The equity fund with the best risk-adjusted return

2 mins. to read
The equity fund with the best risk-adjusted return

The best way to assess the performance of an active fund is to look at its risk-adjusted return, which measures how much value the manager has added per unit of risk. Over the ten years to the end of December 2017 the top investment trust using this metric was BlackRock Smaller Companies (LON:BRSC), which was able to deliver consistent market-beating returns throughout the period.

Risk-adjusted returns can be calculated using the Information Ratio, which is the manager’s active return relative to the benchmark divided by the tracking error. Normally anything in the range of 0.4 to 0.6 is considered pretty good, so it is remarkable that BlackRock Smaller Companies has achieved a figure of 1.4 over the last decade. To put this into context, there was only one other investment trust that managed an Information Ratio of more than 1 over the same period.

The data strongly suggests that the manager, Mike Prentis, who started in September 2002, has successfully been able to add considerable value via his stock selection decisions over a long period of time and in many different market conditions. This is backed up by the fact that he has outperformed his Numis Smaller Companies plus AIM benchmark in each of the last 15 years.

In 2017 the fund achieved a NAV total return of 20.8%, which was well ahead of the 8.3% rise in the benchmark, with the outperformance being driven by stock selection and the gearing that helps to boost returns in a rising market. Over the last 15 years it has managed an astounding cumulative NAV total return of 1,255% versus the 364% increase in the index.

Prentis has put together a diversified portfolio of 170 UK small and mid-cap stocks. Most of these are core long-term holdings that he has identified on the basis that they have proven and trustworthy management, a strong market position, a long track record of earnings growth, good conversion of earnings into cash and a sound balance sheet.

At the end of March, the ten largest positions accounted for just 16.8% of the assets. These included the likes of Dechra Pharmaceuticals, Robert Walters, Avon Rubber and Big Yellow.

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The manager is optimistic about the outlook for the portfolio and thinks that the global economy is in good shape, which should help given that more than 50% of the underlying revenues are generated overseas. His exposure to the domestic UK economy is more defensively oriented.

BRSC is mainly focused on capital growth, yet the strong increase in underlying earnings and dividends over the last ten years has enabled the fund to raise its dividend from 4.9 pence per share to 26 pence per share. This means that it is now yielding 1.4%.

Normally this sort of fantastic performance record would result in the shares moving on to a premium to their net asset value (NAV), but they have consistently traded at a discount, which currently stands at 6%.

BlackRock Smaller Companies has a market cap of £716 million and ongoing charges of 0.67%. It would make an ideal core exposure to growth-oriented UK small and mid-cap stocks with the investment trust analysts at Canaccord Genuity and Winterflood both rating it as a buy.

Comments (1)

  • TonyA says:

    Mike Prentis actually stopped co-managing BRSC on 30 April 2018: see his profile at Trustnet. The manager is now Roland Arnold.

    Prentis also co-managed BRSC’s sister company BlackRock Throgmorton until 31 December 2017, which has a very similar performance history to BRSC. The manager is Daniel Whitestone. One feature that distinguishes THRG is its CFD (contracts for difference) portfolio, which allows the manager to change the trust’s overall exposure to the market and profit from underperforming stocks via a short book; if handled well, this might give some protection in a falling market.

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