Portfolio Update

The information contained in this release was correct as at 31 January2023.  Information on the Company’s up to date net asset values can be found on the London Stock Exchange Website at

https://www.londonstockexchange.com/exchange/news/market-news/market-news-home.html.

BLACKROCK SMALLER COMPANIES TRUST PLC (LEI:549300MS535KC2WH4082)
 

All information is at 31 January2023 and unaudited.
Performance at month end is calculated on a Total Return basis based on NAV per share with debt at fair value
 

	One month %	Three months %	One  year %	Three  years %	Five  years %
Net asset value	3.2	10.4	-16.0	-0.4	16.7
Share price	2.8	10.4	-21.4	-13.2	15.1
Numis ex Inv Companies + AIM Index	5.0	10.0	-12.4	5.5	8.2

Sources:  BlackRock and Datastream

At month end

Net asset value Capital only (debt at par value):	1,550.89p
Net asset value Capital only (debt at fair value):	1,593.75p
Net asset value incl. Income (debt at par value)1:	1,575.27p
Net asset value incl. Income (debt at fair value)1:	1,618.14p
Share price:	1,394.00p
Discount to Cum Income NAV (debt at par value):	11.5%
Discount to Cum Income NAV (debt at fair value):	13.9%
Net yield2:	2.6%
Gross assets3:	£838.7m
Gearing range as a % of net assets:	0-15%
Net gearing including income (debt at par):	4.8%
Ongoing charges ratio (actual)4:	0.7%
Ordinary shares in issue5:	48,829,792

1. Includes net revenue of 24.38p
2. Yield calculations are based on dividends announced in the last 12 months as at the date of release of this announcement, and comprise the final ex-dividend of 22.00 pence per share (announced on 29 April 2022, ex-date on 12 May 2022, and pay date 17 June 2022), and an interim dividend of 14.50 pence per share (announced on 3 November 2022, ex-dividend on 10 November 2022, and paid 9 December 2022).
3. Includes current year revenue.
4. The Company’s ongoing charges are calculated as a percentage of average daily net assets and using the management fee and all other operating expenses excluding finance costs, direct transaction costs, custody transaction charges, VAT recovered, taxation and certain non-recurring items for year ended 28 February 2022.
5. Excludes 1,163,731 ordinary shares held in treasury.

Sector Weightings % of portfolio Industrials 35.1 Consumer Discretionary 19.8 Financials 13.7 Technology 7.5 Consumer Staples 5.5 Basic Materials 5.2 Energy 4.2 Health Care 3.5 Telecommunications 2.8 Communication Services 1.1 Real Estate 0.9 Utilities 0.7 ----- Total 100.0 ===== Country Weightings % of portfolio United Kingdom 99.1 United States 0.9 ----- Total 100.0 =====

Ten Largest Equity Investments Company	% of portfolio
4imprint Group	2.8
Gamma Communications	2.8
CVS Group	2.7
Watches of Switzerland	2.6
Oxford Instruments	1.9
Impax Asset Management	1.8
Ergomed	1.8
Qinetiq Group	1.7
Bloomsbury Publishing	1.7
Breedon	1.6

Commenting on the markets, Roland Arnold, representing the Investment Manager noted:

During January the Company’s NAV per share rose by 3.2% to 1,618.14p on a total return basis (with debt at fair value), while our benchmark index rose 5.0%.¹ For comparison the large cap FTSE 100 Index returned 4.3%.¹

Equity markets had an exceptionally strong start to 2023 with optimism for a dovish stance from central banks. This, combined with lower energy prices and a potential boost from China’s accelerated reopening, has resulted in the more positive performance of the market. Bond yields fell and “risk on” sectors rose, whilst sectors that proved resilient in 2022 underperformed. In the US, the dominant market narrative shifted from recession to soft-landing. Both headline and core inflation eased as goods prices fell further than the market expected and core services excluding shelter surprised on the downside. On the other hand, jobs growth slowed further but still showed resilience as the unemployment rate fell unexpectedly to 3.5%, reverting to a historic low. Labour costs slowed for the third consecutive quarter though, signalling that wage inflation is potentially starting to roll over despite a tight labour market, adding further fuel to the fire that interest rate hikes are nearing the peak.

Europe returned to growth for the first time since mid-2022 as the composite Purchasing Managers’ Index (PMI) rose for a third consecutive month. This showed that activity was improving, led by services, as the energy shock relented and further reinforced the European Central Bank’s resolve of further monetary tightening. This rise in Eurozone PMI contrasted with an unexpected deterioration in the UK, where the corresponding index recorded the sharpest decline in activity in 2 years. Another factor that fuelled confidence was the fact that the mild winter in Europe has meant European gas storage was 30% higher than in 2021. In China, Q4 2022 GDP beat depressed expectations after the zero-COVID-19 policy was suddenly eased. The economy is expected to rebound in 2023 as domestic consumption and investment are expected to pick up with Chinese households having accumulated over USD 2.6 trillion of bank deposits in 2022.

The Company lagged the market rally during the month, however to some extent the annual index rebalance which took place on the 1^st January 2023 was unhelpful, with some of the recent additions to the index, which we have decided to avoid, such as Asos and Carnival, experiencing significant gains. It is worth noting that 2023 has seen the largest ever impact from the “fallen angels” (companies that have seen a dramatic fall in their market value) coming into our benchmark. The largest detractor to performance during the month was Spirent Communications, which fell after the company announced that trading would be more heavily weighted to the second half of the year –as their customers have been delaying their investment decisions. Having reported a disappointing operational update in December and announcing the deal with Tailwind Energy, Serica Energy remained weak in January as falling gas prices continued to weigh on the shares. Shares in Robert Walters fell back after the company warned that full year profits would be below market expectations as a result of softening recruitment activity across many of the groups key markets.

Watches of Switzerland rebounded in January, having been weak in December despite releasing very strong results in the month. Our view remains that the luxury watch category remains strong overall and Watches of Switzerland remains well placed to gain share as a key distribution partner for brands both in existing geographies and in new markets (predominantly Europe). Grafton rallied after a very positive update in January reporting revenue and profit growth ahead of expectations. Shares in Central Asia Metals rallied during the month on the back of better-than-expected production results in the fourth quarter.  The company looks well set to benefit from strengthening copper and zinc prices as China reopens, and longer term the shares offer exposure to the ongoing energy transition.

With equity markets having made a strong start to the year, our outlook remains unchanged. We believe 2023 will see continuation of recent themes of uncertainty; Russia/Ukraine war, China, supply chains and inflation. However, we expect to see an end to interest rate rises and we think inflation is peaking. Generally speaking, financial conditions are not too stretched; corporates and consumers are reasonably well capitalised, and banks have plenty of capital. As such the path of employment will dictate the consumer outlook but we continue to expect the trough to be shallower than in previous recessions.

Industrial activity is likely to decline as inventory works through the system, but given major markets such as automotive and aerospace were seeing choked demand through supply chain issues, again we expect a shallower trough. Housebuilding and RMI (repair, maintenance, improvement) will have a tough H1, but given the rapid re-pricing of mortgages post Truss, the outlook isn’t as bad as it was in September. Valuations have corrected quickly and looking back it appears all consumer orientated stocks overshot to the downside during the chaotic period around the Truss budget.

We expect to see M&A (mergers & acquisitions) picking up through the course of the year as management teams shift the focus away from returning excess cash flow to deploying it

We are not out of the woods yet. In the face of a likely tough reporting season, we could very easily see another sell off. Therefore, gearing within the portfolio remains reasonably low and we are keeping our powder dry, but we have been increasing this somewhat in recent weeks. However, with oil and gas prices lower year-on-year, China re-opening, US$ weakening, shipping / logistics / factory gate prices dropping, much of the inflation pressure of last year could become deflationary during the course of this year.

Against this difficult backdrop, we remind ourselves that many equity markets (Europe, UK) are structurally under owned and could benefit as sentiment turns and investors begin to reduce these underweights. We remain focused on bottom-up company specific analysis to identify high quality, nimble businesses, operated by entrepreneurial management teams, with strong market positions and resilient cash-flows. These are the types of businesses that we believe will be best placed to manage and thrive in the current environment. Historically these periods have been followed by strong returns for the strategy and presented excellent investment opportunities.

¹Source: BlackRock as at 31 January 2023

24 February 2023

ENDS
 

Latest information is available by typing www.blackrock.com/uk/brsc on the internet, "BLRKINDEX" on Reuters, "BLRK" on Bloomberg or "8800" on Topic 3 (ICV terminal).  Neither the contents of the Manager’s website nor the contents of any website accessible from hyperlinks on the Manager’s website (or any other website) is incorporated into, or forms part of, this announcement.