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Blackrock Throgmorton Investment Trust PLC
Quarterly Report • Jul 27, 2023
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BlackRock Throgmorton Trust Plc - Half-year Report
PR Newswire
LONDON, United Kingdom, July 27
BlackRock Throgmorton Trust plc
(Legal Entity Identifier: 5493003B7ETS1JEDPF59)
Information disclosed in accordance with Article 5 Transparency Directive and DTR 4.2
Half Yearly Financial Report 31 May 2023
| As at 31 May 2023 |
As at 30 November 2022 |
||
| Net assets (£’000)1 | 620,407 | 633,357 | |
| Net asset value per ordinary share (pence) | 618.58 | 626.10 | |
| Ordinary share price (mid-market) (pence) | 587.00 | 595.00 | |
| Benchmark Index2 | 15,277.98 | 15,652.96 | |
| Discount to cum income net asset value3 | 5.1% | 5.0% |
| For the six months ended 31 May 2023 |
For the year ended 30 November 2022 |
||
| Performance (with dividends reinvested) | |||
| NAV per share3 | 0.1% | (31.1)% | |
| Ordinary share price3 | 0.0% | (35.5)% | |
| Benchmark Index2 | (2.4)% | (17.5)% | |
| Average discount to cum income net asset value for the period/year3 | 4.3% | 3.5% |
| For the six months ended 31 May 2023 |
For the six months ended 31 May 2022 |
Change % |
|
| Revenue | |||
| Net revenue profit on ordinary activities after taxation (£’000) | 8,544 | 6,303 | +35.6 |
| Revenue earnings per ordinary share (pence)4 | 8.46 | 6.12 | +38.2 |
| Dividends per ordinary share (pence) | |||
| Interim | 3.30 | 2.60 | +26.9 |
| \========= | \========= | \========= |
1 The change in net assets reflects portfolio movements, the purchase of the Company’s own shares and dividends paid during the period.
2 The Company’s Benchmark Index is the Numis Smaller Companies plus AIM (excluding Investment Companies) Index. With effect from 22 March 2018, the Numis Smaller Companies plus AIM (excluding Investment Companies) Index replaced the Numis Smaller Companies excluding AIM (excluding Investment Companies) Index as the Company’s Benchmark Index. From 1 December 2013 to 21 March 2018, the Company’s Benchmark Index was the Numis Smaller Companies excluding AIM (excluding Investment Companies) Index. Prior to 1 December 2013, the Company’s Benchmark Index was the Numis Smaller Companies plus AIM (excluding Investment Companies) Index. The performance of the Benchmark Indices during these periods has been blended to reflect these changes.
3 Alternative Performance Measures, see Glossary contained within the Half Yearly Financial Report.
4 Further details are given in the Glossary contained within the Half Yearly Financial Report.
CHAIRMAN’S STATEMENT
Dear Shareholder
PERIOD HIGHLIGHTS
· NAV per ordinary share increased by 0.1%, versus the decrease in the Benchmark Index of 2.4%, an outperformance of 2.5 percentage points
· Share price return flat at 0.0%
· Earnings per share increased by 38.2% year-on-year
· Interim dividend declared of 3.30p per share (31 May 2022: 2.60p)
· Share rating remained stable ending the period at 5.1% (30 November 2022: 5.0%). Average discount during the period of 4.3%, compared with the weighted average discount for the rest of the peer group of 11.3%
· A total of 863,079 ordinary shares were repurchased into treasury for a total consideration of £5,076,000
OVERVIEW
The six months to 31 May 2023 were once again dominated by powerful macroeconomic drivers. High inflation coupled with the threat of contagion from the US banking crisis acted to exacerbate an already nervous UK market. Stubborn inflation and persistent wage growth data saw the Bank of England (BoE) implement a 50-basis point rise in the base interest rate in June raising interest rates to 5.0%, the highest level since 2008. However, UK inflation rose by 7.9% in the 12 months to 30 June 2023, a fall from 8.7% in May, and down from the recent peak of 11.1% in October 2022. This is the lowest inflation figure for over twelve months and is indeed positive news, although it remains significantly above the BoE’s 2% target. As the BoE wrestled with the conundrum of bringing down inflation whilst avoiding an economic recession, the negative sentiment towards UK assets reported in the 2022 Annual Report continued to weigh heavily on our asset class. Our Portfolio Manager’s high-quality growth style remained firmly out of favour throughout the period under review as rising interest rates adversely impacted company valuations of growth shares.
Against this challenging economic backdrop, our Portfolio Manager, Dan Whitestone, remains optimistic about the longer-term prospects for the companies within our portfolio, and for the asset class more broadly. While the market continues to express a pessimistic view of the outlook in company valuations, he highlights that trading and, importantly, earnings remain strong for many of the companies within his portfolio. Despite the negative sentiment around the outlook, the UK economy has displayed notable resilience, with household balance sheets and corporate earnings in better shape than many anticipated. A much-feared UK recession in 2023 is now expected to be avoided and a return to modest levels of growth in 2024 is forecast by the BoE.
As you will read in the Portfolio Manager’s Report which follows, our portfolio is constructed of differentiated and innovative companies, with strong balance sheets, consistent cash flow and the financial resilience to weather the storm. Our Portfolio Manager believes the challenging macroeconomic conditions described above will expose weaker competitors who will flounder against a backdrop of demand weakness, wage inflation and margin pressure. He trusts that his portfolio of ‘best of breed’ companies will prosper and consolidate their market position.
PERFORMANCE
Over the six months to 31 May 2023, the Company’s Net Asset Value (NAV) return was +0.1% compared to a return of -2.4% from the Company’s Benchmark Index, an outperformance of 2.5 percentage points. The Company’s share price was flat over the period, returning 0.0% and outperforming the Benchmark Index by 2.4 percentage points. Since the period end and up to the close of business on 21 July 2023, the Company’s NAV has risen by 1.6%, and the Benchmark Index has risen by 2.4% (all figures with dividends reinvested). Over the five and ten-year periods to 31 May 2023, the Company’s NAV returned +11.8% and +150.9%, and the share price returned +18.1% and +185.2%, versus the Benchmark Index returns of -0.1% and +66.0% over the same period.
As I reported in the annual report for the year to 30 November 2022, the Company’s relative underperformance for that financial year was largely a result of the impact of a higher than usual gross and net exposure as we entered the first quarter of 2022. The outbreak of the war in Ukraine coupled with an acute market rotation from Growth to Value resulted in a broad derating across the stocks within our portfolio, despite generally good corporate trading results. Our Portfolio Manager believes there is now, more than ever, a disconnect between the underlying fundamentals (sales growth, cash flow and earnings) and the valuations ascribed through the prevailing share price.
The Board continues to believe that the Company’s investment philosophy and approach remain compelling and will, in time, enable the Company to resume the delivery of consistent strong absolute and relative returns to our shareholders.
Further information on the Company’s performance and the factors that contributed to performance during the period and the outlook for the second half of the financial year are set out in the Investment Manager’s Report below.
Performance record to 31 May 2023 (with dividends reinvested)
| NAV per share | Share price | Benchmark Index | |
| 1 Year change % | -6.4 | -5.9 | -11.1 |
| 3 Year change % | 17.2 | 10.8 | 22.2 |
| 5 Year change % | 11.8 | 18.1 | -0.1 |
REVENUE RETURN AND DIVIDENDS
The revenue return per share for the period amounted to 8.46 pence per share, compared to 6.12 pence per share earned during the same six-month period last year, an increase of 38.2%. It is positive to see that despite the broader market turmoil, the income generated from our investment portfolio has increased significantly.
The Board recognises that, although the Company’s objective is capital growth, shareholders value consistency of dividends paid by the Company; an interim dividend of 3.30p per share has therefore been declared (2022: 2.60p per share), payable on 1 September 2023 to shareholders on the register on 4 August 2023 (the ex-dividend date is 3 August 2023). The interim dividend is fully covered by revenue generated by the portfolio during the period.
SHARE RATING
During the six months to 31 May 2023, the Company’s share rating ranged between a discount to NAV of 1.0% and a discount to NAV of 6.7%, ending the period at a discount of 5.1% (30 November 2022: 5.0%). This compares very favourably with the weighted average discount of the UK Smaller Companies peer group which ended the period at an average discount of 13.0%.
The Board believes that the best way of addressing any discount to NAV over the longer term is to generate good performance and to create demand for the Company’s shares in the secondary market through broadening awareness of the Company’s unique structure and other attractions. In determining whether the premium/discount to NAV (the share rating) at which the Company’s shares trade is excessive or otherwise, the Board considers several factors. These may include but are not limited to whether the share rating is commensurate with the current demand for UK Smaller Companies and whether the Company’s shares were trading in normal market conditions; the ongoing attractiveness of the investment proposition, in particular the strength of the portfolio management team and process; and the strong long-term performance delivered for shareholders, both in absolute and relative terms.
During the period the Company bought back a total of 863,079 ordinary shares for a total consideration of £5,076,000 to be held in treasury. The advantage of holding shares in treasury over cancelling them is that they remain listed. This means that where there is an opportunity to re-issue these shares, the Company does not have to pay additional fees for admission to trading as would be required with an issue of new shares. It is the Board’s policy that it will generally only take shares into treasury where it believes there is a reasonable likelihood of re-issue in the future. All shares were bought back at a discount to the prevailing NAV and were therefore accretive to existing shareholders. Since 31 May 2023 and up to the latest practicable date of 21 July 2023, a further 653,500 shares have been bought back for a total consideration of £3,729,000. As at 21 July 2023, the Company’s shares were trading at a discount of 6.8% versus an average discount for the rest of the peer group of 13.1%.
The Board believes that the share buy back activity undertaken has helped reduce the volatility in our share rating, as evidenced by a consistently tighter discount relative to the peer group average. As we navigate these more volatile and uncertain markets, your Board will continue to monitor the Company’s share rating and may deploy its powers to issue or buy back the Company’s shares where it believes that it is in shareholders’ long-term best interests to do so.
CORPORATE GOVERNANCE
The Board takes its governance responsibilities very seriously and follows best practice requirements as closely as possible. As I reported in last year’s Annual Report, we have complied with all applicable regulation and guidance with regard to matters of board diversity such as the FTSE Women Leaders Review and the recommendations of the Parker Review, now enshrined in the UK Listing Rules. More recently, the Board has sought assurances from our Manager that it has made suitable arrangements for its compliance with the FCA’s new Consumer Duty regulation, which comes into force on 31 July 2023.
However, the corporate governance environment in which the Company operates continues to evolve: the FRC has recently published revised minimum standards for FTSE 350 audit committees and is currently consulting on proposed changes to the UK Code, which include, amongst other matters, a focus on internal control, audit committees, ESG consideration and Directors’ time commitment and the concept of overboarding. The Board remains committed to exercising the highest standards of good governance and, as we do each year, will report to shareholders in the Annual Report on our compliance with the UK Code of Corporate Governance and other matters of good governance.
SHAREHOLDER COMMUNICATION
We appreciate how important access to regular information is to our shareholders. To supplement our Company website, we offer shareholders the ability to sign up to the BlackRock’s Trust Matters newsletter which includes information on the Company as well as news, views and insights on the investment trust market. Information on how to sign up is included on the inside cover of the Half Yearly Financial Report.
OUTLOOK
As you will read in his report which follows, our Portfolio Manager describes the macroeconomic factors which have impacted upon performance, sentiment towards our asset class generally, and on his high-quality growth style in particular. Nonetheless, he is optimistic about the future and is encouraged by what he believes is a mispricing within UK small and mid-caps, as evidenced by the disconnect between earnings and valuations seen in P/E ratios and the divergence between UK small cap and large cap, the largest for many years. UK smaller companies also look very good value, with the twelve month forward price-earnings ratio for FTSE UK Small-Cap Index averaging 9.4x1 and the FTSE 250 Index averaging 10.8x1. This compares favourably with other developed markets such as the US and Europe, with the twelve month forward price-earnings ratio for the S&P 500 Index averaging 19.3x1 and the Eurozone (as measured by the Eurostoxx Index) averaging 12.2x1. There are of course headwinds for UK growth stocks, most notably further interest rate increases anticipated during 2023. There are also indications that we may be reaching the peak of the current interest rate hiking cycle, which may be the catalyst for a change in sentiment towards UK smaller companies and in turn a potential re-rating of our asset class. This, he believes, presents a compelling investment opportunity for the medium to long-term investor.
Our Portfolio Manager’s focus on financially strong companies with innovative and disruptive business models and market leading offerings should, over time, see a return of the strong and consistent investment performance to which our shareholders have become accustomed. Your Board therefore remains fully supportive of our Portfolio Manager, his investment philosophy and the investment approach. On behalf of the Board, I would like to thank shareholders for their loyalty and patience.
CHRISTOPHER SAMUEL
Chairman
27 July 2023
1 Source: Refinitiv Datastream.
INVESTMENT MANAGER’S REPORT FOR THE SIX MONTHS ENDED 31 MAY 2023
MARKET REVIEW AND OVERALL INVESTMENT PERFORMANCE
The first six months of the financial year bore witness to a continuation of the macro volatility to which we have become accustomed. This has resulted in a somewhat challenging market environment to navigate, with stock markets grappling with macro-economic news, the latest inflation reports, and second guessing the monetary response from central bankers and its implications for economic growth. Despite the general bearish rhetoric about an inevitable recession and an implosion in corporate earnings, the results and outlook statements from corporates in developed markets has proved far more resilient. In the US, 81% of companies beat earnings expectations for quarter one and in Europe the figure is 74%. In many ways this is a continuation of the theme of the last nine months, i.e. many reasons to be concerned about the macro, offset by broadly positive corporate news flow and profitability. This tension continues to create volatile market conditions and few discernible trends, with the notable exceptions of artificial intelligence (“AI”) related shares and the diverging performance of US and UK stock markets this year, particularly pronounced in the absolute and relative underperformance of UK small and medium sized companies.
Equity markets made a strong start to the year, fuelled by a combination of China reopening, falling headline and core inflation in the US, as well as several positive corporate updates which highlighted a more resilient consumer outlook which all contributed to the increased optimism that a soft landing is not out of reach. However, optimism was short-lived, and markets sold off after a series of worse than expected inflation statistics and more hawkish noises from central banks. Further turbulence came when markets were hit by fears of a banking crisis following the collapse of Silicon Valley Bank, First Republic and Credit Suisse. Thankfully, the main issues were largely confined to US regional banks who had not adequately managed their interest rate risk or had an unusual concentration in non-insured deposits rather than a global systemic issue. Most recently, the rise of generative AI has been a hot topic running through markets, with investors digesting its implications, both positive and negative, across almost all industries and geographies.
On a global scale, markets have recouped some of the negative performance of 2022, driven heavily by the strength of US technology stocks on the back of the generative AI phenomenon. This is even more pronounced when comparing the returns of the technology stock-heavy Nasdaq to the more balanced S&P 500 (respectively returning 24.5% and 9.3% for the year to 31 May 2023). Within the UK market, concerns over the outlook for Chinese demand and global growth, the lack of any notable tech exposure, coupled with a large bias towards resources and financials has resulted in the UK underperforming most global developed markets. The underperformance of UK small and mid-caps versus the FTSE 100 has continued; since the initial underperformance which began in 2021, the mid-cap FTSE 250 has underperformed the FTSE 100 by around 30 percentage points, which is the largest underperformance on record.
Critics of the UK will highlight the myriad challenges facing the UK to explain this underperformance, ranging from stubbornly high inflation (versus our European and US counterparts), and weak productivity and growth. Brexit has not, in our view, helped many of these issues, particularly workforce related problems such as staff shortages/availability and wage inflation. However, for all these woes, the financial performance from UK listed companies, both domestic and internationally focused, is far more robust. There is a growing disconnect between strong company fundamentals and falling share prices, driven in part by persistent outflows as investors move on to other areas. Indeed, UK mid-cap funds saw a -21% reduction in AUM from outflows over the last 12 months, compared to -4% from UK large cap funds. Currently, the only buyers of note for UK listed companies are the companies themselves and private equity firms.
PERFORMANCE REVIEW
The Company’s NAV per share increased by +0.1% during the first half of the financial year, outperforming the benchmark which returned -2.4% (in Sterling terms with income reinvested). Whilst the relative return during the first half was positive, we feel this is not fully reflective of the strength in trading across the portfolio. We consider that a mispricing within UK small and mid-cap listed companies, is evidenced not only in the low price-to-earnings ratio for the small and mid-cap universe but also the extent of relative underperformance versus the FTSE 100. To put this into context, the FTSE 250 has underperformed the FTSE 100 in 17 of the last 24 months, with this now being the largest and longest period of underperformance on record, far exceeding that witnessed during the 2008 global financial crisis.
This Investment Manager’s report focuses on the long holdings within the portfolio as these are the drivers of the Company’s outperformance during the period and where the major contributors and detractors to performance lie. However, before turning to those holdings, we should note that the short book’s contribution for the period includes the negative performance from one of our largest shorts (a software company). This rose in the period before abruptly being suspended on the discovery of “significant, sophisticated and potentially fraudulent irregularities”. Since the suspension, the company in question has appointed an external investigator who has clarified that revenues for 2022 were overstated by 150% and bookings for 2022 were overstated by 1014% i.e. over 90% of bookings were fake. The board hope to be able to re-list the shares but we struggle to see any value in a business with a circa US$10 million revenue run rate and US$40 million of costs. Even assuming a lofty multiple of 10x sales on this new base, this would imply 90% downside to the valuation at suspension. Since the period end, the shares resumed trading after a four-month suspension and we closed our short, locking in a 96% share price fall which the Company will benefit from in the second half of the year.
Positive contributors to performance over the last six months have come from a broad range of companies, with no one company or theme driving an outsized portion of the overall Company return. The largest contributor to performance was the position in Games Workshop, which continued to deliver strong results through the period. Only recently described by some as nothing more than a “work-from-home winner” which caused their shares to halve in early 2022, Games Workshop has continued to grow revenues and profits ahead of expectations and indeed looks likely to close out their fiscal 2023 (May year-end) with sales and profits considerably higher than those achieved during the work-from-home era. In a year of limited new product launches (this is ahead of us) and rising costs, the strength of these results should not be underestimated. The recent news of a potential deal with Amazon to develop a TV series (specific details still unknown) should create a significant positive halo effect on marketing for the brand, in addition to the possible cash flow benefit from licensing.
Shares in Oxford Instruments strengthened further as the company maintained its record of beating expectations and raising guidance. We have commented in the past on the attractions of the long-term secular growth prospects of many of Oxford Instruments’ end markets, such as life science, compound semi-conductors, advanced materials and quantum technology. The strength of these markets, with robust funding across academia, corporates and governments, has contributed to the ongoing strength of their order books and revenue generation. While broad comparisons in sectors like Industrials or Consumer Services are generally best avoided, as no two companies are the same, but in this case, we think it is important to observe that Oxford Instrument’s results exemplify three key investor debates within the Industrials sector. First, Oxford Instruments have been successful in achieving price increases to offset their own cost pressures (easier to do when you are a small percentage of a customer’s overall cost, and are delivering genuine value-add). Second, Oxford Instruments did not achieve the levels of growth that were possible in their last two years due to supply chain challenges (now easing); this in our view reduces their own specific risk of a sharp slowdown amidst customer destocking (the same cannot be said of all companies in the sector). Third, there is already emerging evidence in their order books of the “reshoring” programmes we think will be long-term drivers of Industrial demand in the US.
Dechra Pharmaceuticals rose on the news it has received a cash offer from private equity group EQT, albeit only at a modest premium to where they raised money at the end of last year to acquire a pipeline of veterinary drugs which will accelerate growth in the 2024 financial year and beyond. Recent trading has proved more challenging than management anticipated, amidst destocking within the US wholesale channel. The more volatile trading conditions have also depressed Dechra Pharmaceuticals’ share price. In our view these issues are only transitory and a compelling long-term growth dynamic remains, but it is exactly this type of tension (near-term transient issues versus long-term compound growth) that private equity have capitalised on.
Stepping back, a clear theme to us is that despite the challenging and volatile environment, high-quality companies with market leading positions can continue to grow and deliver better-than-expected results. 4imprint Group, one of our top performers last year, once again reported impressive results showing 45% revenue growth year-on-year, while profits before tax rose by more than 240%. These results demonstrate the company’s ability to win share within a highly fragmented end market due to their recent marketing efforts to grow brand awareness, whilst they have a long track record of growing the revenues from their existing customer base through high service levels and product innovation. Shares in Dunelm Group rose after the company reported positive growth in both online and in-store sales, with upgrades to full-year profits guidance. To us, Dunelm Group is a well-invested and differentiated consumer company that has emerged from COVID-19 with an even stronger business model (post several years of digital investment and 2-man home delivery) and market position (capturing share across all demographics as people seek better value-for-money). Shares in Breedon moved higher after the company reported better than expected results, achieving margin expansion despite a circa 10% reduction in volumes and significant cost headwinds. We think Breedon has an enviable market position in the UK and is well placed to prosper when volumes recover.
Turning to the detractors, the biggest was Watches of Switzerland, where shares have continued to fall despite extremely robust sales growth. Fears continue that demand will erode sharply as the luxury watch category normalises after a period of over-earning (working-from-home, crypto millionaires, or Russian oligarchs) yet wait-lists remain robust and demand still far exceeds supply. The company did experience a recent small earnings downgrade attributable to margin pressure in the coming financial year from the rising cost of interest-free credit products in a higher interest rate environment. However, while this is disappointing, we do not consider it a threat to the investment case. The company is still growing strongly and we believe it has a good market position as a key route to market for luxury watch brands globally. Recent feedback from industry conferences suggests demand for the category remains strong. Valuation, at under 12x price to earnings for this current financial year with a net cash balance sheet looks extremely attractive to us given the runway of growth to take market share in both the US and Europe, and management’s stated desire to do value accretive acquisitions.
The second largest detractor was our long position in specialist pharmaceuticals business Ergomed, which suffered with the broader sell-off in UK small & mid-cap growth shares and specific fears over a slowdown in biotech funding. Ergomed specialises in drug development and drug safety, operating across two businesses (Clinical Research and Pharmacovigilance), focusing on high growth markets in oncology, rare diseases and drug safety, which we believe offer a long runway of future growth. Ergomed reported very strong trading across all divisions for the 12 months to 31 December 2022, with a positive outlook as its order book continues to grow, providing a high level of revenue visibility in the coming years, and therefore our investment case for the share remains unchanged. Ergomed updated the market in June, confirming a strong start to 2023 with solid revenue growth. Other detractors include Spirent which warned that their customers have been delaying their investment decisions as a result of the ongoing challenging economic backdrop, and direct-to-consumer retailer of swimming pool supplies in the US, Leslie’s, which fell in response to soft results impacted by the challenging backdrop and rising costs.
PORTFOLIO POSITIONING & OUTLOOK
To date, 2023 has seen a continuation of the themes of uncertainty; the impacts of the Russia/Ukraine war, China, supply chain disruption and inflation. However, despite the recent inflation figures and the subsequent Bank of England’s 50 basis points interest rate hike, we believe we are closer to the end of monetary tightening and that inflation is now falling, albeit slower than previously thought. As the year-on-year impact of inflation starts to roll over, the impending fall in utility bills will offer some meaningful shelter to those still to re-mortgage into a new fixed deal in the current climate. With 40% of home owners being mortgage free, and a large percentage of the mortgage book having remortgaged earlier this year, there are many who will benefit from strong employment, falling utility costs and higher interest on cash. Indeed many banks have upgraded their household cash-flow forecasts as a consequence and consumer confidence continues to remain robust. This is not to say that the outlook is positive in all ways, far from it. However, there are in our view some factors that run counter to the general tone of recent reporting on the UK economy. Generally speaking, we consider that financial conditions may not be as stretched as this reporting current suggests. Corporates and consumers are reasonably well capitalised, and banks have plenty of capital. The path of employment will dictate the consumer outlook but we continue to believe that the trough will be shallower than in previous downturns.
For UK domestic focused public limited companies (“PLCs”), 2023 will likely see growing dispersion in financial returns. Those with strong market share stories (digital, trading down, new product verticals etc.) will outperform and grow despite a more challenging backdrop. Input costs will (we expect) reverse for many. Financial stability will also be a key contributor to performance, with rising interest costs further eroding profitability in a more challenged consumer backdrop.
Industrial activity is likely to moderate as excess inventory works through the system (we can see evidence of destocking impacting the Chemicals companies for instance). However, given major markets such as automotive and aerospace were already seeing choked demand through supply chain issues, again we expect a shallower trough. Reshoring in the US, as well as several government programmes (such as measures in relation to semiconductor (chip) research and production and the Inflation Reduction Act) will provide additional tailwinds of growth for quite a few US focused UK listed small and mid-caps. Housebuilding and RMI (Repair, Maintenance and Improvement) have had a tough first half of the year, but we still believe the outlook is not as bad as it was in September 2022, and consensus forecasts are already conservatively struck. As such we think valuations are already pricing in a lot of bad news.
Whilst there is much that can be debated about the economic outlook, we think the valuation of UK small and mid-cap companies is compelling. It is therefore disappointing to us to see the continuing de-equitisation of the UK listed market continues writ large, with non-market participants seemingly taking a very different view on the value of company equity and their associated cash flows, as evidenced by i) corporate share buy-backs (the majority of our investments are buying back their equity), ii) corporate mergers and acquisitions (“M&A”) (i.e. Deutsche’s cash-bid for Numis), and iii) Private Equity (i.e. EQT’s cash bid for Dechra Pharmaceuticals). This is a trend we expect to continue. Private Equity is sitting on near record levels of cash (we estimate circa US$438 billion in Europe) which they are keen to deploy. We note that this de-equitisation trend may pose a challenge if a significant disconnect of company valuations from strong fundamentals drives a pick-up in M&A activity and results in companies that would otherwise provide compelling long-term investment opportunities being taken off the market. On the positive side, an increased market focus on the opportunities available in the UK small-cap space may catalyse a positive re-rating.
The portfolio’s positioning has not changed materially over the period. This reflects our preference for differentiated growth companies with an ability to win market share. Consumer Discretionary and Industrials tend to be our two biggest sector areas, and have increased marginally. The Company owns many long-standing positions such as Breedon, Grafton Group, Gamma Communications, Ergomed, Morgan Sindall, that have delivered successive positive updates but have continued to de-rate despite upgrades. We continue to add to these positions as we consider that they have a compelling risk/reward profile. New additions to the portfolio in recent months include Intermediate Capital Group, Permanent TSB, SIG, Future, MJ Gleeson and Crest Nicholson.
Whilst the backdrop is still tough overall, we believe there are reasons for optimism. The recent round of trading updates from our investments have generally been in-line with or better than expectations. However, with oil and gas prices lower year-on-year, China re-opening, USD weakening, and shipping/logistics/factory gate prices dropping, much of the inflation pressure of last year could become deflationary during the course of this year. The picture we see is one of a gradual recovery and in our view, this is not reflected in valuations so remains the biggest risk/reward opportunity for us. The underperformance of UK small and mid-cap companies is not something that we think can persist. We see similar dynamics in the US, with the Russell 2000 versus the Nasdaq back to levels last seen in the 2000 tech bubble. The portfolio now includes many companies on single digit price to earnings ratios, with double digit free cash flow yields, but unlike so many archetypical “value” sectors, have far superior growth prospects. As a result, the net market exposure of the Company is slowly increasing and is now around 106%, while the gross exposure is c.115%.
We thank shareholders for their ongoing support.
DAN WHITESTONE
BLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED
27 July 2023
PORTFOLIO OF INVESTMENTS
1 Gamma Communications* (2022: 7th)
Mobile Telecommunications
Market value: £18,766,000
Share of net assets: 3.0% (2022: 2.8%)
Provider of communication services to UK businesses.
2 WH Smith (2022: 9th)
General Retailers
Market value: £18,687,000
Share of net assets: 3.0% (2022: 2.6%)
Retailer of books, stationery, magazines, newspapers and confectionary.
3 Breedon (2022: 12th)
Construction & Materials
Market value: £17,506,000
Share of net assets: 2.8% (2022: 2.4%)
Supplier of construction materials.
4 4imprint Group (2022: 3rd)
Media
Market value: £17,311,000
Share of net assets: 2.8% (2022: 3.1%)
Supplier of promotional merchandise in the US.
5 CVS Group* (2022: 5th)
General Retailers
Market value: £17,309,000
Share of net assets: 2.8% (2022: 2.9%)
Operator of veterinary surgeries.
6 YouGov* (2022: 11th)
Media
Market value: £17,149,000
Share of net assets: 2.8% (2022: 2.4%)
Provider of survey data and specialist data analytics.
7 Diploma* (2022: 8th)
Support Services
Market value: £16,695,0001
Share of net assets: 2.7% (2022: 2.7%)
Supplier of specialised technical products and services.
8 Grafton Group (2022: 13th)
Support Services
Market value: £16,219,000
Share of net assets: 2.6% (2022: 2.1%)
Builders’ merchants in the UK, Ireland and Netherlands.
9 Watches of Switzerland (2022: 1st)
Personal Goods
Market value: £15,569,000
Share of net assets: 2.5% (2022: 3.3%)
Retailer of luxury watches.
10 Ergomed* (2022: 6th)
Pharmaceuticals & Biotechnology
Market value: £15,515,0001
Share of net assets: 2.5% (2022: 2.9%)
Provider of pharmaceutical services.
Percentages shown are the share of net assets.
The market value shown is the gross exposure to the shares through equity investments and long derivative positions. For equity investments, the market value is the fair value of the shares. For long derivative positions, it is the market value of the underlying shares to which the portfolio is exposed via the contract. Percentages in brackets represent the portfolio holding as at 30 November 2022.
| # | Company | £’000^ | % | Description |
| 11 | Rotork Electronic & Electrical Equipment |
15,091 | 2.4 | Manufacturer of industrial flow equipment |
| 12 | Computacenter Software & Computer Services |
14,9921 | 2.4 | Computer services |
| 13 | SigmaRoc* Construction & Materials |
14,464 | 2.3 | Buy-and-build group targeting construction materials assets in the UK and Northern Europe |
| 14 | Oxford Instruments Electronics & Electrical Equipment |
13,784 | 2.2 | Designer and manufacturer of tools and systems for industry and research |
| 15 | Qinetiq Group Aerospace & Defence |
12,229 | 2.0 | Provider of scientific and technological services to the defence, security and aerospace markets |
| 16 | Bytes Technology Software & Computer Services |
10,909 | 1.8 | Specialist in software, security and cloud services |
| 17 | Games Workshop Leisure Goods |
10,220 | 1.6 | Developer, publisher and manufacturer of miniature war games |
| 18 | Tatton Asset Management* Financial Services |
10,156 | 1.6 | Provider of discretionary fund management services to the IFA market |
| 19 | Moneysupermarket.com Software & Computer Services |
9,8931 | 1.6 | Provider of price comparison website specialising in financial services |
| 20 | Dechra Pharmaceuticals Pharmaceuticals & Biotechnology |
9,840 | 1.6 | Developer and supplier of pharmaceutical and other products focused on the veterinary market |
| 21 | Dunelm Group General Retailers |
9,772 | 1.6 | Retailer of homeware products |
| 22 | Boku* Support Services |
9,482 | 1.5 | Digital payments platform |
| 23 | Mattioli Woods* Financial Services |
9,462 | 1.5 | Provider of wealth management services |
| 24 | Hill & Smith Holdings Industrial Metals & Mining |
9,399 | 1.5 | Supplier of infrastructure products and galvanizing services |
| 25 | Impax Asset Management* Financial Services |
9,394 | 1.5 | Provider of asset management services |
| 26 | Auction Technology Group General Retailers |
9,297 | 1.5 | Operator of marketplaces for curated online auctions |
| 27 | IntegraFin Financial Services |
8,955 | 1.4 | UK savings platform for financial advisors |
| 28 | Baltic Classifieds Group Software & Computer Services |
8,8441 | 1.4 | Operator of online classified businesses in the Baltics |
| 29 | Morgan Sindall Construction & Materials |
8,5461 | 1.4 | Supplier of office fit out, construction and urban regeneration services |
| 30 | TT Electronics Electronic & Electrical Equipment |
8,2901 | 1.3 | Global manufacturer of electronic components |
| 31 | Workspace Group Real Estate Investment Trusts |
7,824 | 1.3 | Supply of flexible workspace to businesses in London |
| 32 | Jet2* Travel & Leisure |
7,684 | 1.2 | Low cost tour operator and airline |
| 33 | OSB Group Financial Services |
7,645 | 1.2 | Specialist lending business |
| 34 | Chemring Group Aerospace & Defence |
7,486 | 1.2 | Provider of technology products and services to aerospace, defence and security markets |
| 35 | GlobalData* Media |
6,7591 | 1.1 | Data analytics and consulting |
| 36 | Intermediate Capital Group Investment Banking & Brokerage |
6,692 | 1.1 | Private equity business |
| 37 | Future Media |
6,596 | 1.1 | Multi-platform media business covering technology, entertainment, creative arts, home interest and education |
| 38 | Next Fifteen Communications* Media |
6,504 | 1.0 | Provider of digital communication products and services |
| 39 | Alfa Financial Software Software & Computer Services |
6,462 | 1.0 | Provider of software to the finance industry |
| 40 | Robert Walters Support Services |
6,442 | 1.0 | Provider of specialist recruitment services |
| 41 | Hiscox Non-life Insurance |
6,4111 | 1.0 | Provision of insurance services |
| 42 | Vesuvius* Industrial Engineering |
6,3071 | 1.0 | British engineered ceramics company |
| 43 | Euronext* Financial Services |
6,1291 | 1.0 | European stock exchange |
| 44 | SIG Industrial Support Services |
6,102 | 1.0 | Supplier of building, roofing and insulation products |
| 45 | Deliveroo Software & Computer Services |
6,089 | 1.0 | Online food delivery business |
| 46 | Londonmetric Property Real Estate Investment Trusts |
5,7841 | 0.9 | Investor in, and developer of property |
| 47 | Lok’nStore* Real Estate Investment & Services |
5,773 | 0.9 | Provider of self-storage space in the UK |
| 48 | Safestore Real Estate Investment Trusts |
5,538 | 0.9 | Provider of self-storage units |
| 49 | Young & Co’s Brewery* Travel & Leisure |
5,516 | 0.9 | Owner and operator of pubs mainly in the London area |
| 50 | RS Group Support Services |
5,307 | 0.9 | Distributor of industrial and electronic products |
| 51 | Bellway Household Goods & Home Construction |
5,120 | 0.8 | UK housebuilder |
| 52 | Xero* Software & Computer Services |
4,9741 | 0.8 | Software company specialising in accounting for small businesses |
| 53 | Porvair Industrial Engineering |
4,915 | 0.8 | Specialist filtration and environmental technology |
| 54 | Herc Holdings* Industrial Transportation |
4,8821 | 0.8 | Equipment rental business |
| 55 | Judges Scientific* Electronic & Electrical Equipment |
4,855 | 0.8 | Designer and producer of scientific instruments |
| 56 | Cranswick Food Producers |
4,792 | 0.8 | Producer of premium, fresh and added-value food products |
| 57 | Kier Group Support Services |
4,718 | 0.8 | UK construction, services and property group |
| 58 | AB Dynamics* Industrial Engineering |
4,683 | 0.8 | Developer and supplier of specialist automotive testing systems |
| 59 | Ashmore Group Financial Services |
4,5991 | 0.7 | Emerging market focused investment manager |
| 60 | Spectris Electronic & Electrical Equipment |
4,571 | 0.7 | Supplier of productivity enhancing instrumentation and controls |
| 61 | Polar Capital Holdings* Financial Services |
4,553 | 0.7 | Provider of investment management services |
| 62 | Zotefoams Chemicals |
4,5101 | 0.7 | Manufacturer of polyolefin foams used in sport, construction, marine, automation, medical equipment and aerospace |
| 63 | Permanent TSB Banks |
4,354 | 0.7 | Irish bank |
| 64 | Ascential Software & Computer Services |
4,299 | 0.7 | Specialist information and data analytics company |
| 65 | Accesso Technology* Software & Computer Services |
4,2811 | 0.7 | Provider of ticketing and virtual queuing solutions |
| 66 | Clarkson Industrial Transportation |
4,216 | 0.7 | Provider of shipping services |
| 67 | The Pebble Group* Media |
4,181 | 0.7 | Designer and manufacturer of promotional goods |
| 68 | Numis* Investment Banking & Brokerage |
4,171 | 0.7 | UK broker |
| 69 | Spirent Technology Hardware & Equipment |
4,130 | 0.7 | Multinational telecommunications testing |
| 70 | Kainos Group Software & Computer Services |
4,0471 | 0.7 | Provider of digital technology solutions |
| 71 | Hunting Oil Equipment & Services |
3,9311 | 0.6 | Oil services business |
| 72 | DiscoverIE Electronic & Electrical Equipment |
3,874 | 0.6 | International designer, manufacturer and supplier of customised electronics |
| 73 | Redrow Household Goods & Home Construction |
3,843 | 0.6 | UK housebuilder |
| 74 | Leslie’s Leisure Goods |
3,7861 | 0.6 | US direct to consumer retailer of swimming pool maintenance products |
| 75 | Serica Energy* Oil, Gas & Coal |
3,770 | 0.6 | Oil and gas producer |
| 76 | Luceco Electronic & Electrical Equipment |
3,763 | 0.6 | Supplier & manufacturer of high quality LED lighting products |
| 77 | Howden Joinery Group General Retailers |
3,7451 | 0.6 | Kitchen and joinery product supplier |
| 78 | Restore* Support Services |
3,698 | 0.6 | Provider of records management services |
| 79 | Sirius Real Estate Real Estate Investment & Services |
3,354 | 0.6 | Owner and operator of business parks, offices and industrial complexes in Germany |
| 80 | Halfords Specialty Retailers |
3,293 | 0.5 | Retailer of motoring and cycling products |
| 81 | Victorian Plumbing* Home Improvement Retailers |
3,2611 | 0.5 | Online retailer of bathroom products |
| 82 | MJ Gleeson Household Goods & Home Construction |
3,159 | 0.5 | UK housebuilder |
| 83 | Renishaw Electronic & Electrical Equipment |
3,135 | 0.5 | Engineering and scientific technology company |
| 84 | Babcock International Group Aerospace & Defence |
3,122 | 0.5 | British aerospace, defence and nuclear engineering services company |
| 85 | Eckoh* Software & Computer Services |
3,075 | 0.5 | Global provider of secure payments products |
| 86 | TP ICAP Investment Banking & Brokerage |
3,056 | 0.5 | Inter-dealer broker |
| 87 | Crest Nicholson Household Goods & Home Construction |
3,036 | 0.5 | UK housebuilder |
| 88 | Sthree Support Services |
3,004 | 0.5 | Provider of specialist professional recruitment services |
| 89 | Ashtead* Oil, Gas & Coal |
2,931 | 0.5 | International equipment rental business |
| 90 | Team17* Leisure Goods |
2,833 | 0.5 | Video game developer and publisher |
| 91 | Cerillion* Software & Computer Services |
2,816 | 0.5 | Provider of billing, charging and customer management systems |
| 92 | AJ Bell Financial Services |
2,732 | 0.5 | UK savings platform for financial advisors & individual investors |
| 93 | Advanced Medical Solutions* Healthcare Equipment & Services |
2,6691 | 0.4 | Developer and manufacturer of advanced wound care solutions |
| 94 | Big Technologies* Software & Computer Services |
2,526 | 0.4 | Provider of remote personal monitoring products |
| 95 | Learning Technologies* Software & Computer Services |
2,402 | 0.4 | Provider of e-learning services |
| 96 | Animalcare Group* Pharmaceuticals & Biotechnology |
2,095 | 0.4 | Veterinary pharmaceuticals business |
| 97 | XP Power Electronic & Electrical Equipment |
1,689 | 0.3 | Leading provider of power solutions |
| 98 | Gooch & Housego* Electronic & Electrical Equipment |
1,643 | 0.3 | Designer and manufacturer of advanced photonic systems |
| 99 | MaxCyte* Pharmaceuticals & Biotechnology |
1,595 | 0.3 | Clinical-stage global cell-based therapies and life sciences company |
| 100 | Close Brothers Group Banks |
1,590 | 0.3 | UK merchant banking group providing lending, deposit taking, wealth management services and securities trading |
| 101 | NCC Group Software & Computer Services |
917 | 0.1 | Cyber security business |
| --------------- | -------- | |||
| Long investment positions (excluding BlackRock’s Institutional Cash Series plc –Sterling Liquidity Environmentally Aware Fund) | 693,989 | 111.9 | ||
| \========= | \==== | |||
| Short investment positions | (22,364) | (3.6) | ||
| \========= | \==== |
1 Includes long derivative positions.
* Traded on the Alternative Investment Market (AIM) of the London Stock Exchange.
^ The market value shown is the gross exposure to the shares through equity investments and long derivative positions. For equity investments, the market value is the fair value of the shares. For long derivative positions, it is the market value of the underlying shares to which the portfolio is exposed via the contract.
Percentages shown as a % of net assets.
At 31 May 2023, the Company held equity interests in four companies comprising more than 3% of a company’s share capital as follows: Tatton Asset Management: 3.8%; SigmaRoc: 3.5%; Eckoh: 3.1%; and Ergomed: 3.0%.
Fair value and gross market exposure of investments as at 31 May 2023
| Fair value1 | Gross market exposure2,3 |
Gross market exposure as a % of net assets2 |
|||
| £’000 | £’000 | 31 May 2023 | 31 May 2022 | 30 November 2022 | |
| Long investment positions (excluding BlackRock’s Institutional Cash Series plc – Sterling Liquidity Environmentally Aware Fund) | 609,814 | 693,989 | 111.9 | 108.8 | 106.8 |
| Short investment positions | 1,005 | (22,364) | (3.6) | (6.3) | (2.5) |
| --------------- | --------------- | --------------- | --------------- | --------------- | |
| Subtotal | 610,819 | 671,625 | 108.3 | 102.5 | 104.3 |
| \========= | \========= | \========= | \========= | \========= | |
| Cash and cash equivalents | 12,983 | (47,823) | (7.8) | (1.2) | (3.5) |
| Other net current liabilities | (3,395) | (3,395) | (0.5) | (1.3) | (0.8) |
| --------------- | --------------- | --------------- | --------------- | --------------- | |
| Net assets | 620,407 | 620,407 | 100.0 | 100.0 | 100.0 |
| \========= | \========= | \========= | \========= | \========= |
The Company uses gearing through the use of long and short derivative positions. Gross and Net Gearing as at 31 May 2023 were 115.5% and 108.3% respectively (31 May 2022: 115.1% and 102.5%; year ended 30 November 2022: 109.3% and 104.3% respectively). Gross and Net Gearing are Alternative Performance Measures, see Glossary contained within the Half Yearly Financial Report.
1 Fair value is determined as follows:
– Long equity investment positions are valued at bid prices where available, otherwise at latest market traded quoted prices.
– The sum of the fair value column for the derivative contracts totaling £84,547,000 represents the net fair valuation of all derivative contracts, which is determined based on the difference between the notional transaction price and market value of the underlying shares in the contract (in effect the unrealised gains/(losses) on the exposed long and short derivative positions).
– The exposure to securities held through long derivative positions directly in the market would have amounted to £84,175,000 at the time of purchase, and subsequent movement in market prices have resulted in unrealised losses on the long derivative positions of £(633,000) resulting in the value of the total long derivative market exposure to the underlying securities decreasing to £83,542,000 as at 31 May 2023. If the long positions had been closed on 31 May 2023, this would have resulted in a loss of £(633,000) for the Company.
– The notional exposure of selling the securities gained via the short derivative positions would have been £(23,369,000) at the time of entering into the contract, and subsequent movement in market prices have resulted in unrealised gains on the short derivative positions of £1,005,000 resulting in the value of the total short derivative market exposure of these investments increasing to £(22,364,000) as at 31 May 2023. If the short positions had been closed on 31 May 2023, this would have resulted in a gain of £1,005,000 for the Company.
2 Gross market exposure for equity investments is the same as fair value; bid prices are used where available and, if unavailable, latest market traded quoted prices are used. For both long and short derivative positions, the gross market exposure is the market value of the underlying shares to which the portfolio is exposed via the contract.
3 The gross market exposure column for cash and cash equivalents has been adjusted to assume the Company traded direct holdings, rather than exposure being gained through long and short derivative positions.
DISTRIBUTION OF INVESTMENTS AS AT 31 MAY 2023
| Sector | % of long portfolio |
% of short portfolio |
% of net portfolio |
| Oil, Gas & Coal | 1.0 | 0.0 | 1.0 |
| Oil Equipment & Services | 0.6 | 0.0 | 0.6 |
| --------------- | --------------- | --------------- | |
| Oil & Gas | 1.6 | 0.0 | 1.6 |
| \========= | \========= | \========= | |
| Chemicals | 0.7 | 0.0 | 0.7 |
| Industrial Metals & Mining | 1.4 | 0.0 | 1.4 |
| --------------- | --------------- | --------------- | |
| Basic Materials | 2.1 | 0.0 | 2.1 |
| \========= | \========= | \========= | |
| Aerospace & Defence | 3.4 | 0.0 | 3.4 |
| Construction & Materials | 6.0 | (0.3) | 5.7 |
| Electronic & Electrical Equipment | 9.0 | 0.0 | 9.0 |
| Industrial Engineering | 2.4 | 0.0 | 2.4 |
| Industrial Support Services | 0.9 | (0.4) | 0.5 |
| Industrial Transportation | 1.3 | (0.1) | 1.2 |
| Support Services | 9.8 | (0.2) | 9.6 |
| --------------- | --------------- | --------------- | |
| Industrials | 32.8 | (1.0) | 31.8 |
| \========= | \========= | \========= | |
| Food Producers | 0.7 | 0.0 | 0.7 |
| Personal Goods | 2.3 | 0.0 | 2.3 |
| --------------- | --------------- | --------------- | |
| Consumer Staples | 3.0 | 0.0 | 3.0 |
| \========= | \========= | \========= | |
| Healthcare Equipment & Services | 0.4 | 0.0 | 0.4 |
| Pharmaceuticals & Biotechnology | 4.3 | (0.3) | 4.0 |
| --------------- | --------------- | --------------- | |
| Health Care | 4.7 | (0.3) | 4.4 |
| \========= | \========= | \========= | |
| General Retailers | 8.8 | (0.2) | 8.6 |
| Home Improvement Retailers | 0.5 | 0.0 | 0.5 |
| Household Goods & Home Construction | 2.3 | 0.0 | 2.3 |
| Leisure Goods | 2.5 | 0.0 | 2.5 |
| Media | 8.7 | 0.0 | 8.7 |
| Specialty Retailers | 0.5 | 0.0 | 0.5 |
| Travel & Leisure | 2.0 | (0.2) | 1.8 |
| --------------- | --------------- | --------------- | |
| Consumer Discretionary | 25.3 | (0.4) | 24.9 |
| \========= | \========= | \========= | |
| Banks | 0.9 | 0.0 | 0.9 |
| Closed End Investments | 0.0 | (0.3) | (0.3) |
| Financial Services | 9.5 | 0.0 | 9.5 |
| Investment Banking & Brokerage | 2.1 | (0.3) | 1.8 |
| Non-life Insurance | 0.9 | 0.0 | 0.9 |
| --------------- | --------------- | --------------- | |
| Financials | 13.4 | (0.6) | 12.8 |
| \========= | \========= | \========= | |
| Real Estate Investment & Services | 1.3 | 0.0 | 1.3 |
| Real Estate Investment Trusts | 2.8 | (0.4) | 2.4 |
| --------------- | --------------- | --------------- | |
| Real Estate | 4.1 | (0.4) | 3.7 |
| \========= | \========= | \========= | |
| Software & Computer Services | 12.9 | (0.6) | 12.3 |
| Technology Hardware & Equipment | 0.6 | 0.0 | 0.6 |
| --------------- | --------------- | --------------- | |
| Technology | 13.5 | (0.6) | 12.9 |
| \========= | \========= | \========= | |
| Mobile Telecommunications | 2.8 | 0.0 | 2.8 |
| --------------- | --------------- | --------------- | |
| Telecommunications | 2.8 | 0.0 | 2.8 |
| \========= | \========= | \========= | |
| Total Investments | 103.3 | (3.3) | 100.0 |
| \========= | \========= | \========= |
The above percentages are calculated on the net portfolio as at 31 May 2023. The net portfolio is calculated as long equity and derivative positions, less short derivative positions as at 31 May 2023.
ANALYSIS OF THE PORTFOLIO
Market capitalisation as at 31 May 2023
| Long positions1 | Short positions | |
| £5bn – £10bn | 1.7% | 0.0% |
| £2.5bn – £5bn | 16.3% | -0.3% |
| £2bn – £2.5bn | 8.7% | -0.2% |
| £1.5bn – £2bn | 12.6% | -0.5% |
| £1bn – £1.5bn | 21.4% | -0.5% |
| £500m – £1bn | 22.1% | -1.2 % |
| £0m – £500m | 20.5% | -0.6% |
1 The above investments may comprise exposures to long equity and long derivative positions.
Source: BlackRock.
Position size as at 31 May 2023
| Long positions1 | Short positions | |
| £15m – £20m | 11 | 0 |
| £10m – £15m | 7 | 0 |
| £5m – £10m | 33 | 0 |
| £2.5m – £5m | 43 | 0 |
| £0m – £2.5m | 7 | -13 |
1 The above investments may comprise exposures to long equity and long derivative positions.
Source: BlackRock.
PORTFOLIO HOLDINGS WITHIN KEY BENCHMARK INDICES
| Gross Basis1 | Net Basis2 | |
| FTSE 250 | 52.9% | 53.2% |
| FTSE AIM | 32.4% | 34.5% |
| FTSE Small Cap | 8.0% | 7.6% |
| Other | 5.1% | 2.9% |
| FTSE 100 | 1.6% | 1.8% |
Portfolio holdings within the Benchmark Index (the Numis Smaller Companies plus AIM
(excluding Investment companies) index)
| Gross Basis1,3 | Net Basis2,3 | |
| Within Benchmark | 62.9% | 66.1% |
| Off-Benchmark | 37.1% | 33.9% |
Source: BlackRock.
1 Long exposure plus short exposure as a percentage of the portfolio in aggregate excluding investment in BlackRock’s Institutional Cash Series plc – Sterling Liquid Environmentally Aware Fund.
2 Long exposure less short exposure as a percentage of the portfolio excluding investment in BlackRock’s Institutional Cash Series plc – Sterling Liquid Environmentally Aware Fund.
3 Holdings included within the Benchmark Index as at 30 November 2022 were 58.6% on a Gross Basis and 56.8% on a Net Basis.
INTERIM MANAGEMENT REPORT AND RESPONSIBILITY STATEMENT
The Chairman’s Statement and the Investment Manager’s Report above give details of the important events which have occurred during the period and their impact on the financial statements.
PRINCIPAL RISKS AND UNCERTAINTIES
The principal risks faced by the Company can be divided into various areas as follows:
· Performance;
· Market;
· Income/dividend;
· Financial;
· Operational; and
· Regulatory.
The Board reported on the principal risks and uncertainties faced by the Company in the Annual Report and Financial Statements for the year ended 30 November 2022. A detailed explanation can be found in the Strategic Report on pages 40 to 43 and in note 16 on pages 103 to 115 of the Annual Report and Financial Statements which are available on the website maintained by BlackRock at www.blackrock.com/uk/thrg.
The Directors have also assessed the impact of market conditions arising from the conflict in Ukraine on the Company’s ability to meet its investment objective. Based on the latest available information, the Company continues to be managed in line with its investment objective, with no disruption to its operations.
In the view of the Board, there have not been any changes to the fundamental nature of the principal risks and uncertainties since the previous report and these are equally applicable to the remaining six months of the financial year as they were to the six months under review.
RELATED PARTY DISCLOSURE AND TRANSACTIONS WITH THE INVESTMENT MANAGER
BlackRock Fund Managers Limited (BFM) was appointed as the Company’s Alternative Investment Fund Manager (AIFM) with effect from 2 July 2014. BFM has (with the Company’s consent) delegated certain portfolio and risk management services, and other ancillary services, to BlackRock Investment Management (UK) Limited (BIM (UK)). Both BFM and BIM (UK) are regarded as related parties under the Listing Rules. Details of the fees payable are set out in note 4 and note 11 of the financial statements below.
The related party transactions with the Directors are set out in note 12 of the financial statements below.
GOING CONCERN
The Board remains mindful of the ongoing uncertainty surrounding the potential duration of the conflict in Ukraine and its longer-term effects on the global economy and the current heightened geopolitical risk. Nevertheless, the Directors, having considered the nature and liquidity of the portfolio, the Company’s investment objective and the Company’s projected income and expenditure, are satisfied that the Company has adequate resources to continue in operational existence for the foreseeable future and is financially sound.
The Company has a portfolio of investments which are predominantly readily realisable and is able to meet all its liabilities from these assets. Accounting revenue and expense forecasts are maintained and reported to the Board regularly and it is expected that the Company will be able to meet all its obligations. Ongoing charges for the year ended 30 November 2022 were 0.54% of net assets and it is expected that this is unlikely to change significantly going forward.
Based on the above, the Board is satisfied that it is appropriate to continue to adopt the going concern basis in preparing the financial statements.
DIRECTORS’ RESPONSIBILITY STATEMENT
The Disclosure Guidance and Transparency Rules (DTR) of the UK Listing Authority require the Directors to confirm their responsibilities in relation to the preparation and publication of the Interim Management Report and Financial Statements.
The Directors confirm to the best of their knowledge that:
· the condensed set of financial statements contained within the Half Yearly Financial Report has been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting; and
· the Interim Management Report, together with the Chairman’s Statement and Investment Manager’s report, include a fair review of the information required by 4.2.7R and 4.2.8R of the FCA’s Disclosure Guidance and Transparency Rules.
The Half Yearly Financial Report has not been audited or reviewed by the Company’s Auditor.
The Half Yearly Financial Report was approved by the Board on 27 July 2023 and the above responsibility statement was signed on its behalf by the Chairman.
CHRISTOPHER SAMUEL
FOR AND ON BEHALF OF THE BOARD
27 July 2023
STATEMENT OF COMPREHENSIVE INCOME FOR THE SIX MONTHS ENDED 31 MAY 2023
| Six months ended 31 May 2023 (unaudited) |
Six months ended 31 May 2022 (unaudited) |
Year ended 30 November 2022 (audited) |
||||||||
| Notes | Revenue £’000 |
Capital £’000 |
Total £’000 |
Revenue £’000 |
Capital £’000 |
Total £’000 |
Revenue £’000 |
Capital £’000 |
Total £’000 |
|
| Income from investments held at fair value through profit or loss | 3 | 7,869 | – | 7,869 | 5,966 | 91 | 6,057 | 12,585 | 91 | 12,676 |
| Net income from derivatives | 3 | 655 | – | 655 | 1,119 | – | 1,119 | 1,526 | – | 1,526 |
| Other income | 3 | 754 | – | 754 | 76 | – | 76 | 749 | – | 749 |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | ||
| Total income | 9,278 | – | 9,278 | 7,161 | 91 | 7,252 | 14,860 | 91 | 14,951 | |
| \========= | \========= | \========= | \========= | \========= | \========= | \========= | \========= | \========= | ||
| Net loss on investments held at fair value through profit or loss | – | (4,300) | (4,300) | – | (200,574) | (200,574) | – | (250,583) | (250,583) | |
| Net loss on foreign exchange | – | (42) | (42) | – | (507) | (507) | – | (676) | (676) | |
| Net loss from derivatives | – | (980) | (980) | – | (53,754) | (53,754) | – | (55,673) | (55,673) | |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | ||
| Total | 9,278 | (5,322) | 3,956 | 7,161 | (254,744) | (247,583) | 14,860 | (306,841) | (291,981) | |
| \========= | \========= | \========= | \========= | \========= | \========= | \========= | \========= | \========= | ||
| Expenses | ||||||||||
| Investment management fee and performance fees | 4 | (325) | (2,461) | (2,786) | (438) | (1,315) | (1,753) | (756) | (2,269) | (3,025) |
| Other operating expenses | 5 | (405) | (10) | (415) | (418) | (10) | (428) | (843) | (20) | (863) |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | ||
| Total operating expenses | (730) | (2,471) | (3,201) | (856) | (1,325) | (2,181) | (1,599) | (2,289) | (3,888) | |
| \========= | \========= | \========= | \========= | \========= | \========= | \========= | \========= | \========= | ||
| Net profit/(loss) on ordinary activities before finance costs and taxation | 8,548 | (7,793) | 755 | 6,305 | (256,069) | (249,764) | 13,261 | (309,130) | (295,869) | |
| Finance costs | (10) | (30) | (40) | (2) | (7) | (9) | (5) | (15) | (20) | |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | ||
| Net profit/(loss) on ordinary activities before taxation | 8,538 | (7,823) | 715 | 6,303 | (256,076) | (249,773) | 13,256 | (309,145) | (295,889) | |
| Taxation credit | 6 | – | 6 | – | – | – | 1 | – | 1 | |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | ||
| Net profit/(loss) on ordinary activities after taxation | 8,544 | (7,823) | 721 | 6,303 | (256,076) | (249,773) | 13,257 | (309,145) | (295,888) | |
| \========= | \========= | \========= | \========= | \========= | \========= | \========= | \========= | \========= | ||
| Earnings/(loss) per ordinary share (pence) | 7 | 8.46 | (7.75) | 0.71 | 6.12 | (248.72) | (242.60) | 12.95 | (302.05) | (289.10) |
| \========= | \========= | \========= | \========= | \========= | \========= | \========= | \========= | \========= |
The total columns of this statement represent the Company’s Statement of Comprehensive Income, prepared in accordance with UK-adopted International Accounting Standards (IASs). The supplementary revenue and capital accounts are both prepared under guidance published by the Association of Investment Companies (AIC). All items in the above statement derive from continuing operations. No operations were acquired or discontinued during the period. All income is attributable to the equity holders of the Company.
The Company does not have any other comprehensive income/(loss). The net profit/(loss) for the period disclosed above represents the Company’s total comprehensive income/(loss).
STATEMENT OF CHANGES IN EQUITY FOR THE SIX MONTHS ENDED 31 MAY 2023
| Note | Called up share capital £’000 |
Share premium account £’000 |
Capital redemption reserve £’000 |
Special reserve £’000 |
Capital reserves £’000 |
Revenue reserve £’000 |
Total £’000 |
|
| For the six months ended 31 May 2023 (unaudited) | ||||||||
| At 30 November 2022 | 5,160 | 242,122 | 11,905 | 33,038 | 327,883 | 13,249 | 633,357 | |
| Total comprehensive (loss)/income: | ||||||||
| Net (loss)/profit for the period | – | – | – | – | (7,823) | 8,544 | 721 | |
| Transactions with owners, recorded directly to equity: | ||||||||
| Ordinary shares bought back into treasury | – | – | – | (5,053) | – | – | (5,053) | |
| Share purchase costs | – | – | – | (23) | – | – | (23) | |
| Dividends paid1 | 6 | – | – | – | – | – | (8,595) | (8,595) |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | ||
| At 31 May 2023 | 5,160 | 242,122 | 11,905 | 27,962 | 320,060 | 13,198 | 620,407 | |
| \========= | \========= | \========= | \========= | \========= | \========= | \========= | ||
| For the six months ended 31 May 2022 (unaudited) | ||||||||
| At 30 November 2021 | 5,072 | 225,660 | 11,905 | 44,582 | 637,028 | 10,901 | 935,148 | |
| Total comprehensive (loss)/income: | ||||||||
| Net (loss)/profit for the period | – | – | – | – | (256,076) | 6,303 | (249,773) | |
| Transactions with owners, recorded directly to equity: | ||||||||
| Ordinary shares issued | 89 | 16,479 | – | – | – | – | 16,568 | |
| Share issue costs | – | (17) | – | – | – | – | (17) | |
| Ordinary shares bought back into treasury | – | – | – | (3,482) | – | – | (3,482) | |
| Share purchase costs | – | – | – | (16) | – | – | (16) | |
| Dividends paid2 | 6 | – | – | – | – | – | (8,255) | (8,255) |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | ||
| At 31 May 2022 | 5,161 | 242,122 | 11,905 | 41,084 | 380,952 | 8,949 | 690,173 | |
| \========= | \========= | \========= | \========= | \========= | \========= | \========= | ||
| For the year ended 30 November 2022 (audited) | ||||||||
| At 30 November 2021 | 5,072 | 225,660 | 11,905 | 44,582 | 637,028 | 10,901 | 935,148 | |
| Total comprehensive (loss)/income: | ||||||||
| Net (loss)/profit for the year | – | – | – | – | (309,145) | 13,257 | (295,888) | |
| Transactions with owners, recorded directly to equity: | ||||||||
| Ordinary shares issued | 88 | 16,479 | – | – | – | – | 16,567 | |
| Share issue costs | – | (17) | – | – | – | – | (17) | |
| Ordinary shares bought back into treasury | – | – | – | (11,487) | – | – | (11,487) | |
| Share purchase costs | – | – | – | (57) | – | – | (57) | |
| Dividends paid3 | – | – | – | – | – | (10,909) | (10,909) | |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | ||
| At 30 November 2022 | 5,160 | 242,122 | 11,905 | 33,038 | 327,883 | 13,249 | 633,357 | |
| \========= | \========= | \========= | \========= | \========= | \========= | \========= |
1 Final dividend of 8.50p per share for the year ended 30 November 2022, declared on 10 February 2023 and paid on 31 March 2023.
2 Final dividend of 8.00p per share for the year ended 30 November 2021, declared on 7 February 2022 and paid on 31 March 2022.
3 Final dividend of 8.00p per share for the year ended 30 November 2021, declared on 7 February 2022 and paid on 31 March 2022 and interim dividend of 2.60p per share for the year ended 30 November 2022, declared on 20 July 2022 and paid on 26 August 2022.
For information on the Company’s distributable reserves, please refer to note 9 below.
STATEMENT OF FINANCIAL POSITION AS AT 31 MAY 2023
| Notes | 31 May 2023 (unaudited) £’000 |
31 May 2022 (unaudited) £’000 |
30 November 2022 (audited) £’000 |
|
| Non current assets | ||||
| Investments held at fair value through profit or loss | 10 | 610,447 | 623,283 | 576,771 |
| Current assets | ||||
| Current tax asset | 315 | 141 | 174 | |
| Other receivables | 3,169 | 3,529 | 3,131 | |
| Derivative financial assets held at fair value through profit or loss | 10 | 1,460 | 8,448 | 4,800 |
| Cash collateral pledged with brokers | 1,060 | 4,730 | – | |
| Cash and cash equivalents | 12,983 | 67,873 | 58,793 | |
| --------------- | --------------- | --------------- | ||
| Total current assets | 18,987 | 84,721 | 66,898 | |
| --------------- | --------------- | --------------- | ||
| Total assets | 629,434 | 708,004 | 643,669 | |
| \========= | \========= | \========= | ||
| Current liabilities | ||||
| Other payables | (5,629) | (14,904) | (2,240) | |
| Derivative financial liabilities held at fair value through profit or loss | 10 | (1,088) | (527) | (2,202) |
| Liability for cash collateral received | (2,310) | (2,400) | (5,870) | |
| --------------- | --------------- | --------------- | ||
| Total current liabilities | (9,027) | (17,831) | (10,312) | |
| --------------- | --------------- | --------------- | ||
| Net assets | 620,407 | 690,173 | 633,357 | |
| \========= | \========= | \========= | ||
| Equity attributable to equity holders | ||||
| Called up share capital | 8 | 5,160 | 5,161 | 5,160 |
| Share premium account | 242,122 | 242,122 | 242,122 | |
| Capital redemption reserve | 11,905 | 11,905 | 11,905 | |
| Special reserve | 27,962 | 41,084 | 33,038 | |
| Capital reserves | 320,060 | 380,952 | 327,883 | |
| Revenue reserve | 13,198 | 8,949 | 13,249 | |
| --------------- | --------------- | --------------- | ||
| Total equity | 620,407 | 690,173 | 633,357 | |
| \========= | \========= | \========= | ||
| Net asset value per ordinary share (pence) | 7 | 618.58 | 672.58 | 626.10 |
| \========= | \========= | \========= |
CASH FLOW STATEMENT FOR THE SIX MONTHS ENDED 31 MAY 2023
| Six months ended 31 May 2023 (unaudited) £’000 |
Six months ended 31 May 2022 (unaudited) £’000 |
Year ended 30 November 2022 (audited) £’000 |
|
| Operating activities | |||
| Net profit/(loss) on ordinary activities before taxation | 715 | (249,773) | (295,889) |
| Add back finance costs | 40 | 9 | 20 |
| Loss on investments held at fair value through profit or loss (including transaction costs) | 4,300 | 200,574 | 250,583 |
| Loss from derivatives (including transaction costs) | 980 | 53,754 | 55,673 |
| Financing costs on derivatives | (1,218) | (405) | (1,101) |
| Net loss on foreign exchange | 42 | 507 | 676 |
| Sales of investments held at fair value through profit or loss | 96,831 | 217,580 | 325,600 |
| Purchases of investments held at fair value through profit or loss | (134,807) | (120,232) | (231,750) |
| Net receipts/(payments) on closure of derivatives | 2,464 | (69,987) | (65,886) |
| (Increase)/decrease in other receivables | (721) | 637 | (279) |
| Increase/(decrease) in other payables | 2,301 | 3,780 | (8,169) |
| Decrease/(increase) in amounts due from brokers | 683 | (2,312) | (998) |
| Increase/(decrease) in amounts due to brokers | 208 | (2,367) | (2,599) |
| Net cash collateral (pledged)/received | (4,620) | 5,050 | 13,250 |
| --------------- | --------------- | --------------- | |
| Net cash (outflow)/inflow from operating activities before taxation | (32,802) | 36,815 | 39,131 |
| Taxation paid | (135) | (60) | (92) |
| --------------- | --------------- | --------------- | |
| Net cash (outflow)/inflow from operating activities | (32,937) | 36,755 | 39,039 |
| \========= | \========= | \========= | |
| Financing activities | |||
| Interest paid | (40) | (9) | (20) |
| Cash proceeds from ordinary shares issued | – | 17,681 | 17,680 |
| Cash paid for ordinary shares bought back into treasury | (4,196) | (3,015) | (11,544) |
| Dividends paid | (8,595) | (8,255) | (10,909) |
| --------------- | --------------- | --------------- | |
| Net cash (outflow)/inflow from financing activities | (12,831) | 6,402 | (4,793) |
| \========= | \========= | \========= | |
| (Decrease)/increase in cash and cash equivalents | (45,768) | 43,157 | 34,246 |
| Effect of foreign exchange rate changes | (42) | (507) | (676) |
| --------------- | --------------- | --------------- | |
| Change in cash and cash equivalents | (45,810) | 42,650 | 33,570 |
| Cash and cash equivalents at start of period | 58,793 | 25,223 | 25,223 |
| --------------- | --------------- | --------------- | |
| Cash and cash equivalents at end of the period | 12,983 | 67,873 | 58,793 |
| \========= | \========= | \========= | |
| Comprised of: | |||
| Cash at bank | 129 | 228 | 103 |
| Cash Fund1 | 12,854 | 67,645 | 58,690 |
| --------------- | --------------- | --------------- | |
| 12,983 | 67,873 | 58,793 | |
| \========= | \========= | \========= |
1 Cash Fund represents funds invested in the BlackRock Institutional Cash Series plc - Sterling Liquid Environmentally Aware Fund.
NOTES TO THE FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED 31 MAY 2023
1. PRINCIPAL ACTIVITY
The principal activity of the Company is that of an investment trust company within the meaning of Section 1158 of the Corporation Tax Act 2010.
2. BASIS OF PRESENTATION
The Half Yearly Financial Statements for the six month period ended 31 May 2023 have been prepared in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the Financial Conduct Authority and with the UK-adopted International Accounting Standard 34 (IAS 34) Interim Financial Reporting. The Half Yearly Financial Statements should be read in conjunction with the Company’s Annual Report and Financial Statements for the year ended 30 November 2022, which have been prepared in accordance with UK-adopted International Accounting Standards (IASs) in conformity with the requirements of the Companies Act 2006.
Insofar as the Statement of Recommended Practice (SORP) for investment trust companies and venture capital trusts, issued by the Association of Investment Companies (AIC) in October 2019 and updated in July 2022, is compatible with UK-adopted IASs, the financial statements have been prepared in accordance with guidance set out in the SORP.
Relevant International Accounting Standards that have yet to be adopted:
IFRS 17 – Insurance contracts (effective 1 January 2023). This standard replaces IFRS 4, which currently permits a wide range of accounting practices in accounting for insurance contracts. IFRS 17 will fundamentally change the accounting by all entities that issue insurance contracts and investment contracts with discretionary participation features.
This standard is unlikely to have any impact on the Company as it does not issue insurance contracts.
IAS 12 – Deferred tax related to assets and liabilities arising from a single transaction (effective 1 January 2023). The International Accounting Standards Board (IASB) has amended IAS 12 Income Taxes to require companies to recognise deferred tax on particular transactions that, on initial recognition, give rise to equal amounts of taxable and deductible temporary differences. According to the amended guidance, a temporary difference that arises on initial recognition of an asset or liability is not subject to the initial recognition exemption if that transaction gave rise to equal amounts of taxable and deductible temporary differences. These amendments might have a significant impact on the preparation of financial statements by companies that have substantial balances of right-of-use assets, lease liabilities, decommissioning, restoration and similar liabilities. The impact for those affected would be the recognition of additional deferred tax assets and liabilities.
The amendment of this standard is unlikely to have any significant impact on the Company.
None of the standards that have been issued but are not yet effective are expected to have a material impact on the Company.
3. INCOME
| Six months ended 31 May 2023 (unaudited) £’000 |
Six months ended 31 May 2022 (unaudited) £’000 |
Year ended 30 November 2022 (audited) £’000 |
|
| Investment income: | |||
| UK dividends | 5,121 | 4,244 | 9,654 |
| UK special dividends | 1,175 | 576 | 839 |
| UK stock dividends | – | 44 | 68 |
| UK REIT dividends | 293 | 210 | 509 |
| Overseas special dividends | 1,280 | 892 | 1,515 |
| --------------- | --------------- | --------------- | |
| Total investment income1 | 7,869 | 5,966 | 12,585 |
| \========= | \========= | \========= | |
| Net income from derivatives | 655 | 1,119 | 1,526 |
| Other income: | |||
| Deposit interest | 3 | 10 | 111 |
| Interest from Cash Fund | 718 | 66 | 594 |
| Collateral interest | 33 | – | 44 |
| --------------- | --------------- | --------------- | |
| 754 | 76 | 749 | |
| \========= | \========= | \========= | |
| Total income | 9,278 | 7,161 | 14,860 |
| \========= | \========= | \========= |
1 UK and overseas dividends are presented based on the country of domicile of the respective underlying portfolio company.
Dividends and interest received in cash in the six months ended 31 May 2023 amounted to £7,007,000 and £835,000 (six months ended 31 May 2022: £6,069,000 and £50,000; year ended 30 November 2022: £12,223,000 and £615,000).
No special dividends have been recognised in capital in the six months ended 31 May 2023 (six months ended 31 May 2022: £91,000; year ended 30 November 2022: £91,000).
4. INVESTMENT MANAGEMENT AND PERFORMANCE FEES
| Six months ended 31 May 2023 (unaudited) |
Six months ended 31 May 2022 (unaudited) |
Year ended 30 November 2022 (audited) |
|||||||
| Revenue £’000 |
Capital £’000 |
Total £’000 |
Revenue £’000 |
Capital £’000 |
Total £’000 |
Revenue £’000 |
Capital £’000 |
Total £’000 |
|
| Investment management fee | 325 | 974 | 1,299 | 438 | 1,315 | 1,753 | 756 | 2,269 | 3,025 |
| Performance fee | – | 1,487 | 1,487 | – | – | – | – | – | – |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | |
| Total | 325 | 2,461 | 2,786 | 438 | 1,315 | 1,753 | 756 | 2,269 | 3,025 |
| \========= | \========= | \========= | \========= | \========= | \========= | \========= | \========= | \========= |
INVESTMENT MANAGEMENT FEES
The investment management fee is calculated at the rate of 0.35% per annum on month end Gross Assets. For the purposes of this note, Gross Assets are defined as the value of the portfolio of the Company, including uninvested cash, with the portfolio valuation based on value at risk (with value at risk being the gross asset value of the long-only portfolio plus the gross value of the underlying equities, long and short, to which the Company is exposed through derivatives including CFDs and index futures). The management fee is charged 25% to the revenue account and 75% to the capital account of the Statement of Comprehensive Income. There is no additional fee for company secretarial and administration services.
PERFORMANCE FEES
The performance fee is calculated at the rate of 15% of the Outperformance of the Company. For the purpose of this note, Outperformance is defined as the amount by which the annualised percentage Net Asset Value total return of the Company arithmetically exceeds the annualised percentage return of the Benchmark Index, measured over a rolling two-year performance period. This rate is applied to the average Gross Assets, in that rolling two-year performance period. Outperformance is the amount by which the Net Asset Value total return arithmetically exceeds the Benchmark Index total return.
There is a cap on the annual total management and performance fees of 1.25% per financial year of the average Gross Assets over the rolling two-year performance period (the “Cap” or “Capped Amount”) which has the effect of capping the annual performance fees at circa 0.9% of average Gross Assets and which means that the performance fee from any performance period will not exceed 0.9% of average Gross Assets for the relevant performance period.
The performance fee is calculated daily for the rolling two-year performance period ending 30 November 2023 and the rolling two-year performance period ending 30 November 2024 and, accruals are made in the NAV subject to the Cap. The performance fee is payable on 30 November each year in relation to the rolling two-year performance period ending on that date. The accrual is calculated applying the following assumptions:
· The Benchmark Index remains unchanged.
· The Net Asset Value total return performs in line with the Benchmark Index total return for the remainder of the respective rolling two-year performance periods ending 30 November 2023 and 30 November 2024.
· The future value of Gross Assets for performance fee purposes is the same at the balance sheet date.
The amount of outperformance on which a performance fee has not been paid in a financial year due to the application of the Cap, will be carried forward to offset against future shortfall returns. As at 1 December 2022, the carried forward unpaid net outperformance, net of prior period shortfall returns, available to offset against future shortfall returns was 10.7% (1 December 2021: 14.6%).
On the first day of the financial year, due to the application of the Cap in the prior financial year, any performance fee for the ongoing rolling two-year performance period not yet recognised is accrued in the daily NAV released to the London Stock Exchange on that day.
Performance fees have been wholly allocated to the capital account of the Statement of Comprehensive Income as the performance has been predominantly generated through capital returns from the investment portfolio. For the six months ended 31 May 2023, the total accrual of performance fee for all rolling two year performance periods amounted to £1,487,000 (31 May 2022: £nil; 30 November 2022: £nil), calculated as follows:
· For the annualised rolling two-year performance period to 30 November 2023, the Company has underperformed the Benchmark Index by -6.5% as at 31 May 2023. No performance fee relating to this performance period has been accrued at the date of this report.
· For the annualised rolling two-year performance period to 30 November 2024, the Company has outperformed the Benchmark Index by 1.4% as at 31 May 2023. A performance fee of £1,487,000 relating to this performance period has been accrued at the date of this report.
5. OTHER OPERATING EXPENSES
| Six months ended 31 May 2023 (unaudited) £’000 |
Six months ended 31 May 2022 (unaudited) £’000 |
Year ended 30 November 2022 (audited) £’000 |
|
| Allocated to revenue: | |||
| Custody fees | 3 | 5 | 8 |
| Auditor’s remuneration1 | 32 | 26 | 52 |
| Registrar’s fees | 17 | 20 | 45 |
| Directors’ emoluments | 115 | 99 | 205 |
| Broker fees | 18 | 17 | 35 |
| Depositary fees | 36 | 48 | 83 |
| Marketing fees | 71 | 66 | 153 |
| FCA fees | 15 | 10 | 28 |
| Printing and postage fees | 22 | 22 | 42 |
| AIC fees | 11 | 11 | 21 |
| Stock exchange listing fees | 16 | 80 | 102 |
| Write back of prior year expenses2 | (9) | – | (26) |
| Other administrative costs | 58 | 14 | 95 |
| --------------- | --------------- | --------------- | |
| 405 | 418 | 843 | |
| \========= | \========= | \========= | |
| Allocated to capital: | |||
| Custody transaction charges3 | 10 | 10 | 20 |
| --------------- | --------------- | --------------- | |
| 415 | 428 | 863 | |
| \========= | \========= | \========= |
1 In the six months ended 31 May 2023, no non-audit services were provided by the auditors (six months ended 31 May 2022: none; year ended 30 November 2022: none).
2 Relates to Directors’ recruitment fees written back during the period (six months ended 31 May 2022: none; year ended 30 November 2022: Directors’ expenses, legal fees, registration fees and miscellaneous fees).
3 For the six month period ended 31 May 2023, expenses of £10,000 (six months ended 31 May 2022: £10,000; year ended 30 November 2022: £20,000) were charged to the capital account of the Statement of Comprehensive Income. This relates to transaction costs charged by the custodian on sale and purchase trades.
The transaction costs incurred on the acquisition of investments amounted to £652,000 for the six months ended 31 May 2023 (six months ended 31 May 2022: £378,000; year ended 30 November 2022: £858,000). Costs relating to the disposal of investments amounted to £66,000 for the six months ended 31 May 2023 (six months ended 31 May 2022: £147,000; year ended 30 November 2022: £230,000). All transaction costs have been included within capital reserves.
6. DIVIDENDS
The Board has declared an interim dividend of 3.30p per share payable on 1 September 2023 to shareholders on the register at 4 August 2023 (six months ended 31 May 2022: interim dividend of 2.60p per share paid on 26 August 2022 to shareholders on the register at 29 July 2022). This dividend has not been accrued in the financial statements for the six months ended 31 May 2023 as, under IAS, interim dividends are not recognised until paid. Dividends are debited directly to reserves.
7. EARNINGS/(LOSS) AND NET ASSET VALAUE PER ORDINARY SHARE
Total revenue return, capital loss and net asset value per ordinary share are shown below and have been calculated using the following:
| Six months ended 31 May 2023 (unaudited) |
Six months ended 31 May 2022 (unaudited) |
Year ended 30 November 2022 (audited) |
|
| Net revenue profit attributable to ordinary shareholders (£’000) | 8,544 | 6,303 | 13,257 |
| Net capital loss attributable to ordinary shareholders (£’000) | (7,823) | (256,076) | (309,145) |
| ---------------- | ---------------- | ---------------- | |
| Total profit/(loss) attributable to ordinary shareholders (£’000) | 721 | (249,773) | (295,888) |
| ---------------- | ---------------- | ---------------- | |
| Equity shareholders’ funds (£’000) | 620,407 | 690,173 | 633,357 |
| \========== | \========== | \========== | |
| The weighted average number of ordinary shares in issue during the period on which the earnings per ordinary share was calculated was: | 100,992,473 | 102,956,409 | 102,346,782 |
| The actual number of ordinary shares in issue at the period end on which the net asset value per ordinary share was calculated was: | 100,295,785 | 102,615,194 | 101,158,864 |
| Earnings/(loss) per ordinary share | |||
| Revenue earnings per share (pence) – basic and diluted | 8.46 | 6.12 | 12.95 |
| Capital loss per share (pence) - basic and diluted | (7.75) | (248.72) | (302.05) |
| ---------------- | ---------------- | ---------------- | |
| Total earnings/(loss) per share (pence) - basic and diluted | 0.71 | (242.60) | (289.10) |
| \========== | \========== | \========== |
| As at 31 May 2023 (unaudited) |
As at 31 May 2022 (unaudited) |
As at 30 November 2022 (audited) |
|
| Net asset value per ordinary share (pence) | 618.58 | 672.58 | 626.10 |
| Ordinary share price (pence) | 587.00 | 635.00 | 595.00 |
| \========== | \========== | \========== |
There were no dilutive securities at the period end (six months ended 31 May 2022: none; year ended 30 November 2022: none).
8. CALLED UP SHARE CAPITAL
| Ordinary shares in issue number |
Treasury shares number |
Total shares number |
Nominal value £’000 |
|
| Allotted, called up and fully paid share capital comprised: | ||||
| Ordinary shares of 5 pence each: | ||||
| At 30 November 2022 | 101,158,864 | 2,051,000 | 103,209,864 | 5,160 |
| Ordinary shares bought back into treasury | (863,079) | 863,079 | – | – |
| ---------------- | ---------------- | ---------------- | ---------------- | |
| At 31 May 2023 | 100,295,785 | 2,914,079 | 103,209,864 | 5,160 |
| \========== | \========== | \========== | \========== |
During the six months ended 31 May 2023, the Company bought back 863,079 shares into treasury (six months ended 31 May 2022: 594,670; year ended 30 November 2022: 2,051,000) for a total consideration of £5,076,000 (six months ended 31 May 2022: £3,498,000; year ended 30 November 2022: £11,544,000) including costs.
During the six months ended 31 May 2023, the Company issued no new shares (six months ended 31 May 2022: 1,773,900; year ended 30 November 2022: 1,773,900) for a total consideration of £nil (six months ended 31 May 2022: £16,551,000; year ended 30 November 2022: £16,550,000) including costs.
Since 31 May 2023 and up to the date of this report, no shares have been reissued. 653,500 shares have been bought back into treasury for a total consideration of £3,729,000.
The ordinary shares give shareholders voting rights, the entitlement to all of the capital growth in the Company’s assets and to all income from the Company that is resolved to be distributed.
9. RESERVES
The share premium account and capital redemption reserve are not distributable reserves under the Companies Act 2006. In accordance with ICAEW Technical Release 02/17BL on Guidance on Realised and Distributable Profits under the Companies Act 2006, the special reserve and capital reserve may be used as distributable reserves for all purposes and, in particular, the repurchase by the Company of its ordinary shares and for payments such as dividends. In accordance with the Company’s Articles of Association, the special reserve, capital reserve and revenue reserve may be distributed by way of dividend. The gain on the capital reserve arising on the revaluation of investments of £9,770,000 (six months ended 31 May 2022: gain of £47,224,000; year ended 30 November 2022: gain of £6,609,000) is subject to fair value movements and may not be readily realisable at short notice, as such it may not be entirely distributable. The investments are subject to financial risks; as such capital reserves (arising on investments sold) and the revenue reserve may not be entirely distributable if a loss occurred during the realisation of these investments.
10. FINANCIAL RISKS AND VALUATION OF FINANCIAL INSTRUMENTS
The Company’s investment activities expose it to the various types of risk which are associated with the financial instruments and markets in which it invests. The risks are substantially consistent with those disclosed in the previous annual financial statements with the exception of those outlined below.
Market risk arising from price risk
Price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting similar financial instruments traded in the market. Local, regional or global events such as war, acts of terrorism, the spread of infectious illness or other public health issues, recessions, climate change or other events could have a significant impact on the Company and its investments.
The current environment of heightened geopolitical risk given the war in Ukraine has undermined investor confidence and market direction. In addition to the tragic and devastating events in Ukraine, the war has constricted supplies of key commodities, pushing prices up and creating a level of market uncertainty and volatility which is likely to persist for some time.
Valuation of financial instruments
Financial assets and financial liabilities are either carried in the Statement of Financial Position at their fair value (investments and derivatives) or at an amount which is a reasonable approximation of fair value (due from brokers, dividends and interest receivable, due to brokers, accruals, cash at bank and bank overdrafts). IFRS 13 requires the Company to classify fair value measurements using a fair value hierarchy that reflects the significance of inputs used in making the measurements. The valuation techniques used by the Company are explained in the accounting policies note 2(g) as set out on pages 93 and 94 in the Company’s Annual Report and Financial Statements for the year ended 30 November 2022.
Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant asset.
The fair value hierarchy has the following levels:
Level 1 – Quoted market price for identical instruments in active markets
A financial instrument is regarded as quoted in an active market if quoted prices are readily available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The Company does not adjust the quoted price for these instruments.
Level 2 – Valuation techniques using observable inputs
This category includes instruments valued using quoted prices for similar instruments in markets that are considered less active, or other valuation techniques where all significant inputs are directly or indirectly observable from market data.
Valuation techniques used for non-standardised financial instruments such as options, currency swaps and other over-the-counter derivatives include the use of comparable recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants making the maximum use of market inputs and relying as little as possible on entity specific inputs.
As at the period end the long and short derivative positions were valued using the underlying equity bid price (offer price in respect of short positions) and the contract price at the inception of the trade or at the trade reset date. There have been no changes to the valuation technique since the previous year or as at the date of this report.
Contracts for difference have been classified as Level 2 investments as their valuation has been based on market observable inputs represented by the market prices of the underlying quoted securities to which these contracts expose the Company.
Level 3 – Valuation techniques using significant unobservable inputs
This category includes all instruments where the valuation technique includes inputs not based on market data and these inputs could have a significant impact on the instrument’s valuation.
This category also includes instruments that are valued based on quoted prices for similar instruments where significant entity determined adjustments or assumptions are required to reflect differences between the instruments and instruments for which there is no active market. The Investment Manager considers observable data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary and provided by independent sources that are actively involved in the relevant market.
The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a Level 3 measurement.
Assessing the significance of a particular input to the fair value measurement in its entirety requires judgement, considering factors specific to the Level 3 asset or liability including an assessment of the relevant risks including but not limited to credit risk, market risk, liquidity risk, business risk and sustainability risk. The determination of what constitutes ‘observable’ inputs requires significant judgement by the Investment Manager and these risks are adequately captured in the assumptions and inputs used in measurement of Level 3 assets or liabilities.
Fair values of financial assets and financial liabilities
The table below sets out fair value measurements using the IFRS 13 fair value hierarchy.
| Financial assets/(liabilities) at fair value through profit or loss at 31 May 2023 (unaudited) | Level 1 £’000 |
Level 2 £’000 |
Level 3 £’000 |
Total £’000 |
| Assets: | ||||
| Equity investments | 610,447 | – | – | 610,447 |
| Contracts for difference | – | 1,460 | – | 1,460 |
| Liabilities: | ||||
| Contracts for difference | – | (1,088) | – | (1,088) |
| ---------------- | ---------------- | ---------------- | ---------------- | |
| 610,447 | 372 | – | 610,819 | |
| \========== | \========== | \========== | \========== |
| Financial assets/(liabilities) at fair value through profit or loss at 31 May 2022 (unaudited) | Level 1 £’000 |
Level 2 £’000 |
Level 3 £’000 |
Total £’000 |
| Assets: | ||||
| Equity investments | 623,283 | – | – | 623,283 |
| Contracts for difference | – | 10,056 | – | 10,056 |
| Liabilities: | ||||
| Contracts for difference | – | (1,573) | – | (1,573) |
| Futures | (562) | – | – | (562) |
| ---------------- | ---------------- | ---------------- | ---------------- | |
| 622,721 | 8,483 | – | 631,204 | |
| \========== | \========== | \========== | \========== |
| Financial assets/(liabilities) at fair value through profit or loss at 30 November 2022 (audited) | Level 1 £’000 |
Level 2 £’000 |
Level 3 £’000 |
Total £’000 |
| Assets: | ||||
| Equity investments | 576,771 | – | – | 576,771 |
| Contracts for difference | – | 4,800 | – | 4,800 |
| Liabilities: | ||||
| Contracts for difference | – | (2,202) | – | (2,202) |
| ---------------- | ---------------- | ---------------- | ---------------- | |
| 576,771 | 2,598 | – | 579,369 | |
| \========== | \========== | \========== | \========== |
There were no transfers between levels for financial assets and financial liabilities recorded at fair value during the six months ended 31 May 2023, six months ended 31 May 2022 or year ended 30 November 2022. The Company did not hold any Level 3 securities during the period ended 31 May 2023 (six months ended 31 May 2022: none; year ended 30 November 2022: none).
For exchange listed equity investments the quoted price is the bid price. Contracts for difference are valued based on the bid price of the underlying quoted securities that the contracts relate to. Substantially, all investments are valued based on unadjusted quoted market prices. Where such quoted prices are readily available in an active market, such prices are not required to be assessed or adjusted for any business risks, including climate risk, in accordance with the fair value related requirements of the Company’s Financial Reporting Framework.
11. TRANSACTIONS WITH THE INVESTMENT MANAGER AND AIFM
BlackRock Fund Managers Limited (BFM) provides management and administration services to the Company under a contract which is terminable on six months’ notice. BFM has (with the Company’s consent) delegated certain portfolio and risk management services, and other ancillary services, to BlackRock Investment Management (UK) Limited (BIM (UK)). Further details of the investment management contract are disclosed on pages 54 and 55 of the Directors’ Report in the Company’s Annual Report and Financial Statements for the year ended 30 November 2022.
The investment management fee due for the six months ended 31 May 2023 amounted to £1,299,000 (six months ended 31 May 2022: £1,753,000; year ended 30 November 2022: £3,025,000). At the period end, £1,906,000 was outstanding in respect of management fees (31 May 2022: £1,753,000; 30 November 2022: £1,272,000).
The performance fee accrued for the six months ended 31 May 2023 amounted to £1,487,000 (six months ended 31 May 2022: £nil; year ended 30 November 2022: £nil). Any final performance fee for the full year ending 30 November 2023 will not fall due until the calculation date of 30 November 2023.
In addition to the above services, BIM (UK) has provided the Company with marketing services. The total fees paid or payable for these services to 31 May 2023 amounted to £71,000 excluding VAT (six months ended 31 May 2022: £66,000; year ended 30 November 2022: £153,000). Marketing fees of £192,000 excluding VAT (31 May 2022: £186,000; 30 November 2022: £120,000) were outstanding at 31 May 2023.
The Company has funds held on deposit with the BlackRock Institutional Cash Series plc – Sterling Liquid Environmentally Aware Fund of £12,854,000 as at 31 May 2023 (31 May 2022: £67,645,000; 30 November 2022: £58,690,000).
As at 31 May 2023, an amount of £198,000 (31 May 2022: £83,000; 30 November 2022: £83,000) was payable to the Manager in respect of Directors’ fees.
The ultimate holding company of the Manager and the Investment Manager is BlackRock, Inc., a company incorporated in Delaware, USA.
12. RELATED PARTY DISCLOSURE
Directors’ emoluments
The Board consists of six non-executive Directors, all of whom are considered to be independent of the Manager by the Board. None of the Directors has a service contract with the Company. With effect from 1 December 2022, the Chairman receives an annual fee of £46,700, the Chairman of the Audit Committee receives an annual fee of £37,000 and each of the other Directors receives an annual fee of £31,700.
As at 31 May 2023, an amount of £18,000 (31 May 2022: £16,500; 30 November 2022: £17,000) was outstanding in respect of Directors’ fees.
At the period end, members of the Board, including any connected persons, held ordinary shares in the Company as set out below:
| Ordinary shares 21 July 2023 |
Ordinary shares 31 May 2023 |
Ordinary shares 30 November 2022 |
|
| Christopher Samuel (Chairman) | 65,229 | 65,229 | 63,352 |
| Loudon Greenlees1 | n/a | n/a | 15,000 |
| Nigel Burton | 16,474 | 16,474 | 16,000 |
| Angela Lane | 11,656 | 11,656 | 11,496 |
| Louise Nash | 3,900 | 3,900 | 2,100 |
| Merryn Somerset Webb | 3,727 | 3,727 | 3,727 |
| Glen Suarez2 | 4,800 | 4,800 | n/a |
1 Loudon Greenlees retired as a Director on 23 March 2023.
2 Glen Suarez was appointed as a Director on 9 January 2023.
Significant Holdings
The following investors are:
a. funds managed by the BlackRock Group or are affiliates of BlackRock, Inc. (Related BlackRock Funds); or
b. investors (other than those listed in (a) above) who held more than 20% of the voting shares in issue in the Company and are as a result, considered to be related parties to the Company (Significant Investors).
As at 31 May 2023
| Total % of shares held by Related BlackRock Funds |
Total % of shares held by Significant Investors who are not affiliates of BlackRock Group or BlackRock, Inc. |
Number of Significant Investors who are not affiliates of BlackRock Group or BlackRock, Inc. |
| 1.53 | n/a | n/a |
As at 31 May 2022
| Total % of shares held by Related BlackRock Funds |
Total % of shares held by Significant Investors who are not affiliates of BlackRock Group or BlackRock, Inc. |
Number of Significant Investors who are not affiliates of BlackRock Group or BlackRock, Inc. |
| 1.71 | n/a | n/a |
13. CONTINGENT LIABILITIES
There were no contingent liabilities as at 31 May 2023 (six months ended 31 May 2022: none; year ended 30 November 2022: none).
14. PUBLICATION OF NON STATUTORY ACCOUNTS
The financial information contained in this half yearly financial report does not constitute statutory accounts as defined in Section 435 of the Companies Act 2006. The financial information for the six months ended 31 May 2023 and 31 May 2022 has not been audited.
The information for the year ended 30 November 2022 has been extracted from the latest published audited financial statements, which have been filed with the Registrar of Companies. The report of the auditor on those financial statements contained no qualification or statement under Sections 498(2) or 498(3) of the Companies Act 2006.
15. ANNUAL RESULTS
The Board expects to announce the annual results for the year ending 30 November 2023 in February 2024. Copies of the results announcement can be obtained from the Secretary on 020 7743 3000 or by email at [email protected]. The Annual Report and Financial Statements should be available by the beginning of February 2024, with the Annual General Meeting expected to be held in March 2024.
For further information, please contact:
Melissa Gallagher, Managing Director, Closed End Funds, BlackRock Investment Management (UK) Limited
Tel: 020 7743 3000
Press Enquiries:
Ed Hooper, Lansons Communications – Tel: 0207 294 3620
E-mail: [email protected]; [email protected]
27 July 2023
12 Throgmorton Avenue
London EC2N 2DL
END
The Half Yearly Financial Report will also be available on the BlackRock website at http://www.blackrock.com/uk/thrg. Neither the contents of the Manager’s website nor the contents of any website accessible from hyperlinks on the Manager’s website (or any other website) is incorporated into, or forms part of, this announcement.
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