Henderson Smaller Companies Investment Trust: September 2020 update

• Neil Hermon is an experienced manager with over three decades of experience
• The trust has held up better than the benchmark among falling markets
• Hermon’s approach, investing in high-quality smaller companies, has delivered impressive long-term results

How it fits in a portfolio

Henderson Smaller Companies Investment Trust aims to deliver long-term growth by investing in UK smaller companies. They have more room to grow than larger ones but their performance is more volatile and they’re higher risk. The trust could be used to help boost the growth potential of an adventurous portfolio, and could work well alongside other trusts or funds investing in larger UK companies, to give a broader exposure to the UK stock market. Investors in closed-ended funds should be aware the trust can trade at a discount or premium to net asset value (NAV).

Manager

Neil Hermon is an experienced manager with over three decades in the investment industry. He began his career as a chartered accountant with Ernst & Young, before moving to General Accident Investment Management (later to become CGU), where he was head of UK smaller companies. He joined Henderson in 2002 – the same year he took over the trust – and in 2013 became a Director of UK Equities. Along with the trust, Hermon manages two open-ended Janus Henderson UK smaller companies funds and co-manages a UK ‘multi-cap’ fund, which invests in companies of any size.

Process

Hermon invests in higher-risk small and medium-sized UK companies that he thinks have excellent long-term growth potential. His approach is sometimes labelled GARP – growth at a reasonable price – as he believes it’s important not to pay too much for a company’s shares based on its growth prospects. He runs a diversified portfolio with currently over 100 holdings, and prefers to stay invested for the long term.

Hermon uses what he calls the ‘4 Ms’ to judge the quality of a company; model – the business model, advantages over competitors and pricing power; management – the strategy, vision and governance of the management team; money – the company’s financial strength; and momentum – the ability of a company to keep growing its earnings in the future.

Companies that fit the 4M bill and have been recently added to the portfolio include defence products maker Chemring, video game developer Frontier Developments and eyewear frames maker Inspecs. Companies that Hermon felt no longer had strong enough prospects and were sold include car retailer Lookers and building materials distributor SIG, both of which recently lost senior management figures. Hermon also sold engineering design software company Aveva as it grew large enough to join the FTSE 100.

The manager can use gearing (borrowing to invest), which could help boost gains but increases losses so it’s a higher-risk approach. He can also use derivatives to help him invest, which increases risk too. Investors should refer to the latest annual reports and accounts and Key Investor Information for details of the risks and charging structure.

Culture

Janus Henderson Investors is a large investment firm with offices all over the world. It was formed in 2017 from the merger of two long-established groups – US-based Janus Capital Group and Henderson Global Investors.

It values experience, and so fund managers at the group have on average over two decades of investment experience. Sharing knowledge and ideas between investment teams is an important part of the culture. Managers have the flexibility to tap into the wider group’s resources for ideas and insights, but also have the freedom to do their own research and form their own views without having a ‘house view’ placed on them.

Cost

The trust has an ongoing annual charge of 0.42%. This is one of the lowest among UK smaller companies investment trusts. It also has a performance fee, although it didn’t apply during the 12 months to 31 May 2020 as the share price fell. We’d prefer it if there wasn’t a performance fee as it holds back investors’ returns. If held in a SIPP or ISA the HL platform fee of 0.45% per annum (capped at £200 per annum for a SIPP and £45 for an ISA) also applies. Our platform fee doesn’t apply if held in a Fund & Share Account.

Performance

During the trust’s financial year to 31 May 2020 its net asset value (NAV) fell 8.2% and the share price declined 6.9% as the discount narrowed. The trust currently trades on a 13.7% discount. While the losses are disappointing, the trust has fared better than the benchmark, which fell 15.9%.

The portfolio’s best performers during the period were computer games developer Team17, which benefitted from the increase in gaming during the coronavirus lockdown; e-learning services provider Learning Technologies, which has done well as corporate learning transitions from classroom to online; and protection equipment and milking solutions maker Avon Rubber, which has grown through an acquisition.

International cinema operator Cineworld on the other hand was a poor performer. The combination of a lot of debt taken on to buy other companies and every one of their cinemas shutting during lockdown hurt the share price. Litigation financer Burford Capital was also a significant detractor, after its share price fell steeply following allegations about the company’s solvency and corporate governance.

The trust paid a 23.5p dividend for the financial year, a 2.2% rise on the previous period’s payment. It currently yields 3.0%, although bear in mind income isn’t guaranteed and yields are variable.

Over the longer term Hermon’s delivered superb performance. Since he took over the trust in November 2002 it’s returned 1,107.7%* versus the FTSE Small Cap (ex investment trusts) index’s 236.7% gain. Remember past performance doesn’t guarantee future returns and all investments fall and rise in value so you may get back less than you originally invest.

Chart showing Henderson Smaller Companies Investment Trust performance under Neil Hermon

Past performance is not a guide to the future. Source: *Lipper IM to 31/08/2020.

Past performance is not a guide to the future. Source: Lipper IM to 31/08/2020.

Find out more about Henderson Smaller Companies Investment Trust, including charges

Henderson Smaller Companies Key Information Document