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The Analyst: Throgmorton Trust boasts portfolio with a difference


Every now and again, it is refreshing to come across an investment that offers something different to the mainstream choices available. The Throgmorton Trust plc has been managed by Mike Prentis and Richard Plackett of BlackRock since July 2008. At its core is a portfolio of UK-listed small and medium-sized companies that Mike Prentis is responsible for selecting. This accounts for 100 per cent of the trust's net asset value (NAV). The unique selling point is Mr Plackett's CFD portfolio, which accounts for a further 30 per cent of NAV.

CFD stands for contract for difference, which allows an investor to benefit from share-price movements without owning the share. They agree with a counterparty, usually an investment bank, to exchange the difference between the value of a share on the date the contract is initiated and a specified future date. CFDs provide an efficient, cost-effective way to benefit from rising or falling share prices. However, they are not risk free. If the share price moves against the manager, he will lose money and there is a risk the counterparty could go bankrupt.

The process of identifying companies the managers are positive on is the same whether they are looking to buy physical shares or invest via a CFD. They look for a proven management team; strong market position with a unique product or brand; consistent record of earnings growth; strong cash generation; and a robust balance sheet with low debt.

There will generally be 50-70 core physical positions possessing all these attributes. There will also be some 'nursery' holdings that don't meet all the criteria but are expected to graduate to core holdings. There can be a further 70 CFD positions but there will be considerable overlap with the physical portfolio. CFDs are used to boost exposure to core holdings or take advantage of short-term opportunities.

Recently, the managers have concentrated on increasing exposure to companies selling their products into faster-growing regions. Hyder Consulting, for example, has exposure to Australia, China and the Middle East. It plans, designs and manages the development of water, highways, rail, defence and telecommunications solutions.

They also believe the outlook for the US is improving and one of the largest holdings is Ashtead Group, a plant hire company. Management continued to invest in growing the business throughout the downturn, and that has paid off. Not only is it capitalising on the improving outlook for the US construction industry, it is benefiting from the trend towards hiring, rather than buying, plant equipment.

The team meets up to 700 companies in a year, and it is inevitable they will find some they expect to experience harder times. The CFD portfolio gives Mr Plackett the flexibility to benefit from share price falls by taking short positions in such companies. The process for identifying short positions is essentially the opposite of how they identify long positions. They look for strategically challenged companies with over-optimistic management; contracting industries where there is little growth; highly indebted companies; and those not generating enough cash.

Presently, they are negative on companies supplying goods or service to the UK public sector, and retailers which face tough competition and often have burdensome leases.

The CFD portfolio means no further borrowing is needed to gear the portfolio. Mr Plackett varies the ratio of long to short positions depending on how positive the team are. Presently net market exposure (total long positions minus total short positions) is 105 per cent, indicating they are positive on the outlook for the stock market.

Messrs Prentis and Plackett are supported by a well-resourced team, and have built a diversified portfolio of companies that have demonstrated resilience in a variety of economic conditions. They tend to have more exposure to genuinely small companies and those listed on AIM than competitors or their benchmark index. This has worked against them recently as medium-sized companies have performed better, but over the long term they believe they can add value by exploring less well-researched areas of the market.

The CFD portfolio certainly differentiates the trust from its peers. Some will not like the added layer of complexity, but more adventurous investors might see an opportunity with the trust currently trading on a discount to NAV of approximately 18 per cent.

Richard Troue is an investment analyst at Hargreaves Lansdown, the asset manager, financial advisor and stockbroker. For more details about the funds included in this column, visit www.hl.co.uk/independent