Connecting: 216.73.216.94
Forwarded: 216.73.216.94, 104.23.197.205:47116
BlackRock’s Roland Arnold: Past performance does matter for small-caps | Trustnet Skip to the content

BlackRock’s Roland Arnold: Past performance does matter for small-caps

05 March 2021

BlackRock manager Roland Arnold explains why past performance matters for small-cap investing and how he approaches picking stocks.

By Abraham Darwyne,

Senior reporter, Trustnet

The warning that past performance is not indicative of future results does not always apply when investing in small-cap companies, according to BlackRock small-cap manager Roland Arnold.

Arnold, who runs the £548m BlackRock UK Smaller Companies fund and the £868m BlackRock Smaller Companies trust, argued that if a company has a track record of growth and meeting expectations, it can be an indication of how strong its business model is and how its management navigates their market.

“Regardless of what the disclaimers say about past performance isn't necessarily a guide, in the case of smaller company investing that’s categorically not true,” Arnold said.

“Past performance tells you a lot about the potential future of a business. If it's grown for the last five years, 10 years, 15 years, if it's lead its markets for that long, it tells you there's something about that business model that people will probably continue to want to buy.

“If it's met its expectations in the past without too much volatility, that probably tells you something about how predictable the revenue and therefore profitability of the businesses is, and also how good management are in guiding the market - and both of those things are important.”

This idea forms one of the five criteria Arnold uses to find growing stocks for the BlackRock UK Smaller Companies fund and BlackRock Smaller Companies trust.

The other four criteria he looks for in a business are cash flow generation, balance sheets, the quality of management teams and the strength of market positions.

The quality of a companies’ management team is abouttheir historic success, their entrepreneurial spirit, how tied in they are and how strategically clear they are”, Arnold explained.

When it comes to its market position, he said this can be important even if a market is small, because if it is leading and dominating its market, it can lead to advantages such as pricing power and productivity.

One of the biggest differences between small-cap investing and large-cap investing is that not owning a stock in the benchmark can be quite a big decision for large-cap investors, but not for small-cap investors.

If a large-cap manager were to avoid owning Shell or AstraZeneca, which both make up large parts of the index, it can lead to underperformance if a manager is wrong about avoiding them and the stocks rise.

“That doesn't happen in small-caps because there's no stock that's a big enough part of the benchmark,” Arnold said.

This means the focus for him is making sure the strategy buys businesses that don’t disappoint and being ruthless if businesses do start to disappoint.

“If something changes about the about the business model or the market, if there's something we got wrong in the analysis, you have to move on quite quickly because in small-cap land owning businesses that go wrong can really impact performance,” he explained.

This is why Arnold focuses on company specific, bottom-up analysis to understand what drives each business: “If you stick with those five criteria, it's very difficult actually to buy a bad business,” he said.

Looking ahead, Arnold believes the UK market will be facing a more supportive consumer spending environment. He believes that some of the headwinds against retail stocks, such as the uncertainty of the British pound due to Brexit and the shift towards online business models, are now largely gone.

This forms part of the reason why Watches of Switzerland is one of the biggest holdings within his UK small-cap strategy today.

In addition to the underlying characteristics of the businesses, he said that the threats retail business face and the things that make the retail environment difficult, don’t necessarily apply to Watches of Switzerland in the same way.

One example he gave was the threat of online competition. “It's very difficult to imagine a world where Watches of Switzerland has a massive online competitive threat,” he said. “You're not going to go to Google and type in Rolex and go into the first website that will sell you one.

“You want to know the provenance you want to know where it comes from. You want to know you're buying something that's legitimate, not stolen, or false or fake, so that online disintermediation for them is quite difficult.”

Share price performance of Watches of Switzerland over 5 yrs

  

Source: FE Analytics

However, for other companies it is much more of an issue as Amazon and other companies with e-commerce strategies swallow up less sophisticated retail business models.

Another area Arnold is overweight currently is in companies within the industrials sector. As of the end of January, the manager’s fund and investment trust both had more than 27 per cent allocated to industrials.

Arnold believes the country is at the early phase of a strong industrial recovery for a whole host of reasons.

“If you look at the look at the statistics for the last few months, because of a cloud of uncertainty that sat across much of the sector, there's been a huge amount of destocking going on in the in the supply chain,” he said.

“So actually, right now as we're still waiting for clarity on demand, whether it be construction, automotive, all these other sectors, there is a very cautious mentality out there.

“But the first time that demand comes back, these companies are not just going to have to buy to satisfy the demand for their own production, they're going to have to restock. So actually you could see - as is typical coming out of these cycles - a very strong restocking cycle coming through on the industrial side.”

Performance of fund versus sector & benchmark over 5yrs

 
Source: FE Analytics

BlackRock UK Smaller Companies has delivered a total return of 91.76 per cent over the last five years, compared to 79.65 per cent from the average fund in the IA UK Smaller Companies sector and 63.33 per cent from the Numis Smaller Companies plus AIM (excluding investment companies) benchmark.

It currently yields 0.49 per cent and has an ongoing charges figure (OCF) of 0.93 per cent.

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.