share has been on a consistent downtrend over the last 12 months. This fall reflects declining earnings of the firm, and market analysts downgrading their outlook for the company. SIG’s management cut their profit outlook in June after citing a dull outlook on construction demand – mirroring Dan’s own comments about a reversal in wider UK market sentiment. SIG’s revenues fell 4% over 2024, with the EPS falling into negative territory.

Watches of Switzerland Group

Figure 21: Watches of Switzerland (GB)

Source: Bloomberg

Watches of Switzerland (watches-of-switzerland.co.uk) is a third-party retailer of luxury watches. Watches of Switzerland’s negative contribution is the result of a sharp selloff in January 2024, falling 37% on 17 January. This was triggered by a poor trading update, with its management downgrading full year revenue and profit expectations – sighting a poor performance over the holiday period. They also cited a challenging trading market for the rest of the year, noting a possible reduction in luxury good demand, with their full-year revenue growth expectations falling from 8-11% to 2-3%.

Peer group

For comparison purposes, we have used a subset of funds in the AIC’s UK smaller companies sector. We have excluded split-capital companies, trusts with a small market capitalisation (below £50m), Marwyn Value Investors (which has a very different investment approach), and those that focus exclusively on micro-cap companies. We note that THRG is the only trust in the UK smaller companies sector that is able to capitalise on short positions.

Figure 22: Cumulative NAV total return performance over periods ending 31 March 2025

THRG’s discount sits below the middle of the pack of its peers. Whilst it has previously been one of the narrowest of its peers, even trading on a premium in the past five years, it has since widened out over 2023 and 2024 (as seen in Figure 24 on page 18). THRG’s yield also sits towards the middle of its peer group.

THRG’s market cap of £385m places it above the average of its peers, and its ongoing charges ratio is highly competitive, being the second lowest amongst its peers. THRG’s ongoing charges is also competitive compared to the open-ended sector (based on the average IA UK smaller companies sector member).

Figure 23: Listed UK smaller companies funds, comparison as 11 April 2025

Premium/(discount)

As at 11 April 2025, THRG was trading on a 12.1% discount. Over the 12 months to 31 March 2025, THRG’s shares have fluctuated between trading on a discount of 6.6% in July 2024, to a 13.7% discount in November 2024, and on average have traded on a 7.3% discount.

THRG’s widening discount may reflect investors’ general overall aversion to the UK market, as THRG’s widening discount is not a unique occurrence. In fact, the majority of the trusts within the UK smaller companies sector have seen their discounts widen over the last 12 months.

The board believes it to be in shareholders’ interests that the share price does not trade at an excessive premium or discount to NAV. Consequently, it asks shareholders at each AGM for approval to issue up to 10%, and to buy back up to 14.99%, of THRG’s issued share capital. As can be seen from the vertical bars in Figure 24, the board has been more proactive in defending THRG’s discount during recent periods when the discount has been at wider levels, with the board’s repurchases made in September and October 2023, and March and April 2024, aligning with the troughs in its moving average discount. Over the past 12 months THRG’s board has repurchased 15m shares, equal to 19% of the current outstanding share account.

Figure 24: THRG discount over five years to 31 March 2025

Source: Morningstar, Marten & Co

THRG’s board has been proactive in defending its discount

Dividend

Figure 25: THRG dividends and revenue per share

Source: BlackRock Throgmorton Trust

Dividends are a by-product of the investment process and THRG’s portfolio is not managed with any income generation objective in mind. Nevertheless, the portfolio may generate reasonable levels of income. The base management fee is charged 25% and 75% to the revenue and capital accounts respectively, while 100% of any performance fee is charged to capital.

THRG is paid a total dividend of 18.0p per share for its 2024 financial year, up 22% on the prior year, and fully covered by the revenue generated over the year. This growth was once again the result of THRG’s improving revenue generation, as was the case in the prior year, where the substantial increase in revenues generated by THRG over 2023 allowed it to increase its payout by 24.7%.

Previous publications

Readers may be interested in our previous publications on THRG, which are listed in Figure 26 below. These are available to read on our website or by clicking the links in the table.

Figure 26: QuotedData’s previously published notes on THRG

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