<p>Infamy, infamy, they&#8217;ve all got it in for me! In the last couple of months, the managers heading up three of my investment trusts have all decided to retire. The latest to desert me is Mike Prentis at BlackRock Smaller Companies. What a carry on!<br />
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<h2>Spotting the signs</h2>
<p>In March, Jeroen Huysinga said he was leaving <a href="https://www.itinvestor.co.uk/2019/04/jpmorgan-global-growth-income-dreaded-manager-change/">JPMorgan Global Income and Growth</a>. A couple of weeks ago, Lord Rothschild announced his departure from <a href="https://www.itinvestor.co.uk/2019/03/rit-capital-partners-still-on-the-defensive/">RIT Capital Partners</a>.</p>
<p>Lord Rothschild is 83 so it was pretty easy to see that one coming, even if the exact timing wasn&#8217;t entirely obvious. Huysinga is 54, so that was more of a surprise.</p>
<p>Prentis turns 62 this summer but this one caught me on the hop a little, too. I thought Prentis would be around for a few more years. There were some signs, though, had I been paying closer attention.</p>
<p>Last year, Prentis stood down from co-management duties at BlackRock Throgmorton (another top-performing UK small-cap trust) and Roland Arnold was appointed as his co-manager on BlackRock Smaller Companies.</p>
<h2>Arnold to step up</h2>
<p>Unsurprisingly, it&#8217;s Arnold who is taking over at BlackRock Smaller Companies. It looks like he is in his early 40s, given that he left university in 1998. He had a short stint as a credit analyst at a bank before joining Merrill Lynch in 2000. Merrill Lynch Investment Management then merged with BlackRock a few years later.</p>
<p>Arnold has worked alongside Prentis since 2005 so I am not expecting a radical shake-up. And the fact that BlackRock has another small-cap investment trust in its ranks, as well as an open-ended fund, gives them a little strength in depth in this area.</p>
<p>Arnold has managed BlackRock&#8217;s open-ended UK smaller companies fund since 2015 and co-managed BlackRock UK Special Situations Fund since 2012. His record on these funds is decent, albeit not quite in Prentis&#8217;s league.</p>
<p>The open-ended UK smaller companies fund, for example, has returned 39% over the three years to March 2019, whereas BlackRock Smaller Companies produced 49% on a net asset basis. It&#8217;s not a massive gap, admittedly, and three years is a pretty short period.</p>
<h2>Key stats</h2>
<ul>
<li><strong>Founded</strong>: 1906</li>
<li><strong>Ticker</strong>: BRSC</li>
<li><a href="https://www.itinvestor.co.uk/2018/10/10-year-performance-figures-handle-with-care/"><strong>10-year net asset return</strong></a>: +551%</li>
<li><strong>Share price</strong>: 1,447p</li>
<li><strong>Indicated spread:</strong> 1,444p-1,500p (0.4%)</li>
<li><strong>Exchange market size</strong>: 750</li>
<li><strong>Results released</strong>: May (finals) and Oct (interims)</li>
<li><strong>Market cap</strong>: £694m</li>
<li><strong>Net assets / discount</strong>: 1,526p (as of 1 May 2019) / 4.8%</li>
<li><a href="https://www.itinvestor.co.uk/2019/02/kids-the-gloves-are-off/"><strong>Costs</strong></a>: 0.7% OCF and 1.6% KID (dated May 2018)</li>
<li><strong>Gearing</strong>: 5%</li>
<li><strong>Current <a href="https://www.itinvestor.co.uk/2018/10/investment-trust-dividends/">dividend</a> and yield</strong>: 31.2p and 2.2%</li>
<li><strong>Dividends paid</strong>: Jun and Nov/Dec</li>
<li><strong>Style</strong>: UK small companies with a large number of holdings</li>
<li><strong>Links:</strong> <a href="https://www.blackrock.com/uk/individual/products/investment-trusts/our-range/blackrock-smaller-companies-investment-trust/trust-information">Website</a> and <a href="https://www.theaic.co.uk/companydata/311">AIC page </a></li>
</ul>
<p>My holding in this trust only dates back eighteen months, when I decided I wanted more direct exposure to <a href="https://www.itinvestor.co.uk/2018/12/sizing-up-uk-small-cap-funds/">UK small caps</a>, although I&#8217;ve topped up a couple of times since.</p>
<p>As you can see, this is another ancient investment trust. It started life way back in 1906 as The North British Canadian Investment Company, becoming the catchier NB Smaller Companies Trust in 1993.</p>
<p>I&#8217;m not sure how long it has specialised in smaller companies. The earliest accounts I could find were from 1977 and it was certainly a small-cap specialist back then.</p>
<p>It was known as 3i Smaller Quoted Companies from 1995 to 2005, with Prentis taking charge in 2002 (he also provided maternity cover for the previous manager, Henrietta Marsh, in 1999).</p>
<p>Merrill Lynch took over the management of the fund in 2005 when 3i decided to dispose of its quoted fund management business. Prentis joined Merrill Lynch as part of the deal.</p>
<p>For the next few years, the fund was called Merrill Lynch British Smaller Companies, before adopting its current name of BlackRock Smaller Companies in 2008.</p>
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<h2>Performance</h2>
<p>Last week, BlackRock Smaller Companies released its final set of results under Prentis&#8217;s leadership. He&#8217;s due to present alongside Arnold at the AGM in early June, where he will no doubt receive plenty of plaudits, before leaving BlackRock at the end of June.</p>
<p>The Chairman (also retiring next month after seven years) led off with this impressive bunch of stats:</p>
<blockquote><p><em>For sixteen consecutive years the trust has outperformed its benchmark and increased its dividend. Over that period, the NAV has increased nearly twelve-fold whereas the benchmark has increased less than four-fold. The compound annual increase in dividends paid over the past ten years has been 20% per annum.</em></p></blockquote>
<p>A seventeenth consecutive year of outperformance, in the year ending February 2020, might even be on the cards. In March and April 2019, the trust added 9.3% on a net asset basis versus 4% for its benchmark.</p>
<p>This run will falter at some point soon, though. I like to look for consistent performers but it&#8217;s unrealistic to expect any trust to beat their bogey every single year.</p>
<p>Cold water having been applied, this table adds more detail on Prentis&#8217;s track record:</p>
<table id="iti">
<tbody>
<tr>
<th>Performance to 28 Feb 2019</th>
<th style="text-align: right;" align="right">1 yr %</th>
<th style="text-align: right;" align="right">3 yrs %</th>
<th style="text-align: right;" align="right">5 yrs %</th>
<th style="text-align: right;" align="right">10 yrs %</th>
<th style="text-align: right;" align="right">16 yrs %</th>
</tr>
<tr>
<td>NAV per share</td>
<td style="text-align: right;" align="right">-6.6</td>
<td style="text-align: right;" align="right">41.9</td>
<td style="text-align: right;" align="right">42.9</td>
<td style="text-align: right;" align="right">519</td>
<td style="text-align: right;" align="right">898</td>
</tr>
<tr>
<td>Benchmark</td>
<td style="text-align: right;" align="right">-8.2</td>
<td style="text-align: right;" align="right">19.7</td>
<td style="text-align: right;" align="right">4.6</td>
<td style="text-align: right;" align="right">196</td>
<td style="text-align: right;" align="right">191</td>
</tr>
<tr>
<td>Share price</td>
<td style="text-align: right;" align="right">0.4</td>
<td style="text-align: right;" align="right">54.1</td>
<td style="text-align: right;" align="right">46.5</td>
<td style="text-align: right;" align="right">651</td>
<td style="text-align: right;" align="right">1,112</td>
</tr>
<tr>
<td>NAV per share (income reinvested)</td>
<td style="text-align: right;" align="right">-4.8</td>
<td style="text-align: right;" align="right">49.4</td>
<td style="text-align: right;" align="right">55.0</td>
<td style="text-align: right;" align="right">624</td>
<td style="text-align: right;" align="right">1,190</td>
</tr>
<tr>
<td>Benchmark (income reinvested)</td>
<td style="text-align: right;" align="right">-5.7</td>
<td style="text-align: right;" align="right">29.4</td>
<td style="text-align: right;" align="right">19.5</td>
<td style="text-align: right;" align="right">282</td>
<td style="text-align: right;" align="right">337</td>
</tr>
<tr>
<td>Share price (income reinvested)</td>
<td style="text-align: right;" align="right">2.4</td>
<td style="text-align: right;" align="right">63.5</td>
<td style="text-align: right;" align="right">60.6</td>
<td style="text-align: right;" align="right">800</td>
<td style="text-align: right;" align="right">1,543</td>
</tr>
</tbody>
</table>
<p>Last year&#8217;s outperformance of 0.9% was actually the smallest since Prentis took over. He outperformed by five percentage points or more in nine of the sixteen years he was in charge.</p>
<p>That&#8217;s all in the past, though. Arnold has a very tough act to follow!</p>
<h2>A tough year</h2>
<p>In common with the experience of most other small-cap funds, 2018 was not easy for BlackRock Smaller Companies. Its discount narrowed, however, meaning it managed to post a small, positive share-price return.</p>
<p>The current discount level of 5% is the smallest it&#8217;s been for a while. Small-cap funds often trade at discounts of 10% or more. Surprisingly, given Prentis&#8217;s record, you could have picked up the shares for a 20% discount less than three years ago.</p>
<p>Big individual winners for the trust over the last year were IntegraFin, YouGov, Faroe Petroleum, Gulf Keystone Petroleum, and AB Dynamics. While former high-flyers Superdry and Gear4Music were singled out for their less inspiring performances. The former has been sold.</p>
<p>Another feature of the last year was a reduction in gearing from 10% to 5% (the trust has a 0-15% borrowing range).</p>
<h2>Portfolio</h2>
<p>I like to get under the skin of a trust&#8217;s portfolio, especially with a part of the market like small-cap stocks where there&#8217;s a lot of dross about.</p>
<p>I tend to skim the full list of holdings to see what&#8217;s in there. If you go back 12-18 months, you can see what the trust held then that has since turned sour. Of course, you need to follow individual companies fairly closely to do this. Since I&#8217;ve been a direct small-cap investor myself in the past, this is something I tend to do anyway.</p>
<p>BlackRock Smaller Companies is pretty big for a small-cap trust. It&#8217;s currently the joint second-largest in the sector with Henderson Smaller Companies.</p>
<p>It also tends to invest at the lower end of the small-cap market, as this portfolio split shows:</p>
<table id="iti">
<tbody>
<tr>
<th>Size of company</th>
<th style="text-align: right;" align="right">% of portfolio</th>
</tr>
<tr>
<td>£0m to £200m</td>
<td style="text-align: right;" align="right">13.3</td>
</tr>
<tr>
<td>£200m to £600m</td>
<td style="text-align: right;" align="right">52.0</td>
</tr>
<tr>
<td>£600m to £1,500m</td>
<td style="text-align: right;" align="right">26.5</td>
</tr>
<tr>
<td>£1,500m +</td>
<td style="text-align: right;" align="right">8.2</td>
</tr>
</tbody>
</table>
<p>This means it tends to have a lot of individual positions, to avoid taking too large a stake in one company. Last year, the number of positions fell from 156 to 122, but its largest position is just 2.3% of its portfolio. Its starting positions tend to be between 0.25% and 0.5%.</p>
<p>Primarily, it&#8217;s a growth investor, seeking out companies with the potential to become significantly larger over time. While small-cap companies are renowned for being more domestically orientated than blue chips, BlackRock says half of the revenues of its portfolio originate from overseas.</p>
<p>It owns between 3% and 5% of the shares in 29 different companies (about a quarter of its total number of positions). So, it should be able to exit most of its holdings without too much trouble. Until recently, 5% of a single investment&#8217;s shares was a hard upper limit, but this has been raised to 6%.</p>
<p>Sector-wise, compared to its benchmark of the Numis Smaller Companies and AIM index, it is overweight financial services, media, and industrial engineers. It&#8217;s underweight travel &; leisure companies, food producers, general retailers, and software and computer services (mainly due to the greater UK focus of these sectors and the usual Brexit-related economic concerns).</p>
<p>I suspect that we could see more of a focus on technology under Arnold, though, as he specialises in that sector.</p>
<h2>Charges</h2>
<p>BlackRock Smaller Companies is one of the cheaper small-cap trusts. It used to have a performance fee, but this was dropped in March 2018.</p>
<p>Its underlying management charge is 0.6% for up to £750m of assets (they were £716m at the latest year-end) and 0.5% over that level. A small reduction from 0.65% to 0.6% was also made when the performance fee was dropped.</p>
<p>The most recent ongoing charges figure is 0.7%, suggesting BlackRock keeps things pretty lean when it comes to other expenses.</p>
<p>When we look at the <a href="https://www.itinvestor.co.uk/2019/02/kids-the-gloves-are-off/">Key Information Document</a> costs jump to 1.6%. Of this gap, 0.3% relates to portfolio transaction costs and there&#8217;s probably a tiny bit in there for borrowing costs, too.</p>
<p>The rest of the difference is unclear, but this document dates back to May 2018 so an updated figure (hopefully with a more detailed breakdown) is likely to be available soon.</p>
<h2>Summing up</h2>
<p>BlackRock Smaller Companies and Henderson Smaller Companies have long been considered as the &#8220;go to&#8221; selections in the UK smaller companies sector, although Harry Nimmo&#8217;s Standard Life UK Smaller Companies isn&#8217;t far behind. Indeed, I bought BlackRock and Henderson at the same time.</p>
<p>One of the main attractions for me is the dividend growth these type of funds can offer. BlackRock&#8217;s record of 20% a year growth over the last decade is excellent.</p>
<p>There wasn&#8217;t much of a share price reaction when Prentis&#8217;s departure was announced, suggesting investors are pretty sanguine about this news. As usual, I plan to reserve judgment for a little while rather than pulling the trigger at the first sign of any change.</p>
<p>While I still have a slight concern that this fund&#8217;s size could make outperforming the small-cap sector harder and harder each year, I&#8217;m happy to hold for now.</p>


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