The past year was marked by political uncertainty in the UK, heightened geopolitical tensions overseas, and ongoing debate around the direction of travel for interest rates and artificial intelligence.

Against this backdrop, UK smaller companies face a challenging environment.

Despite this, Henderson Smaller Companies delivered strong, positive returns.

In the full year to the 31st of May 2026, the Henderson Smaller Companies share price total return rose by 12.6%, and the NAV total return rose by 11.8%.

This compared with the 12.3% return from the benchmark, the Deutsche NUMIS Smaller Companies index. While the company NAV marginally underperformed the benchmark by half a percent, absolute returns were strong and outperformed our sector peers.

We were pleased to declare a final dividend of 21.5 pence per share, taking the full year dividend to 29 pence per share, an increase of 3.6% year on year.

This marks the 23rd consecutive year of dividend growth at the company.

The period was characterized by continued market volatility.

Hopes for lower interest rates were repeatedly challenged by inflation concerns, geopolitical tensions, and political uncertainty in the UK.

Meanwhile, advances in artificial intelligence prompted investors to reassess which business models were likely to benefit from its proliferation and which would face disruption.

Stock selection was a positive contributor during the year, with several holdings delivering strong operational and earnings growth.

Top performance included Balfour Beatty, an international infrastructure and construction company which benefited from continued strong demand across the UK and US infrastructure markets, improving cash generation and returns to shareholders, and the launch of the new Evolve, Energize, and Explore strategy by the new CEO.

Renishaw, a UK engineering and precision measurement technology company, saw continued earnings upgrades driven by strong demand in end markets, including semiconductors, consumer electronics, and aerospace and defense.

Oxford Instruments, which provides specialist scientific and industrial technology, benefited from a disposal of its quantum technology business and strong order book growth in its advanced technologies divisions, which supplies equipment used to manufacture compound semiconductors, serving structural growth markets, including AI data centers and augmented reality.

Detractors to performance included Bellway, the UK house builder which came under pressure as higher interest rates continue to weigh on housing demand and affordability.

Not owning Ceres Power, a clean energy technology company developing fuel cell and hydrogen technologies, hurt our performance, and not owning Hotchild Mining, the precious metals producer, detracted as gold prices and commodity prices continued to rally during the year.

We continue to find exciting new investment opportunities and added CVS Group, a leading UK veterinary services provider benefiting from long-term trends in pet ownership and the humanisation of our pets.

Greencore, a leading manufacturer of convenience foods, which was in a good position to accelerate top line growth and tackle its cost base after the transformational acquisition of Bacopil.

Mitie Group was another addition.

It’s a facilities management business and professional services company sitting on record order books.

We also added to Saga, the specialist provider of ocean and river cruise holidays for over 50 customers, give us, giving us exposure to the strong silver pound.

We also added to a position in SSP Group, operator of food and beverage outlets and travel hubs, which benefits from continued recovery in passenger activity, a renewed focus on cash generation, and capital allocation.

We did this while simultaneously disposing of holdings in Eurocell and Genuit, building materials companies which we felt may be set for a period of poor performance given weak new build volumes.

We also disposed of Future, Mony group, and PageGroup, where we had concerns centered around AI disruption and structural challenges to these business models.

We also said farewell to Empiric Student Property, JTC, Just Group, and Kitwave, all businesses which were taken over last year.

Looking ahead, the environment remains complex.

Geopolitical tensions, inflation concerns, and questions over the path of interest rates continue to dominate headlines, while the recent change in Prime Minister has added a degree of short-term uncertainty in the UK.

Now, we know markets seldom give investors an easy ride, and we have been accustomed to managing your money through a polycrisis.

Encouragingly, we see good reasons to believe that interest rates are more likely to move lower than higher over the medium term.

But most importantly, your portfolio is not depending on it.

We have confidence that our longstanding investment process will yield a portfolio which is diversified by design but deliberate in its construction, with good exposure to everything from international industrial companies to UK domestic cyclicals trading on trough multiples on trough earnings.

We remain encouraged by several specific factors.

Number one, forecast earnings growth remains positive, and earnings momentum is improving in the portfolio.

Number two, at the same time as this is happening, UK smaller companies continue to trade at a substantial discount to both their own history and international peers.

Finally, the steady flow of takeover activity across the market and within our own portfolio suggests that strategic buyers are already recognising this value.

After many years of narrow market leadership, a broadening of market returns feels increasingly overdue.

If that happens, UK smaller companies could be among the greatest beneficiaries.

In the meantime, we remain mindful of the challenges and look forward to the year ahead with cautious optimism.