Throgmorton Trust Regulatory News (THRG)

BlackRock Throgmorton Trust plc

(Legal Entity Identifier: 5493003B7ETS1JEDPF59)

Information disclosed in accordance with Article 5 Transparency Directive and DTR 4.2

Half Yearly Financial Report 31 May 2023

1 The change in net assets reflects portfolio movements, the purchase of the Company’s own shares and dividends paid during the period.

2 The Company’s Benchmark Index is the Numis Smaller Companies plus AIM (excluding Investment Companies) Index. With effect from 22 March 2018, the Numis Smaller Companies plus AIM (excluding Investment Companies) Index replaced the Numis Smaller Companies excluding AIM (excluding Investment Companies) Index as the Company’s Benchmark Index. From 1 December 2013 to 21 March 2018, the Company’s Benchmark Index was the Numis Smaller Companies excluding AIM (excluding Investment Companies) Index. Prior to 1 December 2013, the Company’s Benchmark Index was the Numis Smaller Companies plus AIM (excluding Investment Companies) Index. The performance of the Benchmark Indices during these periods has been blended to reflect these changes.

3 Alternative Performance Measures, see Glossary contained within the Half Yearly Financial Report.

4 Further details are given in the Glossary contained within the Half Yearly Financial Report.

CHAIRMAN’S STATEMENT

Dear Shareholder

PERIOD HIGHLIGHTS  

· NAV per ordinary share increased by 0.1%, versus the decrease in the Benchmark Index of 2.4%, an outperformance of 2.5 percentage points

· Share price return flat at 0.0%

· Earnings per share increased by 38.2% year-on-year

· Interim dividend declared of 3.30p per share (31 May 2022: 2.60p)

· Share rating remained stable ending the period at 5.1% (30 November 2022: 5.0%). Average discount during the period of 4.3%, compared with the weighted average discount for the rest of the peer group of 11.3%

· A total of 863,079 ordinary shares were repurchased into treasury for a total consideration of £5,076,000

OVERVIEWThe six months to 31 May 2023 were once again dominated by powerful macroeconomic drivers. High inflation coupled with the threat of contagion from the US banking crisis acted to exacerbate an already nervous UK market. Stubborn inflation and persistent wage growth data saw the Bank of England (BoE) implement a 50-basis point rise in the base interest rate in June raising interest rates to 5.0%, the highest level since 2008. However, UK inflation rose by 7.9% in the 12 months to 30 June 2023, a fall from 8.7% in May, and down from the recent peak of 11.1% in October 2022. This is the lowest inflation figure for over twelve months and is indeed positive news, although it remains significantly above the BoE’s 2% target. As the BoE wrestled with the conundrum of bringing down inflation whilst avoiding an economic recession, the negative sentiment towards UK assets reported in the 2022 Annual Report continued to weigh heavily on our asset class. Our Portfolio Manager’s high-quality growth style remained firmly out of favour throughout the period under review as rising interest rates adversely impacted company valuations of growth shares.

Against this challenging economic backdrop, our Portfolio Manager, Dan Whitestone, remains optimistic about the longer-term prospects for the companies within our portfolio, and for the asset class more broadly. While the market continues to express a pessimistic view of the outlook in company valuations, he highlights that trading and, importantly, earnings remain strong for many of the companies within his portfolio. Despite the negative sentiment around the outlook, the UK economy has displayed notable resilience, with household balance sheets and corporate earnings in better shape than many anticipated. A much-feared UK recession in 2023 is now expected to be avoided and a return to modest levels of growth in 2024 is forecast by the BoE.

As you will read in the Portfolio Manager’s Report which follows, our portfolio is constructed of differentiated and innovative companies, with strong balance sheets, consistent cash flow and the financial resilience to weather the storm. Our Portfolio Manager believes the challenging macroeconomic conditions described above will expose weaker competitors who will flounder against a backdrop of demand weakness, wage inflation and margin pressure. He trusts that his portfolio of ‘best of breed’ companies will prosper and consolidate their market position.

PERFORMANCEOver the six months to 31 May 2023, the Company’s Net Asset Value (NAV) return was +0.1% compared to a return of -2.4% from the Company’s Benchmark Index, an outperformance of 2.5 percentage points. The Company’s share price was flat over the period, returning 0.0% and outperforming the Benchmark Index by 2.4 percentage points. Since the period end and up to the close of business on 21 July 2023, the Company’s NAV has risen by 1.6%, and the Benchmark Index has risen by 2.4% (all figures with dividends reinvested). Over the five and ten-year periods to 31 May 2023, the Company’s NAV returned +11.8% and +150.9%, and the share price returned +18.1% and +185.2%, versus the Benchmark Index returns of -0.1% and +66.0% over the same period.

As I reported in the annual report for the year to 30 November 2022, the Company’s relative underperformance for that financial year was largely a result of the impact of a higher than usual gross and net exposure as we entered the first quarter of 2022. The outbreak of the war in Ukraine coupled with an acute market rotation from Growth to Value resulted in a broad derating across the stocks within our portfolio, despite generally good corporate trading results. Our Portfolio Manager believes there is now, more than ever, a disconnect between the underlying fundamentals (sales growth, cash flow and earnings) and the valuations ascribed through the prevailing share price.

The Board continues to believe that the Company’s investment philosophy and approach remain compelling and will, in time, enable the Company to resume the delivery of consistent strong absolute and relative returns to our shareholders.

Further information on the Company’s performance and the factors that contributed to performance during the period and the outlook for the second half of the financial year are set out in the Investment Manager’s Report below.

Performance record to 31 May 2023 (with dividends reinvested)

REVENUE RETURN AND DIVIDENDS The revenue return per share for the period amounted to 8.46 pence per share, compared to 6.12 pence per share earned during the same six-month period last year, an increase of 38.2%. It is positive to see that despite the broader market turmoil, the income generated from our investment portfolio has increased significantly.

The Board recognises that, although the Company’s objective is capital growth, shareholders value consistency of dividends paid by the Company; an interim dividend of 3.30p per share has therefore been declared (2022: 2.60p per share), payable on 1 September 2023 to shareholders on the register on 4 August 2023 (the ex-dividend date is 3 August 2023). The interim dividend is fully covered by revenue generated by the portfolio during the period.

SHARE RATING During the six months to 31 May 2023, the Company’s share rating ranged between a discount to NAV of 1.0% and a discount to NAV of 6.7%, ending the period at a discount of 5.1% (30 November 2022: 5.0%). This compares very favourably with the weighted average discount of the UK Smaller Companies peer group which ended the period at an average discount of 13.0%.

The Board believes that the best way of addressing any discount to NAV over the longer term is to generate good performance and to create demand for the Company’s shares in the secondary market through broadening awareness of the Company’s unique structure and other attractions. In determining whether the premium/discount to NAV (the share rating) at which the Company’s shares trade is excessive or otherwise, the Board considers several factors. These may include but are not limited to whether the share rating is commensurate with the current demand for UK Smaller Companies and whether the Company’s shares were trading in normal market conditions; the ongoing attractiveness of the investment proposition, in particular the strength of the portfolio management team and process; and the strong long-term performance delivered for shareholders, both in absolute and relative terms.

During the period the Company bought back a total of 863,079 ordinary shares for a total consideration of £5,076,000 to be held in treasury. The advantage of holding shares in treasury over cancelling them is that they remain listed. This means that where there is an opportunity to re-issue these shares, the Company does not have to pay additional fees for admission to trading as would be required with an issue of new shares. It is the Board’s policy that it will generally only take shares into treasury where it believes there is a reasonable likelihood of re-issue in the future. All shares were bought back at a discount to the prevailing NAV and were therefore accretive to existing shareholders. Since 31 May 2023 and up to the latest practicable date of 21 July 2023, a further 653,500 shares have been bought back for a total consideration of £3,729,000. As at 21 July 2023, the Company’s shares were trading at a discount of 6.8% versus an average discount for the rest of the peer group of 13.1%.

The Board believes that the share buy back activity undertaken has helped reduce the volatility in our share rating, as evidenced by a consistently tighter discount relative to the peer group average. As we navigate these more volatile and uncertain markets, your Board will continue to monitor the Company’s share rating and may deploy its powers to issue or buy back the Company’s shares where it believes that it is in shareholders’ long-term best interests to do so.

CORPORATE GOVERNANCE The Board takes its governance responsibilities very seriously and follows best practice requirements as closely as possible. As I reported in last year’s Annual Report, we have complied with all applicable regulation and guidance with regard to matters of board diversity such as the FTSE Women Leaders Review and the recommendations of the Parker Review, now enshrined in the UK Listing Rules. More recently, the Board has sought assurances from our Manager that it has made suitable arrangements for its compliance with the FCA’s new Consumer Duty regulation, which comes into force on 31 July 2023.

However, the corporate governance environment in which the Company operates continues to evolve: the FRC has recently published revised minimum standards for FTSE 350 audit committees and is currently consulting on proposed changes to the UK Code, which include, amongst other matters, a focus on internal control, audit committees, ESG consideration and Directors’ time commitment and the concept of overboarding. The Board remains committed to exercising the highest standards of good governance and, as we do each year, will report to shareholders in the Annual Report on our compliance with the UK Code of Corporate Governance and other matters of good governance.

SHAREHOLDER COMMUNICATION We appreciate how important access to regular information is to our shareholders. To supplement our Company website, we offer shareholders the ability to sign up to the BlackRock’s Trust Matters newsletter which includes information on the Company as well as news, views and insights on the investment trust market. Information on how to sign up is included on the inside cover of the Half Yearly Financial Report.

OUTLOOK As you will read in his report which follows, our Portfolio Manager describes the macroeconomic factors which have impacted upon performance, sentiment towards our asset class generally, and on his high-quality growth style in particular. Nonetheless, he is optimistic about the future and is encouraged by what he believes is a mispricing within UK small and mid-caps, as evidenced by the disconnect between earnings and valuations seen in P/E ratios and the divergence between UK small cap and large cap, the largest for many years. UK smaller companies also look very good value, with the twelve month forward price-earnings ratio for FTSE UK Small-Cap Index averaging 9.4x1 and the FTSE 250 Index averaging 10.8x1. This compares favourably with other developed markets such as the US and Europe, with the twelve month forward price-earnings ratio for the S&P 500 Index averaging 19.3x1 and the Eurozone (as measured by the Eurostoxx Index) averaging 12.2x1. There are of course headwinds for UK growth stocks, most notably further interest rate increases anticipated during 2023. There are also indications that we may be reaching the peak of the current interest rate hiking cycle, which may be the catalyst for a change in sentiment towards UK smaller companies and in turn a potential re-rating of our asset class. This, he believes, presents a compelling investment opportunity for the medium to long-term investor.

Our Portfolio Manager’s focus on financially strong companies with innovative and disruptive business models and market leading offerings should, over time, see a return of the strong and consistent investment performance to which our shareholders have become accustomed. Your Board therefore remains fully supportive of our Portfolio Manager, his investment philosophy and the investment approach. On behalf of the Board, I would like to thank shareholders for their loyalty and patience.

CHRISTOPHER SAMUELChairman 27 July 2023

1 Source: Refinitiv Datastream.

INVESTMENT MANAGER’S REPORT FOR THE SIX MONTHS ENDED 31 MAY 2023

MARKET REVIEW AND OVERALL INVESTMENT PERFORMANCE The first six months of the financial year bore witness to a continuation of the macro volatility to which we have become accustomed. This has resulted in a somewhat challenging market environment to navigate, with stock markets grappling with macro-economic news, the latest inflation reports, and second guessing the monetary response from central bankers and its implications for economic growth. Despite the general bearish rhetoric about an inevitable recession and an implosion in corporate earnings, the results and outlook statements from corporates in developed markets has proved far more resilient. In the US, 81% of companies beat earnings expectations for quarter one and in Europe the figure is 74%. In many ways this is a continuation of the theme of the last nine months, i.e. many reasons to be concerned about the macro, offset by broadly positive corporate news flow and profitability. This tension continues to create volatile market conditions and few discernible trends, with the notable exceptions of artificial intelligence (“AI”) related shares and the diverging performance of US and UK stock markets this year, particularly pronounced in the absolute and relative underperformance of UK small and medium sized companies.

Equity markets made a strong start to the year, fuelled by a combination of China reopening, falling headline and core inflation in the US, as well as several positive corporate updates which highlighted a more resilient consumer outlook which all contributed to the increased optimism that a soft landing is not out of reach. However, optimism was short-lived, and markets sold off after a series of worse than expected inflation statistics and more hawkish noises from central banks. Further turbulence came when markets were hit by fears of a banking crisis following the collapse of Silicon Valley Bank, First Republic and Credit Suisse. Thankfully, the main issues were largely confined to US regional banks who had not adequately managed their interest rate risk or had an unusual concentration in non-insured deposits rather than a global systemic issue. Most recently, the rise of generative AI has been a hot topic running through markets, with investors digesting its implications, both positive and negative, across almost all industries and geographies.

On a global scale, markets have recouped some of the negative performance of 2022, driven heavily by the strength of US technology stocks on the back of the generative AI phenomenon. This is even more pronounced when comparing the returns of the technology stock-heavy Nasdaq to the more balanced S&P 500 (respectively returning 24.5% and 9.3% for the year to 31 May 2023). Within the UK market, concerns over the outlook for Chinese demand and global growth, the lack of any notable tech exposure, coupled with a large bias towards resources and financials has resulted in the UK underperforming most global developed markets. The underperformance of UK small and mid-caps versus the FTSE 100 has continued; since the initial underperformance which began in 2021, the mid-cap FTSE 250 has underperformed the FTSE 100 by around 30 percentage points, which is the largest underperformance on record.

Critics of the UK will highlight the myriad challenges facing the UK to explain this underperformance, ranging from stubbornly high inflation (versus our European and US counterparts), and weak productivity and growth. Brexit has not, in our view, helped many of these issues, particularly workforce related problems such as staff shortages/availability and wage inflation. However, for all these woes, the financial performance from UK listed companies, both domestic and internationally focused, is far more robust. There is a growing disconnect between strong company fundamentals and falling share prices, driven in part by persistent outflows as investors move on to other areas. Indeed, UK mid-cap funds saw a -21% reduction in AUM from outflows over the last 12 months, compared to -4% from UK large cap funds. Currently, the only buyers of note for UK listed companies are the companies themselves and private equity firms.

PERFORMANCE REVIEW The Company’s NAV per share increased by +0.1% during the first half of the financial year, outperforming the benchmark which returned -2.4% (in Sterling terms with income reinvested). Whilst the relative return during the first half was positive, we feel this is not fully reflective of the strength in trading across the portfolio. We consider that a mispricing within UK small and mid-cap listed companies, is evidenced not only in the low price-to-earnings ratio for the small and mid-cap universe but also the extent of relative underperformance versus the FTSE 100. To put this into context, the FTSE 250 has underperformed the FTSE 100 in 17 of the last 24 months, with this now being the largest and longest period of underperformance on record, far exceeding that witnessed during the 2008 global financial crisis.

This Investment Manager’s report focuses on the long holdings within the portfolio as these are the drivers of the Company’s outperformance during the period and where the major contributors and detractors to performance lie. However, before turning to those holdings, we should note that the short book’s contribution for the period includes the negative performance from one of our largest shorts (a software company). This rose in the period before abruptly being suspended on the discovery of “significant, sophisticated and potentially fraudulent irregularities”. Since the suspension, the company in question has appointed an external investigator who has clarified that revenues for 2022 were overstated by 150% and bookings for 2022 were overstated by 1014% i.e. over 90% of bookings were fake. The board hope to be able to re-list the shares but we struggle to see any value in a business with a circa US$10 million revenue run rate and US$40 million of costs. Even assuming a lofty multiple of 10x sales on this new base, this would imply 90% downside to the valuation at suspension. Since the period end, the shares resumed trading after a four-month suspension and we closed our short, locking in a 96% share price fall which the Company will benefit from in the second half of the year.

Positive contributors to performance over the last six months have come from a broad range of companies, with no one company or theme driving an outsized portion of the overall Company return. The largest contributor to performance was the position in Games Workshop, which continued to deliver strong results through the period. Only recently described by some as nothing more than a “work-from-home winner” which caused their shares to halve in early 2022, Games Workshop has continued to grow revenues and profits ahead of expectations and indeed looks likely to close out their fiscal 2023 (May year-end) with sales and profits considerably higher than those achieved during the work-from-home era. In a year of limited new product launches (this is ahead of us) and rising costs, the strength of these results should not be underestimated. The recent news of a potential deal with Amazon to develop a TV series (specific details still unknown) should create a significant positive halo effect on marketing for the brand, in addition to the possible cash flow benefit from licensing.

Shares in Oxford Instruments strengthened further as the company maintained its record of beating expectations and raising guidance. We have commented in the past on the attractions of the long-term secular growth prospects of many of Oxford Instruments’ end markets, such as life science, compound semi-conductors, advanced materials and quantum technology. The strength of these markets, with robust funding across academia, corporates and governments, has contributed to the ongoing strength of their order books and revenue generation. While broad comparisons in sectors like Industrials or Consumer Services are generally best avoided, as no two companies are the same, but in this case, we think it is important to observe that Oxford Instrument’s results exemplify three key investor debates within the Industrials sector. First, Oxford Instruments have been successful in achieving price increases to offset their own cost pressures (easier to do when you are a small percentage of a customer’s overall cost, and are delivering genuine value-add). Second, Oxford Instruments did not achieve the levels of growth that were possible in their last two years due to supply chain challenges (now easing); this in our view reduces their own specific risk of a sharp slowdown amidst customer destocking (the same cannot be said of all companies in the sector). Third, there is already emerging evidence in their order books of the “reshoring” programmes we think will be long-term drivers of Industrial demand in the US.

Dechra Pharmaceuticals rose on the news it has received a cash offer from private equity group EQT, albeit only at a modest premium to where they raised money at the end of last year to acquire a pipeline of veterinary drugs which will accelerate growth in the 2024 financial year and beyond. Recent trading has proved more challenging than management anticipated, amidst destocking within the US wholesale channel. The more volatile trading conditions have also depressed Dechra Pharmaceuticals’ share price. In our view these issues are only transitory and a compelling long-term growth dynamic remains, but it is exactly this type of tension (near-term transient issues versus long-term compound growth) that private equity have capitalised on.

Stepping back, a clear theme to us is that despite the challenging and volatile environment, high-quality companies with market leading positions can continue to grow and deliver better-than-expected results. 4imprint Group, one of our top performers last year, once again reported impressive results showing 45% revenue growth year-on-year, while profits before tax rose by more than 240%. These results demonstrate the company’s ability to win share within a highly fragmented end market due to their recent marketing efforts to grow brand awareness, whilst they have a long track record of growing the revenues from their existing customer base through high service levels and product innovation. Shares in Dunelm Group rose after the company reported positive growth in both online and in-store sales, with upgrades to full-year profits guidance. To us, Dunelm Group is a well-invested and differentiated consumer company that has emerged from COVID-19 with an even stronger business model (post several years of digital investment and 2-man home delivery) and market position (capturing share across all demographics as people seek better value-for-money). Shares in Breedon moved higher after the company reported better than expected results, achieving margin expansion despite a circa 10% reduction in volumes and significant cost headwinds. We think Breedon has an enviable market position in the UK and is well placed to prosper when volumes recover.

Turning to the detractors, the biggest was Watches of Switzerland, where shares have continued to fall despite extremely robust sales growth. Fears continue that demand will erode sharply as the luxury watch category normalises after a period of over-earning (working-from-home, crypto millionaires, or Russian oligarchs) yet wait-lists remain robust and demand still far exceeds supply. The company did experience a recent small earnings downgrade attributable to margin pressure in the coming financial year from the rising cost of interest-free credit products in a higher interest rate environment. However, while this is disappointing, we do not consider it a threat to the investment case. The company is still growing strongly and we believe it has a good market position as a key route to market for luxury watch brands globally. Recent feedback from industry conferences suggests demand for the category remains strong. Valuation, at under 12x price to earnings for this current financial year with a net cash balance sheet looks extremely attractive to us given the runway of growth to take market share in both the US and Europe, and management’s stated desire to do value accretive acquisitions.

The second largest detractor was our long position in specialist pharmaceuticals business Ergomed, which suffered with the broader sell-off in UK small & mid-cap growth shares and specific fears over a slowdown in biotech funding. Ergomed specialises in drug development and drug safety, operating across two businesses (Clinical Research and Pharmacovigilance), focusing on high growth markets in oncology, rare diseases and drug safety, which we believe offer a long runway of future growth. Ergomed reported very strong trading across all divisions for the 12 months to 31 December 2022, with a positive outlook as its order book continues to grow, providing a high level of revenue visibility in the coming years, and therefore our investment case for the share remains unchanged. Ergomed updated the market in June, confirming a strong start to 2023 with solid revenue growth. Other detractors include Spirent which warned that their customers have been delaying their investment decisions as a result of the ongoing challenging economic backdrop, and direct-to-consumer retailer of swimming pool supplies in the US, Leslie’s, which fell in response to soft results impacted by the challenging backdrop and rising costs.

PORTFOLIO POSITIONING & OUTLOOKTo date, 2023 has seen a continuation of the themes of uncertainty; the impacts of the Russia/Ukraine war, China, supply chain disruption and inflation. However, despite the recent inflation figures and the subsequent Bank of England’s 50 basis points interest rate hike, we believe we are closer to the end of monetary tightening and that inflation is now falling, albeit slower than previously thought. As the year-on-year impact of inflation starts to roll over, the impending fall in utility bills will offer some meaningful shelter to those still to re-mortgage into a new fixed deal in the current climate. With 40% of home owners being mortgage free, and a large percentage of the mortgage book having remortgaged earlier this year, there are many who will benefit from strong employment, falling utility costs and higher interest on cash. Indeed many banks have upgraded their household cash-flow forecasts as a consequence and consumer confidence continues to remain robust. This is not to say that the outlook is positive in all ways, far from it. However, there are in our view some factors that run counter to the general tone of recent reporting on the UK economy. Generally speaking, we consider that financial conditions may not be as stretched as this reporting current suggests. Corporates and consumers are reasonably well capitalised, and banks have plenty of capital. The path of employment will dictate the consumer outlook but we continue to believe that the trough will be shallower than in previous downturns.

For UK domestic focused public limited companies (“PLCs”), 2023 will likely see growing dispersion in financial returns. Those with strong market share stories (digital, trading down, new product verticals etc.) will outperform and grow despite a more challenging backdrop. Input costs will (we expect) reverse for many. Financial stability will also be a key contributor to performance, with rising interest costs further eroding profitability in a more challenged consumer backdrop.

Industrial activity is likely to moderate as excess inventory works through the system (we can see evidence of destocking impacting the Chemicals companies for instance). However, given major markets such as automotive and aerospace were already seeing choked demand through supply chain issues, again we expect a shallower trough. Reshoring in the US, as well as several government programmes (such as measures in relation to semiconductor (chip) research and production and the Inflation Reduction Act) will provide additional tailwinds of growth for quite a few US focused UK listed small and mid-caps. Housebuilding and RMI (Repair, Maintenance and Improvement) have had a tough first half of the year, but we still believe the outlook is not as bad as it was in September 2022, and consensus forecasts are already conservatively struck. As such we think valuations are already pricing in a lot of bad news.

Whilst there is much that can be debated about the economic outlook, we think the valuation of UK small and mid-cap companies is compelling. It is therefore disappointing to us to see the continuing de-equitisation of the UK listed market continues writ large, with non-market participants seemingly taking a very different view on the value of company equity and their associated cash flows, as evidenced by i) corporate share buy-backs (the majority of our investments are buying back their equity), ii) corporate mergers and acquisitions (“M&A”) (i.e. Deutsche’s cash-bid for Numis), and iii) Private Equity (i.e. EQT’s cash bid for Dechra Pharmaceuticals). This is a trend we expect to continue. Private Equity is sitting on near record levels of cash (we estimate circa US$438 billion in Europe) which they are keen to deploy. We note that this de-equitisation trend may pose a challenge if a significant disconnect of company valuations from strong fundamentals drives a pick-up in M&A activity and results in companies that would otherwise provide compelling long-term investment opportunities being taken off the market. On the positive side, an increased market focus on the opportunities available in the UK small-cap space may catalyse a positive re-rating.

The portfolio’s positioning has not changed materially over the period. This reflects our preference for differentiated growth companies with an ability to win market share. Consumer Discretionary and Industrials tend to be our two biggest sector areas, and have increased marginally. The Company owns many long-standing positions such as Breedon, Grafton Group, Gamma Communications, Ergomed, Morgan Sindall, that have delivered successive positive updates but have continued to de-rate despite upgrades. We continue to add to these positions as we consider that they have a compelling risk/reward profile. New additions to the portfolio in recent months include Intermediate Capital Group, Permanent TSB, SIG, Future, MJ Gleeson and Crest Nicholson.

Whilst the backdrop is still tough overall, we believe there are reasons for optimism. The recent round of trading updates from our investments have generally been in-line with or better than expectations. However, with oil and gas prices lower year-on-year, China re-opening, USD weakening, and shipping/logistics/factory gate prices dropping, much of the inflation pressure of last year could become deflationary during the course of this year. The picture we see is one of a gradual recovery and in our view, this is not reflected in valuations so remains the biggest risk/reward opportunity for us. The underperformance of UK small and mid-cap companies is not something that we think can persist. We see similar dynamics in the US, with the Russell 2000 versus the Nasdaq back to levels last seen in the 2000 tech bubble. The portfolio now includes many companies on single digit price to earnings ratios, with double digit free cash flow yields, but unlike so many archetypical “value” sectors, have far superior growth prospects. As a result, the net market exposure of the Company is slowly increasing and is now around 106%, while the gross exposure is c.115%.

We thank shareholders for their ongoing support.

DAN WHITESTONEBLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED 27 July 2023

PORTFOLIO OF INVESTMENTS

1  Gamma Communications* (2022: 7th)Mobile TelecommunicationsMarket value: £18,766,000Share of net assets: 3.0% (2022: 2.8%)

Provider of communication services to UK businesses.

2  WH Smith (2022: 9th)General RetailersMarket value: £18,687,000Share of net assets: 3.0% (2022: 2.6%)

Retailer of books, stationery, magazines, newspapers and confectionary.

3  Breedon (2022: 12th)Construction & MaterialsMarket value: £17,506,000Share of net assets: 2.8% (2022: 2.4%)

Supplier of construction materials.

4  4imprint Group (2022: 3rd)MediaMarket value: £17,311,000Share of net assets: 2.8% (2022: 3.1%)

Supplier of promotional merchandise in the US.

5  CVS Group* (2022: 5th)General RetailersMarket value: £17,309,000Share of net assets: 2.8% (2022: 2.9%)

Operator of veterinary surgeries.

6  YouGov* (2022: 11th)MediaMarket value: £17,149,000Share of net assets: 2.8% (2022: 2.4%)

Provider of survey data and specialist data analytics.

7  Diploma* (2022: 8th)Support ServicesMarket value: £16,695,0001Share of net assets: 2.7% (2022: 2.7%)

Supplier of specialised technical products and services.

8  Grafton Group (2022: 13th)Support ServicesMarket value: £16,219,000Share of net assets: 2.6% (2022: 2.1%)

Builders’ merchants in the UK, Ireland and Netherlands.

9  Watches of Switzerland (2022: 1st)Personal GoodsMarket value: £15,569,000Share of net assets: 2.5% (2022: 3.3%)

Retailer of luxury watches.

10  Ergomed* (2022: 6th)Pharmaceuticals & BiotechnologyMarket value: £15,515,0001Share of net assets: 2.5% (2022: 2.9%)

Provider of pharmaceutical services.

Percentages shown are the share of net assets.

The market value shown is the gross exposure to the shares through equity investments and long derivative positions. For equity investments, the market value is the fair value of the shares. For long derivative positions, it is the market value of the underlying shares to which the portfolio is exposed via the contract. Percentages in brackets represent the portfolio holding as at 30 November 2022.

1 Includes long derivative positions.

* Traded on the Alternative Investment Market (AIM) of the London Stock Exchange.

^ The market value shown is the gross exposure to the shares through equity investments and long derivative positions. For equity investments, the market value is the fair value of the shares. For long derivative positions, it is the market value of the underlying shares to which the portfolio is exposed via the contract.

Percentages shown as a % of net assets.

At 31 May 2023, the Company held equity interests in four companies comprising more than 3% of a company’s share capital as follows: Tatton Asset Management: 3.8%; SigmaRoc: 3.5%; Eckoh: 3.1%; and Ergomed: 3.0%.

Fair value and gross market exposure of investments as at 31 May 2023

The Company uses gearing through the use of long and short derivative positions. Gross and Net Gearing as at 31 May 2023 were 115.5% and 108.3% respectively (31 May 2022: 115.1% and 102.5%; year ended 30 November 2022: 109.3% and 104.3% respectively). Gross and Net Gearing are Alternative Performance Measures, see Glossary contained within the Half Yearly Financial Report.

1 Fair value is determined as follows:

– Long equity investment positions are valued at bid prices where available, otherwise at latest market traded quoted prices.

– The sum of the fair value column for the derivative contracts totaling £84,547,000 represents the net fair valuation of all derivative contracts, which is determined based on the difference between the notional transaction price and market value of the underlying shares in the contract (in effect the unrealised gains/(losses) on the exposed long and short derivative positions).

– The exposure to securities held through long derivative positions directly in the market would have amounted to £84,175,000 at the time of purchase, and subsequent movement in market prices have resulted in unrealised losses on the long derivative positions of £(633,000) resulting in the value of the total long derivative market exposure to the underlying securities decreasing to £83,542,000 as at 31 May 2023. If the long positions had been closed on 31 May 2023, this would have resulted in a loss of £(633,000) for the Company.

– The notional exposure of selling the securities gained via the short derivative positions would have been £(23,369,000) at the time of entering into the contract, and subsequent movement in market prices have resulted in unrealised gains on the short derivative positions of £1,005,000 resulting in the value of the total short derivative market exposure of these investments increasing to £(22,364,000) as at 31 May 2023. If the short positions had been closed on 31 May 2023, this would have resulted in a gain of £1,005,000 for the Company.

2 Gross market exposure for equity investments is the same as fair value; bid prices are used where available and, if unavailable, latest market traded quoted prices are used. For both long and short derivative positions, the gross market exposure is the market value of the underlying shares to which the portfolio is exposed via the contract.

3 The gross market exposure column for cash and cash equivalents has been adjusted to assume the Company traded direct holdings, rather than exposure being gained through long and short derivative positions.

DISTRIBUTION OF INVESTMENTS AS AT 31 MAY 2023

The above percentages are calculated on the net portfolio as at 31 May 2023. The net portfolio is calculated as long equity and derivative positions, less short derivative positions as at 31 May 2023.

ANALYSIS OF THE PORTFOLIO

Market capitalisation as at 31 May 2023 

1 The above investments may comprise exposures to long equity and long derivative positions.

Source: BlackRock.

Position size as at 31 May 2023 

1 The above investments may comprise exposures to long equity and long derivative positions.

Source: BlackRock.

PORTFOLIO HOLDINGS WITHIN KEY BENCHMARK INDICES

Portfolio holdings within the Benchmark Index (the Numis Smaller Companies plus AIM

(excluding Investment companies) index) 

Source: BlackRock.

1 Long exposure plus short exposure as a percentage of the portfolio in aggregate excluding investment in BlackRock’s Institutional Cash Series plc – Sterling Liquid Environmentally Aware Fund.

2 Long exposure less short exposure as a percentage of the portfolio excluding investment in BlackRock’s Institutional Cash Series plc – Sterling Liquid Environmentally Aware Fund.

3 Holdings included within the Benchmark Index as at 30 November 2022 were 58.6% on a Gross Basis and 56.8% on a Net Basis.

INTERIM MANAGEMENT REPORT AND RESPONSIBILITY STATEMENT

The Chairman’s Statement and the Investment Manager’s Report above give details of the important events which have occurred during the period and their impact on the financial statements.

PRINCIPAL RISKS AND UNCERTAINTIES The principal risks faced by the Company can be divided into various areas as follows:

· Performance;

· Market;

· Income/dividend;

· Financial;

· Operational; and

· Regulatory.

The Board reported on the principal risks and uncertainties faced by the Company in the Annual Report and Financial Statements for the year ended 30 November 2022. A detailed explanation can be found in the Strategic Report on pages 40 to 43 and in note 16 on pages 103 to 115 of the Annual Report and Financial Statements which are available on the website maintained by BlackRock at www.blackrock.com/uk/thrg.

The Directors have also assessed the impact of market conditions arising from the conflict in Ukraine on the Company’s ability to meet its investment objective. Based on the latest available information, the Company continues to be managed in line with its investment objective, with no disruption to its operations.

In the view of the Board, there have not been any changes to the fundamental nature of the principal risks and uncertainties since the previous report and these are equally applicable to the remaining six months of the financial year as they were to the six months under review.

RELATED PARTY DISCLOSURE AND TRANSACTIONS WITH THE INVESTMENT MANAGER BlackRock Fund Managers Limited (BFM) was appointed as the Company’s Alternative Investment Fund Manager (AIFM) with effect from 2 July 2014. BFM has (with the Company’s consent) delegated certain portfolio and risk management services, and other ancillary services, to BlackRock Investment Management (UK) Limited (BIM (UK)). Both BFM and BIM (UK) are regarded as related parties under the Listing Rules. Details of the fees payable are set out in note 4 and note 11 of the financial statements below.

The related party transactions with the Directors are set out in note 12 of the financial statements below.

GOING CONCERN The Board remains mindful of the ongoing uncertainty surrounding the potential duration of the conflict in Ukraine and its longer-term effects on the global economy and the current heightened geopolitical risk. Nevertheless, the Directors, having considered the nature and liquidity of the portfolio, the Company’s investment objective and the Company’s projected income and expenditure, are satisfied that the Company has adequate resources to continue in operational existence for the foreseeable future and is financially sound.

The Company has a portfolio of investments which are predominantly readily realisable and is able to meet all its liabilities from these assets. Accounting revenue and expense forecasts are maintained and reported to the Board regularly and it is expected that the Company will be able to meet all its obligations. Ongoing charges for the year ended 30 November 2022 were 0.54% of net assets and it is expected that this is unlikely to change significantly going forward.

Based on the above, the Board is satisfied that it is appropriate to continue to adopt the going concern basis in preparing the financial statements.

DIRECTORS’ RESPONSIBILITY STATEMENT The Disclosure Guidance and Transparency Rules (DTR) of the UK Listing Authority require the Directors to confirm their responsibilities in relation to the preparation and publication of the Interim Management Report and Financial Statements.

The Directors confirm to the best of their knowledge that:

· the condensed set of financial statements contained within the Half Yearly Financial Report has been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting; and

· the Interim Management Report, together with the Chairman’s Statement and Investment Manager’s report, include a fair review of the information required by 4.2.7R and 4.2.8R of the FCA’s Disclosure Guidance and Transparency Rules.

The Half Yearly Financial Report has not been audited or reviewed by the Company’s Auditor.

The Half Yearly Financial Report was approved by the Board on 27 July 2023 and the above responsibility statement was signed on its behalf by the Chairman.

CHRISTOPHER SAMUELFOR AND ON BEHALF OF THE BOARD 27 July 2023

STATEMENT OF COMPREHENSIVE INCOME FOR THE SIX MONTHS ENDED 31 MAY 2023

The total columns of this statement represent the Company’s Statement of Comprehensive Income, prepared in accordance with UK-adopted International Accounting Standards (IASs). The supplementary revenue and capital accounts are both prepared under guidance published by the Association of Investment Companies (AIC). All items in the above statement derive from continuing operations. No operations were acquired or discontinued during the period. All income is attributable to the equity holders of the Company.

The Company does not have any other comprehensive income/(loss). The net profit/(loss) for the period disclosed above represents the Company’s total comprehensive income/(loss).

STATEMENT OF CHANGES IN EQUITY FOR THE SIX MONTHS ENDED 31 MAY 2023

1 Final dividend of 8.50p per share for the year ended 30 November 2022, declared on 10 February 2023 and paid on 31 March 2023.

2 Final dividend of 8.00p per share for the year ended 30 November 2021, declared on 7 February 2022 and paid on 31 March 2022.

3 Final dividend of 8.00p per share for the year ended 30 November 2021, declared on 7 February 2022 and paid on 31 March 2022 and interim dividend of 2.60p per share for the year ended 30 November 2022, declared on 20 July 2022 and paid on 26 August 2022.

For information on the Company’s distributable reserves, please refer to note 9 below.

STATEMENT OF FINANCIAL POSITION AS AT 31 MAY 2023