Prentis, manager of the five crown-rated BlackRock Smaller Companies IT, says that investing in small caps is usually a higher risk strategy than holding larger blue chips, but adds that until recently he had been maintaining a relatively defensive portfolio. However, although he says he is keeping a lid on the portfolio's overall cyclical exposure, he has upped his weighting to both the financial and the mining sector over the last few weeks.
"We took a fairly defensive stance during the year, given the uncertain global economic backdrop."
"Mid-year, we reduced exposure to some holdings which were more capital-spending oriented and thus exposed to delayed decision-making during uncertain times," he said.
"Towards the end of the financial year, with markets showing a bit more appetite for risk, we subsequently increased our risk exposure slightly."
"We added modestly to our holdings in the miners and also to the financials. It is the return of confidence that has helped markets and enabled us to finish the financial year robustly, as many macroeconomic uncertainties look to be past their worst."
Simon Laing, manager of the Invesco Perpetual US Equity fund, has also upped his exposure to cyclicals as he feels that more defensive names have been overbought in the current rally.
However, Prentis says that by investing in quality companies, his portfolio can deliver in all market conditions.
"We still remain quite cautiously positioned," he continued.
"In the past, UK smaller companies have tended to do well coming out of a recession and going into periods of growth."
"The smaller companies we own are well placed to make the most of slowly improving economic conditions, and many have good exposure to the faster-growing parts of the world."
"Most importantly they are run by strong management teams, well able to make the most of opportunities ahead."
"We expect reasonable earnings growth from our holdings, and this should feed through into higher dividends and share prices."
Prentis has managed the BlackRock Smaller Companies investment trust since September 2002.
According to FE Analytics, it has returned 601.88 per cent over the past 10 years, while its benchmark – the Numis Smaller Companies & AIM ex IT index – has made 217.2 per cent.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
It is the second-best performing portfolio in the IT UK Smaller Companies sector over the decade; FE Alpha Manager Harry Nimmo’s Standard Life UK Smaller Companies is the only trust to have beaten it over this time.
Despite the BlackRock portfolio’s high returns, it has been a lot more volatile than the sector and its benchmark over the 10-year period.
It is also the second-best performing trust in the sector over five years, again falling slightly behind Nimmo’s portfolio.
Over one year BlackRock Smaller Companies has returned 23.38 per cent, beating the index's returns of 16.57 per cent. Prentis says this is due to the growth approach he uses in his portfolio.
"Stock selection contributed strongly to relative outperformance during the year, as did our use of gearing. We maintained exposure to high quality, well managed and well financed companies," he said.
"The largest stocks which contributed to relative outperformance were our core holdings in Ashtead, Howden Joinery, Oxford Instruments, Bellway and Booker."
"These are all very well-run companies with good growth prospects. We also continued to add holdings which we viewed as good quality and offering an attractive upside."
He adds that examples of these include Devro International, Young & Co’s Brewery and James Fisher.
BlackRock Smaller Companies is 11 per cent geared.
It has ongoing charges plus performance fee of 0.98 per cent.
The closed-ended fund is currently trading on a 13.3 per cent discount to its NAV.