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BlackRock Smaller Companies Trust “Market volatility presents us with a fantastic investment opportunity”

BlackRock Smaller Companies Trust plc (LON:BRSC) has provided the following portfolio update.

All information is at 30 June 2020 and unaudited.
Performance at month end is calculated on a capital only basis

One month
%
Three months
%
One
 year
%
Three
 years
%
Five
 years
%
Net asset value*-0.219.0-8.00.833.8
Share price*-0.613.9-11.67.737.4
Numis ex Inv Companies + AIM Index0.818.7-12.5-16.2-2.1

*performance calculations based on a capital only NAV with debt at par, without income reinvested. Share price performance calculations exclude income reinvestment.

Sources:  BlackRock and Datastream

At month end
Net asset value Capital only (debt at par value):1,362.18p
Net asset value Capital only (debt at fair value):1,341.24p
Net asset value incl. Income (debt at par value)1:1,362.66p
Net asset value incl. Income (debt at fair value)1:1,341.72p
Share price1,276.00p
Discount to Cum Income NAV (debt at par value):6.4%
Discount to Cum Income NAV (debt at fair value):4.9%
Net yield2:2.6%
Gross assets3:£735.0m
Gearing range as a % of net assets:0-15%
Net gearing including income (debt at par):7.6%
2019 Ongoing charges ratio4:0.7%
Ordinary shares in issue5:48,829,792
  1. includes net revenue of 0.48p.
  2. Yield calculations are based on dividends announced in the last 12 months as at the date of release of this announcement, and comprise the first interim dividend of 12.80 pence per share (announced on 5 November 2019, ex-dividend on 14 November 2019) and the second interim dividend of 19.70 pence per share (announced on 3 June 2020, ex-dividend on 11 June 2020).
  3. includes current year revenue.
  4. As reported in the Annual Financial Report for the year ended 28 February 2019 the Ongoing Charges Ratio (OCR) was 0.7%. The OCR is calculated as a percentage of net assets and using operating expenses, excluding performance fees, finance costs and taxation.
  5. excludes 1,163,731 shares held in treasury.
Sector Weightings% of portfolio
Industrials30.7
Financials19.4
Consumer Services17.1
Consumer Goods10.7
Technology7.5
Health Care5.9
Basic Materials4.6
Oil & Gas2.1
Materials1.0
Telecommunications1.0
—–
Total100.0
=====
Ten Largest Equity Investments
Company% of portfolio
YouGov2.3
Avon Rubber1.9
Breedon1.9
Stock Spirits Group1.8
Serco Group1.7
4imprint Group1.7
Games Workshop1.6
IntegraFin1.6
Watches of Switzerland1.4
Chemring Group1.4

Commenting on the markets, Roland Arnold, representing the Investment Manager noted:

The Company paid a second interim dividend of 19.70 pence per share on 29 June which went ex-dividend on 11 June; after allowing for dividend reinvestment the Company’s NAV per share during June rose by 1.3%1 to 1,362.66p outperforming the benchmark index which returned 1.0%1 (all calculations on a total return basis). On a capital only basis the NAV fell by 0.2%1 in the month to 1,362.18p and the benchmark increased by 0.8%1; for comparison the FTSE 100 Index rose by 1.7%1 on a total return basis and by 1.5%1 on a capital only basis.

Equity markets remained volatile during the month as investor sentiment shifted between positive signs of lockdowns around the world gradually being lifted, to fears of a second wave, notably with rising cases in certain US states. This serves as a reminder of how delicate the current environment is, and how the market remains vulnerable to ongoing newsflow surrounding the COVID-19 pandemic and any setbacks to the eventual easing of lockdowns.

Despite markets more broadly being driven by the impacts of COVID-19, we are pleased to report that it is company specific fundamentals which have driven the portfolio’s outperformance during the month (on a total return basis). The largest positive contributor was Serco, which reported strong first half trading profits and reinstated full-year guidance with upgrades to the outlook. The COVID-19 pandemic has had little impact on the business which has managed to offset losses in areas such as leisure and transport, with additional contracts in pandemic response related activities, for example drive-through test centres. Tatton Asset Management reported continued strong net inflows despite the challenging macro backdrop, with assets under management increasing by 9.6% during the year, resulting in a 24% increase in operating profits. Shares in Robert Walters rebounded following some weakness in the shares during the previous month, with easing restrictions being potentially beneficial to the recruiter as economic activity begins to pick-up.

Of the detractors, a number were simply companies which fell despite no company specific newsflows, for example, IG Design Group and IntegraFin which we believe simply gave back some recent strong performance. Shares in Accesso, the virtual ticketing technology provider were weak during the month. The company issued an additional 13.5 million shares in June (£39m) to provide the business with additional liquidity to survive the remaining period of lockdowns, but more importantly thrive once theme parks reopen and many of Accesso’s services such as virtual queuing and online ticketing shift from being ‘nice to have’, to essential for theme parks.

As we move into the second half of the year the outlook remains highly uncertain, and as alluded to above, markets remain vulnerable to setbacks in the return to normality from the current restrictions that are in place around the world. While many economies continue to gradually ease restrictions, from reopening non-essential retail, to leisure activities such as pubs, restaurants and gyms, the pockets of rising cases that we have seen around the world serve as a reminder that we are far from ‘out of the woods’ with this crisis. The likelihood of a second wave continues to pose a threat to the economic outlook, and is something that we are watching, however as we discussed in recent updates, we must not allow the focus on COVID-19 to let us overlook some of the other issues that can and will drive volatility; Brexit, US/China relations, or the coming US election.

While the current environment remains challenging, we remain confident in our strategy on a medium-term view. Market volatility presents us with a fantastic investment opportunity. The Company’s investment strategy is focussed on quality growth investment opportunities in smaller companies, a style that has demonstrably worked for the long-term, and historically periods of sudden underperformance, such as this, have proven to be excellent investment opportunities.

1Source: BlackRock as at 30 June 2020

22 July 2020

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Disclaimer: Statements in this article should not be considered investment advice, which is best sought directly from a qualified professional.