Henderson Smaller Companies has a superb track record of rewarding shareholders
Thursday 27 Sep 2018 Author: James Crux

Investors keen to put money to work with UK equities, yet skittish about the domestic outlook given Brexit uncertainties, might find the 10.4% discount to net asset value (NAV) on Henderson Smaller Companies Trust (HSL) appealing.

Given more hesitant GDP growth, higher inflation and a hard-pressed consumer, the UK equities space remains unloved, yet value abounds and this trust’s unwavering mission to buy quality companies with above-average growth potential is driving impressive total returns.

Henderson Smaller Companies is managed by Neil Hermon, who has outperformed the Numis Smaller Companies benchmark in 14 of the last 15 financial years. He insists that investing in equities is about growth, but he remembers the bursting of the dotcom bubble and his portfolio has the bedrock of value.

Over the past 10 years, the trust has delivered 18.4% annualised total return, significantly outperforming the FTSE Small Cap Ex-IT TR benchmark index which achieved 11.3%. Shareholders have seen a 41-fold increase in the dividend over the past 15 years.

Growth at a reasonable price (GARP) investor Hermon wants to own companies that are profitable, cash generative and dividend-paying; over 90% of the portfolio’s stocks are income-yielding and this GARP approach drives above-average dividend growth, albeit with a lower than market starting yield of 2.3%.

The trust delivered a net asset value total return of 15.9% in the year to 31 May 2018, dwarfing the 5.3% return of the benchmark and boosted by the likes of NMC Health (NMC) – subsequently sold at a profit when it entered the FTSE 100 – as well as gains from chemical company Victrex (VCT) and litigation finance provider Burford Capital (BUR:AIM).

The trust has a portfolio of 108 holdings. Despite having ‘smaller companies’ in its name, there is a mid-cap bias with 62% of net assets in the FTSE 250 as at 31 August – a result of the fund manager’s desire not to sell his most successful smaller companies when they hit the mid-cap bracket.

Investors nervous about Brexit can also take comfort in the fact roughly half of the portfolio’s end market sales are generated away from UK shores.

Top 10 holdings include housebuilder Bellway (BWY), cinema operator Cineworld (CINE), precision engineer Renishaw (RSW) and fashion brand Ted Baker (TED).

We admire Hermon’s long-term approach and avoidance of unnecessary portfolio turnover, which helps to keep ongoing charges low. (JC)

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