Prentis (pictured) says that while risks have loomed over the course of the past year, including a sell-off in UK small and mid-caps, the threat of ongoing risk has been overly priced into markets.“My outlook is positive on a medium-term view. It is always difficult to call the outcome of events - if you look at the Middle East, Scottish referendum and the general election next year - there are all sorts of things that could create some short-term uncertainty. But these are all noise,” he said.
“What really matters is the companies you invest in, how they are trading and how they are managed,” he added.
After rising strongly for the 18 months up to January 2014, UK small and mid-caps sold off at the start of the year.
While they have since recovered, they have been broadly flat over the course of the year, underperforming large caps for the first time since 2011.
Performance of indices in 2014
Source: FE Analytics
“There is some perception that this is the year of large caps but I must say I am not convinced. There is a feeling - partly driven by the approach for AstraZeneca [by Pfizer] - that mega caps could be bid for and that it could happen again but they just don't really have the growth potential that companies lower down the cap scale do.”
"The valuations [in smaller companies] are at a level that you couldn't find six months ago, they have been de-rated and it is now an interesting time."
After being one of the best investment trusts in its sector in 2013 BlackRock Smaller Companies has had a torrid 2014 and has lost 12.39 per cent, making it the second worst performer in its sector.
Performance of trust, sector and index in 2014
Source: FE Analytics
The manager of the £482m investment trust says that while small and mid-caps are generally more liable to a sell off than larger caps, the perception of risk has pulled away from more positive economic fundamentals in the UK and emerging markets.
“Managing the reality and perception of markets are both important but perception is a different game. The fact that they have become a bit detached over the past six months presents an opportunity.”
Prentis says for this reason he is maintaining a 10 per cent gearing in the trust.
Despite the manager’s sanguine outlook for much of the UK economy, and smaller companies in particular, he says companies exposed to government spending – such as outsourcing firms – may be set for further depreciation.
“We are cautious on government spending. The UK and US government has a lot of pressure on public spending that is not going to go away. It is going to be there for years and so you see when new contracts are being awarded the terms are re-tended on less favourable terms.”
“Some of the past contracts were generally on pretty generous terms and that just isn't happening. Any more and so for companies that are re-tending that is tough and is going to hurt their margins and they could even lose them all together.”
Prentis has been at the helm of the BlackRock Smaller Companies investment trust since August 2002. It has been a top-quartile performer over the past five and ten years and has beaten its benchmark in six of the last 10 full calendar years.
Since he took over the trust it has returned 622.56 per cent, the best return in the sector over this period, while the closet rival made almost 100 percentage points less.
By comparison the average return in the IT UK Small Companies sector over this period is 333.29 per cent while the trust’s benchmark gained 368.76 per cent.
Performance of trust, sector and index since Aug 2002
Source: FE Analytics
Prentis also says he is tentatively looking to up emerging exposure through UK listed companies such as estate agents Savills and shipping services firm Clarksons.
“We are warming up to emerging markets; it feels the right time to be increasing our exposure. We have been looking for ways to gradually add to our emerging market exposure. Going back three or four years we were quite exposed but have reduced exposure in recent years.”
“If you look at the growth rates in some emerging markets they are still quite strong. You have to pick and choose but generally they have the advantage of faster growth rates, of younger and generally well-educated populations.”
The trust’s discount has widened to 13.5 per cent from trading at NAV at the beginning of 2014, along with most of the 15 other trusts in the IT UK Smaller Companies sector.
