BlackRock Throgmorton’s short book provides some cushion to March decline

In a monthly update release, BlackRock Throgmorton (THRG), the UK-smaller companies sector fund, said that its NAV was down by (24.7) over the month of March 2020. This was cushioned by the trust’s short book, one of THRG’s defining features.

At the time of writing, the shares are up over 10%, over the month of April.


Views from manager Dan Whitestone

“During a month where global stock markets continued to fall significantly, the Company fell by 24.7%1 (net of fees), thereby marginally underperforming our benchmark, the Numis Smaller Companies plus AIM (excluding Investment Companies) Index, which fell by 23.9%1. Unsurprisingly the short book contributed positively to performance during the month, delivering +2.4%1, whilst the long book detracted.

During March we saw an acceleration of the spread of the Coronavirus into Europe and the US, which caused rapid sell offs in stock markets globally. The market falls during the month have not only been large, but also very sharp, with daily falls larger than those experienced in the 2008 financial crisis, with large daily and intra-day moves throughout the month.

The scale of government and monetary authority interventions over the month were huge. These include both lower interest rates and monetary easing as well as direct interventions to cover labour costs and ease business costs in the face of a social shutdown. On this last point, leisure has been one of the industries hit hardest in the sell-off and this, with our wider consumer services exposure, has been a material drag on returns. Whilst we don’t think the Government’s actions will draw a line under valuations, this should help alleviate an emerging liquidity crisis engulfing so many businesses that were on a completely different trajectory only a matter of weeks ago. Unfortunately, many companies, will not make it through to the other side, or will survive but in a much-weakened state. It is our belief that this virus will result in the structural withdrawal of capacity in many industries, and  therefore we are likely to enter a period of heightened “corporate Darwinism” will that will create opportunities for those survivors with the financial resources to win market share and further solidify their market position, which will be increasingly important for industries where the recovery in demand is more elongated.

The largest detractors from performance during the month came from our holdings in Consumer Services, where several companies we own have been mandated to suspend operations and are therefore generating zero, or close to zero, revenues. To hold ourselves up to account, with hindsight we were too slow to reduce our exposure in Consumer Services in aggregate, particularly those with exposure to airport passenger volumes. WH Smith and Watches of Switzerland were among the top detractors during the month. We were short several other companies in this space too however, with inferior financial positions which were among the top contributors during the month.

While the businesses on the consumer side of our portfolio have hurt performance the most, reflecting a sudden move that has collapsed short-term demand, the companies we own exposed to business-to-business spending have fared much better. Many of the long-term trends in this area could really accelerate in our opinion due to COVID-19; notably the adoption of software and cloud infrastructure to aid the digital transformation (infrastructure-as-a-service, business software, cloud communications), or digital payments. The reality is that COVID-19 will change many habits, from increased “working-from-home” (and the software and systems required to support this) to online communication/collaborations, online ordering/delivery and digital payments. We believe our portfolio includes many companies driving these secular shifts and therefore continue to see many years of positive growth ahead. It should also be noted that some of these new changes to our lifestyles, both work and social, could have far reaching negative implications for some incumbent models if they persist, which we think is quite probable. As such, the “recovered” earnings for some companies will likely disappoint, and this is an area exercising a lot of our attention and where we see grounds for new longer duration short positions.

It should be noted, that amidst all the panic and uncertainty right now, long term investment opportunities continue to present themselves. Many companies we’ve engaged with recently have been able to quickly reduce their cash burn so enable them to “hibernate” to preserve equity value for the upturn. Others have sought equity injections to ensure they emerge from this crisis on the front foot, or have secured waivers of their banking covenants. We also believe that some industries will see their aggregate growth rates accelerate on a 5-year view e.g. digital payments, cloud audio/visual communication, software-as-a-service, infrastructure-as-a-service. Other companies will emerge with a strong market position as capacity exits. And to the future, there will be new and exciting small and medium sized companies that will emerge to capitalize on the profound changes many industries will endure and the structural changes in corporate and consumer behaviour that will likely occur.”

THRG top holdings

Company % of Total Gross Assets, as at 31 March 2020
YouGov 3.8
Serco Group 3.1
IntegraFin 3.0
Qinetiq Group 2.6
Dechra Pharmaceuticals 2.6
Breedon 2.6
4imprint Group 2.2
Gamma Communications 2.2
Watches of Switzerland 2.0
Team17 2.0

THRG: BlackRock Throgmorton’s short book provides some cushion to March decline

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