BlackRock Smaller Companies reports on strong year

BlackRock Smaller Companies reports on strong year – Over the year ended 29 February 2020, BlackRock Smaller Companies reported a 14.1% return on NAV and a 14.0% return to shareholders, both of which compare favourably with a 1.4% return on the trust’s benchmark, the Numis Smaller Companies plus AIM (excluding Investment Companies) Index. The dividend was increased by 4.2% to 32.5p. The trust has given back some of that outperformance since the year end – the NAV (as at 22 June 2020) had decreased by 10.7%, against a decrease in the benchmark of 7.7%, and the share price has fallen by 10.1%.

Extract from the manager’s report

Our focus on differentiated well-capitalised quality growth companies, that have been able to generate strong sustainable earnings growth and cashflow has been key to the Company’s performance. Key contributors this year have been Avon Rubber, Liontrust Asset Management, Team17, 4imprint Group and YouGov.

Shares in Avon Rubber rallied after the company acquired the ballistic-protection business from US conglomerate 3M. The division manufactures bulletproof vests and helmets for the US army, and the acquisition should increase the pace of the company’s expansion into global military and law enforcement markets. The company continued to report strong trading at the beginning of 2020, while increasing global tensions provide a further fillip to the defence sector. Liontrust Asset Management has continued to see positive fund flows, particularly in the retail market. The acquisition of Neptune Investment Management provided further diversification to the business and added £2.7 billion in assets under management, while the sustainable products have been in demand as investors’ appetite for ESG related investment continues to build momentum. Shares in Team17 rallied throughout the period, as the video game developer reported multiple upgrades to profit guidance. In fact, the company provided five upgrades to forecasts in the last 12 months, and the future continues to look promising, with a number of new titles scheduled to be launched in the coming year, further adding to the group’s growing portfolio. 4imprint Group, a long-term core holding which we have mentioned in many previous reports, remained a top contributor for the full year as the business continued to deliver organic top-line growth with upgrades to forward guidance. Another repeat contributor to performance is YouGov, which continued to trade well during the second half of the year. Many people still think of YouGov as a UK political polling business, but if investors take the time to look beneath the bonnet, they will find a company that has been repositioning itself, pushing the valuable consumer data they have generated through their internal analysis system (the ‘Cube’) to produce actionable insights for their clients in the marketing industry.

Unsurprisingly given the strong performance during the period, detractors were limited. The largest was Zotefoams, the global manufacturer of specialty foams. Whilst still seeing demand for high performance products like those supplied to Nike, the challenging economic environment has resulted in a slowdown in sales in its more competitive industrial division. Eco Animal Health Group fell after the company issued a profit warning in November in response to a sharp slowdown in sales in China where demand has fallen further on the back of the African Swine Fever epidemic than we had anticipated. The company’s decision to maintain the cost base in order to benefit from the recovery once the outbreak is contained meant the reduction in revenues had a disproportionate impact on profitability. We have subsequently reduced the position but maintain a holding as we see its long-term competitive position unchanged and expect demand to improve as the Chinese pig herd recovers.

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