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Henderson Smaller Companies posts modest outperformance due to stock selection

Henderson Smaller Companies, managed by Neil Hermon (pictured), has announced its interim results for the six-months ended 30 November 2015. During the period the company’s NAV total return was -1.0% thereby beating its Numis Smaller Companies (excluding investment companies) benchmark, which fell 3.3% on a total return basis. The Company’s share price total return declined by 1.8% over the same period, resulting in the Company’s discount marginally increasing from 9.0% to 9.6%. The company points out that, despite recent weakness in markets, the company’s share price increase has increased by 24.3% and by 173.2% over the past one and five years respectively, giving an annualised return of 22.3% over the five-year period. The Board have decided to pay an interim dividend of 4.0p per share. They say this reflects continuing growth in the dividend payments from portfolio companies and that it is currently their intention to at least maintain the final dividend for the current year (2015: 10.0p).

In terms of attribution, the manager says that the out-performance of the benchmark was due to stock selection. The largest contributor was national UK housebuilder Bellway, Lonmin (South African producer of platinum), Paysafe is a global payment solutions business, Kaz Minerals (Kazakhstan copper company) and NCC is a global provider of independent escrow and information security assurance services. In terms of detractors, were Northgate (light commercial vehicle rental business operating in the UK and Spain), not owning JD Sports (branded sports and leisure wear retailer), Oxford Instruments (advanced instrumentation equipment manufacturer), Spectris (electronic control and process instrumentation) and Renishaw (precision measuring and calibration).

In terms of portfolio activity, new additions include Gamma Communications, the telecommunications provider, GB Group the data intelligence and fraud prevention software company, Ibstock, the bricks and concrete building products group, Kainos, the information technology services and consulting business, and Scapa, a manufacturer of technical tapes.

To balance these additions the managers say that they have disposed of positions in companies which they felt were set for poor price performance or where the valuation had become extended, including the holdings in Countrywide, Fenner, Fidessa, Thomas Cook and Virgin Money. In addition to these, positions in Anite, Chime Communications, HellermannTyton, Quintain Estates and Synergy Healthcare were sold out of a a result of bids from another corporate.

In terms of outlook, the managers say that this remains challenging with mixed economic performance across the globe. The recent rise in US interest rates has flagged to investors that loose global monetary conditions will at some stage reverse. However the ‘normalisation’ of monetary policy will be slow and measured in the manager’s view. They believe that the collapse of oil prices should provide a boost to global growth, although certain oil producing economies are seeing a negative impact on their economic performance. The managers say that they consider, in terms of valuations, that the equity market has gone from being cheap to more fairly rated and is now more in line with long term averages. To see the market make progress they need to see earnings growth accelerate.

The managers say that, generally, balance sheets are strong and dividends are growing in the companies owned by the trust. M&A activity in 2015 has seen some pick-up from depressed levels and the managers believe that, if corporate confidence improves, M&A will increase, especially as little or no return can currently be generated from cash and the cost of debt is historically low. They say that this is a trend which will help smaller companies in particular as mergers and acquisition activity tends to be focused in this area.

Henderson Smaller Companies posts modest outperformance due to stock selection : HSL

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