BlackRock Throgmorton Trust plc

Overview

A Warren Buffett–style intrinsic value review of BlackRock Throgmorton Trust plc (LSE: THRG), a UK closed‑end investment trust focused on smaller and mid‑cap equities, assessing business simplicity, moat, management, financial strength, intrinsic value vs. market price, and long‑term prospects.

Business Understanding

THRG is a London‑listed closed‑end fund investing primarily in UK smaller and mid‑cap companies, run by BlackRock’s Emerging Companies team. It uses a quality‑growth, high‑conviction stock‑picking approach and can also use CFDs to add selective long exposure and maintain a modest short book, resulting in net exposure typically around 90–110%. The trust aims for capital growth with a modest, progressive dividend. The business model—pooling investor capital to own a portfolio and compounding NAV per share over time—is straightforward. The derivatives overlay and ability to short add some complexity, but the underlying economics (NAV growth, discount management, cost discipline) are clear and within a standard circle of competence for closed‑end funds.

Economic Moat Analysis

Moats in asset management are often narrow. THRG’s advantages are: 1) Brand and distribution: association with BlackRock provides research depth, risk control infrastructure, and investor awareness. 2) Process and culture: a long‑tenured, repeatable quality‑growth process that has compounded NAV meaningfully above the benchmark over 10 years (+104.6% vs +44.9%). 3) Closed‑end structure: allows full investment, avoids forced selling amid open‑ended redemptions, and supports contrarian positioning in UK small caps during persistent outflows. 4) Flexibility: ability to short and use CFDs gives a wider toolset than many peers and can cushion style headwinds. 5) Scale/cost: ongoing charges of ~0.56% (FY2024) are competitive for an actively managed small‑cap mandate, with performance fees capped. These advantages are durable but still manager‑dependent, so the moat is moderate, not wide; key‑person and style dependency temper moat durability.

Management Quality

Capital allocation has been shareholder‑oriented: the Board and Manager bought back ~9.74m shares in the six months to 31 May 2025 at discounts, accretive to NAV. The Board cancelled the share premium account (court approval 29 Apr 2025) to increase distributable reserves, enhancing buyback/dividend flexibility. Dividends are progressive yet sensibly sized; the FY2024 final dividend was 14.25p (paid Apr 2025) and an interim 3.80p was declared for Sep 2025. Fees are aligned with performance (base 0.35% of gross assets; performance fee accruals written back when underperforming; performance fee effectively capped so total management + performance ≤1.25% of average gross assets over a rolling two‑year period). Reporting is transparent, with detailed half‑year and daily NAV disclosures and frequent RNS on buybacks. Portfolio management under Dan Whitestone has delivered strong long‑term results despite cyclical headwinds; governance looks robust.

Financial Strength

For an investment trust, balance‑sheet strength is about prudent gearing, liquidity, and cost control rather than ROE. As at 31 May 2025: net assets £505.9m; cash £31.4m; no structural debt; net and gross gearing via derivatives at ~105.5% and ~111.1% of net assets, respectively—modest leverage. Derivative fair value marks were small relative to NAV. Ongoing charges 0.56% (FY2024) are competitive; performance fee accruals were written back in H1’25 due to underperformance. Revenue earnings covered the interim dividend, and progressive dividend policy has been maintained, though income is a secondary objective. NAV volatility is inherent to small caps, but liquidity and closed‑end structure mitigate forced‑selling risk. Overall, financial footing is solid with conservative structural risk and disciplined costs.

Intrinsic Value Assessment

For a closed‑end fund, intrinsic value approximates NAV per share, adjusted for a normalized discount/premium reflecting manager quality, costs, and liquidity. Reported NAV per share was 652.56p at 31 May 2025 (up ~1.6% through 30 Jul 2025). The share price at analysis is 614p, implying a mid‑single‑digit discount to that NAV and historically around a high‑single‑digit to low‑teens discount during 2024–2025 (average discount ~9–11%). Long‑term, THRG has compounded NAV at ~7–8% CAGR over 10 years, outpacing its benchmark materially. With UK small caps trading below long‑term P/E averages and extensive buybacks at a discount, a reasonable fair value is NAV less a normalized 5–8% discount, crediting manager alpha and capital returns. Using a conservative fair value at 670p (assumes modest NAV appreciation from 31 May plus a 5–8% normalized discount), the upside vs. 614p is ~9% plus a ~2.5–3.0% dividend yield (based on ~18p total dividend recent run‑rate), and further potential if the discount narrows toward peer averages or if UK small caps re‑rate. Expected long‑term total return potential: 9–12% p.a. (7–8% NAV compounding + yield + possible discount tailwind). Margin of safety at today’s price is moderate (price ~8–10% below conservative fair value and ~6% below last reported NAV), supported by buybacks and depressed UK small‑cap valuations.

Investment Details

Overview

A Druckenmiller-style macro, reflexivity, and positioning analysis of BlackRock Throgmorton Trust (LSE: THRG) — a UK small/mid-cap, long/short investment trust — assessing cycle, policy, flows, and entry asymmetry.

Macro Context

Cycle: Late-cycle deceleration with rolling slowdowns, but improving UK inflation trajectory and early-rate-cut dynamics versus 2023–24. Policy: The Bank of England has begun easing and signalled further cuts contingent on inflation and labour data; the ECB has already moved. Fiscal is constrained in the UK (tight budgets, stealth taxes), while U.S. policy is pro-capex/AI but tariff-prone. Geopolitics: 2025 ‘Liberation Day’ tariff shock created volatility, later partially paused/recalibrated; Middle East shocks have faded but remain a tail risk. Secular trends: (1) De-equitisation (M&A + buybacks) shrinking UK listed supply, (2) AI-induced power and infrastructure capex wave, (3) capital scarcity for small caps after multi-year outflows, (4) sustained valuation discounts of UK small/mid caps to global peers creating optionality when flows turn.

Company Position in Macro Landscape

THRG is a geared, long/short specialist in UK small and mid caps with a quality-growth bias. It sits at the nexus of two opposing forces: cyclical headwinds (weak UK productivity, earnings downgrades risk, style headwinds vs ‘value’) and powerful secular supports (historic valuation discount, de-equitisation, revived international interest in UK assets, and accelerating M&A that can crystallise value). The trust’s closed-end structure and ongoing buybacks harness the supply/demand set-up, allowing NAV accretion while peers face redemptions. Manager has already moderated domestic cyclicality and increased select international names within a 15% limit, reflecting a flexible, opportunistic stance.

Reflexivity Analysis

Negative loop (past): 46 of 48 months of outflows from UK small/mid funds pushed the ‘clearing price’ lower irrespective of fundamentals; quant and platform selling amplified downgrades; THRG’s quality-growth style underperformed as ‘traditional value’ led. Positive loop (potential): depressed valuations sparked record M&A and corporate buybacks, which reduce free float and can force reappraisals; THRG’s own buybacks narrowed the discount marginally and are NAV-accretive. If BoE cuts and outflow fatigue stabilize earnings expectations, even modest inflows can produce outsized price responses in illiquid small caps. Conversely, fresh earnings downgrades could trigger another mechanical derating via quant models and keep discounts wide. Positioning tell: THRG net exposure ~105% and gross ~111% (31 May 2025) shows measured conviction with optionality from the short book; cuts to domestic cyclicals and selective adds in defence/AI adjacencies align with a reflexive turn from forced sellers to strategic buyers.

Competitive Position & Disruptive Threats

Edge versus peers: (1) Dual toolset (longs + shorts via CFDs) to navigate UK small-cap volatility, (2) proven long-term alpha (10-year NAV +104.6% vs benchmark +44.9%), (3) active buybacks to manage discount, (4) style consistency (‘true to label’ quality growth) with flexibility to rotate exposures. Threats: Persistent factor headwinds if ‘value’/commodities keep leading; UK domestic stagnation that delays earnings inflection; structural outflows from UK equities; performance fee optics if style tailwinds return unevenly. Disruption risk at the portfolio level is stock-specific (e.g., fintech, software) but the manager has demonstrated willingness to cut exposures swiftly on thesis breaks (e.g., exiting Workspace, Trainline).

Asymmetric Risk/Reward

Setup: Price 614p (as of 4 Dec 2025), 52-week 454–644p; last disclosed NAV 652.6p (31 May 2025), discount ~10–11% then; buybacks ongoing. UK small/mid caps trade at ~10x forward P/E vs LT average ~12.7x. Base case (12–24 months): a 10–12% NAV lift from mild earnings recovery plus 1–1.5 turns of multiple mean reversion (mid-teens) + 300–500 bps discount narrowing from buybacks/M&A implies ~20–30% TSR. Bull case: sharper flow reversal + M&A wave (discount to mid-single digit), NAV compounding on quality growth names — 30–45% TSR. Bear case: renewed downgrades/outflows; discount drifts to mid-teens, NAV flat/down low single digits — downside ~10–15%. Convexity: THRG’s closed-end structure, buybacks, and M&A-rich universe create positive optionality; shorts cushion drawdowns; ability to lean non-UK (≤15%) adds uncorrelated sources. Entry: Above 200D MA (578p) but still below/near NAV and far from global peer valuations; asymmetry remains favourable if catalysts arrive (rate cuts, flows).

Investment Details