Portfolio Manager - Annual Results update
[00:00:06.44] Hi, I'm Dan Whitestone, the portfolio manager for the Throgmorton Investment Trust. Thanks for watching this video. The purpose of this is that this video is to go alongside the published full year 2023 annual results of Throgmorton.
[00:00:21.26] And similar to the video recorded at the interims, this will really focus really on three areas, a review of performance, in particular of H2 of 2023, I think that'll be more instructive, two, to provide an overview of portfolio positioning and then, three, obviously to end with some thoughts about the outlook from here.
[00:00:42.38] So to the first of those three sections, the performance review. The second half of 2023, Throgmorton outperformed its benchmark by 1.3% net of fees. The long book lost 2.9% whilst the short book had a strong period generating 0.9%. This means that for our full financial year ending November of 2023, we outperformed our benchmark by 3.7% net of all fees.
[00:01:11.71] Now, this marks the second consecutive year of losses for our benchmark, which reflects a significant negative sentiment that clouds UK small and medium-sized companies in particular. This is reflected in the flow data, which shows that up until November of 2023, the last month of a financial year. That was the 28th consecutive month of outflows in UK small and mid caps.
[00:01:35.50] And it's my view that this pervasive selling pressure has resulted in a significant mispricing within UK small and mid caps evidenced by the low valuation metrics. For instance, if we take the price to earnings ratio for the FTSE 250, it's now 10.5 times, and for the FTSE smallcap, it's 8.3 times for 2024. But it also shows the extent of relative underperformance versus the FTSE 100.
[00:01:57.98] Now for context, the FTSE 250 has underperformed the FTSE 117 of the last 24 months and is now the longest and largest period of relative underperformance on record, around 30%, far exceeding that of the great financial crisis.
[00:02:14.03] However, despite the growing chorus for persistently high inflation, a recession, a collapse in corporate profitability, the second half of 2023 has given cause for much optimism, reflecting falling inflation, strong employment, increasing consumer confidence.
[00:02:31.34] Moreover, when looking at underlying fundamentals, i.e. sales growth, margins, balance sheet strength, free cash flow generation of many of the Trust's holdings, it remains incredibly robust. And company updates on the whole have been supportive.
[00:02:46.70] Now, of course, in any given year, there will be disappointments, and this year is no exception. But in aggregate, I think the earnings of the company's holdings and the broader smaller mid-cap universe have proved far more resilient than many predicted. If we focus briefly on the top three contributors-- and detractors to performance and please refer to the annual report for a fuller explanation on all the names I mentioned--
[00:03:08.52] If we look at the three contributors first, it's interesting because it comes from a wide variety of sources. The biggest contributor was Ergomed, which was bid at a 28% premium by the private equity firm Permira. And whilst addicted to performance, I can't help but feel incredibly sad to lose I think one of the most genuinely exciting and differentiated growth companies in the portfolio.
[00:03:33.78] But once again, Ergomed is an example of how corporates or private equity are taking a different view on the value that we think is inherent in small mid-caps than the stock market in aggregate.
[00:03:43.74] The second biggest contributor was from a short position in a UK-listed technology company, which went through a period of rapid order growth and a meteoric share price rise but then their shares were suspended upon a fraud investigation. It transpired that the vast majority of those orders were fraudulent. There was an emergency cash call, and we closed our short out at 96% below the price before suspension.
[00:04:09.46] And the third biggest contributor was from computer center, an IT reseller that we've owned for a number of years, which would continue to execute really well, growing really strongly, obviously benefiting from big secular themes like digital transformation, cybersecurity, et cetera, but also from another year of very strong market share gains.
[00:04:28.21] When we look at detractors, the biggest detractor was from our longbeach and CVS group, the veterinary pharma services company, which we've owned for a number of years. And they fell not due to trading conditions, which remain resilient, but because the CMA are launching into inquiry into how vet services and products are sold and making sure that customers get the best choice and the best price.
[00:04:49.78] And we've got lots of experience in dealing with CMA inquiries investigations. And I think it's totally imprudent at this stage to comment further on this. Obviously, it's developments that we're watching closely, and obviously, we've had multiple interactions with the management team, but it remains a core holding within the portfolio.
[00:05:05.77] The other two detractors were WHSmith and SigmaRoc, which both continue to execute well and are very strong results and trading updates through the period, but their share price has continued to fall, which I think really reflects more the dark cloud that sort of looms ever large over our universe, not actually relating to stock specific outcomes. And we think both are incredibly attractive in terms of valuation versus their long-term prospects.
[00:05:37.45] As to portfolio positioning, I think the overall positioning of the company really reflects our outlook, which hasn't really changed significantly over the last six months. If you go back to our interim video from a few months ago, my view then was that interest rates would peak and inflation would fall markedly through H2 23.
[00:05:55.27] And I think as that case continues to strengthen, I think central banks will ultimately change course, and I think that all goes well for small and medium-sized companies to focus on a few areas, in particular in the fund, house building and RMI, which is repair, maintenance, and improvement.
[00:06:10.54] So a really tough 2022 and 2023 for many RMI companies. Volumes are probably now down about 20% over those two years, but I continue to believe the outlook is far better than valuations would suggest. And in recent weeks, I've been adding to housebuilders as well as building up and adding to other RMI-related plays in the portfolio.
[00:06:27.94] And really that reflects my view that valuations are close to trough on earnings that are also close to trough. So the recovery potential in both the earnings and the multiple is substantial and positioning so extreme combined with falling borrowing costs we've seen in recent days and weeks were implications that can have on these types of shares as falling borrowing costs and a steadying housing market and strong employment have forced a sharp reappraisal.
[00:06:54.63] For other UK domestic focused PLCs, I think 2024 will see growing dispersion in financial returns as also strong market share stories, i.e. digital trading down on new product verticals will outperform and grow despite a more challenging backdrop. Input costs have now reversed for many.
[00:07:13.62] So tension should focus much more on a top line, in particular underlying volume growth as price will become a far less significant lever to flex going forward. And the converging valuations of so many UK consumer shares has been the source of immense frustration to myself and the team with well capitalized market share winners, with high gross margins trading on similar price earnings ratios, and free cash flow yield is therefore far inferior peer group. That could be a huge source of financial alpha for us going forward.
[00:07:42.94] And we hope that 2024 will mark the year of more dispersion in valuations between winners and losers intra sector. And I think that positions or hopefully should benefit the positioning of Throgmorton.
[00:07:56.37] As for industrials, we retain a significant exposure here. And our approach has always been very selective. Destocking has definitely been a big theme in the sector coming off the sort of halcyon days of 2020, 2021 when many supply bottlenecks prompted significant overordering. Security of supply went into overdrive.
[00:08:16.11] And this has taken some time to unwind, definitely longer than I thought in many cases. However, there are grounds for hope. Quite a few of our companies have flagged a recent pickup in their book to bill ratios through November and December of 2023. And so perhaps, there really is some genuine emerging evidence that several have turned a corner and growth can accelerate through 2024.
[00:08:36.75] Reshoring or local for local in the US as well as other several government programs from the CHIPS to the Inflation Reduction Act continue to provide additional tailwinds of growth for quite a few US focused but UK listed small and midsize companies that we have exposure to in the Trust.
[00:09:00.30] After the last section, perhaps the most important looking ahead, as we look into 2024, the macro volatility is unlikely to abate. And of course, 2024 will mark a significant year for elections worldwide, which definitely could inject some turbulence.
[00:09:16.44] However, there are reasons for optimism. We enter 2024 with inflation and mortgage rates falling whilst productivity and factory construction and corporate profits are rising, labor markets are showing signs of softness but remain robust. And so with low levels of unemployment that many of experiencing and the benefits of real wage growth coming through, which will benefit many for the first time in decades, that in turn should lead to higher services PMIs.
[00:09:47.43] As mentioned earlier, talk about industrial's, inventory balances are now low after a prolonged period of destocking. And so my hope is that manufacturing PMIs turn upwards, which will certainly help boost the outlook for growth. As for inflation, much of the inflationary pressures of last year could become more deflationary during the course of this year.
[00:10:06.24] Oil and gas prices are low at the time of this call certainly admits concerns over supply, which will continue to alleviate pressure on both corporate input costs as well as consumer wallets. And if we look at the recently-announced food price cuts by the major supermarkets in the UK, that will certainly help too.
[00:10:22.86] Oil is something that I continue to watch closely. It remains a significant swing factor, as are the emerging developments in the red sea for global supply chains, but generally, I think at the moment the picture is still one of optimism.
[00:10:34.51] As for the Fed and central banks, recent weeks suggest the Fed on hold but with a faster cut. And I think what's important is the last couple of months, we have seen the potential to catalyze a broadening out of market leadership away from some very, very narrow areas of outperformance both in the US and Europe and the UK. And I hope overall, that should be a net positive for our positioning if a light can burn bright over small and medium-sized companies.
[00:11:02.20] In summary, the picture I see is really one of gradual recovery. And in our view, that is not reflected in the valuations of this exciting, differentiated universe of companies. And I think that offers compelling value in both absolute and relative terms.
[00:11:18.28] And indeed, for Throgmorton specifically, this is a company that now possesses many companies, with fantastic growth prospects on single digit price to earnings ratios and with double digit free cash flow yields but unlike so many archetypical value sectors have far superior growth prospects. As a result, the net of the Throgmorton is slowly increasing. It sits now at 106%, while growth is around 114%, but it continues to build.
[00:11:47.81] So that concludes this video recording. I just want to say thank you so much for listening, for watching. If you're a shareholder and Throgmorton, then clearly, a huge thank you for your support and for your patience. And if you're new, then thank you for your interest. And obviously, feel free to reach out to your BlackRock contact if you'd like further information.
[00:12:04.97] I know it's been a difficult couple of years for the Trust and obviously for the investment universe, but I remain an ardent supporter of the attractions of UK small mid-caps. I think it's a fantastic asset class. It's exciting. It's dynamic.
[00:12:16.82] It constantly evolves and some phenomenally exciting and differentiated and advantaged growth companies that really can beat to their own rhythm that aren't dependent on changes in inflation or consumer confidence that really do have really powerful secular drivers behind them from a top line perspective or really strong self-help or market share stories that ultimately can determine their fate over a medium to long-term view.
[00:12:43.10] I really believe that we're in a far better place today than we have been in, let's say, the last 18 months, but valuations have yet to catch up with that. So I can't help but see on the time frame that I look at and when I evaluate companies asset classes a very interesting and attractive setup.
[00:12:58.56] So thank you for your patience. And I ask you to keep the faith, keep the interest. And I think in time, that will be rewarded. But thank you very much.
[00:00:06.44] Hi, I'm Dan Whitestone, the portfolio manager for the Throgmorton Investment Trust. Thanks for watching this video. The purpose of this is that this video is to go alongside the published full year 2023 annual results of Throgmorton.
[00:00:21.26] And similar to the video recorded at the interims, this will really focus really on three areas, a review of performance, in particular of H2 of 2023, I think that'll be more instructive, two, to provide an overview of portfolio positioning and then, three, obviously to end with some thoughts about the outlook from here.
[00:00:42.38] So to the first of those three sections, the performance review. The second half of 2023, Throgmorton outperformed its benchmark by 1.3% net of fees. The long book lost 2.9% whilst the short book had a strong period generating 0.9%. This means that for our full financial year ending November of 2023, we outperformed our benchmark by 3.7% net of all fees.
[00:01:11.71] Now, this marks the second consecutive year of losses for our benchmark, which reflects a significant negative sentiment that clouds UK small and medium-sized companies in particular. This is reflected in the flow data, which shows that up until November of 2023, the last month of a financial year. That was the 28th consecutive month of outflows in UK small and mid caps.
[00:01:35.50] And it's my view that this pervasive selling pressure has resulted in a significant mispricing within UK small and mid caps evidenced by the low valuation metrics. For instance, if we take the price to earnings ratio for the FTSE 250, it's now 10.5 times, and for the FTSE smallcap, it's 8.3 times for 2024. But it also shows the extent of relative underperformance versus the FTSE 100.
[00:01:57.98] Now for context, the FTSE 250 has underperformed the FTSE 117 of the last 24 months and is now the longest and largest period of relative underperformance on record, around 30%, far exceeding that of the great financial crisis.
[00:02:14.03] However, despite the growing chorus for persistently high inflation, a recession, a collapse in corporate profitability, the second half of 2023 has given cause for much optimism, reflecting falling inflation, strong employment, increasing consumer confidence.
[00:02:31.34] Moreover, when looking at underlying fundamentals, i.e. sales growth, margins, balance sheet strength, free cash flow generation of many of the Trust's holdings, it remains incredibly robust. And company updates on the whole have been supportive.
[00:02:46.70] Now, of course, in any given year, there will be disappointments, and this year is no exception. But in aggregate, I think the earnings of the company's holdings and the broader smaller mid-cap universe have proved far more resilient than many predicted. If we focus briefly on the top three contributors-- and detractors to performance and please refer to the annual report for a fuller explanation on all the names I mentioned--
[00:03:08.52] If we look at the three contributors first, it's interesting because it comes from a wide variety of sources. The biggest contributor was Ergomed, which was bid at a 28% premium by the private equity firm Permira. And whilst addicted to performance, I can't help but feel incredibly sad to lose I think one of the most genuinely exciting and differentiated growth companies in the portfolio.
[00:03:33.78] But once again, Ergomed is an example of how corporates or private equity are taking a different view on the value that we think is inherent in small mid-caps than the stock market in aggregate.
[00:03:43.74] The second biggest contributor was from a short position in a UK-listed technology company, which went through a period of rapid order growth and a meteoric share price rise but then their shares were suspended upon a fraud investigation. It transpired that the vast majority of those orders were fraudulent. There was an emergency cash call, and we closed our short out at 96% below the price before suspension.
[00:04:09.46] And the third biggest contributor was from computer center, an IT reseller that we've owned for a number of years, which would continue to execute really well, growing really strongly, obviously benefiting from big secular themes like digital transformation, cybersecurity, et cetera, but also from another year of very strong market share gains.
[00:04:28.21] When we look at detractors, the biggest detractor was from our longbeach and CVS group, the veterinary pharma services company, which we've owned for a number of years. And they fell not due to trading conditions, which remain resilient, but because the CMA are launching into inquiry into how vet services and products are sold and making sure that customers get the best choice and the best price.
[00:04:49.78] And we've got lots of experience in dealing with CMA inquiries investigations. And I think it's totally imprudent at this stage to comment further on this. Obviously, it's developments that we're watching closely, and obviously, we've had multiple interactions with the management team, but it remains a core holding within the portfolio.
[00:05:05.77] The other two detractors were WHSmith and SigmaRoc, which both continue to execute well and are very strong results and trading updates through the period, but their share price has continued to fall, which I think really reflects more the dark cloud that sort of looms ever large over our universe, not actually relating to stock specific outcomes. And we think both are incredibly attractive in terms of valuation versus their long-term prospects.
[00:05:37.45] As to portfolio positioning, I think the overall positioning of the company really reflects our outlook, which hasn't really changed significantly over the last six months. If you go back to our interim video from a few months ago, my view then was that interest rates would peak and inflation would fall markedly through H2 23.
[00:05:55.27] And I think as that case continues to strengthen, I think central banks will ultimately change course, and I think that all goes well for small and medium-sized companies to focus on a few areas, in particular in the fund, house building and RMI, which is repair, maintenance, and improvement.
[00:06:10.54] So a really tough 2022 and 2023 for many RMI companies. Volumes are probably now down about 20% over those two years, but I continue to believe the outlook is far better than valuations would suggest. And in recent weeks, I've been adding to housebuilders as well as building up and adding to other RMI-related plays in the portfolio.
[00:06:27.94] And really that reflects my view that valuations are close to trough on earnings that are also close to trough. So the recovery potential in both the earnings and the multiple is substantial and positioning so extreme combined with falling borrowing costs we've seen in recent days and weeks were implications that can have on these types of shares as falling borrowing costs and a steadying housing market and strong employment have forced a sharp reappraisal.
[00:06:54.63] For other UK domestic focused PLCs, I think 2024 will see growing dispersion in financial returns as also strong market share stories, i.e. digital trading down on new product verticals will outperform and grow despite a more challenging backdrop. Input costs have now reversed for many.
[00:07:13.62] So tension should focus much more on a top line, in particular underlying volume growth as price will become a far less significant lever to flex going forward. And the converging valuations of so many UK consumer shares has been the source of immense frustration to myself and the team with well capitalized market share winners, with high gross margins trading on similar price earnings ratios, and free cash flow yield is therefore far inferior peer group. That could be a huge source of financial alpha for us going forward.
[00:07:42.94] And we hope that 2024 will mark the year of more dispersion in valuations between winners and losers intra sector. And I think that positions or hopefully should benefit the positioning of Throgmorton.
[00:07:56.37] As for industrials, we retain a significant exposure here. And our approach has always been very selective. Destocking has definitely been a big theme in the sector coming off the sort of halcyon days of 2020, 2021 when many supply bottlenecks prompted significant overordering. Security of supply went into overdrive.
[00:08:16.11] And this has taken some time to unwind, definitely longer than I thought in many cases. However, there are grounds for hope. Quite a few of our companies have flagged a recent pickup in their book to bill ratios through November and December of 2023. And so perhaps, there really is some genuine emerging evidence that several have turned a corner and growth can accelerate through 2024.
[00:08:36.75] Reshoring or local for local in the US as well as other several government programs from the CHIPS to the Inflation Reduction Act continue to provide additional tailwinds of growth for quite a few US focused but UK listed small and midsize companies that we have exposure to in the Trust.
[00:09:00.30] After the last section, perhaps the most important looking ahead, as we look into 2024, the macro volatility is unlikely to abate. And of course, 2024 will mark a significant year for elections worldwide, which definitely could inject some turbulence.
[00:09:16.44] However, there are reasons for optimism. We enter 2024 with inflation and mortgage rates falling whilst productivity and factory construction and corporate profits are rising, labor markets are showing signs of softness but remain robust. And so with low levels of unemployment that many of experiencing and the benefits of real wage growth coming through, which will benefit many for the first time in decades, that in turn should lead to higher services PMIs.
[00:09:47.43] As mentioned earlier, talk about industrial's, inventory balances are now low after a prolonged period of destocking. And so my hope is that manufacturing PMIs turn upwards, which will certainly help boost the outlook for growth. As for inflation, much of the inflationary pressures of last year could become more deflationary during the course of this year.
[00:10:06.24] Oil and gas prices are low at the time of this call certainly admits concerns over supply, which will continue to alleviate pressure on both corporate input costs as well as consumer wallets. And if we look at the recently-announced food price cuts by the major supermarkets in the UK, that will certainly help too.
[00:10:22.86] Oil is something that I continue to watch closely. It remains a significant swing factor, as are the emerging developments in the red sea for global supply chains, but generally, I think at the moment the picture is still one of optimism.
[00:10:34.51] As for the Fed and central banks, recent weeks suggest the Fed on hold but with a faster cut. And I think what's important is the last couple of months, we have seen the potential to catalyze a broadening out of market leadership away from some very, very narrow areas of outperformance both in the US and Europe and the UK. And I hope overall, that should be a net positive for our positioning if a light can burn bright over small and medium-sized companies.
[00:11:02.20] In summary, the picture I see is really one of gradual recovery. And in our view, that is not reflected in the valuations of this exciting, differentiated universe of companies. And I think that offers compelling value in both absolute and relative terms.
[00:11:18.28] And indeed, for Throgmorton specifically, this is a company that now possesses many companies, with fantastic growth prospects on single digit price to earnings ratios and with double digit free cash flow yields but unlike so many archetypical value sectors have far superior growth prospects. As a result, the net of the Throgmorton is slowly increasing. It sits now at 106%, while growth is around 114%, but it continues to build.
[00:11:47.81] So that concludes this video recording. I just want to say thank you so much for listening, for watching. If you're a shareholder and Throgmorton, then clearly, a huge thank you for your support and for your patience. And if you're new, then thank you for your interest. And obviously, feel free to reach out to your BlackRock contact if you'd like further information.
[00:12:04.97] I know it's been a difficult couple of years for the Trust and obviously for the investment universe, but I remain an ardent supporter of the attractions of UK small mid-caps. I think it's a fantastic asset class. It's exciting. It's dynamic.
[00:12:16.82] It constantly evolves and some phenomenally exciting and differentiated and advantaged growth companies that really can beat to their own rhythm that aren't dependent on changes in inflation or consumer confidence that really do have really powerful secular drivers behind them from a top line perspective or really strong self-help or market share stories that ultimately can determine their fate over a medium to long-term view.
[00:12:43.10] I really believe that we're in a far better place today than we have been in, let's say, the last 18 months, but valuations have yet to catch up with that. So I can't help but see on the time frame that I look at and when I evaluate companies asset classes a very interesting and attractive setup.
[00:12:58.56] So thank you for your patience. And I ask you to keep the faith, keep the interest. And I think in time, that will be rewarded. But thank you very much.
