Henderson Smaller Companies

The 11.5% discount for HSL offers an interesting entry point into a trust with an attractive yield and a long-term track record of capital appreciation in the UK smaller companies space…

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This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. With this commentary, Kepler Partners LLP does not intend to influence your investment firm's behaviour. 

Henderson Smaller Companies

Henderson Smaller Companies (HSL) aims to maximise shareholder returns over the longer term by investing in a diversified portfolio of UK companies listed on the FTSE 250, FTSE Small Cap and FTSE AIM indices.

The manager, Neil Hermon, is a bottom-up stock picker, following a ‘growth at a reasonable price’ (GARP) investment process. This means that the manager considers himself a growth investor, but applies value principles so as not to overpay for the above-average earnings growth he is looking to find.

The strategy involves looking at what Neil refers to as the ‘Four Ms’:

  • 'Model' reflects the pricing power of the company and its competitive advantage
  • 'Management' assesses the strength and vision of the management team
  • 'Money' refers to the balance sheet strength and cash flow of the company, and
  • 'Momentum' analyses the company's earnings momentum and whether it is likely to outperform expectations.

Since Neil took over managing the trust in November 2002 performance has been strong. As we discuss in the performance tab, the trust has outperformed both its IA and AIC UK Smaller Companies peers and its Numis Smaller Companies ex Investment Trust benchmark over the period. Nevertheless performance has been rocky in recent times due to the political turmoil in the UK and the high levels of gearing employed by the manager and board.

Alongside capital appreciation a key part of the investment proposition is income generation. Currently yielding 2.7%, the trust offers investors a unique way to diversify income, and the team has an impressive record of dividend growth, which we discuss in the dividend section.

The trust’s discount is wide relative to its peers, despite the long-term track record of outperformance. Currently the trust is trading at a discount of 11.5% (see discount section for more detail).

Kepler View

Since Neil started running the portfolio in 2002, he has shown he is able to generate strong levels of alpha and has the capacity to outperform peers. That said, the past year has been more difficult for the trust, which was hit particularly hard during the correction in 2018. This performance was further weakened by the high level of gearing, illustrating the risks associated with some investment trusts generally. As such, the HSL standard deviation metric is in the highest quartile of the AIC peer group for the most recent one- and five-year periods. This profile is also illustrated by the trust’s beta over the past year, which stands at 1.02.

However, we have seen the trust rally strongly in 2019, and the yield of 2.7% could be a great way for investors to diversify their income. The current discount of over 11% could be an attractive entry point to a trust which has performed strongly over the long term and which holds some exciting opportunities in the mid-to-small cap space.

bull bear
Strong long-term track record for outperformance of the benchmark and peer group Volatile performance due to high levels of gearing
Attractive yield and dividend growth Less impressive performance track record in recent times
Exceptionally low charges
William Sobczak
William joined Kepler Partners in February 2018 as an investment trust analyst. Prior to joining, William graduated from the University of Western Australia, with a BSc in Psychology.

Fund History

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