Henderson Smaller Companies has announced its interim results for the six months ended 30 November 2016. During the period, the trust provided and an NAV total return of 1.4% and a share price total return of 2.0%, thereby underperforming its benchmark, The Numis Smaller Companies (excluding Investment Companies) Index, which provided a total return of 4.4%. The trust says that this was mainly due to its underweight position in mining and metals stocks but highlights that the manager, Neil Hermon (pictured), has outperformed the index in 12 of the last 13 years. The interim dividend was increased by 25% t0 5.0p (2014: 4.0p). The board says that the increase reflects the continuing strong growth in dividend payments from portfolio companies.
In terms of the performance of individual holdings, the largest contributor was Melrose Industries, a holding company for engineering and building material businesses, which added 1.1%. This was followed by Clinigen, a global speciality pharmaceuticals group involved in the ethical supply of hard-to-access drugs, which added 0.5%. Thereafter, RPC, a highly acquisitive global plastic packaging group added 0.4%, Renishaw (precision measuring) added 0.4% and Circassia Pharmaceuticals (specialist biotechnology) added 0.4%.
The principal detractors were Evraz, is a Russian steel producer which cost 1.2%, whilst Vedanta Resources, an Indian diversified oil and metals group, cost 0.9%. Thereafter, Essentra (a specialist distributor, filter products and pharmaceutical packaging group) cost 0.8%, Kaz Minerals (Kazakhstan copper) cost 0.6% and Laird (technology solutions for wireless connectivity, EMI shielding and precision metal cutting) cost 0.5%.
Looking at portfolio activity, a number of new positions were added where the manager believes that they are set to improve or will continue with strong performance. These were Avon Rubber, the specialised product supplier into the defence and dairy markets; Burford Capital, the litigation financing company; Hollywood Bowl, the 10-pin bowling centre operator; Luceco, the manufacturer and distributor of electrical products; and Smart Metering Systems, the smart meter operator. Disposals were made in a number of positions where the manager believes that they were set for a period of poor price performance are that the valuation had become extended. These included Carpetright, First Group, Laird, LSL Property Services and Motorpoint. Additionally, the holding in Informa was sold as it had grown to a market capitalisation that no longer fitted the remit of the trust.
In terms of market outlook, the manager says the picture is mixed with subdued economic performance across the globe. In his view, the UK economy has defied the doom-mongers with post-Brexit resilience. However, he also says that the triggering of Article 50 and subsequent exit negotiations may lead to a drop in UK consumer and corporate confidence and that the recent rise in US interest rates has flagged to investors that loose global monetary conditions will at some stage reverse. However, he believes that the ‘normalisation’ of monetary policy should be slow and measured. He says that inflation, particularly in the UK, is likely to rise, primarily from the rising cost of imported goods, which could squeeze consumers as net disposable income could come under pressure as wage inflation fails to match cost-of-goods inflation.
In terms of valuations, the manager considers that the equity market is roughly in line with long-term averages and, to see the market make progress , he believes that we need to see earnings growth accelerate, a situation which will be aided by the recent devaluation of sterling.
Henderson Smaller Companies modestly underperforms benchmark but grows dividend 25% : HSL