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Throgmorton & Oryx split on small-cap ‘winners & losers’

4 August 2020

UK smaller companies trusts BlackRock Throgmorton and Oryx International Growth both have great long-term records but one has turned bearish and the other bullish on post-pandemic prospects.

BlackRock Throgmorton (THRG ) and Oryx International Growth (OIG ), two investment companies with leading records when it comes to picking the UK’s brightest and best small firms, have revealed very different outlooks on the new ‘winners and losers’ world, particularly when it comes to consumer-focused businesses.  

Throgmorton’s bull

After smaller companies received an outsized savaging during the coronavirus selloff, Throgmorton fund manager Dan Whitestone told investors in its half-year results he was excited about how the quicker pace of change spurred by the pandemic could drive returns for the £477m trust, which leads the AIC UK Smaller Companies trust sector over five years with a 93% shareholder return.

‘Whilst there remains much uncertainty in the near-term, we are very positive about the long-term, and indeed our conviction and excitement for the outlook for specific companies and industry trends has, if anything, increased,’ he wrote.

‘We have read some truly remarkable company statements in recent weeks supporting some of these high conviction views about changing industry dynamics, notably our views on the acceleration in corporate spending on digital transformation.’

Chairman Cristopher Small talked about the ‘greater dispersion of winners and losers’ as a result of the pandemic creating an opportunity for the trust, which is relatively unusual in that it takes short positions in some companies, letting it profit from share price falls.  

In the six months to the end of May, the trust held up slightly better than its benchmark. Shareholder assets fell 12.5%, ahead of the 14.8% decline for the Numis Smaller Companies plus AIM (ex-investment companies) index, and have roughly kept pace since.

The short book contributed 2.5% return over the period. The number of short positions was reduced to 12, down from 34 six months prior, as the managers locked in gains in February and March before the market recovered and bought ‘market-leading’ companies on depressed valuations, such as LondonMetric Property (LAP), a real estate investment trust which focuses on logistics. 

Whitestone said Throgmorton, which claimed the top prize in its sector at Citywire’s 2019 Investment Trust Awards, had been ‘too slow’ to reduce exposure to consumer services companies. He chiefly identified WH Smith (SMWH) and Dart Group (DTG) as detractors. However, both remain holdings, and he expects their track records as ‘market share winners’ to shine post-pandemic. 

Despite the reduction in consumer holdings, the manager said the sector remained ‘a significant overweight reflecting our ongoing conviction in differentiated companies with strong digital offerings’. Consumer goods and services companies topped 30% of the portfolio at the time of the results.

The largest contributor to performance over the six months was Games Workshop (GAW), whose shares are up 38% this year.

‘Despite the company having to cease operations for a short period, the business has continued to generate strong sales through its digital offering,’ said Whitestone.

He identified the Warhammer-creator and Pets at Home (PETS) as ‘bricks and mortar retailers that have prioritised investment in their digital offerings to great effect’. The pet shop chain was also designated as an ‘essential retailer’, allowing stores to stay open at the height of the pandemic.

The fund manager also increased exposure the video games industry, positive both on the long-term dynamics and the short-term boost from house-bound gamers. The trust already backed the AIM-quoted trio of Sumo Group (SUMO), Team17 (TM17) and Frontier Developments (FDEV), but has now added Keyword Studios (KWS) and the US’ Take-Two Interactive Software (TTWO.O).

Oryx bear takes care

Annual results for Oryx, running until the end of March, show the net asset value (NAV) falling 6.3% over the period, which captures the maximum impact of the crash. That was a strong performance compared to the 25% drop for the Numis Smaller Companies plus AIM (ex-ICs) index and may have contributed to the recent narrowing in its wide discount, which has boosted shareholder returns and left Oryx second in the AIC UK Smaller Companies group over five years behind Throgmorton with total growth of 82.9%. 

Harwood Capital Management’s Christopher Mills (pictured) manages the £143m investment company as well as the £426m North Atlantic Smaller Companies (NAS ) with an activist approach, buying smaller businesses trading at a discount and seeking to unlock value via restructuring. There is considerable overlap between the two listed funds, which are invested mostly in companies in the UK, some unlisted, while NAS also holds a big stake in Oryx.

The manager took a bearish view on the wider economy and, in contrast with Throgmorton’s Whitestone, on the consumer, in particular:

‘In our view the economy, weighed down by massive government debt and further debt incurred by corporations as they [fund] their survival, will not bounce back to normalcy in the short term.

‘Indeed, it is also possible that consumer expenditure will also be constrained as individuals curtail spending as they remain fearful for the economy and the possibility of a recurrence of Covid-19 with the attendant loss of income.’

The manager reiterated that many of the larger positions were relatively immune to the current uncertainty and emphasised the policy of investing in companies with ‘conservative’ balance sheets, often carrying little or no debt.

He said several life sciences holdings has seen ‘speculative rises’ in April, following which they were largely sold.

The top holding at the end of March was Augean (AUG), a 9.3% position, which is a market leader in hazardous waste management. Its shares are up more than 175% since the beginning of 2020. The second biggest position was EKF Diagnostics (EKF), at 7.6%, which has entered into contract manufacturing agreements to aid coronavirus testing in the US and UK.

‘Given these uncertain times, it is not realistic to comment that we expect a year of further progress in the growth of our net asset value, though we are hopeful,’ said Mills.

The comparatively strong performance for Oryx’s shares this year, rising 6.9%, has been helped by a narrowing discount to NAV, which according to broker Numis Securities stands at around 13.5% compared to a 12-month average of 23.9%. Returns on net assets have also been limited to a 1.9% drop. 


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