Big returns from UK Small Cap

04/06/2019

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Neil Hermon, Fund Manager for Henderson Smaller Companies Trust, discusses how the trust has performed so far in 2019 and delivers the latest portfolio activity, explaining why the team have chosen to reduce the number of holdings. Neil also discusses the Trust’s income growth and how his strategy has led to a very impressive income growth record.

Transcript

Q:Hello and welcome to this latest video update for the Henson Smaller Companies Investment Trust. I'm delighted to be joined by the fund manager Neil Hermon. Neil thank you very much for joining me today. Now we're not far off the halfway point for 2019. So how has the U.K. smaller company sector fared so far this year?

A: It's been quite good. Double-digit returns from UK small cap in the first five-and-a-half months of 2019. Q4 2018 was very tough indeed, and there were a number of reasons for that, really around concerns of Brexit, escalating tensions between US and China trade wars, the Fed rates rise in December and likely to rise in 2019, and a potential global economic slowdown. So, Q1 saw a lot of those things come to a slightly better conclusion, Brexit made progress, or stumbling progress; US and China seem to be getting on a bit better regarding their trade negotiations and the Fed moved from raising rates in 2019 to actually maybe even see none or even a decrease in rates. So markets have rallied, only back to where they were in September 2018, but they've made reasonable progress. So in that context small caps have done quite well and have made double digit returns.

Q:Okay now looking at the smaller companies portfolio, the number of names has come down from about one 105 five to roughly a 102. Perhaps you could shed some light on why you've sold some of those positions.

A: It's quite a small change 105 to 102 is hardly a material change, we're around 100 holdings usually so we're quite consistent to where we have been previously. We've disposed of the few things this year; a few names have gone from the portfolio. This would include, for example Elementis, they’re a chemicals company, where we're concerned about the outlook for earnings and a poorly judged acquisition last year which raised leverage.

We sold of our position in Faroe Petroleum after we received an agreed bid from DNO, a Norwegian company. We sold our position in Equinity, increasingly frustrated by lack of progress regarding the Wells Fargo US acquisition integration.

Also the NCC, a kind of cyber security business, because they had a pretty poor set of earnings in January. Concerns regarding the escrow business and also then the ability for them to retain and recruit staff, which means seeing margin pressure in their computer consultancy business.

So a number of holdings, it's always the way, there's a bit of turnover in the portfolio. We don't see much material change in the number of holdings, around 100 is what we try to aim towards.

Q:Now one little talked about aspect of the trust is that it has a very impressive income growth record since you took the job back in 2002. Now assuming dividends are reinvested, the income story is 28 percent growth annually, which is not bad for a trust that focuses on growth primarily. Now obviously past performance is not a guide to future results but perhaps you can tell us about how you got to that record and what's your philosophy?

A: We don't target income we target total return. If you think about the returns we've generated over the last 16 years, most have come from capital. However, the style we do is we are very much total return focused, but we are very much on quality companies.

Therefore, we want companies that are profitable, cash generative, growing and generally pay a dividend. Over 90 percent of the companies that we own pay a dividend and basically whilst we're investing in those growth companies the dividends they pay generally are growing quite quickly.

So ultimately, although our starting yield in a portfolio isn't particularly high, it's about 2.5 percent as we stand today, it’s growing at a pretty rapid rate. And over the last 16 years our dividends are growing 28 percent compound, albeit from a pretty low base. So if you put that in context, if you put one hundred pounds into HSL back in 2003 you'd be initially getting about six pound of income; your income would now be worth 270 pounds a year. So that just shows the power of growth and compounding leads to a pretty good dividend and return story.

Q:Neil Hermon, as always, it's been a pleasure. Thank you very much for joining me.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. 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.

The information in this article does not qualify as an investment recommendation.

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

The Henderson Smaller Companies Investment Trust plc

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.

Past performance is not a guide to future performance. 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.

Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier). We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Specific risks

  • Active management techniques that have worked well in normal market conditions could prove ineffective or detrimental at other times.
  • This trust is suitable to be used as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this trust.
  • The trust could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the trust.
  • If a trust's portfolio is concentrated towards a particular country or geographical region, the investment carries greater risk than a portfolio diversified across more countries.
  • Derivatives use exposes the trust to risks different from, and potentially greater than, the risks associated with investing directly in securities and may therefore result in additional loss, which could be significantly greater than the cost of the derivative.
  • The return on your investment is directly related to the prevailing market price of the trust’s shares, which will trade at a varying discount (or premium) relative to the value of the underlying assets of the trust. As a result losses (or gains) may be higher or lower than those of the trust’s assets.
  • 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 trust may use gearing as part of its investment strategy. If the trust utilises its ability to gear, the profits and losses incured by the trust can be greater than those of a trust that does not use gearing.
  • Most of the investments in this portfolio are in smaller companies shares. They may be more difficult to buy and sell and their share price may fluctuate more than that of larger companies.

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