BlackRock Smaller Companies Trust plc

About this investment trust

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

The Company aims to achieve long-term capital growth for shareholders through investment mainly in smaller UK quoted companies.

Why choose it?

We aim to find the ‘hidden gems’ within the small cap universe, investing in high-quality growth companies that are able to shape their own futures regardless of the wider economic environment. As active managers, we believe this area presents us with an attractive hunting ground: these companies are often under-researched, and pricing is inefficient. This gives us great opportunities to generate returns for our clients over the long term.

Suited to…

Investors looking for carefully selected opportunities among the UK’s vibrant small cap sector for long-term capital growth. Investors need to be able to tolerate variation in their capital.

Morningstar Rating: Since January 2012.
Awards/Ratings have not been superseded to date.

The Morningstar Analyst Rating is subjective in nature and reflects Morningstar’s current expectations of future events/behaviour as they relate to a particular fund. Because such events/behaviour may turn out to be different than expected, Morningstar does not guarantee that a fund will perform in line with its Morningstar Analyst Rating. Likewise, the Morningstar Analyst Rating should not be seen as any sort of guarantee or assessment of the creditworthiness of a fund or of its underlying securities and should not be used as the sole basis for making any investment decision.

Past performance is not a reliable indicator of future results and should not be the sole factor of consideration when selecting a product or strategy.

What are the risks?

• Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
• Net Asset Value (NAV) performance is not the same as share price performance, and shareholders may realise returns that are lower or higher than NAV performance.
• The Trust’s investments may have low liquidity which often causes the value of these investments to be less predictable. In extreme cases, the Trust may not be able to realise the investment at the latest market price or at a price considered fair.
• Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.
• Smaller company investments are often associated with greater investment risk than those of larger company shares.

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ESG Integration

The fund noted above does not commit to sustainable criteria nor does it have a sustainable investment objective.

BlackRock considers many investment risks in our processes. In order to seek the best risk-adjusted returns for our clients, we manage material risks and opportunities that could impact portfolios, including financially material Environmental, Social and/or Governance (ESG) data or information, where available. See our Firm Wide ESG Integration Statement for more information on this approach and fund documentation for how these material risks are considered within this product, where applicable.

Fund manager commentary

31 October 2024

Comments from the Portfolio Manager

Please note that the commentary below includes historic information on the Company’s NAV performance and index performance. 

The figures shown relate to past performance. Past performance is not a reliable indicator of future results.

During October the Company’s NAV per share returned -2.1% to 1,571.90p on a total return basis, while our benchmark index also returned -2.1%.¹

Equity markets globally ended October in negative territory, during a month that was filled with high profile political events both here and across the Atlantic, namely the US election and closer to home, the Chancellor’s first budget. Specifically in the UK, the market reacted negatively to the scale of tax increases and borrowing announced by Chancellor Rachel Reeves, which saw Gilt yields rise while rate sensitive and domestic shares were the worst impacted areas of the market.

XPS Pensions Group was the largest contributor to performance over the month. The company reported a 23% year-on-year revenue growth in its post-close trading update for the six months ending September 2024. This increase in revenue was driven by heightened demand for their services, particularly in response to regulatory changes affecting pension schemes while administration services have also seen strong growth. Morgan Sindall's share price surged, with the company raising its profit forecast for the year, as a result of strong performance in its Fit-Out division, which focuses on office space design and refurbishment. Additionally, the firm reported a robust secured order book of £8.9 billion, providing strong visibility for future revenues and reinforcing investor confidence in the company's sustained business activity and financial health. Boku was another contributor. The company reported a 24% increase in revenues for the first half of 2024, reaching US$47.3 million, driven by rising transaction volumes and a more than 50% surge in digital wallet and Account to Account (A2A) revenues.

Concerns around the outlook for UK interest rates weighed on our holdings within the property sector, notably Great Portland and Workspace. Both businesses reported resilient trading updates during the month, with Great Portland highlighting lettings for the quarter running at 7% ahead of ERV (Estimated Rental Value), while Workspace reported continued pricing momentum, with LFL (Long Funding Lease) rent per square foot up 1.6% in the quarter and 2.8% in the first half of the year. Shares in Secure Trust Bank (STB) fell after unexpectedly being drawn into the vehicle financing issues following the unfavourable court ruling on other business in the industry. Post month end STB warned that profits for the full year would be between £10m and £15m below expectations due to the performance of its vehicle finance business.

Reflecting on October, I think it is fair to say that the budget was not the clearing event that we as a team had hoped for. However, while the impact on growth, debt, inflation and interest rates, is incrementally more negative in the near term, some of the potential benefits from investments could come through further out. Importantly, we do still believe that the Budget was an important milestone to get past in order for the UK SMID (small and mid-cap) market to make any progress. Certain announcements, notably national insurance, will put pressure on profit margins of many domestic businesses into next year and companies will have to adjust to the new cost base, hiring intentions may change and companies without pricing power are going to feel the squeeze.

We also continue to keep a close eye on inflation and UK unemployment, which as of now this remains low. Finally, and importantly, the valuation of UK SMID companies is attractive on a historic basis. As we move through this near-term noise, the opportunity presented by the UK Small and Mid-cap will present itself, and maybe we will finally see investors looking to allocate back to what has historically been an profitable asset class.

We thank shareholders for your ongoing support.

¹Source: BlackRock as at 31 October 2024

Unless otherwise stated all data is sourced from BlackRock as at 31 October 2024. 

Any opinions, forecasts represent an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research, investment advice or a recommendation.

Risk: Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy and should not be construed as investment advice or investment recommendation of those companies.

Portfolio manager biography

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Roland Arnold is manager of BlackRock Smaller Companies Trust plc and a member of the UK Equity Team. Mr Arnold has been co-manager of the BlackRock UK Special Situations Fund since August 2012, and manager of Small & Mid Cap UK Equity Portfolios since 2006. Roland’s service with the firm dates back to 2000, including his years with Merrill Lynch Investment Managers (MLIM), which merged with BlackRock in 2006.

Board of directors

All of the Directors are independent of the management company and are members of the Management Engagement Committee. With the exception of the Chairman all Directors are members of the Audit Committee.

Ronald Gould (Chairman) was appointed to the Board in April 2019 and became chairman of the Company in June 2019. He is currently Chairman of Henderson Far East Income Trust plc, Think Alliance Asia and was previously Chairman of Credo Capital Partners AB, Compliance Science Ltd and a Non-Executive Director of the JPMorgan Asian Investment Trust plc. He was also previously Managing Director and Head of the Promontory Financial Group in China, CEO of Chi-X Asia Pacific, Senior Adviser to the UK Financial Services Authority, CEO of investment bank ABG Sundal Collier and Vice Chairman of Barclays Bank asset management activities.

Susan Platts-Martin (Senior Independent Director) appointed on 21 April 2016, is the Chairman of Baillie Gifford China Growth Trust plc and formerly sat on the Advisory Board of the Barings Targeted Return Fund. She previously acted as Protector of Power to Change Trust. A qualified chartered accountant with 26 years' experience in financial services, she was the first head of investment trusts at Fidelity International, responsible for establishing and growing a successful investment trust business. She has experience of both open and closed ended funds having also been director of product development and head of fund accounting at Fidelity.

Mark Little (Chairman of the Audit Committee) was appointed to the Board on 1 October 2020. He is a non-executive director and also chairs the audit committees of the Majedie Investment Trust Plc and Securities Trust of Scotland Plc and is a non-executive Director and audit committee chairman designate of the Abrdn Equity Income Trust plc. He was also previously Investment Director at Seven Investment Management and a non-executive director (and audit committee chairman) of Sanditon Investment Trust plc as well as a non-executive director for the start-up business UWI Technology and the charity Winning Scotland Foundation. Mr Little has a wealth of experience in the financial services sector, and began his career as a fund manager with Scottish Widows Investment Management after qualifying as a chartered accountant with Price Waterhouse in 1991. He subsequently worked as Global Head of Automotive Research for Deutsche Bank and joined Barclays Wealth in 2005, where he became Managing Director of Barclays Wealth (Scotland and Northern Ireland).

James Barnes was appointed to the Board on 31 July 2021. He is a Non-Executive Director and is also currently the Chairman of Vestey Holdings, the Horticultural Trades Association, Thirlstane Castle Trust and the Crieff Food Company and was previously a Director and Chairman of Dunedin Smaller Companies Trust plc. Mr Barnes was also previously a Director of Dobbies Garden Centres plc; he was instrumental in growing the business and leading its sale to Tesco in 2007. Mr Barnes has a wealth of experience in the financial services and UK smaller companies sector and began his career in corporate finance and investment banking.

Helen Sinclair was appointed to the Board on 1 March 2022. She began her career in investment banking and spent nearly eight years at 3i plc focusing on management buy-outs and growth capital investments. She later co-founded Matrix Private Equity (which became Mobeus Equity Partners) in 2000 and subsequently became Managing Director of the company before moving to take on a number of non-executive director roles. She is a non-executive director of WH Ireland Group plc, Shire Income plc and Sherborne Investors (Guernsey) C Limited and Chairman of Octopus Future Generations VCT PLC. Ms Sinclair was previously Chairman and non-executive director of British Smaller Companies VCT and a non-executive director of Mobeus Income & Growth 4 VCT plc and The Income & Growth VCT plc.

Dunke Afe was appointed to the Board on 1 January 2024 as a Non-Executive Director. She is an accomplished global marketing executive with extensive experience in raising brand awareness, delivering high-impact portfolio strategies and omni-channel marketing campaigns to drive business growth. She has previously worked with top blue chip multinationals including Unilever, Kimberly Clark and Estee Lauder. Ms Afe is also a Non-Executive Director of CT UK Capital and Income Investment Trust plc.