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Small wonder Blackrock Throgmorton delivers big

The Times

The stock market adage has it that smaller companies tend to fare better than larger ones in the long run, albeit with a bit of additional volatility thrown in to make the investment ride a little less comfortable. Not only has Blackrock Throgmorton consistently borne out this thesis, but the high-performing investment trust has trounced most of its sector peers along the way.

The trust was incorporated in 1957 and its portfolio has been overseen since July 2008 by Blackrock, the world’s largest money manager. Its brief is to generate returns by investing predominantly in smaller and mid-sized UK-listed companies.

As well as taking long positions in companies that it thinks have been undervalued, the trust bets against listed businesses that it believes will be on the losing end of market disruptions by shorting, or gambling, that their prices will fall. Unlike most of its peers, Blackrock Throgmorton charges performance fees, which has become increasingly hard to justify in an era of super-low costs attached to passive vehicles such as exchange-traded funds.

The trust halved its base management fee in 2017 to 0.35 per cent, but shareholders can be charged up to a further 0.9 per cent — for a total of 1.25 per cent — depending on the level of success. That is a high all-in cost, yet based on their performance it’s hard to argue that the managers don’t deserve it. As of the end of last week, Blackrock Throgmorton’s returns in net asset value terms outperformed its benchmark over one and three months and one, three and five years.

The managers rate themselves against the Numis Smaller Companies index, adding in Aim-listed businesses but stripping out other investment trusts. For those minded to keep their fund holdings for the long term, Blackrock Thogmorton’s performance gets better the further back the measure is taken: assessed over five years, for example, its NAV has improved by 119.7 per cent, compared with a gain of 47.9 per cent in the benchmark.

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As a crude test of the argument about smaller and larger companies, over the same five-year period, the FTSE 100 rose by just over 11.1 per cent. While not a direct like-for-like comparison, the difference between the percentages nevertheless makes the point. There is no glaringly obvious explanation for this trust’s success, except, perhaps, that it has been consistently good at picking winners and sticking with them.

The portfolio is stuffed with companies that, while not to everyone’s taste, have tended to deliver performances that have flown in the face of the prevailing perceived wisdom.

The biggest holding as of late last year is WH Smith, the high street retailer that has made a success of its shops in travel centres such as airports and train stations: in an otherwise deeply unloved sector, the share price has gained more than 84 per cent in the past five years. Other notable holdings include 4imprint, the marketing group, Workspace, the flexible offices provider, and Team17, the recently floated games maker.

While the managers try to make their investment decisions irrespective of the economic or political backdrop, any resurgence in business investment after Boris Johnson’s general election victory should be beneficial to many of their chosen stocks.

Blackrock Throgmorton’s dividend yield, at about 1.5 per cent, is a little thin, but it is more than offset by the gains in the value of the shares, down 12p, or 1.7 per cent, at 692p yesterday but up 45 per cent during the past 12 months.

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The shares trade at a small premium to the net value of its assets and are a clear “buy”.

ADVICE Buy
WHY Strong and diverse portfolio that has delivered consistently market-beating returns over the medium term

NICHOLS
It looks as if Saudi Arabia and the United Arab Emirates have managed to come up with a sugar tax that is a little more watertight than a similar levy introduced in Britain nearly two years ago. Whereas here, the makers of soft drinks could escape the tax by using artificial sweeteners rather than sugars in their non-carbonated drinks, the authorities in Saudi Arabia and the UAE have applied a 50 per cent duty to both ingredients.

Not being able to reformulate Vimto for these markets was enough to trigger a profits alert at Nichols last month as the soft drinks group warned that earnings for the coming year could be materially lower once it absorbs the tax.

Nichols’ annual sales of concentrated syrup to the two markets for use in Vimto amount to roughly £7 million, or about 4.8 per cent of last year’s expected revenues of £147.2 million. While small, the contribution to profits, expected to be about £32.9 million for the year to the end of December, is stronger because the margins are very high.

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Taken with clear signs of a second-half slowdown in the UK, responsible for about 80 per cent of sales, it’s little wonder that the shares have fallen by just over 19 per cent since the update.

Nichols was set up in Manchester in 1908 and while Vimto is its best-known brand, available as a fizzy drink as well as a cordial and exported to more than 85 countries, it also owns the Levi Roots, Sunkist, Feel Good and Starslush brands, all sold in the UK. Nichols also supplies drinks and equipment to the leisure, catering and hospitality sectors.

Vimto sales have held up extremely well in the face of fierce competition, growing last year just ahead of the market, by 0.8 per cent against 0.7 per cent.

However, the 3.6 per cent growth in group revenues for the whole of last year marks a discernable slowdown against far stronger growth in the first half, with the UK showing a similar trend.

Even so, the shares are hardly bargain basement. Down 17½p, or 1.3 per cent, at £13.50, they change hands for 20.8 times Numis’s forecast earnings and yield just under 2.7 per cent. Given the uncertainty ahead, they are not tempting.

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ADVICE Avoid
WHY Signs of a slowdown in all-important UK market

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