BlackRock Smaller Companies NAV outperformed its benchmark in December

BlackRock Smaller Companies Trust plc (LON:BRSC) has announced its latest portfolio update.

All information is at 31 December 2022 and unaudited.

To learn more about the BlackRock Smaller Companies Trust plc please follow this link: blackrock.com/uk/brsc

Performance at month end is calculated on a Total Return basis based on NAV per share with debt at fair value 

One month
%
Three months
%
One
 year
%
Three
 years
%
Five
 years
%
Net asset value-1.011.6-26.4-1.714.8
Share price0.312.5-34.3-15.315.8
Numis ex Inv Companies + AIM Index-1.26.9-21.9-1.71.1

Sources:  BlackRock and Datastream

At month end

Net asset value Capital only (debt at par value):1,498.30p
Net asset value Capital only (debt at fair value):1,544.71p
Net asset value incl. Income (debt at par value)1:1,521.60p
Net asset value incl. Income (debt at fair value)1:1,568.01p
Share price:1,356.00p
Discount to Cum Income NAV (debt at par value):10.9%
Discount to Cum Income NAV (debt at fair value):13.5%
Net yield2:2.7%
Gross assets3:£812.5m
Gearing range as a % of net assets:0-15%
Net gearing including income (debt at par):2.7%
Ongoing charges ratio (actual)4:0.7%
Ordinary shares in issue5:48,829,792
Ten Largest Equity Investments
Company
% of portfolio
4imprint Group2.9
CVS Group2.8
Gamma Communications2.7
Watches of Switzerland2.4
Qinetiq Group2.0
Ergomed2.0
Spirent Communications1.9
Oxford Instruments1.9
Bloomsbury Publishing1.9
Impax Asset Management1.8

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

During December the Company’s NAV per share fell by -1.0% to 1,568.01p on a total return basis (with debt at fair value), while our benchmark index fell by -1.2%. For comparison the large cap FTSE 100 Index returned -1.5%.

Equity markets fell in December as investors priced in expectations of higher for longer interest rates. The Federal Reserve, the Bank of England and the European Central Bank, all hiked rates by 50bps during the month. In the UK the base rate is now 3.5%, which after 8 increases in 2022, is 3.25% higher than where it started the year.  Central bankers continue to take a relatively hawkish stance highlighting, whilst goods inflation may be easing, that supply side pressures, notably tight labour markets, are keeping services inflation at elevated levels.

In China, the government announced a relaxation to the contentious zero-COVID policy and signalled a shift in focus from battling COVID-19 to stabilising the economy. Whilst bulls are encouraged by the likely rebound in demand this should have as China reopens, it has simultaneously led to concerns that surging infections will lead to temporary labour shortages and further supply chain disruptions.

While markets sold off during the month and small & mid-caps appeared to bear the brunt of the pain, particularly within the more growth orientated stocks, the Company was able to marginally outperform thanks to positive trading updates from our holdings. Energy services provider Hunting rose after the company announced robust trading in 2022 with upgrades to guidance for 2023 as a result of a strong sales book which will be monetised in the coming years. Online travel agent, On the Beach, rallied after reporting a return to profit for the full year to September 2022. The company pointed to success being driven by investments made in brand, technology and customer proposition over the last 12 months. Despite the ongoing challenges facing the travel industry in 2023 as a result of the cost of living crisis, management feel confident in their position due to the foundations that they have laid over the last year. Games Workshop contributed to the Company’s performance, where its positive returns were the result of the company’s announcement of a potential deal with Amazon to develop a new TV series with the Warhammer franchise.

A key feature during the month of December was the reversal in many of the best performing shares from November, as many gave back gains during the market sell-off, for example Watches of Switzerland, Auction Technology Group and Impax Asset Management. Shares in Serica Energy slumped after the company reported disappointing drilling results from its North Eigg well off the coast of Scotland. This latest disappointment added pressure to the shares, which have been impacted recently by the UK Governments increased windfall tax legislation.

We believe 2023 will see continuation of recent themes of uncertainty; Russia/Ukraine war, China, supply chains and inflation. However, we expect to see an end to interest rate rises and we think inflation is peaking. Generally speaking, financial conditions are not too stretched; corporates and consumers are reasonably well capitalised, and banks have plenty of capital. As such the path of employment will dictate the consumer outlook but we continue to expect the trough to be shallower than in previous recessions.

Industrial activity is likely to decline as inventory works through the system but given major markets such as automotive and aerospace were seeing choked demand through supply chain issues, again we expect a shallower trough. Housebuilding and RMI (repair, maintenance and improvement) will have a tough H1, but given the rapid re-pricing of mortgages post Prime Minister Truss, the outlook isn’t as bad as it was in September. Valuations have corrected quickly and looking back it appears all consumer orientated stocks overshot to the downside during the chaotic period around the Truss budget.

We expect to see M&A (Mergers & Acquisitions) picking up through the course of the year as management teams shift the focus away from returning excess cash flow to deploying it.

We are not out of the woods yet. In the face of a likely tough reporting season, we could very easily see another sell off. Therefore, gearing within the portfolio remains low and we are keeping our powder dry for the time being. However, with oil and gas prices lower year-on-year, China re-opening, US$ weakening, shipping / logistics / factory gate prices dropping, much of the inflation pressure of last year could become deflationary during the course of this year.

Against this difficult backdrop, we remind ourselves that many equity markets (Europe, UK) are structurally under owned and could benefit as sentiment turns and investors begin to reduce these underweights. We remain focused on bottom-up company specific analysis to identify high quality, nimble businesses, operated by entrepreneurial management teams, with strong market positions and resilient cash-flows. These are the types of businesses that we believe will be best placed to manage and thrive in the current environment. Historically these periods have been followed by strong returns for the strategy and presented excellent investment opportunities.

     1Source: BlackRock as at 31 December 2022

To learn more about the BlackRock Smaller Companies Trust plc please follow this link: blackrock.com/uk/brsc

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