Holly Cook: Morningstar analysts rate well over 1,000 funds and to discuss one specific rating, I'm joined today by Jackie Beard, Director of Closed-End Fund Research.
Jackie, thanks very much for joining me.
Jackie Beard: Hi Holly.
Cook: So today we're talking about the Throgmorton Trust (THRG). You rated it Silver. Does that indicate you've got a high conviction?
Beard: Yes it does, and so there are a few things that we like here, but first and foremost it's very much the management duo behind this fund. It's a UK smaller cap equities [fund]. The two guys running it—Richard Plackett and Mike Prentis—very long experience in this sector and they live and breathe UK smaller companies. In fact they met way back in the 1980s when they were both working at 3i, which itself is a small cap expert.
Mike Prentis has been running this fund since 2002, when it was in its former guise before BlackRock won the mandate, and when 3i sold off their asset business and BlackRock won the mandate, Mike was very happy to come across with it because of course he knew Richard Plackett, who was by then heading up the UK small cap team at BlackRock. It's quite a small team, but it's very tight, it's very cohesive. They've been together a long time and they very clearly know their universe very well. So, yes, resources, very, very strong on that.
Cook: So you mentioned this is a cohesive team, but they actually manage separate parts, is that right?
Beard: That's right. It makes this one quite different from its peers. So there are two portfolios: Mike Prentis is responsible for the bulk of the portfolio, which is in straightforward equity investing in small caps; but then there's an extra 30% on top of that core part, which is the gearing part, which is Richard Plackett's Contract for Difference portfolio. So he's using CFDs. And the way they'll run it, typically, is Mike will have core holdings in the main part of the funds and if their conviction is particularly strong on certain names, then Plackett will go and buy CFDs on those and try and increase the exposure that way rather than by the underlying asset.
Conversely, if they come out of a meeting and think there was a fundamental flaw in a company, they can take a short CFD position, so they are really trying to maximise the value they can get from company meetings. It makes it a little bit different. We're seeing quite a few people using CFDs now, but [Prentis and Plackett] have been doing it quite a bit longer than most of their peers. It also means that they can short sectors and themes as well, so if they think there is a fundamental problem in the economy, they can short that sector. It really makes it a quite interesting portfolio.
Cook: Yes, so it sounds like an interesting setup. Has it actually worked for shareholders?
Beard: Yes it has and that's again something else that we're very positive about. So they took over in July '08—quite a tricky time—they had quite a bit of work to do in the fund initially, but from the very beginning it was run in these two separate parts and it has very much added value for shareholders over the long-term. One of the things we like about BlackRock is that they will attribute the performance in separate parts. So, we can see very clearly how much value the CFD part is adding compared with the underlying stock selection from Mike Prentis as well, and they will both perform differently in different market conditions, but overall if you put it together, then yeah, so far they have done a great job. The nice thing is that we can see both their track records at other funds too, because they are both long-standing equity managers.
Cook: This is all sounding very positive. Is there anything that you don’t like?
Beard: Unfortunately, yes. The performance fee we’re struggling a little bit with. So the base management fee is very cheap, it makes [the fund] very competitive, but for us when the performance fee kicks in that’s when we are starting to have hesitations. The way it's been structured is quite complicated. There are reasons for that and we understand that it all centres around reducing the performance fee when the underlying NAV is falling. So, if the markets go down, the managers take less and there is a tiered structure for that.
The problem is, in those scenarios, we appreciate the managers are still adding value by losing less for their shareholders, but the shareholders are still losing money, and we don’t really like the fact that managers are being paid for losing their shareholders’ money, even if it’s less than the market. Conversely, on the upside, when there is a positive NAV, they are getting quite a high performance rate and there is no hurdle rate either, so there is not even a barrier they have to jump over to generate that. Now that doesn’t mean the whole structure is flawed, because there are a couple of other extra bits which are sort of safeguarding investors' interests, but we just think overall as a structure it’s not really very shareholder friendly.
Cook: So the fund does perform for shareholders, but it comes at a cost?
Beard: It does, yes. To be fair, it's got our Silver rating, we still have very high conviction in the managers, we think they are doing a great job, but it’s an expensive fund.
Cook: Well thanks very much for giving us your synopsis on this fund, Jackie.
Beard: Thanks.
Cook: For Morningstar, I am Holly Cook. Thanks for watching.
