(THRG) Throgmorton Tst

Small-cap growth at a discount
Created: 7 April 2011 Written by: Leonora Walters
BULL POINTS:
■ Strong recent performance
■ Ability to go short
■ Managers' very good track record
■ Wide discount could narrow
BEAR POINTS:
■ Very high performance fee
■ Dividend not covered
Just over three years ago Throgmorton Trust moved its management mandate from AxaFramlington to BlackRock following a period of poor performance. Since then, the trust's returns have improved markedly - it's beaten its benchmark and sector average over one and three years in terms of its net asset value (NAV) total return - and the balance sheet has been strengthened. But this appears to have gone unnoticed by the market, and the share price lags the value of the assets by a comparatively wide 15 per cent.
IC TIP RATING
Style Growth
Risk rating Medium
Timescale Medium-term
If the trust continues to perform well, this discount is likely to close; Iain Scouller, investment trust analyst at Oriel Securities, thinks a 10 per cent discount is more appropriate for trusts in this sector.
Throgmorton invests in small and mid-sized companies, including Alternative Investment Trust (Aim) stocks which accounted for nearly 40 per cent of assets in the last quarter of 2010. At the moment the trust is concentrating on companies with high levels of overseas earnings and strong brands, and good revenue visibility. It is avoiding companies exposed to UK consumer and government spending.
Another feature which differentiates Throgmorton from many investment trusts is its use of derivatives called contracts for difference (CFDs) to manage risk. The managers can also use these to take bets on falling share prices, giving Throgmorton some of the characteristics of a hedge fund. Exposure to CFDs is limited to 30 per cent of the gross asset value of the investment portfolio.
Throgmorton's fund management team is led by Mike Prentis and Richard Plackett. Mr Prentis also runs the BlackRock Smaller Companies investment trust, one of the best-performing trusts its sector. Mr Plackett, who runs Throgmorton's CFD allocation, also manages some hedge fund style products as well as the BlackRock UK Special Situations unit trust, one of the best-performing UK All Companies funds.
The investment trust has a market value of more than £100m, so its shares should be fairly easy to buy and sell. The total expense ratio - according to Lipper data - is 1.26 per cent.
However, that's before a very high performance fee, which is calculated based on the the trust's NAV performance compared with its benchmark, the Hoare Govett Smaller Companies index (including Aim, but excluding investment trusts). If its NAV beats the HG index on a total return basis, it can charge 12.5 per cent of the margin of outperformance.
True, there is a cap at 4.99 per cent of the average value of the assets, and the "high water mark" is quite challenging; if the trust undershoots its benchmark in one year, it must both claw back that underperformance and beat the index in the following year in order to charge a performance fee. Nevertheless, in the year to 30 November 2010, outperformance of 34.3 per cent meant a performance fee of 4.8 per cent of net assets - bringing the TER to an eye-watering 6.8 per cent.
Only you can decide whether such fees, which are all too common in the world of hedge funds, are justified by the trust's performance. But it's worth noting that even with the fee, returns were still well ahead of both the benchmark and the sector average.
Throgmorton's dividend is not covered, which could mean that dividend growth is limited in future years. But then, yield is not generally something you would seek from a smaller companies fund. If you're after aggressive growth, plus a possible kicker from a narrowing discount, this trust could be just the ticket. Buy
Key fund data:
THROGMORTON TRUST (THRG)
PRICE 194.25p 1-YEAR NAV PERFORMANCE 42.85%
MARKET

But not quick to reflect in the share price........Why?

I notice that the share price has been disapppointing recently.

I am however optimisting for the coming weeks that the share price will start to track the NAV again. Why?

1) I believe the share price went ahead of itself with the proposed share reduction. Now it has been withdrawn and the NAV discount is back at 16% I expect normal service to resume.

2) The management has been buying up the 'sellers' stock for cancellation at the 16% NAV discount, supporting the share price and enhancing holders NAV.

3) The fund manager, Roger Whiteoak will be able to return to fund management for all of us rather that planning for the potential forced share repurchase.

My only negative thought. Is it time for the FTSE Small Cap's to rest at this level / decline from current level . Any thoughts anybody?

IMHO

JR

I do not know what to make out of this one!

As shares were heading north a requisition comes along, stalls the share price, discount grows from 12% to 17%, company buys enormous amount of its own shares and now the requisition is withdrawn!

This may well have been a devious way of dumping these shares without damaging the share price, but the way NAV is still heading north I have full faith in this lot.