Blackrock Smaller Companies Trust plc (LON:BRSC) has announced its annual results announcement for the year ended 28 February 2022
To learn more about the BlackRock Smaller Companies Trust plc please follow this link: blackrock.com/uk/brsc
PERFORMANCE RECORD
| 28 February 2022 | 28 February 2021 | ||
| Net asset value per ordinary share (debt at par value) (pence)1 | 1,878.11 | 1,784.35 | |
| Net asset value per ordinary share (debt at fair value) (pence)1 | 1,882.38 | 1,774.71 | |
| Ordinary share price (mid-market) (pence)1 | 1,684.00 | 1,698.00 | |
| Numis Smaller Companies plus AIM (excluding Investment Companies) Index2 | 17,421.96 | 17,167.37 | |
| Performance (with dividends reinvested) | |||
| Net asset value per ordinary share (debt at par value)2,3 | 7.0% | 16.1% | |
| Net asset value per ordinary share (debt at fair value)2,3 | 7.8% | 16.7% | |
| Ordinary share price (mid-market)2,3 | 0.9% | 17.2% | |
| Numis Smaller Companies plus AIM (excluding Investment Companies) Index2,3 | 1.5% | 24.9% |
| Year ended 28 February 2022 | Year ended 28 February 2021 | Change % | |
| Revenue and dividends | |||
| Revenue return per share | 35.29p | 13.36p | +164.1 |
| Interim dividend per share | 13.00p | 12.80p | +1.6 |
| Final dividend per share | 22.00p | 20.50p | +7.3 |
| ————— | ————— | ————— | |
| Total dividends paid and payable | 35.00p | 33.30p | +5.1 |
| ======= | ======= | ======= | |
| Assets | |||
| Total assets less current liabilities (£’000) | 986,537 | 960,900 | +2.7 |
| Equity shareholders’ funds (£’000)4 | 917,078 | 871,296 | +5.3 |
| Ongoing charges ratio3,5 | 0.7% | 0.8% | -12.5 |
| Dividend yield3 | 2.1% | 2.0% | |
| Gearing3 | 4.3% | 8.9% |
1 Without income reinvested.
2 Total return basis with income reinvested.
3 Alternative Performance Measure, see Glossary contained within the Annual Report and Financial Statements.
4 The change in equity shareholders’ funds represents the market movements during the year and dividends paid.
5 Ongoing charges ratio calculated as a percentage of average daily net assets and using the management fee and all other operating expenses, excluding finance costs, direct transaction costs, custody transaction charges, VAT recovered, taxation and certain non-recurring items in accordance with AIC guidelines.
CHAIRMAN’S STATEMENT
Dear Shareholder
MARKET OVERVIEW
After two years of a global pandemic, shrinking economies and dwindling employment, we all looked forward to a return of more normal times. A successful global roll-out of vaccines and government efforts to control the COVID-19 infection across the population did indeed bring us back toward normality and a resurgence of economic growth. UK markets performed well through the first half of the Company’s financial year into September 2021 as lockdown restrictions relaxed and consumer spending increased. Corporate spending rose, mainly in response to fundamental changes in global supply chains and a drive to localise sourcing. Investors grew more cautious in the latter part of the year as the combined effects of supply chain disruption and fiscal stimulus fuelled surging inflation. The era of cheap money, low interest rates and supportive fiscal policy looked set to come to an end. In these circumstances, it may not be surprising that the most significant contributors to performance in the year came from the portfolio’s exposure to oil and gas stocks, where increasing energy prices boosted returns. Performance also benefited from a resurgence in Merger & Acquisition (M&A) activity, as companies took advantage of increased liquidity and still modest valuations.
Sadly, the return to normality did not last. Against an already challenging market backdrop, the tragic and devastating events in Ukraine, which began to unfold at the end of the Company’s financial year, undermined investor confidence and market direction. In addition to the hugely negative impact on investor psychology, the war in Europe caused constricted supplies of key hard and soft commodities while dramatically pushing prices up even further. In a market environment only just beginning to recover from past pandemic driven events, the situation created a turbocharged level of market uncertainty and volatility. This uncertainty is likely to persist for some time as the war in Europe unfolds and the predictability of economic forces remains limited. However, your Company’s focus has always been on investing in companies with well capitalised balance sheets and strong, entrepreneurial management teams that are able to rapidly adapt their businesses to shifting market dynamics. As such we believe the portfolio is well-positioned and prepared to navigate the challenges ahead and to take advantage of the investment opportunities that may arise in these uncertain times.
PERFORMANCE
In the year under review the Company’s Net Asset Value per share rose by 7.0%1,2,3, outperforming our benchmark index, the Numis Smaller Companies plus AIM (excluding Investment Companies), which returned 1.5%1,2. Over the same period your Company’s share price on a total return basis with income reinvested rose by 0.9%1,2 compared with the FTSE AIM All-Share Index which fell by 11.3%1, the FTSE 250 Index which rose by 2.9%1 and the FTSE 100 Index which rose by 19.2%1. The wide disparity between index returns reflected changing investor sentiment about large versus smaller cap companies during a period of great market uncertainty over future prospects.
More detail on the significant contributors to and detractors from performance during the year are given in the Investment Manager’s Report below.
The Company’s longer-term performance is set out in the table below. More information is also given in the chart on page 7 of the Annual Report and Financial Statements which illustrates how long-term investors have had an opportunity to build up an attractive annual income from an investment in the Company. Even if the initial dividend yield at the point of purchase has been unremarkable, the strong underlying growth in dividends over the years has resulted in a competitive yield on cost when compared with equity income funds in general.
To illustrate this investment and income success, the chart on page 7 of the Annual Report and Financial Statements shows that £1,000 invested in the Company on 28 February 2006 would have increased in value by 546%1 in NAV terms to 28 February 2022, whereas £1,000 invested in the UK open-ended income sector median would have increased by just 133%1. The chart also demonstrates that while the yield on the Company’s shares was much lower at the beginning of the period, over time the Company’s dividend has grown at a much faster rate than open-ended UK income fund competitors. As a result, the yield on the purchase cost of an investment in the Company would now be more than that on the UK open-ended income sector median.
RETURNS AND DIVIDENDS
Your Company’s total revenues per year are a reflection of the dividends we receive from portfolio companies. This in turn drives our ability to pay dividends to our shareholders. The period of the pandemic saw a dramatic drop in our revenues from portfolio dividends followed by a sharp improvement that reflected the strength of our portfolio companies’ recovery. Total revenue return for the year was 35.29 pence per share (2021: 13.36 pence per share). The increase of 164.1% was largely due to the exceptionally low level of dividends received in the year to 28 February 2021 as the COVID-19 pandemic hit portfolio companies’ revenue streams. Notwithstanding this fact, it is pleasing to note that current year revenues are just 5.0% lower than the more comparable earnings per share of 37.13 pence for the year to 29 February 2020. This is despite the fact that the UK economy was still struggling against lockdown restrictions and COVID-19 variants for a substantial part of the financial year to 28 February 2022. The fact that revenue streams have recovered so significantly is a tribute to the strength and resilience of many of our portfolio holdings.
The Board continues its policy to ensure the sustainability of dividends and their future growth through investment in companies with strong balance sheets, solid management and sustainable business growth models. We remain mindful of the importance of yield to shareholders. The Board is also cognisant of the benefits of the Company’s investment trust structure which enables it to retain up to 15% of total revenue each year to build up reserves which may be carried forward and used to pay dividends during leaner times. The Company has substantial distributable reserves (£851 million as at 28 February 2022, including revenue reserves of £16.4 million). Taking note of your Company’s current reserves, the Board has decided to declare a final dividend of 22.00p per share, representing a 5.1% increase over total dividends declared for the year to 28 February 2021. The dividend will be paid on 17 June 2022 to shareholders on the Company’s register as at 13 May 2022. The Board has also taken this decision recognising that many portfolio companies are demonstrating a robust rebound in their dividend paying ability, allowing us to take a more optimistic view of future prospects.
Your Company has now increased its annual dividend every year since 2003. The annualised increase in dividends paid since this date equates to 12.2%.
| 1 Year change | 3 Years change | 5 Years change | 10 Years change | 15 Years change | |
| Performance to 28 February 2022 | % | % | % | % | % |
| NAV per share (debt at par)1,2 | 7.0 | 41.7 | 65.5 | 262.4 | 428.3 |
| Benchmark1,2 | 1.5 | 28.5 | 34.6 | 125.5 | 123.1 |
| Share price1,2 | 0.9 | 34.8 | 75.7 | 304.4 | 465.3 |
1 Percentages in Sterling terms with income reinvested.
2 Alternative Performance Measure, see Glossary within the Annual Report and Financial Statements.
3 NAV with debt at par.
4 In Sterling terms with income reinvested.
GEARING AND SOURCES OF FINANCE
The Company has traditionally maintained a range of borrowings and facilities to provide balance between longer-term and short-term maturities and between fixed and floating rates of interest. The Company currently has in place fixed rate funding consisting of the £15 million debenture maturing in July 2022, £25 million senior unsecured fixed rate private placement notes maturing in 2037, £20 million senior unsecured notes maturing in 2044 and £25 million senior unsecured notes maturing in 2046. We chose to increase long-term fixed rate funding over the past year to capture what we considered very attractive interest rates and more recent changes in interest rate prospects underscore the logic of that decision. By way of illustration, the interest cost for the 7.75% £15 million debenture that matures in July this year amounts to £1.2 million per annum; the equivalent cost for £15 million at the rate of the most recent Long Dated Note issued in September 2021 of 2.47% (which may be used to repay the debenture) equates to just £0.4 million, a saving of £0.8 million (9 basis points of NAV based on asset values at 28 February 2022). Variable rate funding consists of a £35 million three-year revolving loan facility with SMBC Bank International plc and an uncommitted overdraft facility of £10 million with The Bank of New York Mellon (International) Limited.
It is the Board’s intention that net gearing will not exceed 15% of the net assets of the Company at the time of the drawdown of the relevant borrowings. Under normal operating conditions it is envisaged that gearing will be within a range of 0%-15% of net assets. At the year end, the Company’s net gearing was 4.3% of net assets (2021: 8.9%).
DISCOUNT
The Board monitors the Company’s share rating closely, and recognises the importance to shareholders that the price of the Company’s shares do not trade at either a significant premium or discount to the underlying NAV.
Market volatility persisted as the world grappled with the ongoing COVID-19 pandemic through the year under review and discounts across the closed-end funds sector widened. Your Company’s average discount narrowed, trading at an average discount of 5.0% to NAV (with debt at fair value) over the full year (compared to an average discount of 5.5% for the year to 28 February 2021). To put this in context, the average discount for companies in the AIC UK Smaller Companies sector for the same period was 7.0%. The Company’s discount currently stands at 12.5%.
BOARD COMPOSITION AND IMPLEMENTATION OF POLICY ON TENURE
Since the date of my last report, the Board has made significant progress in the implementation of its policy on tenure (that no Director’s tenure should exceed nine years, or in the case of the Chairman, twelve years).
As previously announced, Mr James Barnes joined the Board with effect from 31 July 2021 and Ms Helen Sinclair joined with effect from 1 March 2022. Mrs Burton is the only remaining Director whose tenure has exceeded nine years and she has advised the Board of her intention not to seek re-election at the Company’s Annual General Meeting in 2022 and to retire with effect from the conclusion of this meeting. The Board wishes to thank Mrs Burton for her wise counsel and invaluable contribution to the Company over her tenure as a Director.
ANNUAL GENERAL MEETING
The Company’s Annual General Meeting will be held at the offices of BlackRock at 12 Throgmorton Avenue, London EC2N 2DL on Thursday, 9 June 2022 at 11.30 a.m. Details of the business of the meeting are set out in the Notice of Annual General Meeting contained within the Annual Report and Financial Statements.
The Board is delighted to return to in person AGMs. At present UK Government restrictions on public gatherings are no longer in force in connection with COVID-19. We therefore intend to hold the AGM in the normal way with physical attendance by shareholders. However, shareholders should be aware that it is possible that such restrictions could be reimposed prior to the date of the AGM.
Shareholders who intend to attend the AGM should ensure that they have read and understood the venue requirements for entry to the AGM. These requirements, along with further information on the arrangements for the AGM, can be found in Note 1 of the Notice of Annual General Meeting contained within the Annual Report and Financial Statements.
In the absence of any reimposition of restrictions, the Board very much looks forward to meeting with shareholders at the AGM.
OUTLOOK
The war in Europe makes any forecast of future results more than usually difficult. Since the financial year end the Company’s NAV (as at 27 April 2022) has decreased by 5.7%1, against a decrease in the benchmark of 1.9%1, and the share price has fallen by 7.4%1. These results should be seen in the context of continued and significant market volatility.
As the COVID-19 pandemic has evolved, the resurgence of variants and the unpredictable trajectory of a return to normal life has continued to create significant volatility in markets across the globe. The monetary and fiscal hangover from the pandemic and the sharp resurgence in economic activity in the midst of ongoing supply disruptions have set the stage for a high inflation environment. The situation has been exacerbated by the devastating events in Ukraine which have constricted the supply of key commodities dramatically and pushed prices up even further.
Against this turbulent backdrop, the Company’s portfolio is weighted towards companies with well capitalised balance sheets and entrepreneurial management teams that are able to rapidly adapt their businesses to the shifting market dynamics. As such we believe your Company is well-positioned and prepared to take advantage of the investment opportunities that lie ahead despite the uncertain market conditions.
If shareholders would like to contact me, please write to BlackRock Smaller Companies Trust plc, Exchange Place One, 1 Semple Street, Edinburgh EH3 8BL marked for the attention of the Chairman.
RONALD GOULD
Chairman
29 April 2022
1 Alternative Performance Measure. Percentages in Sterling terms with income reinvested and based on NAV with debt at par value.
INVESTMENT MANAGER’S REPORT
As with last year, I write this year’s Manager’s Report sitting at home. However, this year it’s not because of lockdown, but through choice as hybrid working has become more entrenched. I’m at home because I needed to get my family a pre-flight COVID-19 test for entry to the US, a test I conducted on Zoom. The test unfortunately coincided with a Blackrock Smaller Companies Board meeting, but such clashes are no longer an issue, video conferencing allowed me to participate, as it did with others who were at home because they had been in contact with a confirmed COVID-19 case. Two years ago these statements would have sounded unusual, yet now they are an everyday part of our lives, such has been the change since COVID-19 first entered our lives. It is amazing how necessity can accelerate the pace of change, and how quickly we adapt to that horrid phrase, the “new normal”. The Company’s financial year has generally seen a recovery in markets as COVID-19 risks began to recede. However, whilst we may have hoped this would be a reason for enthusiasm, the ripples of the pandemic continued to be felt through logistics, inflation and labour disruption. Where once we were worried about lockdowns, we moved onto the “pingdemic”. The shortage of pasta and toilet rolls became shortages in critical components and semi-conductors. During the height of COVID-19 we worried about the strength of company balance sheets, now pricing power dominates discussions. The debate moved on from who were the “COVID-19 winners” to which companies were most exposed to normalisation as old habits and practices returned. The era of easy money, low rates, and supportive fiscal policy gave way to rising rates and tax rises. All the while transient inflation has become less transitory, leading to a significant shift in expectations for interest rate rises. Finally, the period under review ends with the shocking and dreadful events in Ukraine which led to volatility in global markets, albeit the Company does not have a direct exposure to any Russian or Ukrainian securities.
The Company’s NAV (debt at par value) rose by 7.0%1 during the financial year, outperforming our Benchmark which rose by 1.5% (all percentages stated with income reinvested). It is pleasing to see the Company return to outperformance this year, and for that performance to come from a wide set of investments, highlighting the strength of our process and stock picking.
As investors, we aim to identify opportunities that can deliver in the medium to long-term, so it is always pleasing when shares appear as top performers over a number of years. Watches of Switzerland delivered further upgrades as demand for higher end jewellery and watches continued post the re-opening of their retail outlets. Their success as a distributor has been recognised by the major brands, resulting in further opportunities in the United States (US) and Europe. The recovery in corporate spending has been felt in several areas, from Next Fifteen Communications benefiting from the increased demand for digital content, to YouGov and their suite of data products. In an ever-changing world it is of paramount importance for businesses to know not just who their customers are, but also how best to access them, and whilst large technology companies do more to protect their customer data, the value of businesses that can provide other mechanisms to identify and target audiences will increase. Morgan Sindall delivered several upgrades through the course of the year as domestic infrastructure and regeneration markets recovered. The management of Morgan Sindall take great pride in the relationship they maintain with the supply chain, with prompt payment a key component. In an industry that has historically been characterised by confrontational relationships between clients and suppliers, this is a definite source of competitive advantage, and will likely help Morgan Sindall manage their business more effectively than others in today’s environment of component shortages.
Even before the recent dislocation in energy markets caused by events in Ukraine, oil and gas prices were rallying as the additional demand required by a post COVID-19 world met the supply side realities of an industry that hasn’t invested for growth for a number of years. Whilst high commodity prices will inevitably cause pressure for corporates and consumers, they are of course positive for the resources sector, with both Serica Energy and Gulf Keystone Petroleum appearing in the top performers this year.
No year is ever perfect, there are always companies that fail to deliver on expectations. When this happens, our role is to understand if changes are temporary, and ultimately have no impact on longer term fundamentals and value, or if they represent a more permanent shift in opportunity. Joules is an example of the twin pressures of a weakening consumer backdrop and the supply chain stresses that are impacting on the retail sector, with the shares weakening on the back of two downgrades. Sadly, we expect these difficult conditions for Joules to continue, and have sold the position. In contrast, Moonpig shares have also fallen substantially since their 2021 peak despite delivering on the earnings expectations set at the time of their Initial Public Offering (IPO). The supply chain for greetings cards is far less complicated than for fashion, less exposed to the logistics and inflationary pressures we are seeing elsewhere, whilst there is a structural shift to online cards and gifting that will continue to drive the top line. With this view in mind, we continue to hold a position.
In an environment of rising costs, it is paramount that businesses have pricing power. Unfortunately, International Greetings has shown what happens when customers are unwilling to accept price increases, no matter how justified they may be by raw material inflation, and the company finds itself in the vice like grip of the closing jaws of cost and price. With the outlook showing no signs of improvement, and no suggestion they will suddenly develop more pricing power, we have exited the position.
A combination of significant available liquidity and favourable valuations catalysed a resurgence in Mergers & Acquisitions (M&A) activity. The Company has been fortunate to benefit on a number of occasions this year, with bids for Sumo, Sanne, Stock Spirits and Vectura. It is worth noting how many of these deals have corporate buyers rather than private equity, highlighting the increased confidence from management teams, and value they see in the UK market. That confidence extends to our own investments too, as Auction Technology Group, Team17, and Learning Technologies took advantage of equity markets to raise capital for transactions, whilst a myriad of others utilised their own cash flow to carry out bolt on deals. However, the health of the M&A markets stood in stark contrast to the IPO markets, where the offerings this year were generally of lower quality or at unattractive valuations. As such, our participation in offerings this year has been minimal, with only Kitwave Group, In The Style Group, Big Technologies and Devolver Digital added to our holdings.
Whilst we have a fundamental bottom-up investment process, by default that stock selection aggregates up to produce sector exposures. This year we have reduced our overweight in consumer related stocks, moderating the position as the outlook for consumer spending becomes more opaque. Employment is still high, wage increases are coming through, but it is still unclear whether these increases will be enough to cover the rapid changes to the cost of living. Overlaying the macro dynamics are unknown shifts in consumer spending patterns. After two years of lockdowns, home shopping and house repairs, it is unclear where consumers will look to spend their tightening budgets in the coming twelve months. However, whilst consumer spending may be more challenged, it is clear that corporates have their cheque books out. Whilst some of this may be post COVID-19 catch up, most is a response to fundamental changes in global supply chains. Traditional patterns of trade are shifting, “just in time” is being replaced with “just in case”, and global supply chains are being localised or nearshored. As a result, our exposure to corporate expenditure, whether that be through Capital Goods or Media has been increasing. Finally, our exposure to the resources sector has increased. Typically, this is an area where we struggle to identify valuations that suitably compensate for the risk, but with resources prices hitting new highs all through the year, some of these businesses are now producing significant cash flow.
OUTLOOK
With the shocking events in Ukraine, there is an enormous range of outcomes for the coming year. The immediate impact of the invasion has been seen in markets and commodities, further fuelling the inflation fire. But, like COVID-19 before, it will take time for the wider implications to manifest themselves. COVID-19 has shown us the magnified impact on end markets that small disruptions in supply chains can have, history shows us the profound social consequences of high inflation in food and fuel, and the substantial and unprecedented sanctions that have been announced will amplify these distortions. I often worry that I sound like a broken record when discussing positioning, repeating the same mantra year after year, but in these markets the companies best placed to perform are those with well capitalised balance sheets, market leading positions, pricing power and entrepreneurial management teams able to rapidly adapt their businesses to the shifting market dynamics. This was true in the tech crisis, the global financial crisis, through Brexit and COVID-19. The companies we invest in have proved themselves through numerous cycles, and we consider that there is no reason to suggest they will be incapable of doing so in 2022.
ROLAND ARNOLD
BLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED
29 April 2022
1 Alternative Performance Measure. Percentages calculated in Sterling terms with income reinvested.
TEN LARGEST INVESTMENTS AS AT 28 FEBRUARY 2022
1 Oxford Instruments
Electronic & Electrical Equipment
Portfolio value £24,230,000
Percentage of portfolio 2.5%
A manufacturer of scientific instruments serving both academic and commercial markets. Oxford Instruments sells highly technical and complex instruments which play into some of the most highly funded and exciting areas of global research and development (R&D) today.
2 Watches of Switzerland
Personal Goods
Portfolio value £22,869,000
Percentage of portfolio 2.4%
The UK’s leading luxury watch specialist with a growing US presence. The group is comprised of four prestigious retail brands; Watches of Switzerland, Mappin & Webb, Goldsmiths and Mayors and has been transformed over the last 5 years into a modern, technologically advanced, multi-channel retailer. The group has a showroom network which includes flagships in London, two flagship showrooms in New York, and increasing presence of mono-brand boutiques along with an industry leading e-commerce platform.
3 Gamma Communications
Mobile Telecommunications
Portfolio value £21,889,000
Percentage of portfolio 2.3%
A leading provider of Unified Communications as a Service (UCaaS) into the UK and European business markets, supplying communication solutions via their extensive network of trusted channel partners and also directly.
4 Treatt
Chemicals
Portfolio value £20,363,000
Percentage of portfolio 2.1%
An ingredients manufacturer and solutions provider to the global flavour, fragrance and consumer goods markets with operations based in the UK, the US and China.
5 Next Fifteen Communications
Media
Portfolio value £19,390,000
Percentage of portfolio 2.0%
A global provider of digital communication products and services. The company offers digital content, public relations and affairs, technology, marketing software, market research and policy communications.
6 4imprint Group
Media
Portfolio value £19,078,000
Percentage of portfolio 2.0%
A UK-listed but US-centric direct marketing business of promotional goods. Despite a relatively small market share, they are the market leader in the US by some distance which reflects just how fragmented the competitive set is.
7 Impax Asset Management
Financial Services
Portfolio value £18,682,000
Percentage of portfolio 2.0%
A sustainable focused fund manager with a growing franchise, market leading investment performance and structural growth/interest in sustainability which underpins the company’s investment philosophy.
8 YouGov
Media
Portfolio value £18,415,000
Percentage of portfolio 1.9%
An international provider of specialist data analytics and marketing information. The company was recently named one of the world’s top 25 research companies.
9 CVS Group
General Retailers
Portfolio value £17,887,000
Percentage of portfolio 1.9%
CVS Group plc is one of the largest integrated veterinary services providers in the UK encompassing four main business areas; veterinary practices, diagnostic laboratories, pet crematoria and e-commerce division.
10 Breedon
Construction & Materials
Portfolio value £17,345,000
Percentage of portfolio 1.8%
A leading construction materials group in Great Britain and Ireland producing cement, aggregates, asphalt, ready-mixed concrete, specialist concrete and clay products.
FIFTY LARGEST INVESTMENTS AS AT 28 FEBRUARY 2022
Company | Business activity | Market value £’000 | % of portfolio |
| Oxford Instruments | Designer and manufacturer of tools and systems for industry and scientific research | 24,230 | 2.5 |
| Watches of Switzerland | Retailer of luxury watches | 22,869 | 2.4 |
| Gamma Communications | Provider of communication services to UK businesses | 21,889 | 2.3 |
| Treatt | Development and manufacture of ingredients for the flavour and fragrance industry | 20,363 | 2.1 |
| Next Fifteen Communications | Digital communication products and services | 19,390 | 2.0 |
| 4imprint Group | Promotional merchandise in the US | 19,078 | 2.0 |
| Impax Asset Management | Asset management | 18,682 | 2.0 |
| YouGov | International online research data and analysis group | 18,415 | 1.9 |
| CVS Group | Operator of veterinary surgeries | 17,887 | 1.9 |
| Breedon | UK construction materials | 17,345 | 1.8 |
| Robert Walters | Recruitment services | 17,108 | 1.8 |
| Learning Technologies | E-learning services | 16,368 | 1.7 |
| IntegraFin | Investment platform for financial advisers | 16,306 | 1.7 |
| Workspace Group | Supply of flexible workspace to businesses in London | 16,040 | 1.7 |
| Auction Technology Group | Operator of marketplaces for curated online auctions | 16,030 | 1.7 |
| Ergomed | Provider of pharmaceuticals services | 15,544 | 1.6 |
| Team17 | British video game developer and publisher | 15,510 | 1.6 |
| DiscoverIE | Specialist components for electronics applications | 14,936 | 1.6 |
| Bloomsbury Publishing | Publisher of fiction and non-fiction | 14,837 | 1.6 |
| Sirius Real Estate | Owner and operator of business parks, offices and industrial complexes in Germany and the UK | 14,656 | 1.5 |
| XP Power | Leading provider of power solutions | 14,089 | 1.5 |
| OSB Group | Specialist lending business | 14,000 | 1.5 |
| Morgan Sindall | Office fit-out, construction and urban regeneration services | 12,678 | 1.3 |
| Tatton Asset Management | Provider of discretionary fund management services to financial advisors | 11,970 | 1.2 |
| Baltic Classifieds Group | Operator of online classified businesses in the Baltics | 11,934 | 1.2 |
| Spirent Communications | Multinational telecommunications testing | 11,558 | 1.2 |
| Pets at Home | Pet supplies retailer | 11,284 | 1.2 |
| Serica Energy | Gas and oil exploration and production company | 11,219 | 1.2 |
| Hilton Food Group | Food packaging business | 11,149 | 1.2 |
| QinetiQ Group | British multi-national defence technology company | 11,104 | 1.2 |
| Central Asia Metals | Mining operations in Kazakhstan and Macedonia | 11,101 | 1.2 |
| Alliance Pharma | Pharmaceutical and healthcare products | 11,000 | 1.1 |
| Johnson Service Group | Provider of textile services | 10,803 | 1.1 |
| Fuller Smith & Turner – A Shares | Owner and operator of pubs in the London area and South East England | 10,514 | 1.1 |
| Genuit Group | Building products | 9,862 | 1.0 |
| Sigmaroc | UK and European construction materials | 9,625 | 1.0 |
| Gulf Keystone Petroleum | Operation of oil producing assets in the Kurdistan region of Iraq | 9,414 | 1.0 |
| Vitec Group | Provider of hardware products and software solutions to the content creation market | 9,044 | 0.9 |
| Molten Ventures | Technology focused venture capital firm | 8,918 | 0.9 |
| Restore | Records management business | 8,910 | 0.9 |
| Lok’n Store Group | Self-storage provider | 8,836 | 0.9 |
| Jadestone Energy | Oil and gas development and production company | 8,832 | 0.9 |
| Tyman | International building products | 8,678 | 0.9 |
| Renew | Construction company | 8,505 | 0.9 |
| Liontrust Asset Management | Asset management | 8,478 | 0.9 |
| Restaurant Group | Operator of restaurants and pubs | 8,330 | 0.9 |
| Ten Entertainment Group | Operator of entertainment centres across the UK | 8,330 | 0.9 |
| Inspecs Group | Manufacturer of eye wear | 8,280 | 0.9 |
| Accesso Technology | Provider of ticketing and virtual queuing solutions | 8,240 | 0.9 |
| Atalaya Mining | Copper miner | 8,190 | 0.9 |
| ————— | ————— | ||
| 50 largest investments | 662,358 | 69.3 | |
| ————— | ————— | ||
| Remaining investments | 294,071 | 30.7 | |
| ————— | ————— | ||
| Total | 956,429 | 100.0 | |
| ========= | ========= |
Details of the full portfolio are available on the Company’s website at blackrock.com/uk/brsc.
PORTFOLIO HOLDINGS IN EXCESS OF 3% OF ISSUED SHARE CAPITAL
At 28 February 2022, the Company did not hold any equity investments comprising more than 3% of any company’s share capital other than as disclosed in the table below:
| Security | % of issued share capital held |
| Longboat Energy | 5.2 |
| RM | 5.1 |
| Kitwave Group | 5.1 |
| City Pub Group | 5.1 |
| Ten Entertainment Group | 5.0 |
| Bloomsbury Publishing | 4.5 |
| Tatton Asset Management | 4.5 |
| The Pebble Group | 4.3 |
| Everyman Media GP | 4.3 |
| Distribution Finance Capital Holdings | 4.2 |
| Fuller Smith & Turner – A Shares | 3.8 |
| Robert Walters | 3.5 |
| Treatt | 3.5 |
| Mercia Asset Management | 3.4 |
| MacFarlane Group | 3.2 |
| Animalcare Group | 3.2 |
| Lok’n Store Group | 3.1 |
| Central Asia Metals | 3.1 |
Distribution of investments as at 28 February 2022
| Sector | % of portfolio |
| Oil & Gas Producers | 4.0 |
| Oil Equipment, Services & Distribution | 0.8 |
| ————— | |
| Energy | 4.8 |
| ========= | |
| Chemicals | 2.1 |
| Mining | 2.7 |
| ————— | |
| Basic Materials | 4.8 |
| ========= | |
| Aerospace & Defence | 1.9 |
| Construction & Materials | 6.9 |
| Electronic & Electrical Equipment | 7.6 |
| General Industrials | 0.7 |
| Industrial Engineering | 2.0 |
| Industrial Support Services | 6.3 |
| Industrial Transportation | 0.8 |
| ————— | |
| Industrials | 26.2 |
| ========= | |
| Automobiles & Parts | 0.9 |
| General Retailers | 5.3 |
| Leisure Goods | 2.7 |
| Media | 8.5 |
| Personal Goods | 4.3 |
| Specialty Retailers | 1.1 |
| Travel & Leisure | 5.4 |
| ————— | |
| Consumer Discretionary | 28.2 |
| ========= | |
| Pharmaceuticals & Biotechnology | 3.4 |
| ————— | |
| Health Care | 3.4 |
| ========= | |
| Food Producers | 1.2 |
| Household Goods & Home Construction | 0.9 |
| ————— | |
| Consumer Staples | 2.1 |
| ========= | |
| Mobile Telecommunications | 2.3 |
| ————— | |
| Telecommunications | 2.3 |
| ========= | |
| Financial Services | 10.1 |
| ————— | |
| Financials | 10.1 |
| ========= | |
| Real Estate Investment & Services | 3.6 |
| Real Estate Investment Trusts | 3.0 |
| ————— | |
| Real Estate | 6.6 |
| ========= | |
| Software & Computer Services | 10.0 |
| Technology Hardware & Equipment | 1.2 |
| Technology Support Services | 0.3 |
| ————— | |
| Technology | 11.5 |
| ========= | |
| Total | 100.0 |
| ========= |
PORTFOLIO ANALYSIS AS AT 28 FEBRUARY 2022
ANALYSIS OF PORTFOLIO VALUE BY SECTOR
Company % | Benchmark (Numis Smaller Companies, plus AIM (ex Investment Companies) Index) % | |
| Other | 0.0 | 1.6 |
| Energy | 4.8 | 6.9 |
| Basic Materials | 4.8 | 7.0 |
| Industrials | 26.2 | 23.4 |
| Consumer Discretionary | 28.2 | 15.5 |
| Health Care | 3.4 | 6.0 |
| Consumer Staples | 2.1 | 6.9 |
| Telecommunications | 2.3 | 1.4 |
| Financials | 10.1 | 13.4 |
| Real Estate | 6.6 | 5.4 |
| Technology | 11.5 | 10.8 |
| Utilities | 0.0 | 1.7 |
Sources: BlackRock and Datastream.
INVESTMENT SIZE AS AT 28 FEBRUARY 2022
| Number of investments | Market value of investments as % of portfolio | |
| £0m to £1m | 1 | 0.1 |
| £1m to £2m | 4 | 0.6 |
| £2m to £3m | 3 | 0.9 |
| £3m to £4m | 3 | 1.2 |
| £4m to £5m | 14 | 6.9 |
| £5m to £6m | 12 | 6.8 |
| £6m to £7m | 8 | 5.5 |
| £7m to £8m | 10 | 7.9 |
| £8m to £9m | 13 | 11.6 |
| £9m to £10m | 4 | 3.9 |
| £10m to £11m | 2 | 2.2 |
| £11m to £12m | 9 | 10.7 |
| £12m to £13m | 1 | 1.3 |
| £14m to £15m | 5 | 7.7 |
| £15m to £16m | 2 | 3.2 |
| £16m to £17m | 4 | 6.8 |
| £17m to £18m | 3 | 5.5 |
| £18m to £19m | 2 | 3.9 |
| £19m to £20m | 2 | 4.0 |
| £20m to £21m | 1 | 2.1 |
| £21m to £22m | 1 | 2.3 |
| £22m to £23m | 1 | 2.4 |
| £24m to 25m | 1 | 2.5 |
Source: BlackRock.
MARKET CAPITALISATION OF OUR PORTFOLIO COMPANIES AS AT 28 FEBRUARY 2022
| Market capitalisation | % of portfolio |
| £0m to £200m | 8.6 |
| £200m to £600m | 28.6 |
| £600m to £1.5bn | 51.7 |
| £1.5bn+ | 11.1 |
Source: BlackRock.
STRATEGIC REPORT
The Directors present the Strategic Report of the Company for the year ended 28 February 2022. The aim of the Strategic Report is to provide shareholders with the information to assess how the Directors have performed their duty to promote the success of the Company for the collective benefit of shareholders.
The Chairman’s Statement together with the Investment Manager’s Report and the Directors’ Statement setting out how they promote the success of the Company contained within the Annual Report and Financial Statements form part of the Strategic Report. The Strategic Report was approved by the Board at its meeting on 29 April 2022.
PRINCIPAL ACTIVITY
The Company is a public company limited by shares and carries on business as an investment trust and its principal activity is portfolio investment. Investment trusts, like unit trusts and OEICs, are pooled investment vehicles which allow exposure to a diversified range of assets through a single investment, thus spreading, although not eliminating investment risk.
INVESTMENT OBJECTIVE
The Company’s prime objective is to seek to achieve long-term capital growth for shareholders through investment mainly in smaller UK quoted companies.
No material change will be made to the Company’s investment objective without shareholder approval.
To achieve its investment objective the Company invests predominantly in UK smaller companies with securities admitted to trading on the Main Market of the London Stock Exchange or on AIM. The Company may also invest in securities which are listed overseas but have a secondary UK quotation. Although investments are primarily in companies with securities admitted to trading on recognised stock exchanges or AIM, the Investment Manager may also invest in less liquid unquoted securities with the prior approval of the Board. The Manager has adopted a consistent investment process, focusing on good quality growth companies; stock selection is the primary focus, but consideration is also given to sector weightings and underlying themes. Whilst there are no set limits on individual sector exposures against the Company’s benchmark, a schedule of sector weightings is presented at each Board meeting for review. In applying the investment objective, the Investment Manager expects the Company to be substantially fully invested and to borrow as and when appropriate. The Company seeks to achieve an appropriate spread of investment risk by investing in a number of holdings across a range of sectors. The Company may not hold more than 6% of the share capital of any company in which it has an investment. No single portfolio holding (excluding holdings in cash fund investments held for cash management purposes) will, on the date such holding is acquired by the Company, exceed 5% of the Company’s net asset value. Notwithstanding the foregoing, the general aim is that no single portfolio holding (excluding cash fund investments held for cash management purposes) will, on the date such holding is acquired by the Company, exceed 3% of the Company’s net asset value. In addition, while the Company may hold shares in other listed investment companies (including investment trusts), the Board has agreed that the Company will not invest more than 15% of its total assets in other UK listed investment companies. The Investment Manager will not deal in derivatives without prior approval of the Board.
AMENDMENTS TO THE INVESTMENT POLICY
As previously advised, the Board announced on 15 March 2021 that it was undertaking a review of the AIM threshold of 50%. After consultation with the Company’s largest shareholders, the Board decided to seek approval from shareholders to remove the AIM limit of 50% of the portfolio by value. The Investment Manager’s approach in determining the optimal exposure to AIM investments is to focus on the merits of the underlying company and to seek value rather than to focus on the exchange on which the holding is listed or traded.
The amended investment policy that shareholders were asked to approve included the removal of the AIM limit and other, non-material amendments to the wording of the investment policy for the purposes of clarification. In particular, the investment policy has been expanded to clarify that (as previously stated in the investment philosophy section of the Strategic Report) the general aim is for portfolio holdings not to exceed 3% of the Company’s net assets (excluding cash fund investments held for cash management purposes) at the time of purchase and that no single portfolio holding (excluding holdings in cash fund investments held for cash management purposes) will, on the date such holding is acquired by the Company, exceed 5% of the Company’s net asset value.
Following shareholder approval, the amended investment policy took effect from the date of the Company’s AGM on 11 June 2021.
BENCHMARK
Performance is measured against an appropriate benchmark, the Numis Smaller Companies plus AIM (excluding Investment Companies) Index.
GEARING POLICY
It is intended that net gearing will not exceed 15% of the net assets of the Company at the time of the drawdown of the relevant borrowings. Under normal operating conditions it is envisaged that gearing will be within a range of 0%-15% of net assets.
BUSINESS MODEL
The Company’s business model follows that of an externally managed investment trust. Therefore, the Company does not have any employees and outsources its activities to third-party service providers including the Manager, who is the principal service provider. The management of the investment portfolio and the administration of the Company have been contractually delegated to the Manager who in turn (with the permission of the Company) has delegated certain investment management and other ancillary services to the Investment Manager. The Manager, operating under guidelines determined by the Board, has direct responsibility for the decisions relating to the day-to-day running of the Company and is accountable to the Board for the investment, financial and operating performance of the Company. The Company delegates fund accounting services to BlackRock Investment Management (UK) Limited (BIM (UK)), which in turn sub-delegates these services to The Bank of New York Mellon (International) Limited (BNYM).
Other service providers include the Depositary (also BNYM) and the Registrar, Computershare Investor Services PLC. The Depositary has sub-delegated the provision of custody services to the Asset Servicing division of BNYM. Details of the contractual terms with the Manager and the Depositary and more details of the sub-delegation arrangements in place governing custody services are set out in the Directors’ Report contained within the Annual Report and Financial Statements.
INVESTMENT PHILOSOPHY
The Investment Manager seeks to identify companies which it believes have superior long-term growth prospects and the management in place to take advantage of these prospects. This is done through internal investment research, company visits and the careful monitoring of market newsflow and external broker analysis. Initially, if the Investment Manager is sufficiently impressed with a company’s prospects, it will look to take a small position, usually 0.25% to 0.50% of the Company’s net assets, in a new holding. These holdings will be closely monitored, and members of the portfolio management team will meet with management on a regular basis. If these companies continue to prosper and make the most of opportunities, the Investment Manager will gradually add to the portfolio holding. Where initial expectations are disappointed, the holding will be sold. The anticipation is that each holding will develop into a core holding over time; one that meets the Investment Manager’s criteria for high quality growth companies.
Valuation is a key consideration; it is important not to overpay for new holdings. However, investment fundamentals are also important, and the Investment Manager may be prepared to pay what seems like a high price if it believes that long-term growth prospects are very strong. Generally, a company will be held within the portfolio if it meets the criteria for core holdings; in respect of recent investments, the Investment Manager will consider whether they have the potential to meet these criteria. Holdings will be sold if there are concerns that the investment case has changed in a negative way. Holdings will be reduced where the position size becomes too large and raises concerns about risk and diversification. The general aim is for portfolio holdings not to exceed 3% of the Company’s net assets (excluding cash fund investments held for cash management purposes). As the investments within the portfolio become larger over time, the Portfolio Manager will continue to assess growth prospects in comparison to smaller businesses operating within similar markets. New holdings must have a market cap beneath £2 billion, however holdings that move above that level will be maintained providing the investment adheres to the original thesis and remains the most attractive opportunity that can be found amongst a comparable peer group. In accordance with the guidelines, the Portfolio Manager will sell any stock that enters the FTSE 100 Index within thirty days of entry.
The Investment Manager believes that consistent outperformance can be achieved by employing a combination of bottom-up and top-down analysis, based upon strong fundamental research.
In building a robust portfolio the Investment Manager will also consider the macro-economic background, working with strategists, economists and other teams internally and externally to understand the broad environment. It also works closely with BlackRock’s risk team to assess the risks in the structure of the portfolio. Any necessary adjustments will be made to the portfolio to ensure that it is structured in an appropriate way from a macro and risk point of view.
PORTFOLIO ANALYSIS
A detailed analysis of the portfolio has been provided within the Annual Report and Financial Statements.
PERFORMANCE
Details of the Company’s performance including the dividend are set out in the Chairman’s Statement above. The Chairman’s Statement and the Investment Manager’s Report form part of this Strategic Report and include a review of the main developments during the year, together with information on investment activity within the Company’s portfolio.
RESULTS AND DIVIDENDS
The results for the Company are set out in the Income Statement in the Financial Statements. The total net profit for the year, after taxation, was £62,140,000 (2021: £119,293,000) of which the revenue return amounted to £17,234,000 (2021: £6,526,000), and the capital profit amounted to £44,906,000 (2021: £112,767,000).
The Company’s revenue return amounted to 35.29p per share (2021: 13.36p). The Directors have declared a final dividend of 22.00p per share as set out in the Chairman’s Statement.
FUTURE PROSPECTS
The Board’s main focus is to achieve long-term capital growth. The future performance of the Company is dependent upon the success of the investment strategy and, to a large extent, on the performance of financial markets. The outlook for the Company in the next twelve months is discussed in the Chairman’s Statement and the Investment Manager’s Report above.
SOCIAL, COMMUNITY AND HUMAN RIGHTS ISSUES
As an investment trust, the Company has no direct social or community responsibilities or impact on the environment, and the Company has not adopted an ESG investment strategy or exclusionary screens. However, the Directors believe that it is in shareholders’ interests to consider human rights issues, environmental, social and governance matters when selecting and retaining investments. Details of the Board’s approach to ESG and socially responsible investment is set out below. Details of the Manager’s approach to ESG integration are set out within the Annual Report and Financial Statements.
MODERN SLAVERY ACT
As an investment vehicle the Company does not provide goods or services in the normal course of business and does not have customers. Accordingly, the Directors consider that the Company is not required to make any slavery or human trafficking statement under the Modern Slavery Act 2015. In any event, the Board considers the Company’s supply chain, dealing predominantly with professional advisers and service providers in the financial services industry, to be low risk in relation to this matter.
DIRECTORS, GENDER REPRESENTATION AND EMPLOYEES
The Directors of the Company on 28 February 2022 are set out in the Directors’ biographies contained within the Annual Report and Financial Statements. With effect from 1 March 2022, the Board consists of three male Directors and three female Directors. The Company’s policy on diversity is set out within the Annual Report and Financial Statements. The Company does not have any executive employees.
KEY PERFORMANCE INDICATORS
At each Board meeting, the Directors consider a number of performance measures to assess the Company’s success in achieving its objectives. The key performance indicators (KPIs) used to measure the progress and performance of the Company over time, and which are comparable to those reported by other investment trusts are set out below. As indicated in footnote 2 to the table, some of these KPIs fall within the definition of ‘Alternative Performance Measures’ (APMs) under guidance issued by the European Securities and Markets Authority (ESMA) and additional information explaining how these are calculated is set out in the Glossary contained within the Annual Report and Financial Statements.
Key Performance Indicators | Year ended 28 February 2022 | Year ended 28 February 2021 |
| NAV per share (debt at par value)1,2 | 7.0% | 16.1% |
| NAV per share (debt at fair value)1,2 | 7.8% | 16.7% |
| Share price total return1,2 | 0.9% | 17.2% |
| Benchmark return1 | 1.5% | 24.9% |
| Average discount to NAV with debt at fair value2 | 5.0% | 5.5% |
| Revenue return per share | 35.29p | 13.36p |
| Ongoing charges ratio2,3 | 0.7% | 0.8% |
| Retail ownership | 68.6% | 65.3% |
1 Total return basis with income reinvested.
2 Alternative Performance Measure, see Glossary contained within the Annual Report and Financial Statements.
3 Calculated as a percentage of average daily net assets and using the management fee and all other operating expenses, excluding finance costs, direct transaction costs, custody transaction charges, VAT recovered, taxation and certain non-recurring items in accordance with AIC guidelines.
Sources: BlackRock and Datastream.
Additionally, the Board regularly reviews many indices and ratios to understand the impact on the Company’s relative performance of the various components such as asset allocation and stock selection. The Board also reviews the performance and ongoing charges of the Company against a peer group of UK smaller companies trusts and open-ended funds.
PRINCIPAL RISKS
The Company is exposed to a variety of risks and uncertainties. As required by the UK Code, the Board has in place a robust ongoing process to identify, assess and monitor the principal risks and emerging risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. A core element of this process is the Company’s risk register which identifies the risks facing the Company and assesses the likelihood and potential impact of each risk and the quality of the controls operating to mitigate it. A residual risk rating is then calculated for each risk based on the outcome of the assessment.
The risk register, its method of preparation and the operation of key controls in BlackRock’s and third-party service providers’ systems of internal control are reviewed on a regular basis by the Audit Committee. In order to gain a more comprehensive understanding of BlackRock’s and other third-party service providers’ risk management processes and how these apply to the Company’s business, BlackRock’s internal audit department provides an annual presentation to the Audit Committee Chairman setting out the results of testing performed in relation to BlackRock’s internal control processes. The Audit Committee also periodically receives presentations from BlackRock’s Risk and Quantitative Analysis team and reviews Service Organisation Control (SOC 1) reports from the Company’s service providers. The current risk register categorises the Company’s main areas of risk as follows:
- Investment performance risk;
- Market risk;
- Income/dividend risk;
- Legal & compliance risk;
- Operational risk;
- Financial risk; and
- Marketing risk.
The Board has undertaken a robust assessment of both the principal and emerging risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. Over the course of 2020 and through to the present time, the COVID-19 pandemic has given rise to unprecedented challenges for businesses across the globe and the Board has taken into consideration the risks posed to the Company by the crisis and incorporated these into the Company’s risk register. The risks identified by the Board have been described in the table that follows, together with an explanation of how they are managed and mitigated. Emerging risks are considered by the Board as they come into view and are incorporated into the existing review of the Company’s risk register. They were also considered as part of the annual evaluation process.
Additionally, the Manager considers emerging risks in numerous forums and the Risk and Quantitative Analysis team produces an annual risk survey. Any material risks of relevance to the Company identified through the annual risk survey will be communicated to the Board.
The Board will continue to assess these risks on an ongoing basis. In relation to the UK Code, the Board is confident that the procedures that the Company has put in place are sufficient to ensure that the necessary monitoring of risks and controls has been carried out throughout the reporting period.
| Principal risk | Mitigation/Control |
| Investment performance Returns achieved are reliant primarily upon the performance of the portfolio. The Board is responsible for:deciding the investment strategy to fulfil the Company’s objective; andmonitoring the performance of the Investment Manager and the implementation of the investment strategy.An inappropriate investment strategy may lead to:poor performance compared to the Benchmark Index and the Company’s peer group;a loss of capital; anddissatisfied shareholders.The Board is also cognisant of the long-term risk to performance from inadequate attention to ESG issues, and in particular the impact of Climate Change. More detail in respect of these risks can be found in the AIFMD Fund Disclosures document available on the Company’s website at https://www.blackrock.com/uk/ individual/literature/policies/itc-disclosure-blackrock-smaller-companies-trust-plc.pdf | To manage this risk the Board:regularly reviews the Company’s investment mandate and long-term strategy;has set investment restrictions and guidelines which the Investment Manager monitors and regularly reports on;receives from the Investment Manager a regular explanation of stock selection decisions, portfolio exposure, gearing and any changes in gearing and the rationale for the composition of the investment portfolio;monitors the maintenance of an adequate spread of investments in order to minimise the risks associated with factors specific to particular sectors, based on the diversification requirements inherent in the investment policy; andreceives reports showing the Company’s performance against the benchmark.ESG analysis is integrated into the Manager’s investment process, as set out in the Annual Report and Financial Statements. This is monitored by the Board. |
| Market risk Market risk arises from volatility in the prices of the Company’s investments influenced by currency, interest rate or other price movements. It represents the potential loss the Company might suffer through holding market positions in financial instruments in the face of market movements. Market risk includes the potential impact of events which are outside the Company’s control, including (but not limited to) heightened geo-political tensions and military conflict, a global pandemic and high inflation or stagflation (in particular through increased commodity price volatility driving inflation and impacting trade). The impact of climate change and new legislation governing climate change and environmental issues have the potential to adversely impact markets and the valuation of companies within the portfolio. There is the potential for the Company to suffer loss through holding investments in the face of negative market movements. | The Board considers asset allocation, stock selection and levels of gearing on a regular basis and has set investment restrictions and guidelines which are monitored and reported on by the Investment Manager. The Board monitors the implementation and results of the investment process with the Investment Manager. The Board also recognises the benefits of a closed-end fund structure in extremely volatile markets such as those experienced as a consequence of the COVID-19 pandemic. Unlike open-ended counterparts, closed-end funds are not obliged to sell down portfolio holdings at low valuations to meet liquidity requirements for redemptions. During times of elevated volatility and market stress, the ability of a closed-end fund structure to remain invested for the long-term enables the portfolio manager to adhere to disciplined fundamental analysis from a bottom-up perspective and be ready to respond to dislocations in the market as opportunities present themselves. The Manager takes into account climate risk within the investment process along with other ESG considerations as set out in the Annual Report and Financial Statements. |
| Income/dividend risk The amount of dividends and future dividend growth will depend on the performance of the Company’s underlying portfolio and may be impacted by events which are outside the Company’s control, such as the COVID-19 pandemic. In addition, any change in the tax treatment of the dividends or interest received by the Company may reduce the level of dividends received by shareholders. | The Board monitors this risk through the receipt of detailed income forecasts and considers the level of income at each Board meeting. The Company has substantial revenue reserves which can be utilised and also has the ability to make distributions by way of dividends from capital reserves if required. |
| Legal & Compliance risk The Company has been approved by HM Revenue & Customs as an investment trust, subject to continuing to meet the relevant eligibility conditions and operates as an investment trust in accordance with Chapter 4 of Part 24 of the Corporation Tax Act 2010. As such, the Company is exempt from capital gains tax on the profits realised from the sale of its investments. Any breach of the relevant eligibility conditions could lead to the Company losing investment trust status and being subject to corporation tax on capital gains realised within the Company’s portfolio. In such event the investment returns of the Company may be adversely affected. Any serious breach could result in the Company and/or the Directors being fined or the subject of criminal proceedings or the suspension of the Company’s shares which would in turn lead to a breach of the Corporation Tax Act 2010. Amongst other relevant laws and regulations, the Company is required to comply with the provisions of the Companies Act 2006, the Alternative Investment Fund Managers’ Directive, the UK Listing Rules and Disclosure Guidance and Transparency Rules, the Sanctions and Anti-Money Laundering Act 2018 and the Market Abuse Regulation. | The Investment Manager monitors investment movements and the amount of proposed dividends to ensure that the provisions of Chapter 4 of Part 24 of the Corporation Tax Act 2010 are not breached. The results are reported to the Board at each meeting. Compliance with the accounting rules affecting investment trusts is also carefully and regularly monitored. The Company Secretary and the Company’s professional advisers provide regular reports to the Board in respect of compliance with all applicable rules and regulations. The Company’s Investment Manager, BlackRock, at all times complies with sanctions administered by the UK Office of Financial Sanctions Implementation, the United States Treasury’s Office of Foreign Assets Control, the United Nations, European Union member states and any other applicable regimes. The Company does not invest in companies domiciled in Russia. |
| Operational risk In common with most other investment trust companies, the Company has no employees. The Company therefore relies on the services provided by third parties. Accordingly, it is dependent on the control systems of the Manager, the Depositary and the Fund Accountant who maintain the Company’s assets, dealing procedures and accounting records. The security of the Company’s assets, dealing procedures, accounting records and adherence to regulatory and legal requirements and the prevention of fraud depend on the effective operation of the systems of these other third-party service providers. There is a risk that a major disaster, such as floods, fire, a global pandemic, or terrorist activity, renders the Company’s service providers unable to conduct business at normal operating capacity and effectiveness. Failure by any service provider to carry out its obligations to the Company could have a material adverse effect on the Company’s performance. Disruption to the accounting, payment systems or custody records could prevent the accurate reporting and monitoring of the Company’s financial position. | Due diligence is undertaken before contracts are entered into with third-party service providers. Thereafter, the performance of the provider is subject to regular review and reported to the Board. The Board reviews on a regular basis an assessment of the fraud risks that the Company could potentially be exposed to, and also a summary of the controls put in place by the Manager, the Depositary, the Custodian, the Fund Accountant and the Registrar designed specifically to mitigate these risks. Most third-party service providers produce Service Organisation Control (SOC 1) reports to provide assurance regarding the effective operation of internal controls as reported on by their reporting accountants. These reports are provided to the Audit Committee. The Company’s financial instruments held in custody are subject to a strict liability regime and in the event of a loss of such financial instruments held in custody, the Depositary must return assets of an identical type or the corresponding amount, unless able to demonstrate the loss was a result of an event beyond its reasonable control. The Board reviews the overall performance of the Manager, Investment Manager and all other third-party service providers and compliance with the Investment Management Agreement on a regular basis. The Board also considers the business continuity arrangements of the Company’s key service providers on an ongoing basis and reviews these as part of their review of the Company’s risk register. In respect of the unprecedented risks posed by the COVID-19 pandemic in terms of the ability of service providers to function effectively, the Board has received reports from key service providers (the Manager, the Depositary, the Custodian, the Fund Administrator, the Broker, the Registrar and the printers) setting out the measures that they have put in place to address the crisis in addition to their existing business continuity framework. Having considered these arrangements and reviewed service levels since the crisis has evolved, the Board is confident that a good level of service will continue to be maintained. |
| Financial risk The Company’s investment activities expose it to a variety of financial risks that include interest rate, credit and liquidity risk. | Details of these risks are disclosed in note 17 to the financial statements contained within the Annual Report and Financial Statements, together with a summary of the policies for managing these risks. |
| Marketing risk Marketing efforts are inadequate, do not comply with relevant regulatory requirements, and fail to communicate adequately with shareholders or reach out to potential new shareholders resulting in reduced demand for the Company’s shares and a widening discount. | The Board focuses significant time on communications with shareholders and reviewing marketing strategy and initiatives. All investment trust marketing documents are subject to appropriate review and authorisation. |
VIABILITY STATEMENT
In accordance with provision 31 of the 2018 UK Corporate Governance Code, the Directors have assessed the prospects of the Company over a longer period than the 12 months referred to by the ‘Going Concern’ guidelines.
The Board is cognisant of the uncertainty surrounding the potential duration of the COVID-19 pandemic, and the additional challenges posed to international supply chains and commodity prices arising from recent events in Ukraine and the escalation of geopolitical conflict. The Board notes that these events will have an impact on the global economy and the prospects for some of the Company’s portfolio holdings. However, notwithstanding these issues, and given the factors stated below, the Board expects the Company to continue for the foreseeable future and has therefore conducted this review for the period up to the AGM in 2027 being a five-year period from the date that this Annual Report will be approved by shareholders. This assessment term has been chosen as it represents a medium-term performance period over which investors in the smaller companies’ sector generally refer to when making investment decisions.
In making this assessment the Board has considered the following factors:
- The Company’s principal risks as set out above;
- The impact of a significant fall in UK equity markets on the value of the Company’s investment portfolio, factoring in the impact of recent market volatility related to the COVID-19 pandemic;
- The potential impact of the COVID-19 pandemic on the ability of portfolio companies to pay dividends, and the consequent impact on the Company’s portfolio yield and ability to pay dividends;
- The ongoing relevance of the Company’s investment objective in the current environment; and
- The level of demand for the Company’s ordinary shares.
The Board has also considered a number of financial metrics and other factors, including:
- The Board has reviewed portfolio liquidity as at 28 February 2022 in light of the impact of the COVID-19 pandemic on global market liquidity;
- The Board has reviewed the Company’s revenue and expense forecasts in light of the COVID-19 pandemic and its anticipated impact on dividend income and market valuations. The Board is confident that the Company’s business model remains viable and that the Company has sufficient resources to meet all liabilities as they fall due for the period under review;
- The Board has reviewed the Company’s borrowing and debt facilities and considers that the Company continues to meet its financial covenants in respect of these facilities and has a wide margin before any relevant thresholds are reached;
- The Board keeps the Company’s principal risks and uncertainties as set out above under review, and is confident that the Company has appropriate controls and processes in place to manage these and to maintain its operating model, even given the global economic challenges posed by COVID-19, the impact of climate change on portfolio companies and the current climate of heightened geo-political risk (notably the war in Ukraine);
- The operational resilience of the Company and its key service providers (the Manager, Depositary, Custodian, Fund Administrator, Registrar and Broker) and their ability to continue to provide a good level of service for the foreseeable future;
- The effectiveness of business continuity plans in place for the Company and key service providers in particular in respect to COVID-19;
- The level of current and historic ongoing charges incurred by the Company;
- The discount to NAV;
- The level of income generated by the Company; and
- Future income forecasts.
The Company is an investment company with a relatively liquid portfolio. As at 28 February 2022, the Company held no illiquid unquoted investments and 56.9% of the Company’s portfolio investments were readily realisable and listed on the London Stock Exchange. The remaining 43.1% that were listed on the Alternative Investment Market are also considered to be readily realisable. The Company has largely fixed overheads which comprise a very small percentage of net assets. Therefore, the Board has concluded that, even in exceptionally stressed operating conditions, including the challenges presented by the COVID-19 pandemic, the Company would comfortably be able to meet its ongoing operating costs as they fall due.
Based on the results of their analysis, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment.
SECTION 172 STATEMENT: PROMOTING THE SUCCESS OF THE COMPANY
The Companies (Miscellaneous Reporting) Regulations 2018 require directors to explain in greater detail how they have discharged their duties under Section 172(1) of the Companies Act 2006 in promoting the success of their companies for the benefit of members as a whole. This enhanced disclosure is required under the Companies Act 2006 and the AIC Code of Corporate Governance and covers how the Board has engaged with and understands the views of stakeholders and how stakeholders’ needs have been taken into account, the outcome of this engagement and the impact that it has had on the Board’s decisions.
As the Company is an externally managed investment company and does not have any employees or customers, the Board considers the main stakeholders in the Company to be the shareholders, key service providers (being the Manager and Investment Manager, the Custodian, Depositary, Registrar and Broker) and investee companies. The reasons for this determination, and the Board’s overarching approach to engagement, are set out in the table below.
| Stakeholders | |||
| Shareholders | Manager and Investment Manager | Other key service providers | Investee companies |
| Continued shareholder support and engagement are critical to the continued existence of the Company and the successful delivery of its long-term strategy. The Board is focused on fostering good working relationships with shareholders and on understanding the views of shareholders in order to incorporate them into the Board’s strategy and objectives in delivering long-term growth and income. | The Board’s main working relationship is with the Manager, who is responsible for the Company’s portfolio management (including asset allocation, stock and sector selection) and risk management, as well as ancillary functions such as administration, secretarial, accounting and marketing services. The Manager has sub-delegated portfolio management to the Investment Manager. Successful management of shareholders’ assets by the Investment Manager is critical for the Company to successfully deliver its investment strategy and meet its objective. The Company is also reliant on the Manager as AIFM to provide support in meeting relevant regulatory obligations under the AIFMD and other relevant legislation. | In order for the Company to function as an investment trust with a listing on the premium segment of the official list of the FCA and trade on the London Stock Exchange’s (LSE) main market for listed securities, the Board relies on a diverse range of advisors for support in meeting relevant obligations and safeguarding the Company’s assets. For this reason, the Board considers the Company’s Custodian, Depositary, Registrar and Broker to be stakeholders. The Board maintains regular contact with its key external service providers and receives regular reporting from them through the Board and committee meetings, as well as outside of the regular meeting cycle. | Portfolio holdings are ultimately shareholders’ assets, and the Board recognises the importance of good stewardship and communication with investee companies in meeting the Company’s investment objective and strategy. The Board monitors the Manager’s stewardship arrangements and receives regular feedback from the Manager in respect of meetings with the management of portfolio companies. |
A summary of the key areas of engagement undertaken by the Board with its key stakeholders in the year under review and how Directors have acted upon this to promote the long-term success of the Company are set out in the table below.
| Area of Engagement | Issue | Engagement | Impact |
| Management of share rating | The Board recognises that it is in the long-term interests of shareholders that shares do not trade at a significant discount or premium to their prevailing net asset value. | The Board monitors the Company’s share rating on an ongoing basis and receives regular updates from the Company’s Broker and Manager regarding the level of discount and the drivers behind this. The Manager provides regular performance updates and detailed performance attribution. The Board believes that the best way of maintaining the share rating at an optimal level over the long-term is to create demand for the shares in the secondary market. To this end the Investment Manager is devoting considerable effort to broadening the awareness of the Company, particularly to wealth managers and to the wider retail shareholder market. The Company contributes to a focused investment trust sales and marketing initiative operated by BlackRock on behalf of the investment trusts under its management. The Company’s contribution to the consortium element of the initiative, which enables the trusts to achieve efficiencies by combining certain sales and marketing activities was a fixed amount of £64,000 and this contribution is matched by the Investment Manager for the year ended 31 December 2021. In addition, a budget of £51,000 was allocated for Company specific sales and marketing activity also for the year to 31 December 2021. The purpose of the programme overall is to ensure effective communication with existing shareholders and to attract new shareholders to the Company to improve liquidity in the Company’s shares and to sustain the stock market rating of the Company. | Over the last four years, the Company’s discount has narrowed steadily, from an average discount of 13.0% for the year to 28 February 2018 to 5.0% for the year ended 28 February 2022. As at 27 April 2022 the Company’s shares were trading at a discount of 12.5% to the cum income NAV (with debt at fair value). Over the last ten years, the number of shares held by retail shareholders has increased from 34.1% (as at 29 February 2012) to 68.6% at 28 February 2022. |
| Investment mandate and objective | The Board has the responsibility to shareholders to ensure that the Company’s portfolio of assets is invested in line with the stated investment objective and in a way that ensures an appropriate balance between spread of risk and portfolio returns. | The Board works closely with the Investment Manager throughout the year in further developing our investment strategy and underlying policies, not simply for the purpose of achieving the Company’s investment objective but in the interests of shareholders and future investors. The Board worked with the Manager to review the Company’s limits on investing in AIM-traded securities. This review was driven by the fact that, in recent years, some of the Company’s AIM holdings had performed well and this resulted in an increase in the portfolio’s aggregate exposure to AIM to just under 50% of the portfolio by value. Had no action been taken, the Company would be required to dispose of these AIM stocks solely as a result of circumstances where the performance of these stocks has brought the Company’s total AIM holdings close to the 50% limit. This limit could also restrict the Company’s ability to subscribe to IPOs or placings of AIM companies that are regarded as attractive investment propositions by the Investment Manager. | The portfolio activities undertaken by the Investment Manager can be found in the Investment Manager’s Report above. Details regarding the Company’s NAV and share price performance can be found in the Chairman’s Statement and in the Strategic Report above. A shareholder consultation was undertaken in March 2021, in respect of the removal of the AIM limit, and as a result of feedback received, a resolution put forward to the Company’s AGM on 11 June 2021 seeking shareholder approval to remove the AIM limit was approved. |
| Responsible investing | More than ever, good governance and consideration of sustainable investment is a key factor in making investment decisions. Climate change is becoming a defining factor in companies’ long-term prospects across the investment spectrum, with significant and lasting implications for economic growth and prosperity. | The Board believes that responsible investment and sustainability are important to the longer-term delivery of the Company’s success. The Board works closely with the Investment Manager to regularly review the Company’s performance, investment strategy and underlying policies to ensure that the Company’s investment objective continues to be met in an effective and responsible way in the interests of shareholders and future investors. The Investment Manager’s approach to the consideration of Environmental, Social and Governance (ESG) factors in respect of the Company’s portfolio, as well as the Investment Manager’s engagement with investee companies are kept under review by the Board. The Investment Manager reports to the Board in respect of its ESG policies and how these are integrated into the investment process; a summary of BlackRock’s approach to ESG and sustainability is set out within the Annual Report and Financial Statements. The Investment Manager’s engagement and voting policy is detailed within the Annual Report and Financial Statements and on the BlackRock website. | The Board and the Investment Manager believe there is a positive correlation between ESG practices and investment performance. Details of the Company’s performance in the year are given in the Chairman’s Statement above and the Performance Record contained within the Annual Report and Financial Statements. The Company does not meet the criteria for Article 8 or 9 products under the EU Sustainable Finance Disclosure Regulation (SFDR) and the investments underlying this financial product do not take into account the EU criteria for environmentally sustainable economic activities. |
| Gearing and sources of finance | The Board believes that it is important for the Company to have an appropriate range of borrowings and facilities in place to provide a balance between longer-term and short-term maturities and between fixed and floating rates of interest. | Gearing levels and sources of funding are reviewed regularly by the Board with a view to ensuring that the Company has a suitable mix of financing at competitive market rates. As at 28 February 2022, the Company had the following borrowing facilities in place: long-term fixed rate funding in the form of a £15 million debenture with a coupon of 7.75% maturing on 31 July 2022, £25 million senior unsecured fixed rate private placement notes issued in May 2017 at a coupon of 2.74% with a 20 year maturity, £20 million senior unsecured fixed rate private placement notes issued in December 2019 at a coupon of 2.41% with a 25 year maturity and £25 million senior unsecured fixed rate private placement notes issued in September 2021 at a coupon of 2.47% with a 25 year maturity. Shorter-term variable rate funding consisted of a £35 million three-year revolving loan facility with SMBC Bank International plc with interest charged at SONIA plus a credit adjustment spread for the relevant draw down period (0.0326% per annum for one month and 0.1193% for three months). The Company also has an uncommitted overdraft facility of £10 million with The Bank of New York Mellon (International) Limited with interest charged at SONIA plus 100 basis points. It is the Board’s intention that gearing will not exceed 15% of the net assets of the Company at the time of the drawdown of the relevant borrowings. Under normal operating conditions it is envisaged that gearing will be within a range of 0%-15% of net assets. | The Board has been proactive over the last few years in putting in place structural fixed gearing with the issue of an additional £25 million of private placement notes in September 2021 to lock in fixed rate, long dated, sterling denominated financing at a highly competitive pricing level. For the year to 28 February 2022, it is estimated that gearing contributed 0.43% to the NAV per share performance. At the year end, the Company’s gearing was 4.3% of net assets. |
| Service levels of third-party providers | The Board acknowledges the importance of ensuring that the Company’s principal suppliers are providing a suitable level of service: including the Manager in respect of investment performance and delivering on the Company’s investment mandate; the Custodian and Depositary in respect of their duties towards safeguarding the Company’s assets; the Registrar in its maintenance of the Company’s share register and dealing with investor queries and the Company’s Broker in respect of the provision of advice and acting as a market maker for the Company’s shares. | The Manager reports to the Board on the Company’s performance on a regular basis. The Board carries out a robust annual evaluation of the Manager’s performance, their commitment and available resources. The Board performs an annual review of the service levels of all third-party service providers and concludes on their suitability to continue in their role. The Board receives regular updates from the AIFM, Depositary, Registrar and Broker on an ongoing basis. The ongoing COVID-19 pandemic continues to pose significant challenges to the operation of businesses across the globe. The Board has continued to work closely with the Manager to gain comfort that relevant business continuity plans are in place and are operating effectively for all of the Company’s service providers. | All performance evaluations were performed on a timely basis and the Board concluded that all third-party service providers, including the Manager were operating effectively and providing a good level of service. The Board has received updates in respect of business continuity planning from the Company’s Manager, Custodian, Depositary, Fund Administrator, Broker, Registrar and printers, and is confident that arrangements are in place to ensure that a good level of service has continued to be provided despite the impact of the COVID-19 pandemic. |
| Board composition | The Board is committed to ensuring that its own composition brings an appropriate balance of knowledge, experience and skills, and that it is compliant with best corporate governance practice under the UK Code, including guidance on tenure and the composition of the Board’s committees. | During the 2021 financial year, Mr Peacock advised of his desire to retire at the 2021 AGM, creating the need to appoint a new director and Audit Committee Chairman. The Nomination Committee agreed the selection criteria and the method of selection, recruitment and appointment. Board diversity, including gender, was taken into account when establishing the criteria. The services of an external search consultant were used to identify potential candidates. All Directors are subject to a formal evaluation process on an annual basis (more details and the conclusions in respect of the 2022 evaluation process are given within the Annual Report and Financial Statements). All Directors stand for re-election by shareholders annually. Notwithstanding the issues posed by the COVID-19 pandemic, in normal operating conditions, shareholders may attend the AGM and raise any queries in respect of Board composition or individual Directors in person or may contact the Company Secretary or the Chairman using the details provided within the Annual Report and Financial Statements with any issues. In line with provision 21 of the UK Code of Corporate Governance (the Code) which recommends that companies should consider having a regular externally facilitated board evaluation, the Directors have engaged the services of Stogdale St James to carry out an external evaluation of the Board over the forthcoming year. The results will be reported in the 2023 annual report. | As a result of the recruitment process, Mr Barnes was appointed as a Director of the Company with effect from 31 July 2021. Mr Little took over the role of Audit Committee Chairman with effect from 11 June 2021. Ms Sinclair was appointed as a Director of the Company on 1 March 2022. One Board Director has tenure close to or in excess of nine years at the date of this report. Mrs Burton has served for ten years and ten months. Mrs Burton has given notice of her intention to retire at the Company’s AGM on 9 June 2022 and she will not be seeking re-election. The Board announced in June 2020 that it would implement, over time, a policy of limiting directors’ tenure to nine years. Subject to the constraints of effective succession planning, it is the Board’s aim that no Director will serve on the Board for more than nine years (or twelve years in the case of the Chairman). In setting this policy, the Board was mindful that several Board members had exceeded or were close to exceeding the proposed nine-year limit, and therefore to ensure an orderly Board refreshment process, the implementation of the new policy on tenure is being phased in over a period of time. For this reason, Mrs Burton agreed to remain on the Board for a further year to provide continuity of leadership while a replacement was found. Mrs Burton will not be seeking re-election as a Director at the Annual General Meeting on 9 June 2022. Details of each Director’s contribution to the success and promotion of the Company are set out in the Directors’ Report and details of Directors’ biographies which can be found within the Annual Report and Financial Statements. The Directors are not aware of any issues that have been raised directly by shareholders in respect of Board composition in the year under review. Details for the proxy voting results in favour and against individual Directors’ re-election at the 2021 AGM are given on the Company’s website at blackrock.com/uk/brsc. |
| Shareholders | Continued shareholder support and engagement are critical to the continued existence of the Company and the successful delivery of its long-term strategy. | The Board is committed to maintaining open channels of communication and to engage with shareholders and (COVID-19 health and safety restrictions permitting) welcomes and encourages attendance and participation from shareholders at its Annual General Meetings. If shareholders wish to raise issues or concerns with the Board outside of the AGM, they are welcome to do so at any time. The Chairman is available to meet directly with shareholders periodically to understand their views on governance and the Company’s performance where they wish to do so. He may be contacted via the Company Secretary whose details are given within the Annual Report and Financial Statements. The Annual Report and Half Yearly Financial Report are available on the Company’s website and are also circulated to shareholders either in printed copy or via electronic communications. In addition, regular updates on performance, monthly factsheets, the daily NAV and other information are also published on the website at blackrock.com/uk/brsc. The Board also works closely with the Manager to develop the Company’s marketing strategy, with the aim of ensuring effective communication with shareholders in respect of the investment mandate and objective. Unlike trading companies, one-to-one shareholder meetings usually take the form of a meeting with the portfolio manager as opposed to members of the Board. As well as attending regular investor meetings the portfolio managers hold regular discussions with wealth management desks and offices to build on the case for, and understanding of, long-term investment opportunities in the UK smaller companies’ sector. The Manager also coordinates public relations activity, including meetings between the portfolio managers and shareholders and potential investors to set out their vision for the portfolio strategy and outlook for the region. As social distancing restrictions were implemented during the COVID-19 pandemic, the Company held a number of webcasts and virtual conferences as well as meeting with investors by videoconference. The Manager releases monthly portfolio updates to the market to ensure that investors are kept up to date in respect of performance and other portfolio developments and maintains a website on behalf of the Company that contains relevant information in respect of the Company’s investment mandate and objective. | The Board values any feedback and questions from shareholders ahead of and during Annual General Meetings in order to gain an understanding of their views and will take action when and as appropriate. Feedback and questions will also help the Company evolve its reporting, aiming to make reports more transparent and understandable. Feedback from all substantive meetings between the Investment Manager and shareholders will be shared with the Board. The Directors will also receive updates from the Company’s broker on any feedback from shareholders, as well as share trading activity, share price performance and an update from the Investment Manager. The portfolio management team attended a number of professional investor meetings (mainly by videoconference) and held discussions with many different wealth management desks and offices in respect of the Company during the year under review. The portfolio manager also presented at virtual events hosted by Asset TV and MoneyWeek. In addition, the portfolio manager met with a number of investors throughout the year by videoconference. Investors gave positive feedback in respect of the portfolio manager, the good long-term track record, clear investment strategy and low fee. Some investors commented that they liked the fact that a significant proportion of the portfolio companies’ revenues were generated overseas, and the potential that this gave to benefit from a weak sterling currency especially in light of Brexit. Investors expressed concerns over the impact of Brexit on the UK Smaller Companies sector. |
ENVIRONMENTAL, SOCIAL AND GOVERNANCE ISSUES AND APPROACH
THE BOARD’S APPROACH
Environmental, social and governance (ESG) issues can present both opportunities and threats to long-term investment performance. Whilst the Company does not exclude investment in stocks purely on ESG criteria, ESG analytics are fully integrated into the investment process when weighing up the risk and reward benefits of investment decisions and the Board believes that communication and engagement with portfolio companies is important and can lead to better outcomes for shareholders and the environment than merely excluding investment in certain areas.
More information on BlackRock’s global approach to ESG integration, as well as activity specific to the BlackRock Smaller Companies Trust plc portfolio, is set out below. BlackRock has defined ESG integration as the practice of incorporating material ESG information and consideration of sustainability risks into investment decisions in order to enhance risk-adjusted returns. ESG integration does not change the Company’s investment objective or constrain the Investment Manager’s investable universe, and does not mean that an ESG or impact focused investment strategy or any exclusionary screens have been or will be adopted by the Company. Similarly, ESG integration does not determine the extent to which the Company may be impacted by sustainability risks. More information on sustainability risks may be found in the AIFMD Fund Disclosures document of the Company available on the Company’s website at https://www.blackrock.com/uk/individual/literature/policies/itc-disclosure-blackrock-smaller-companies-trust-plc.pdf
BLACKROCK SMALLER COMPANIES TRUST PLC – BLACKROCK INVESTMENT STEWARDSHIP ENGAGEMENT WITH PORTFOLIO COMPANIES FOR THE YEAR ENDED 28 FEBRUARY 2022
The BlackRock portfolio management team has excellent access to company management teams and undertakes about 700 company meetings each year to identify high quality, cash generative businesses with strong management teams that are able to generate growth in a more challenging economic environment. In addition, BlackRock also has a separate Business Investment Stewardship (BIS) team that is committed to promoting sound corporate governance through engagement with investee companies, development of proxy voting policies that support best governance practices and wider engagement on public policy issues. For the year to 28 February 2022, BIS held 32 company engagements on a range of governance issues with the management teams of 25 companies in the BlackRock Smaller Companies Trust portfolio, representing 23.3% of the portfolio by value at 28 February 2022. Additional information is set out in the table below and the charts on page 45 (of the Annual Report and Financial Statements) as well as the key engagement themes for the meetings held in respect of the Company’s portfolio holdings.
| Year ended 28 February 2022 | |
| Number of engagements held1 | 32 |
| Number of companies met1 | 25 |
| % of equity investments covered2 | 23.3 |
| Shareholder meetings voted at1 | 133 |
| Number of proposals voted on1 | 1,690 |
| Number of votes against management1 | 98 |
| % of total votes represented by votes against management | 5.8 |
1 Source: Institutional Shareholder Services as at 28 February 2022.
2 Source: BlackRock. Company valuation as included in the portfolio at 28 February 2022 as a percentage of the total portfolio value.
BLACKROCK’S APPROACH TO ESG INTEGRATION
BlackRock believes that sustainability risk – and climate risk in particular – now equates to investment risk, and this will drive a profound reassessment of risk and asset values as investors seek to react to the impact of climate policy changes. This in turn, in BlackRock’s view, is likely to drive a significant reallocation of capital away from traditional carbon intensive industries over the next decade. BlackRock believes that carbon-intensive companies will play an integral role in unlocking the full potential of the energy transition, and to do this, they must be prepared to adapt, innovate and pivot their strategies towards a low carbon economy.
As part of BlackRock’s structured investment process, ESG risks and opportunities (including sustainability/climate risk) are considered within the portfolio management team’s fundamental analysis of companies and industries and the Company’s portfolio managers work closely with BlackRock’s Investment Stewardship team (BIS) to assess the governance quality of companies and investigate any potential issues, risks or opportunities.
As part of their approach to ESG integration, the portfolio managers use ESG information when conducting research and due diligence on new investments and again when monitoring investments in the portfolio. In particular, portfolio managers at BlackRock now have access to 1,200 key ESG performance indicators in Aladdin (BlackRock’s proprietary trading system) from third-party data providers. BlackRock’s internal sustainability research framework scoring is also available alongside third-party ESG scores in core portfolio management tools. BlackRock’s access to company management allows it to engage on issues that are identified through questioning management teams and conducting site visits. In conjunction with the portfolio management team, BIS meets with boards of companies frequently to evaluate how they are strategically managing their longer-term issues, including those surrounding ESG and the potential impact these may have on company financials. BIS’s and the portfolio management team’s understanding of ESG issues is further supported by BlackRock’s Sustainable Investment Team (BSI). BSI looks to advance ESG research and integration, active engagement and the development of sustainable investment solutions across the firm.
INVESTMENT STEWARDSHIP
As a fiduciary to its clients, BlackRock has built its business to protect and grow the value of clients’ assets. As part of this fiduciary duty to its clients, BIS is committed to promoting sound corporate governance through engagement with investee companies, development of proxy voting policies that support best governance practices and also through wider engagement on public policy issues.
GLOBAL PRINCIPLES
BlackRock’s approach to corporate governance and stewardship is explained in its Global Principles. These high-level Principles are the framework for BlackRock’s more detailed, market-specific voting guidelines, all of which are published on the BlackRock website. The Principles describe BlackRock’s philosophy on stewardship (including how it monitors and engages with companies), its policy on voting, its integrated approach to stewardship matters and how it deals with conflicts of interest. These apply across relevant asset classes and products as permitted by investment strategies. BlackRock reviews its Global Principles annually and updates them as necessary to reflect changes in market standards, evolving governance practice and insights gained from engagement over the prior year. BlackRock’s Global Principles are available on its website at https://www.blackrock.com/corporate/literature/fact-sheet/blk-responsible-investment-engprinciples-global.pdf
MARKET-SPECIFIC PROXY VOTING GUIDELINES
BlackRock’s voting guidelines are intended to help clients and companies understand its thinking on key governance matters. They are the benchmark against which it assesses a company’s approach to corporate governance and the items on the agenda to be voted on at the shareholder meeting. BlackRock applies its guidelines pragmatically, taking into account a company’s unique circumstances where relevant. BlackRock informs voting decisions through research and engages as necessary. BlackRock reviews its voting guidelines annually and updates them as necessary to reflect changes in market standards, evolving governance practice and insights gained from engagement over the prior year.
BlackRock’s market-specific voting guidelines are available on its website at https://www.blackrock.com/corporate/about-us/investment-stewardship#principles-and-guidelines.
In 2021, BIS explicitly asked that all companies disclose a business plan aligned with the goal of limiting global warming to well below 2ºC, consistent with achieving net zero global greenhouse gas (GHG) emissions by 2050. BlackRock viewed these disclosures as essential to helping investors assess a company’s ability to transition its business to a low carbon world and to capture value-creation opportunities created by the climate transition. BlackRock also asked that companies align their disclosures to the Task Force on Climate-related Financial Disclosures (TCFD) framework and the SASB standards. For 2022, BIS is evolving its perspective on sustainability reporting to recognize that companies may use standards other than that of the SASB (Sustainability Accounting Standards Board), and reiterates its ask for metrics that are industry-specific or company-specific. BIS is also encouraging companies to demonstrate that their plans are resilient under likely decarbonization pathways, and the global aspiration to limit warming to 1.5°C. BIS is also asking companies to disclose how considerations related to having a reliable energy supply and just transition affect their plans. More information in respect of BlackRock’s investment stewardship approach to sustainable investing can be found at https://www.blackrock.com/corporate/literature/publication/blk-commentary-climate-risk-and-energy-transition.pdf
BlackRock has been a member of Climate Action 100+ since 2020 and has aligned its engagement and stewardship priorities to UN Sustainable Development Goals (including Gender Equality and Affordable and Clean Energy). A map of how BIS’s engagement priorities align to the UN Sustainable Development Goals (SDGs) can be found at https://www.blackrock.com/corporate/literature/publication/blk-engagement-priorities-aligned-to-sdgs.pdf
BlackRock is committed to transparency in terms of disclosure on its engagement with companies and voting rationales and is committed to voting against management to the extent that they have not demonstrated sufficient progress on ESG issues. This year, BlackRock voted against or withheld votes from 6,560 directors globally at 3,400 different companies driven by concerns regarding director independence, executive compensation, insufficient progress on board diversity, and overcommitted directors, reflecting our intensified focus on sustainability risks. In the 2020-21 proxy year, BlackRock voted against 255 directors and against 319 companies for climate-related concerns that could negatively affect long-term shareholder value. More detail in respect of BIS’s engagement and voting history can be found at https://www.blackrock.com/corporate/literature/publication/2021-voting-spotlight-full-report.pdf
BIS also publishes voting bulletins explaining its vote decision, and the engagement and analysis underpinning it, on certain high-profile proposals at company shareholder meetings. Vote bulletins for 2021 can be found at https://www.blackrock.com/corporate/about-us/investment-stewardship#vote-bulletins.
BLACKROCK’S REPORTING AND DISCLOSURES
In terms of its own reporting, BlackRock believes that the SASB provides a clear set of standards for reporting sustainability information across a wide range of issues, from labour practices to data privacy to business ethics. For evaluating and reporting climate-related risks, as well as the related governance issues that are essential to managing them, the TCFD provides a valuable framework. BlackRock recognises that reporting to these standards requires significant time, analysis and effort. BlackRock’s 2021 TCFD report can be found at https://www.blackrock.com/corporate/literature/continuous-disclosure-and-important-information/tcfd-report-2021-blkinc.pdf
BY ORDER OF THE BOARD
RONALD GOULD
Chairman
29 April 2022
To learn more about the BlackRock Smaller Companies Trust plc please follow this link: blackrock.com/uk/brsc
