BlackRock Throgmorton Trust Annual Results

Thank you for watching this video. If you don't know me, I'm Dan Whitestone. I'm portfolio manager for the BlackRock Throgmorton Investment Trust. And the purpose of this video is really a recap on performance over 2024 to cover recent changes to portfolio positioning and of course, to, leave you with some thoughts on the broader macro environment and the outlook, as we see things going forward.

Okay. So to summarise, 2024, the trust delivered a positive return of 16.3% net of fees over the 2024 financial year, outperforming our benchmark by 2.2%. I think I'd say that 2024 has probably been one of the most difficult years to navigate. In almost a ten year period, I've managed this trust in which nine of those ten years we have outperformed our benchmark.

Thinking back, the positive momentum developing UK over the first nine months of this year was swiftly undermined by the budget and the drumbeat and negativity that preceded it, casting a long, dark shadow over the UK. And as a consequence, outflows in asset class have not only continued but actually have accelerated into year end, and that has really pressurized share prices and valuations of thinly traded shares, where valuation alone is an insufficient catalyst for reversal of performance,

despite in many cases (and this is a real frustrating point) much more robust trading than valuations would suggest. M&A continues at large, which is a double edged sword. I mean, it's fantastic, right? If you're on the right side, there's a huge debate to be had about whether you're selling out on the cheap, but in circumstances case, which is pertinent, the M&A activities actually cost us around 300 basis points of relative performance in the year.

And what I mean by that is that these are companies being acquired that are in the benchmark that Throgmorton didn't own. And that's been a material headwind to relative performance and something I've never experienced in the last ten years. If you just drill down on to an investment performance, a little bit more detail. As mentioned, overall net return 16.3% after all, fees outperformed the benchmark by 2.2% and the trust's outperformance during this year was definitely weighted towards H1 and can be attributed to a number of strong stock specifics across a range of companies.

Anything from Breedon to Morgan Sindall to Jet2. Detractors were a combination of some stock specific negative developments, particularly in the case of, Next 15 group, for instance, or in many cases, just owning shares that delivered commendable results but continue to see their share prices weaken on sentiment and or flow. You can find a much more detailed breakdown of the trust's key contributors and detractors in our annual report.

Thinking about portfolio positioning, it was only a few months ago that I was sat in this very room talking to a camera about robust UK macro data, falling mortgage rates, a positive outlook for 2025. But as Keane said, when the facts change, I change my mind and unfortunately the UK budget is had a real chilling effect on the UK economic momentum.

The change to the National Insurance threshold was definitely unexpected and will disproportionately affect those in part time work and impose large costs on the businesses that employ them. In many of our interactions with companies recently, they have told us that they respond to these inflationary impulses by reducing staff and seeking efficiency savings, and that will weigh on the growth outlook as unemployment rises.

As for industrials to remain competitive, they will either have to absorb or mitigate these mechanical National Insurance costs should they wish to remain price competitive against global rivals. However, they should get a big boost from sterling, which has weakened and continues to depreciate, not only against the dollar, but major European currencies as well. Areas we were particularly positive on at the time are in terms such as house builders and repair and maintenance improvements.

Supply chains clearly face a much more challenging set of circumstances. Now, though, depressed valuations have compressed even further. Labour will need to move at an even faster rate with supply side reforms if they want to stimulate a housing recovery. But if people can't afford a mortgage it won't really matter. So the direction obviously for bond yields and for funding rates is key.

So, despite these elevated concerns, I've still chosen to maintain exposure to house builders, because I really believe it is one way that Labour can demonstrate real progress through supply side reform. And there's still the potential boost for demand assistance if they want to ignite growth. Shares like Bellway trade at a large discount to the asset value. Despite UK housing volumes down roughly 30% from pre-COVID, that looks pretty compelling value to me.

We have reduced long exposure in some UK domestics. We have rate sensitivity where valuations don't reflect the new reality and we actually introduce some shorts. For UK domestic companies, particularly with large labour bases, we see profits pressurized by national insurance changes and also rising foreign import costs. We've added some shorts and technology in a few areas, where we see budgetary pressures among small to medium sized enterprises.

So we think could be disappointingly hit by this budget logic, but also impacted will be those companies where the government is a large customer itself, under pressure to find savings. What makes me very nervous in doing too much in the short book is three things. One, the shares have moved down significantly since the budget. So many cases are trading on cross cycle valuation metrics.

Second, in 2024, we witnessed significant M&A activity and we think 2025 will be no different. And three, the Bank of England may accelerate rate cuts despite the near-term concerns on inflation to compensate for the weaker growth outlook. We've not made significant changes to our positioning in UK international earning companies which should benefit from weaker sterling and obviously have limited UK domestic cyclicality. We still favour domestic US exposure, particularly where we see long roadmaps for growth and things like infrastructure, rreshoring and day to day CapEx..

Now some of those holdings I think of like Hill and Smith, Rotork and Oxford Instruments should benefit. As for general industrials, 2024 saw, more moderation in activity levels as destocking continued for longer than many (including myself) had hoped. the stop start nature of the supply chain throughout the year has impacted a range of geographies and subsectors differently as they are all at different points in the cycles..

I think it's fair to say we've got some of those dynamics wrong and some right in 2024. But overall, in general industrials we have noticed in recent weeks and months an improvement in book to bill ratios as many turn the corner, accelerating through H2 24 and looking positive going into 2025.

And many of these companies do trade on depressed cross cycle valuations, which I think is pretty encouraging. And as mentioned earlier on, weak sterling will help both their competitive position as well as their earnings (from a translational perspective). As for the outlook, I mean, without doubt this is a frustrating time. It's so easy to bash the UK right now.

So sitting here trying to make a constructive case for UK small and mid-sized companies is definitely not without its challenges. Valuations are undoubtedly cheap, but I'm sure every single UK small and mid-cap fund manager you've spoken to has told you the same thing. This valuation argument has been true for some time. I've sat here and commented on it myself before. It isn't sufficient in itself to turn the tide on sentiment and flows, and it seems to me the only real buyers for shares right now, apart from the companies themselves, are private equity and corporates.

They take advantage of that valuation opportunity that sits before us. Before we get too despondent and talk ourselves into such a bearish frenzy, maybe lets try and put some of this data into context. UK construction PMIs have come off the peak, but are still the strongest in Europe. Mortgage volumes did fall 3% month on month in November, but are actually upin September and at the end the year 2024 they were up 40%.

I mean, just sit back and just compare and contrast that with those three consecutive months of minus10% following the Truss mini budget. Aggregate employment is still strong, even as forward looking indicators are moderating, as is the disposable income tracker, which is effectively a proxy for household cash flow, which is still growing roughly 10% on annualized basis and the savings rate is still above ten, which is way higher than the pre-COVID 20 average of 7%.

So there is money to be spent, should the consumer want to. Service sector PMI’s remain hovering around and above 50, even as confidence in business has fallen. And lastly, and perhaps key is the Bank of England's own view on inflation which is rather more sanguine than financial markets, which does leave scope to cut faster than currently expected, particularly considering the growth outlook which is is deteriorating.

I think if you think about that, along with the simple fact that several industries have effectively been in the volume recession for around three years, cement, housing volumes, bricks, very structural widgets, consumer electronics, a deep recession in the UK I think is really unlikely, but certainly our hopes for a V-shaped recovery in 2025 have been squashed. The base case, as I see it now, is a return to the environment more akin to that of 2023.

Subdued demand, anaemic growth. So downside risks from a further fiscal misstep or punishment by the bond market are definitely clear. But normally, and not being facetious, by the time the bond market moves make the mainstream press and the comments at all start to cry and say to the pound, it's normally closer to the end than the start. You know, who can remember all those calls for sterling to be at parity with the dollar in 2022?

Ultimately, we've moved from a situation of economic strength in financial markets, looking supportive to one where economic data has weakened and UK fiscal policy looks increasingly the whim of financial markets. Even in this tough environment, though, we shouldn't lose hope or rip up a long standing tried and tested investment philosophy and process. Remember, in nine of the ten years I've run this trust, we've beaten our benchmark.

We will continue to seek out differentiated and advantaged companies with a long runway of growth. Let me just bring it this to life again. In the last few days, I've met three very different holdings in Throgmorton. So let's just play “guess that share” game. Number one, I met a UK industrial involved in filtration. It seen its profits grow 50% over the last four years.

That's nearly all organic, but in the same four year period, its share price is flat. It now trades at a record low price earnings ratio. This is not an anomaly. Trading is robust and the outlook is positive!. Number two is a central London property developer trading at almost a 50% discount to its NAV, despite record levels of occupancy and record levels of new rental demand.

Number three is a UK aggregates business that has grown profits in the last three years despite volumes being down 20% due to the strength of its pricing and obvious cost efficiencies that they have enacted. I mean, cement volumes in the UK are running 8% below 2008 levels. Housing starts at a 20 year low . You know, I think this company is really well placed to benefit from any volume recovery from housing, and from UK infrastructure. 

We will continue to seek idiosyncratic investment opportunities where we see a compelling runway for growth and an asymmetric risk reward opportunity, even though there may be and certainly are, more clouds on the short term horizon. But in many cases, if valuations are what we think, these are some of the highest quality domestic assets in the UK on trough levels, and they offer very attractive medium term upside, and where trading remains solid despite the backdrop, we remain alive.

To the data and more importantly, what it comesto tell us and we'll have to adjust positioning accordingly. So we enter 2025 somewhat apprehensively, and that is reflected in the gross exposure which is now down to around 110%, and the net exposure that's around 105%. But we do have real conviction in our portfolio. And I think in time, these shares could really grow into their own.

Without doubt, this has been a difficult period. It's been difficult period now, I think really for about three or so years. There are some fantastic opportunities I think in Throgmorton. The share prices don't reflect the great things that management teams have done, the progress they've made in terms of taking market share, the strength of their balance sheets and more importantly, runway for earnings and cash flow growth in the coming years.

But in time, I think talent will out. I want to thank you all for your perseverance, for your patience, for your interest in Throgmorton, for sticking with this trust and asset class in a very difficult period. It's definitely hard work at the moment. The team is committed to continue to do the best for you as the custodian of your capital, and I do believe that in time, the sun will shine down on the green fields of Elysium and the will be better times.

than we are currently in. But with that, a huge thank you for me. And I look forward to, seeing many of you, on the road in 2025. Thanks very much.

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