BlackRock Throgmorton (THRG ) portfolio manager Dan Whitestone has apologised to shareholders after the UK smaller companies investment trust dived 31% in the year to 30 November, eradicating its impressive 37% gain of the previous year.

The 12-month slump, which largely occurred in an ‘extremely challenging’ first half marred by Russia’s invasion of Ukraine, soaring inflation and an intensification in the stock market’s shift from ‘growth’ to ‘value’, saw Throgmorton badly underperform the Numis Smaller Companies plus AIM index which fell 17.5%.

Wealth management platform Integrafin (IHP) was the worst stock, falling 46% after it disappointed the market over its guidance for costs. Whitestone reduced the position to 1% as a result.

4Imprint Group (FOUR), the distributor of promotional gifts, a 3.1% position, was the top performer, rising 46% as its market share gains accelerated.

Writing in the trust’s annual results, Whitestone said he ‘would like to apologise to the company’s loyal shareholders’. He admitted he could have reduced the fund’s market exposure earlier than he did in the summer, by cutting gearing, or borrowing, and the small number of its ‘short’ positions betting that shares would fall. 

‘I recognise that de-risking sooner would have helped cushion relative performance,’ wrote Whitestone (pictured below). ‘Whilst the short book made a positive contribution (0.6%) the positive impact of this was reduced due to the elevated net positioning of the company at the start of the year.’

Not a year of profit warnings

In his defence, Whitestone – who has beaten the Numis benchmark in his five years in charge of Throgmorton – said the steep falls in stocks such as mobile telecoms group Gamma Communications (GAMA), e-commerce platform Auction Technology (ATG) and polling company YouGov (YOU) had not been the result of poor financial or trading performance.

He said 2022 was ‘not a year where our poor performance can be attributed to lots of profit warnings or negative developments to investment theses’. Rather the switch from growth and de-rating of loss-making, speculative businesses had seen many profitable companies thrown out with the bath water.

Smaller and medium-sized stocks proved particularly vulnerable, he said, as the market assumed they were all tied into the economic cycle and relied on discretionary consumer spending that would dry up in a recession.

Whitestone said: ‘It is with a sense of real irony that many companies with strong pricing power and no debt have fared far worse than peers who have inferior balance sheets and weaker track records of volume growth and margin expansion. Indeed, it is the latter that are far more exposed to inflationary cost pressures and higher interest charges eroding profitability and cashflows.’

It was ‘simplistic’, the manager claimed, to assert that his stock picks had been too expensive to begin with as their previous high ratings reflected impressive track records and strong future growth prospects.

Reset for recovery

While a ‘frustrating’ year, Whitestone said valuations had been reset and the portfolio showed far greater potential for gains. He was ‘optimistic’ that the Federal Reserve would start to cut US interest rates in the third quarter of this year as inflation fell further, relieving the pressure on growth stocks.

He said he was adding to lowly-rated industrial and consumer stocks, believing they would ride through the storm and recover.

A final dividend of 8.5p per share has been declared, taking the total for the year to 11.1p, up from 10.5p, and covered by revenues which rose from 12.15p to 12.95p per share.

Shares in the growth fund yield only 1.7% but, in response to a recent improvement in investor sentiment and share buybacks by the board, have started to show signs of recovery, rising 7% this year, just ahead of the benchmark’s 6% gain.

The previous double-digit discount to net asset value has narrowed to 2.6%, putting the shares up 47.4% over five years against just 14% from the Numis index.

Over 10 years, a 241.5% total shareholder return is among the best in its sector and far exceeds the 83% from the benchmark.