HSL ShareSoc Webinar Transcript:
Mike Dennis:
Good morning, and welcome to another live webinar with ShareSoc.
Today, you’ll be meeting Janus Henderson, and I’ll introduce you to their fund manager for the Henderson Smaller Companies Investment Trust very shortly.
My name’s Mike Dennis. I’m your host for this webinar and one of ShareSoc’s directors.
Today, I’m pleased to welcome Indri van Hien, fund manager of the Henderson Smaller Companies Investment Trust. Indri is going to take you through a short presentation as usual, and I’ll return at the end to host the Q&A session.
So, welcome, Indri. Over to you, and I’ll catch up with you later on.
Indri van Hien:
Thanks, Mike, and good morning, everybody.
Hopefully, you can see my slides and hear me.
I want to talk to you today about the uniquely attractive entry point we see in the UK small-cap market, why we think that after a lost decade this asset class could start to outperform large caps again, and how we seek to create value at Henderson Smaller Companies Investment Trust.
But first, a little about the trust.
At Henderson Smaller Companies, we aim to provide investors with long-term capital and income growth by investing in smaller companies listed in the UK. We believe this is where investors can access businesses at their most exciting stage of growth. We take a growth-focused approach and seek to identify those opportunities before others do.
Our philosophy is to capture the UK small-cap premium by remaining disciplined and ensuring the prices we pay do not fully reflect a company’s growth prospects and cash-generative fundamentals. We believe that it is this combination of earnings growth and valuation re-rating that drives superior returns over time.
Our investable universe comprises the bottom 10% of the FTSE market by market capitalisation. Initial investments are typically made in companies with market capitalisations between £150 million and £3 billion at the point of investment.
As a long-established trust with a strong long-term track record and around £560 million of net assets, we are one of the largest and most liquid trusts in the sector.
Our investment trust structure allows us to use gearing, and we benefit from attractively priced 30-year debt, paying only around 3% interest. That makes us a better credit than the UK government. Admittedly that’s a low bar, but it’s still impressive.
Alongside a strong record of capital returns, which has earned us AIC ISA Millionaire status, we also have a long track record of dividend growth, giving us AIC Dividend Hero status. While we are not an income fund, this is a positive by-product of our investment process, which focuses on cash-generative growth companies.
Who is the team behind this strategy?
I’ve been involved with the trust for nearly 13 years and became lead fund manager last year following the retirement of Neil Hermon, who led the strategy for 22 years.
Before joining what was then Henderson, I worked at PwC, where I qualified as an accountant. We believe accounting skills are particularly important in the small-cap space, where understanding cash generation and funding requirements is critical.
Both of us managing the portfolio are also analysts. We do our own stock picking and aren’t constrained by house lists or house views.
I work alongside Cassie Herlihy, who joined the team last November and brings a strong background in UK small-cap investing. While she isn’t an accountant, she has valuable banking experience in the sector and understands how businesses are really put together.
We’re also supported by dedicated research analyst Olivia Jones.
Although the strategy is run directly by the three of us, many others contribute indirectly. We work closely with specialist property, healthcare, technology and natural resources teams across Janus Henderson, as well as our ESG experts, who help us assess non-financial risks.
With over £400 billion of assets under management at Janus Henderson, we have excellent access to company management teams, boards and industry experts.
So why devote so much resource to UK small caps?
The first thing to say is that the small-cap effect is real. Over long periods, small-cap stocks have consistently outperformed large caps.
Since the Numis Smaller Companies Index began in 1955, it has delivered annualised returns of nearly 14% per year, significantly above the returns many investors seek from larger markets such as the S&P 500.
There are several reasons for this. Smaller companies often grow faster, are run by more entrepreneurial management teams and operate in innovative industries. But the most important factor is that this area of the market offers more opportunities for active investors to generate alpha.
Fewer analysts cover more stocks, creating greater dispersion in valuations and performance. That creates fertile hunting ground for stock pickers like us.
It’s also worth noting that small caps are difficult to access effectively through passive investing because liquidity is more limited. This is one of many reasons why active management remains important in this area of the market.
However, as many investors will know, the past decade has been a difficult one for UK small caps.
We’ve experienced Brexit, political instability, an energy crisis, inflation driven by the war in Ukraine and a significant interest-rate tightening cycle. These factors have weighed heavily on the UK economy, one of the most interest-rate-sensitive developed economies in the world.
Since the start of 2022, UK smaller companies have not only delivered disappointing returns in absolute terms, but have underperformed the FTSE 100 by more than 50%.
Investors tend to gravitate towards larger, more liquid stocks during periods of uncertainty and volatility.
Yet history shows that some of the strongest periods of small-cap outperformance have followed times of economic disruption. We saw this after the dotcom crash and again following the global financial crisis.
That is why we believe conditions for a recovery are now starting to emerge.
We believe inflation has peaked, interest rates are falling and economic conditions are gradually improving. Combined with attractive starting valuations and the prospect of investors diversifying away from the US, this could create a very favourable environment for UK small caps.
Let’s start with valuations.
UK equities are widely recognised as being cheap compared to international markets, large-cap peers and recent acquisition multiples. In our view, valuations remain near cyclical lows despite improving earnings prospects.
The FTSE 250 is trading near the bottom of its historic valuation range relative to large caps and the US market, which sits towards the higher end of its historical range.
The S&P 500 trades on over 20 times earnings, while our portfolio trades on less than 12 times earnings, despite forecast earnings growth that is broadly comparable.
That is very compelling in our view.
Private equity investors certainly agree. The pace of inbound M&A activity into the UK market continues to accelerate, driven largely by attractive valuations.
Public investors may be failing to notice these valuations, but private equity investors are certainly not.
The pace of inbound M&A into the UK market is not stopping, and part of the reason is that UK assets remain highly attractive on valuation grounds.
So what is changing?
Well, we think the interest rate environment is changing. In fact, we know it’s changing.
There is a strong negative correlation between the FTSE 250 and UK bond yields. In simple terms, small caps tend to underperform when bond yields are rising. Higher rates have been a significant headwind for UK domestic stocks because the UK economy is one of the most rate-sensitive developed economies in the world.
Falling base rates should help improve confidence, stimulate growth and ultimately encourage investors back into smaller companies.
One concern often raised is whether higher energy prices could force rates back up again. That is certainly a risk the market is considering. However, oil and gas prices remain well below their 2022 highs, labour markets are softer than they were then, and base rates are starting from a much higher level than they were before the inflation shock.
In our view, monetary policy was loose in 2022, whereas today it remains relatively restrictive.
I love this next slide because it really highlights the opportunity we see.
It compares key characteristics of the S&P 500, the FTSE 100 and our portfolio. What stands out is the greater opportunity for alpha generation in our part of the market. Stocks in the S&P 500 typically have more than three times as many analysts covering them as the companies in our portfolio.
At the same time, the earnings growth outlook for our companies is comparable to that of the S&P 500, despite many of our holdings still being at cyclical lows in terms of earnings.
We also see lower leverage, which supports resilience during periods of economic uncertainty.
Most importantly, the valuation of our portfolio is almost half that of the S&P 500 and below that of UK large-cap peers.
As discussion around AI bubbles, asset bubbles and US exceptionalism continues, we believe investors will increasingly recognise the attractive opportunities available in this oversold area of the market.
That’s important because small caps are highly influenced by investment flows. For the past decade, the dominant trend has been outflows. It won’t take much of a shift in allocation away from the US and back towards Europe and the UK to reignite interest in small caps.
And as I mentioned earlier, while these low valuations may be ignored by some public investors, they certainly aren’t being ignored by private equity.
The level of takeover activity involving UK-listed companies has accelerated significantly. We haven’t even reached the fourth quarter of the year, yet both the number and value of deals in 2026 have already surpassed where they were at this point last year.
Importantly, this activity is broad based. We’re seeing deals across industrials, healthcare and many other sectors. It’s not isolated to one corner of the market.
Buyers are also highly diversified, ranging from strategic acquirers to private equity firms from various geographies.
So far this year, eleven companies held in our portfolio have attracted takeover interest, and those are only the deals that have become public.
We don’t believe this trend is slowing down.
Which leads me back to the flows environment.
What we should expect to see is an increasing drumbeat of M&A activity causing more investors to sit up and notice the valuation opportunity in our part of the market.
As I said earlier, small caps are very much a flows-driven market. UK equities, both large and small cap combined, represent less than 4% of the MSCI World Index. A relatively small shift in global allocations from US equities back into UK equities would have a material impact on asset levels and valuations.
This chart shows flows into UK equity funds, which we use as a useful indicator of investor interest. Historically, UK small caps have performed particularly well in years when UK equity funds have experienced inflows.
What is encouraging today is that 2026 is shaping up to be a positive year for flows. At the moment, much of that money is going into large-cap equities, but historically those flows tend to work their way down through the market into small caps as confidence improves.
For the past four or five years I’ve regularly been asked what investment themes exist in the UK. Investors often compare us to markets exposed to artificial intelligence, obesity drugs and other fashionable themes. They’ll point out that the UK has Greggs listed while other markets have cutting-edge technology companies.
My reaction is always the same. So what?
The UK doesn’t need a fashionable theme to be attractive. In many ways it is an excellent diversifier away from the crowded US technology trade. As interest returns to the UK market, that should be supportive for both valuations and returns.
So, if you’re interested in UK small caps, why choose HSL?
We think this part of the market gives investors the opportunity to identify businesses before they become obvious and before they become large.
I’ve included our top holdings here and I’m pleased that many people listening today may never have heard of some of them. That’s exactly the point. Many of these businesses are niche innovators on their way to becoming national champions.
Take Renishaw, for example. The company’s metrology probes are used in manufacturing environments to ensure precision when producing highly complex components such as aircraft engine turbines. As manufacturing becomes increasingly automated and sophisticated, demand for this type of technology should continue to grow.
Or consider SigmaRoc, a leading producer of lime and industrial minerals. It operates in a highly concentrated industry with significant barriers to entry. The company benefits from long-life reserves, pricing power and customer relationships that often extend over decades.
In fact, SigmaRoc reported results this morning showing strong volume growth and demonstrating its ability to self-fund acquisitions. It recently acquired an asset in Lithuania at what we believe is an attractive valuation, and the shares have responded positively.
Now, some people may be wondering why there is a picture of a penguin on this slide.
Firstly, because fat penguins are excellent icebreakers.
More importantly, however, because penguins embody many of the qualities we believe are required to succeed in small-cap investing.
They are resilient and can survive harsh environments. We focus on quality companies with strong balance sheets and high-quality management teams for exactly that reason.
They are committed. We are long-term investors, with average holding periods of four to five years.
And they understand diversification. When penguins huddle together, they rotate positions so no single penguin bears all of the difficult conditions. That’s broadly how we think about portfolio construction.
So how do we create value?
First and foremost, we are long-term investors. Our portfolio is built from the bottom up through stock selection.
Our philosophy centres around identifying quality growth businesses at sensible valuations. In other words, we are GARP investors, focused on Growth At a Reasonable Price.
We’re looking for companies that are growing, whether through structural growth, cyclical recovery or turnaround situations, but where valuations do not fully reflect those growth prospects.
In simple terms, we’re trying to identify growth before everybody else does.
That re-rating potential can come from something as straightforward as increased analyst coverage or from a stock trading at a discount to peers despite having similar fundamentals.
Ultimately, we’re trying to combine earnings growth with valuation re-rating, because we believe that is the most powerful driver of long-term returns.
So what sort of companies do we look for?
Take Chemring.
Chemring operates in aerospace and defence, specialising in countermeasures, energetics and cyber intelligence solutions.
The changing geopolitical environment has increased the importance of defence spending across Europe. Energetics capacity is extremely constrained and governments are looking to rebuild stockpiles.
We believe this creates a highly supportive environment for Chemring’s long-term growth prospects.
Importantly, the business is not solely dependent on defence spending. Chemring also provides pyrotechnic components used in space exploration. One of its components was recently used in NASA’s Artemis II mission.
Another example is Genus, a global leader in bovine and porcine genetics.
The company recently received FDA approval for a genetically edited pig designed to reduce respiratory disease. It is now seeking approval in China, which represents a pork market many times larger than the United States.
We like Genus because it plays a critical role in what I like to call the original AI, artificial insemination.
It’s one of the rare businesses we own that has very little exposure to artificial intelligence disruption. No matter how sophisticated generative AI becomes, it still can’t compete with a prize breeding bull named Montana.
Finally, there’s CVS, one of the UK’s leading veterinary services businesses.
It should benefit from increasing pet ownership and the continued humanisation of pets. Many of the pets acquired during the pandemic are now reaching an age where veterinary treatment becomes more frequent and more complex.
For CVS, this creates a multi-year growth tailwind that we believe is only just beginning.
This chart illustrates how our GARP philosophy works in practice.
What we’re really seeking are businesses that sit in the top-left quadrant, companies with strong growth prospects but relatively low valuations.
Take Rathbones, for example. The shares trade on around nine times earnings. Meanwhile, comparable transactions in wealth management have taken place at much higher multiples. At the same time, we’re being paid to wait through a dividend yield of around 6%.
Another example is Bridgepoint, the alternative asset manager. It trades on roughly ten times earnings, less than half the multiple of some comparable European peers.
What we’re trying to do is buy growing businesses where valuations fail to reflect underlying fundamentals. Ideally, those businesses migrate over time into the top-right quadrant as investor recognition improves and shares re-rate.
When that happens, we then decide whether it is appropriate to continue holding the position or recycle capital into new opportunities.
Softcat is a good example. The shares have already re-rated significantly, but earnings continue to grow strongly and we still believe there is a case for ownership. Every situation is assessed individually.
Our stock-selection process revolves around what we call the 4Ms.
We begin with a universe of around 1,000 stocks. We eliminate businesses that are too small, pre-revenue, loss-making or excessively leveraged.
That reduces the universe to roughly 200 names.
From there, we apply our 4Ms framework:
Model: How attractive is the business model? How strong is the company’s competitive position?
Money: Is the company profitable? More importantly, does it generate cash and can it fund its growth plans?
Management: Who is running the business? Do they have strong track records? Do they have meaningful ownership stakes that align their interests with shareholders?
Momentum: Are earnings expectations improving? Positive earnings momentum is often associated with positive share price performance.
Of course, none of these factors matter if valuation is excessive.
We take a pragmatic approach to valuation. We don’t rely heavily on complex discounted cash flow models. Instead, we focus on practical comparisons and asking whether the valuation can be justified relative to peers and precedent transactions.
The portfolio typically contains around 80 holdings, with the top 20 accounting for approximately half of net asset value. These represent our highest-conviction ideas.
Finding winners matters, but knowing when to sell is equally important.
We sell when the investment thesis deteriorates, when valuations become less attractive, or as part of ongoing capital recycling.
Having competition for capital ensures that no stock remains in the portfolio without earning its place.
We also regularly become sellers when companies are acquired or graduate into the FTSE 100, which forces us to exit positions within six months.
Let me bring the process to life with a case study.
Saga is a good example of the type of opportunity we’re looking for when trying to identify undervalued growth businesses.
Most people know Saga as a travel and insurance brand focused on the over-50s. What many investors don’t realise is that the company owns purpose-built cruise ships, operates a growing river cruise business and remains one of the most trusted brands in the UK.
For years, Saga looked too difficult for many investors. It emerged from Covid carrying significant debt. Its insurance operations were complex and restructuring activity obscured underlying profitability.
Many investors viewed it simply as a highly leveraged recovery story.
However, when we did the work, we believed the company was approaching a major inflection point.
Management had largely completed a multi-year transformation programme. The insurance business had been sold, simplifying the company significantly and removing a capital-intensive operation.
What remained was a business built around two things we like very much: a trusted brand and a loyal customer base.
Saga’s cruise operation has an industry-leading repeat booking rate of around 64%, and its ships continue to operate at occupancy levels above 90%.
Perhaps more importantly, pricing continues to increase, which is exactly what we want to see.
Once a cruise ship is largely full, additional profitability comes through yield management and higher ticket pricing, with a substantial proportion of that increase dropping through to profits.
The market remained focused on debt. While leverage was elevated, we were more interested in the company’s improving cash generation, declining interest costs and lower capital expenditure requirements.
We also liked the customer demographic.
Saga customers tend to be wealthier, less economically sensitive and continue prioritising travel and experiences. These are customers who often no longer have mortgages and generally enjoy strong financial positions.
The business provides exposure to what is often referred to as the “silver pound”. The average 55 to 65 year old typically holds significantly more wealth than younger age groups.
Demographically, this is one of the fastest-growing segments of the UK population.
When we invested, Saga traded on a single-digit EV/EBITDA multiple despite analysts forecasting earnings growth of more than 20% annually.
Comparable operators traded on meaningfully higher multiples.
In our view, investors were valuing Saga based on its past rather than its future.
Since we initiated our position, the shares have performed strongly. We’ve taken opportunities to add to the holding during periods of market volatility, and it remains an excellent illustration of how we approach investing.
I hope that example gives you a flavour of what we look for.
And yes, you can see a picture of Cassie on a Saga cruise ship here undertaking some rather intensive due diligence. She tells me she returned from the visit looking forward to retirement far more than before.
Hopefully that was because of the ship rather than because she has to work with me.
Here you can see a top-down view of the portfolio.
We like to describe it as diversified by design, yet highly deliberate in construction.
The top 20 holdings represent the core engine of portfolio growth.
Although we invest in UK small caps, nearly half of our portfolio earnings come from overseas. The success of the portfolio is therefore not solely dependent on the UK economy.
Sector exposure is diversified, although industrials and consumer discretionary represent our largest allocations.
Looking at the top ten holdings, we have exposure to a broad range of themes and businesses.
Balfour Beatty gives us exposure to infrastructure spending.
Paragon and OSB are specialist lenders trading on significantly lower multiples than larger banking peers despite delivering attractive returns.
Oxford Instruments is benefiting from increased investment in artificial intelligence infrastructure.
Bellway trades at a valuation below levels seen during the global financial crisis, despite having a substantially stronger balance sheet today.
Let me briefly update you on what we’ve been doing this year.
Markets have been volatile and that has created numerous opportunities for both buying and selling.
Among our new positions, we took advantage of weakness in several software and technology names that were perceived to be AI losers.
We added to consumer staples businesses such as Greencore and initiated positions in companies like Chesnara.
We also established a position in Volex following technical selling pressure associated with its move from AIM to the Main Market.
On the sell side, we exited positions such as Burford Capital, Trainline and Telecom Plus where our investment thesis had deteriorated.
We switched from Bytes Technology into Computacenter, reflecting a stronger conviction in the latter and greater exposure to hardware-related technology investment.
That switch proved particularly successful.
We also realised profits in positions such as Harbour Energy, Hunting, Luceco and Oxford Instruments after strong performance and valuation re-ratings.
At the same time, we added to holdings like Bridgepoint and Rathbones where we continued to see attractive value.
One notable feature of the year has been the number of takeovers involving portfolio companies.
This isn’t luck.
It’s evidence that private buyers are recognising the same combination of quality and undervaluation that attracted us in the first place.
Turning briefly to performance, since the strategy began in 2002 it has outperformed peers and delivered strong long-term returns.
Over the twelve months to July, the trust’s net asset value increased by around 10%.
So far in 2026, the portfolio has outperformed its benchmark by approximately 2%.
These are short time periods and I certainly wouldn’t declare victory.
However, they are encouraging after a challenging market environment that began in early 2022.
Importantly, we believe the portfolio is benefiting from several changes we implemented over the past year.
These include strengthening sell discipline, reducing exposure to long-duration growth stocks, improving diversification and increasing focus on catalyst-driven opportunities.
We’ve also reduced the number of holdings from more than 100 to around 80, increasing competition for capital and concentrating the portfolio around our highest-conviction ideas.
Looking at performance contributors and detractors, several of the largest detractors came from areas exposed to the UK housing market and interest-rate expectations, including Bellway, Crest Nicholson and Harworth.
However, these businesses continue to trade at valuations that we believe understate their underlying value.
On the positive side, strong contributors included Balfour Beatty, Computacenter, Renishaw, Oxford Instruments, XP Power and Serica Energy.
Many of these businesses are benefitting from themes such as infrastructure investment, AI-related spending and recovering industrial demand.
Mike Dennis:
Indri, we’ve got about fifteen minutes left.
Indri van Hien:
Apologies. This is my final slide.
The Henderson Smaller Companies Investment Trust has followed this investment approach for more than two decades.
Over that period, it has delivered strong capital and income growth, earning both AIC ISA Millionaire and AIC Dividend Hero status.
We believe the significant headwinds experienced by UK small caps have created what may prove to be a generational buying opportunity.
We remain patient, disciplined and focused on identifying quality growth businesses trading at attractive valuations.
With that, I’ll open up for questions.
Mike Dennis:
Thank you, Indri. Sorry to rush you, but there are plenty of questions coming in and I didn’t want us to miss the opportunity to get through them.
We’ve already got around 13 questions waiting, and if anyone has more, now is the time to submit them.
So let’s begin. Mark asks:
“Do you expect the application of AI to result in fewer under-researched companies in the future, and will that affect your investment approach?”
Indri van Hien:
Potentially, yes.
However, at the moment I actually think the opposite is happening.
The market is taking a very binary view of AI winners and AI losers. That’s creating more pricing inefficiencies and therefore more opportunities.
AI is extremely useful for initial research and screening, and we use it regularly.
However, when AI analyses a company you know very well, it often misses important nuances and details.
Today, the way investors are reacting to AI is actually increasing inefficiencies in the market.
For example, we’ve been able to buy consultancy businesses on very low valuations because investors assume AI will eliminate demand for consultants.
In reality, demand for advice on AI implementation is increasing.
Businesses still need help understanding how AI will affect their costs, operations and strategy.
So for now, AI is creating opportunities rather than eliminating them.
Mike Dennis:
Thank you, Indri. Let’s move on to the next question.
Toby asks:
“The annual report states there are more than 1,000 listed companies in your investment universe. After applying your filters, you reduce that to around 200 investable companies and ultimately hold around 80 stocks. Does holding 80 out of 200 limit your choices, and could that number fall further?”
Indri van Hien:
It’s a good question.
As I mentioned earlier, I became lead manager last year and we have already reduced the number of holdings materially.
While the portfolio currently contains around 81 stocks, once you account for holdings that are being exited or have received takeover offers, the effective number is closer to 70.
I’m not going to manage the portfolio by targeting a specific number of holdings, but it could certainly become smaller over time.
It’s also important to remember that the group of approximately 200 companies we conduct deeper work on is not static. That opportunity set changes every year.
Although IPO activity has been limited in recent years, we continue to see a healthy pipeline of potential opportunities. As market conditions improve and valuations recover, IPO activity should eventually increase, creating new opportunities for us.
Mike Dennis:
Staying on that topic, you’ve said IPO markets are cyclical. We’ve seen a significant decline in the number of listed companies over the past few years. Do you think that trend will reverse?
Indri van Hien:
Yes, I do.
Historically, when a company in a sector receives a takeover offer, the rest of that sector would often re-rate as investors recognised the underlying value.
What has happened in the UK over the last decade is that persistent outflows have prevented that process from fully occurring. Instead of valuation improvements being recycled into new opportunities, money has simply left the market.
However, once investors start seeing stronger returns from UK equities again, flows can return quite quickly.
When valuations recover and confidence improves, private equity firms suddenly have an incentive to bring companies to market through IPOs.
We’ve actually seen a reasonable number of early-stage opportunities and preliminary discussions over recent years. Often the businesses are ready, but geopolitical events or market volatility delay the transaction.
So I don’t believe the UK IPO market is permanently broken. These cycles always come and go.
Mike Dennis:
Sukhbir asks:
“The trust’s NAV has lagged the benchmark over three, five and ten years. What specifically have you changed to improve future performance?”
Indri van Hien:
Over longer periods, much of that underperformance reflects style headwinds.
Our growth-oriented approach faced a very challenging environment as interest rates moved from near zero to more than 5%.
However, we’re focused on what happens next.
Since taking over as lead manager, I’ve made several changes.
We’ve become much more focused on identifying the catalysts that will drive share price performance.
It’s not enough for a company simply to be cheap and growing. We need to understand what will unlock value.
We’ve added a formal assessment of twelve-month catalysts into our conviction framework.
We’ve strengthened sell discipline, reduced the number of holdings, improved earnings momentum across the portfolio and become more selective about where we allocate capital.
Historically, we haven’t struggled to identify attractive new investments. In some cases we simply held underperforming positions for too long. Strengthening portfolio construction and sell discipline has been a major area of focus.
Mike Dennis:
Another question from Sukhbir:
“What are the debt levels of your top ten holdings and how would higher interest rates affect them?”
Indri van Hien:
More than 40% of the portfolio operates with net cash balance sheets, so overall leverage is relatively low.
We’re generally less concerned about interest expense and more focused on the impact of higher rates on valuations and economic activity.
Of course, if rates remain higher for longer because the economy is overheating, that may affect earnings growth. But direct balance sheet sensitivity isn’t a major concern across most of the portfolio.
Our view remains that recent geopolitical developments have delayed rate cuts rather than completely derailed them.
Mike Dennis:
One question asks about the rationale for investing in Aston Martin.
Indri van Hien:
That’s straightforward.
We don’t own Aston Martin.
It appeared on one of the illustrative slides, but it is not a portfolio holding.
Mike Dennis:
Kevin asks:
“Has your optimism factored in the possibility of rates rising again and continued political uncertainty in the UK?”
Indri van Hien:
Absolutely.
That’s one reason why we reduced our exposure to the UK housing market and certain interest-rate-sensitive sectors over the last year.
We don’t want the portfolio to become a one-way bet on falling rates.
While lower rates would certainly be supportive, we’ve tried to ensure the portfolio remains resilient under a variety of scenarios.
That diversification is important.
Mike Dennis:
Kevin also asks whether a quality-based investment style still makes sense when some quality-focused managers have struggled recently.
Indri van Hien:
For us, quality means quality management teams, strong balance sheets and durable business models.
We think those characteristics remain especially important in small caps because smaller businesses are often more exposed to macroeconomic challenges.
However, it’s important to stress that we’re growth at a reasonable price investors.
We’re not willing to pay any valuation simply because a company possesses attractive qualities.
Valuation discipline remains central to our process.
Mike Dennis:
Martin asks:
“Is part of the investment case for Chemring based on winning contracts related to new UK ammunition production facilities?”
Indri van Hien:
Not specifically.
Our investment case is based on the broader increase in demand for energetics capacity across Europe.
We’re not relying on any single government contract or policy initiative.
The wider environment remains very supportive regardless.
Mike Dennis:
Another question from Martin:
“If AI-related capital expenditure slows, won’t that affect XP Power?”
Indri van Hien:
It’s certainly a risk.
XP Power has benefited substantially from strong order growth and increasing investment in AI infrastructure.
However, the company is not solely exposed to that theme.
It also serves industrial and healthcare end markets.
AI-related investment is important, but it’s only one part of the overall business.
Mike Dennis:
Kevin asks whether there is a formal limit on special situations within the portfolio.
Indri van Hien:
No formal limit.
Special situations can be attractive opportunities, but they are not the core of what we do.
I wouldn’t expect them to ever become a dominant part of the portfolio.
Mike Dennis:
Taha asks whether the trust trades at a discount or premium to NAV.
Indri van Hien:
At the moment the trust trades at roughly an 8% discount to NAV.
That’s still a meaningful discount, although it is narrower than many peers.
The board has undertaken share buybacks where appropriate, largely to support liquidity for shareholders.
The board’s philosophy has generally been to ensure the discount remains reasonable and broadly in line with the sector.
Mike Dennis:
John asks:
“Why are you still holding Chesnara when profits appear to be falling?”
Indri van Hien:
We only initiated the position earlier this year.
It’s actually been a profitable investment for us so far.
Chesnara is a consolidator of closed life assurance books. Naturally, earnings would decline if the company stopped making acquisitions.
However, management has remained active in M&A, which continues to support growth.
So our view is quite different from the suggestion that profitability is deteriorating.
Mike Dennis:
Final question.
Gordon asks:
“Does the board have any plans to introduce an enhanced dividend policy?”
Indri van Hien:
That is ultimately a question for the board.
However, one of the advantages of the investment trust structure is that we have substantial revenue reserves and capital reserves.
Those reserves allow us to smooth dividend payments over time.
That’s one reason we were able to continue increasing dividends during the pandemic, despite many underlying portfolio companies reducing or suspending their own dividends.
The board remains very committed to a progressive dividend policy, which is reflected in our AIC Dividend Hero status.
Mike Dennis:
Do you ever find your dividend objectives conflicting with your GARP investment style?
For example, do you ever have to sell investments simply to support the dividend?
Indri van Hien:
No.
I’m very clear on that point.
You never want the dividend tail wagging the investment dog.
Our dividend record is really a by-product of investing in growing, cash-generative businesses.
As those businesses grow and increase their own dividends, we benefit naturally.
The reserves available to the trust provide flexibility and mean we don’t need to become forced buyers or sellers purely to support distributions.
Mike Dennis:
Excellent.
Thank you, Indri.
That’s all of the questions we had today.
Thank you for joining us and taking us through the Henderson Smaller Companies Investment Trust. It has been extremely insightful and very useful for our audience.
Thank you again for your time.
Indri van Hien:
Thank you very much, everyone. I appreciate your time and your questions. It was great to be with you today.