# BlackRock Smaller Companies Trust: Finding the best

- Link: https://www.directorstalkinterviews.com/blackrock-smaller-companies-trust-finding-the-best/4121031115
- Published: 2021-11-01T11:51:14+00:00
- Author: Amilia Stone

Roland Arnold, Portfolio Manager of the **BlackRock Smaller Companies Trust plc**(
[LON:BRSC](https://www.directorstalkinterviews.com/company/blackrock-smaller-companies-trust-plc/brsc.l)),
explains how he uncovers companies that could grow their earnings for the long term.

**Capital at risk. **The value of investments and the income from them can fall 
as well as rise and are not guaranteed. Investors may not get back the amount originally
invested.

In the short term, share prices for individual companies may be driven by a variety
of unpredictable and erratic factors – from fear, or greed, to investor confidence
or fund flows. However, in the longer term, share prices largely follow company 
earnings. If a company can grow its earnings sustainably over time, this will drive
share price performance. Identifying such companies is the simple goal of our investment
approach.

Over the very long term, since 1955, smaller companies have delivered around 4% 
better return than larger companies. Compounded over many years, this could make
a significant difference to an investor’s returns, however, it is worth noting that
this is an average. Active managers may deliver a higher return if they get their
stock selection right, or a lower return if they don’t.  

![brsc (BRSC)](https://www.directorstalkinterviews.com/wp-content/uploads/2021/11/
brsc.png "BlackRock Smaller Companies Trust: Finding the best (BRSC)")

With this in mind, we focus considerable resources on stock selection. Our bottom-
up research process looks to find those companies that can grow their earnings over
many years. These are companies that we can buy early in their development, with
a goal to hold them through their growth into larger companies. However, please 
be aware that past performance is not a reliable indicator of current or future 
results and should not be the sole factor of consideration when selecting a product
or strategy.

**To learn more about the BlackRock Smaller Companies Trust plc please follow this
link: [blackrock.com/uk/brsc](https://www.blackrock.com/uk/individual/products/investment-trusts/our-range/blackrock-smaller-companies-investment-trust/trust-information?siteEntryPassthrough=true&cid=aff:investmenttrusts2020:brsc:directorstalk:link)**

**Finding growing companies**

The 100-120 companies that sit in our portfolio score well on the five key criteria
at the heart of our investment process. The first is to assess the quality of the
management team, whether they have a track record of delivering on their promises.
We also look at the market position for each company – are these businesses capable
of leading and shaping their markets long term?

We examine the balance sheets in-depth: this has been particularly relevant over
the past year. Do they have the capital to survive through difficult and unusual
market conditions? Cash flow is also important. A company needs to have the cash
flow to support its organic growth, rather than being forced to keep coming back
to shareholders for more capital.

We also look at the track record. History can be a guide to the future. Has a company
consistently met or beaten expectations? If it has, it tells us something positive
about the management team or the market position or the products.

**What sectors do we find appealing?**

Where we find these opportunities will change over time. However, our core holdings
have remained relatively similar in recent years and through the pandemic. Management
teams have rewarded our faith in them during this crisis, responding flexibly and
skilfully to a changing world, reshaping their business or strategy where necessary.

The three largest sectors in the portfolio today are media, investment banking/brokerage
and consumer services. The media sector suggests a conformity in exposure, however
the stocks that sit in the portfolio have a variety of specific drivers, some are
geared to reopening, others to structural market shifts. The ‘investment banking/
brokerage’ sector is poorly named and doesn’t reflect our exposure, which is focused
on are asset managers. We believe the market has further to run as economic recovery
builds and this sector is well-placed. This is particularly true for those with 
expertise in the [sustainability](https://www.directorstalkinterviews.com/sustainability-green-stocks-news)
sector.

On the consumer services side, there are many businesses in the retail sector that
look interesting today. Many have fundamentally shifted their distribution mix during
the pandemic, shifting to a multi-channel offering that will endure. Sadly, many
retailers haven’t made it through Covid, so the ones that are left are in a much
stronger position.

**The broader outlook**

We see three key themes emerging, which will help guide our stock selection from
here. The growth in consumer spending as the economy reopens will be important. 
Labour shortages are leading to increased pay, whilst furlough and government support
have allowed consumers to build considerable savings, which could be very beneficial
in boosting the recovery.

The industrial cycle is another area of focus. We see the demand continuing to build
with recoveries in manufacturing, automotive and, ultimately, aerospace. We also
think companies are re-examining the ‘just-in-time’ model that is commonplace but
has been proved to be a very difficult way to manage supply chains in the last two
years. Both the US/China trade war and the pandemic exposed the problems with companies
not having the stock they need to maintain production. We believe two things are
likely to happen: the first is a general industrial recovery, but the second is 
an inventory restock as companies rethink their supply chains. It will create a 
leveraged effect for certain industrial companies.

We’re also positive on the UK construction sector. This is seeing strong demand 
from both the private sector (such as housebuilders), and the public sector (from
infrastructure development). This is a sector that has changed in the last few years,
with a far better contract environment.

Equally, we are conscious of emerging risks. We continue to consider how inflation
or labour shortages may affect our portfolio holdings. However, our focus is on 
market leading businesses, which have natural pricing power. This can help mitigate
against inflationary and competitive forces.

We will keep looking, trying to find more companies that can deliver strong earnings
growth in the years ahead. Ultimately, we want to find the strongest 100-120 companies
in the UK market. Most of all, we are optimistic from here – we believe in the market
recovery.

**To learn more about the BlackRock Smaller Companies Trust plc please follow this
link: [blackrock.com/uk/brsc](https://www.blackrock.com/uk/individual/products/investment-trusts/our-range/blackrock-smaller-companies-investment-trust/trust-information?siteEntryPassthrough=true&cid=aff:investmenttrusts2020:brsc:directorstalk:link)**

**Risk Warnings**

Past performance is not a reliable indicator of current or future results and should
not be the sole factor of consideration when selecting a product or strategy.

Changes in the rates of exchange between currencies may cause the value of investments
to diminish or increase. Fluctuation may be particularly marked in the case of a
higher volatility fund and the value of an investment may fall suddenly and substantially.
Levels and basis of taxation may change from time to time.

**Trust Specific Risks**

Liquidity risk: The Trust’s investments may have low liquidity which often causes
the value of these investments to be less predictable. In extreme cases, the Trust
may not be able to realise the investment at the latest market price or at a price
considered fair. 

Gearing risk: Investment strategies, such as borrowing, used by the Trust can result
in even larger losses suffered when the value of the underlying investments fall.

Smaller companies risk: Smaller company investments are often associated with greater
investment risk than those of larger company shares.

**Important Information**

Issued by BlackRock Investment Management (UK) Limited, authorised and regulated
by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London,
EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394.
For your protection telephone calls are usually recorded. Please refer to the Financial
Conduct Authority website for a list of authorised activities conducted by BlackRock.

BlackRock has not considered the suitability of this investment against your individual
needs and risk tolerance. To ensure you understand whether our product is suitable,
please read the fund specific risks in the Key Investor Document (KID) which gives
more information about the risk profile of the investment. The KID and other documentation
are available on the relevant product pages at www.blackrock.co.uk/its. We recommend
you seek independent professional advice prior to investing.

This material is marketing material. The Company is managed by BlackRock Fund Managers
Limited (BFM) as the AIFM. BFM has delegated certain investment management and other
ancillary services to BlackRock Investment Management (UK) Limited. The Company’s
shares are traded on the London Stock Exchange and dealing may only be through a
member of the Exchange.  The Company will not invest more than 15% of its gross 
assets in other listed investment trusts. SEDOL™ is a trademark of the London Stock
Exchange plc and is used under licence.

Net Asset Value (NAV) performance is not the same as share price performance, and
shareholders may realise returns that are lower or higher than NAV performance.

The BlackRock Smaller Companies Trust plc currently conducts its affairs so that
its securities can be recommended by IFAs to ordinary retail investors in accordance
with the Financial Conduct Authority’s rules in relation to non-mainstream investment
products and intends to continue to do so for the foreseeable future. The securities
are excluded from the Financial Conduct Authority’s restrictions which apply to 
non-mainstream investment products because they are shares in an investment trust.

Any research in this material has been procured and may have been acted on by BlackRock
for its own purpose. The results of such research are being made available only 
incidentally. The views expressed do not constitute investment or any other advice
and are subject to change. They do not necessarily reflect the views of any company
in the BlackRock Group or any part thereof and no assurances are made as to their
accuracy.

This material is for information purposes only and does not constitute an offer 
or invitation to anyone to invest in any BlackRock funds and has not been prepared
in connection with any such offer.

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BUILD ON BLACKROCK and SO WHAT DO I DO WITH MY MONEY are trademarks of BlackRock,
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are those of their respective owners.

ID: MKTGH1021E/S-1880162

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