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Fund Profile

Henderson Smaller Companies 10 June 2021

Disclaimer

Disclosure – Independent Investment Research

This is independent research issued by Kepler Partners LLP. The analyst who has prepared this research is not aware of Kepler Partners LLP having a relationship with the company covered in this research report and/or a conflict of interest which is likely to impair the objectivity of the research and this report should accordingly be viewed as independent.

Overview
HSL has an extensive track record of outperformance...
Overview

Henderson Smaller Companies Investment Trust (LON:HSL) invests in UK small- and mid-cap companies, seeking to generate total returns. Managed since 2002 by Neil Hermon of Janus Henderson Investors, HSL typically owns around 100 companies which the manager and his analyst team believe offer superior growth potential at a reasonable valuation.

Neil builds his portfolio primarily through bottom-up stock analysis, looking for companies which are attractive on his ‘4 Ms’: Model, Management, Money and Momentum (which we explain in the Portfolio section). This is balanced with valuation considerations (and we note Neil presently thinks the UK market looks attractively valued, with earnings set to be strong in the current financial year too).

Returns over the long term have been very strong, HSL significantly outperforming the benchmark index under the current manager’s tenure and over the past five years. As we discuss under Performance, this outperformance has been consistent, with HSL having outperformed on average in both positive and negative markets (though the trust did underperform in the market sell-off of Q1 2020).

Whilst the investment focus is on small- and mid-cap companies, which tend to yield less, HSL has an extensive track record of dividend growth. The current yield (as at 31/05/2021) of 1.9% on an historic basis is not particularly high but, as we discuss in the Dividend section, HSL has a track record of growing its dividend over the previous 18 financial years.

Analyst's View

HSL has an exceptional long-term track record of consistent outperformance, and a relatively balanced approach that may suit as a more ‘core’ UK small- and mid-cap allocation. Returns in recent months have remained strong, and stock selection appears to have been a consistently positive contributor to returns over previous financial years. Despite the post-vaccine rally posing some stylistic headwinds to a growth-focussed investment approach, we note that the manager has nonetheless managed to remain ahead of the benchmark over this period. With a consistent investment process and a stable team, we see no reason why stock-picking should not continue to be a positive contributor going forward. Investors looking to access the smallest companies in the UK market should, however, consider the sizeable (currently majority) allocation to mid-cap, which is likely to feature consistently.

Whilst an historic yield of 1.9% is unlikely on its own to hold significant attractions to income seeking investors, the strong track record of dividend growth potential may alter this calculus. However, the severe challenges to income generation posed by COVID-19 necessitated the deployment of revenue reserves in the previous financial year to support the dividend, and it seems likely to remain necessary if the dividend is to again grow. Having narrowed significantly in recent years, there currently appears to be limited discount opportunity here.

Bull bear
Exceptional and consistent track record of outperformance driven by stock-picking Underweight allocation to GBP revenues could prove a near-term headwind given recent GBP rally
Long-term track record of dividend growth Relatively structural gearing can exacerbate downside as well as amplify upside
Large trust offering economies of scale, seen in low management charges Board likely to have to draw further upon revenue reserves to support dividend
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