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Look beyond the UK when it comes to income


The Henderson Smaller Companies Investment Trust plc

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Building a prudent position: Henderson Smaller Companies

While a challenging 2023 looks more likely to give way to a better 2024, conditions for UK smaller companies remain tough. Fortunately, the companies themselves have been diligent in preparing for such an environment.

After a difficult 2023, we see several reasons to be positive about the outlook for the trust, and UK smaller companies more broadly, in 2024.

UK businesses of all sizes struggled with rapidly rising inflation during the first half of last year, with inflation still above the Bank of England’s target.

This level of inflation hurts companies in various ways, including by reducing their customers’ ability to spend and by increasing the costs of running their businesses due to an increase in wages, energy bills and other essential materials.

Inflation is now falling but some of the underlying causes of it remain in place; in particular the war in Ukraine and ongoing trade tensions between the United States and China.

This means that next year’s economic outlook, while likely to be an improvement on 2023, remains unpredictable.

The state of UK smaller companies

But the UK corporate sector shows signs of resilience in the face of this outlook, which give us a number of reasons for optimism. We particularly see opportunities in a number of industrial and commercial sectors that we are hopeful can drive an improvement on last year’s performance.

Firstly, we believe that the market conditions for UK smaller companies are fundamentally stronger now than they have been in previous periods of economic and market downturn and volatility, such as the financial crisis of 2008.

The companies in our investment universe have significantly less debt now than they did then, and indeed a high proportion have net cash. The amount they are able to pay their shareholders in dividends, or buy stock back from them, is increasing, which is a good signal for both investors and the companies themselves.

Valuations among UK companies, including smaller ones, remain low relative to their historic average, and also to their global peers. We believe this will support a likely increase in mergers and acquisitions next year, which will help to drive stock performance in the sector.

A steady hand

We will approach 2024 with the same disciplined investment approach as we have always taken, based on our proprietary ‘4Ms’ methodology for choosing companies to invest in.

  1. Model: Focuses on a company’s competitive advantage in their markets
  2. Management: Our assessment of a company’s leadership team and strategy
  3. Money: The current state and direction of a company’s financial position and strength
  4. Momentum: The market factors likely to drive a company’s near and longer-term earnings performance

Based on this approach we believe we are well positioned going into 2024, when we think certain factors could work to our advantage.

We have retained the bias towards growth companies in the portfolio. As interest rates start to decline this will support a return to favour of these sort of companies and allow earnings valuation multiples to expand after a period of contraction.

We have also added a number of new companies to the fund this year, which we think could strengthen our portfolio next year, based on the 4M criteria.

Although these new positions cut across a variety of different business sectors – including pharmaceuticals, data services, financial services, sophisticated technology-led manufacturing and education – the majority of them score particularly strongly on ‘Model’ and ‘Management’, either through offering products and services that differentiate them in their sectors, or by focussing on areas of their markets that we think are most likely to ensure their competitiveness and profitability.

Additionally, we have added some companies with strong cash balance sheets (‘Money’), making them better able to withstand economic difficulties or to invest in their profitability, both of which we think strengthens the position of the fund overall.

Finally, we have also sold positions in several companies this year that we anticipated could have acted as a drag on the trust’s performance in 2024.


Balance sheet – A financial statement that summarises a company’s assets, liabilities and shareholders’ equity at a particular point in time. Each segment gives investors an idea as to what the company owns and owes, as well as the amount invested by shareholders. It is called a balance sheet because of the accounting equation: assets = liabilities + shareholders’ equity.

Balance sheet strength – A company’s financial position. See also: balance sheet.

Dividend – A variable discretionary payment made by a company to its shareholders.

Inflation – The rate at which the prices of goods and services are rising in an economy. The Consumer Price Index (CPI) and Retail Price Index (RPI) are two common measures. The opposite of deflation.

Valuation metrics – Metrics used to gauge a company’s performance, financial health and expectations for future earnings, eg. price to earnings (P/E) ratio and return on equity (ROE).

Volatility – The rate and extent at which the price of a portfolio, security or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. The higher the volatility the higher the risk of the investment.


References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.

Not for onward distribution. Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser. This is a marketing communication. Please refer to the AIFMD Disclosure document and Annual Report of the AIF before making any final investment decisions. Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Henderson Investors International Limited (reg no. 3594615), Janus Henderson Investors UK  Limited (reg. no. 906355), Janus Henderson Fund Management UK Limited (reg. no. 2678531), (each registered in England and  Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial  Conduct Authority) and Janus Henderson Investors Europe S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier).

Important information

Please read the following important information regarding funds related to this article.

Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser. This is a marketing communication. Please refer to the AIFMD Disclosure document and Annual Report of the AIF before making any final investment decisions.
    Specific risks
  • Higher yielding bonds are issued by companies that may have greater difficulty in repaying their financial obligations. High yield bonds are not traded as frequently as government bonds and therefore may be more difficult to trade in distressed markets.
  • The portfolio allows the manager to use options for efficient portfolio management. Options can be volatile and may result in a capital loss.
  • Global portfolios may include some exposure to Emerging Markets, which tend to be less stable than more established markets. These markets can be affected by local political and economic conditions as well as variances in the reliability of trading systems, buying and selling practices and financial reporting standards.
  • Where the Company invests in assets that are denominated in currencies other than the base currency, the currency exchange rate movements may cause the value of investments to fall as well as rise.
  • This Company is suitable to be used as one component of several within a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested in this Company.
  • Active management techniques that have worked well in normal market conditions could prove ineffective or negative for performance at other times.
  • The Company could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Company.
  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • The return on your investment is directly related to the prevailing market price of the Company's shares, which will trade at a varying discount (or premium) relative to the value of the underlying assets of the Company. As a result, losses (or gains) may be higher or lower than those of the Company's assets.
  • The Company may use gearing (borrowing to invest) as part of its investment strategy. If the Company utilises its ability to gear, the profits and losses incurred by the Company can be greater than those of a Company that does not use gearing.
  • If the Company seeks to minimise risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or negative for performance.
  • All or part of the Company's management fee is taken from its capital. While this allows more income to be paid, it may also restrict capital growth or even result in capital erosion over time.