Henderson Smaller Companies beats benchmark despite resources underweight – Henderson Smaller Companies has reported results for the year ended 31 May 2017. Over this period the share price has risen by 32.7%, and the net assets by 28.7%, outperforming the benchmark, the Numis Smaller Companies Index (excluding investment companies), by 4.8% on a total return basis. Over the ten years to 31 May 2017, the fund’s net asset value total return is 170.5%, versus a total return from the benchmark of 124.3%. This is a compound annual return to shareholders of 10.5%.
The Board is proposing a final dividend for the year of 13.0p per share, making a total dividend for the year of 18.0p (2016: 15.0p), as an interim dividend of 5.0p was paid in March. This marks a 20% increase on the previous financial year and is their 14th consecutive year of dividend growth.
Attribution Analysis
The tables below show the top five contributors to, and the bottom five detractors from, the Company’s relative performance.
Principal contributors 12 month return % Relative contribution %
NMC Health +98.9 +1.8
Melrose Industries +230.8 +1.6
Renishaw +92.5 +0.9
e2v Technologies +41.2 +0.7
Clinigen +61.2 +0.6
NMC Health is a Middle Eastern based healthcare operation. Its main facilities are in the United Arab Emirates, particularly Dubai and Abu Dhabi. NMC has grown strongly since its IPO in 2012 through the building of new facilities and acquisitions. This growth is set to continue, particularly given the positive structural opportunities in the UAE, driven by an underprovision of state provided healthcare, the continued roll-out of mandatory health insurance and positive demographics. The acquisition strategy has supplemented the organic strategy by diversifying the business by geography and medical discipline. Even after a strong share price performance in the last year the shares still look good value considering the strong earnings growth forecast.
Melrose Industries is a diversified engineering group whose raison d’être is to buy underperforming businesses, improve them and then sell the assets on. Essentially it is deploying a private equity model in the public markets. The company has had significant success in the past with its acquisitions of Dynacast, McKechnie, FKI and Elster, all of which have been sold for significant profit on cost. The management team are highly rated due to their demonstrable track record of making money for shareholders. In late 2016 Melrose acquired Nortek, a US based provider of building products. Initial indications are that the improvements to Nortek margins and return on capital employed are ahead of plan, which has propelled the share price higher. With plans to make further enhancing acquisitions we continue to be firm supporters of the Melrose story.
Renishaw designs, develops and manufactures high technology precision measuring and calibration equipment. The business is a global leader in its field with strong patent protection. The company invests heavily in research and development to maintain its market leading technological position. Over the medium term the organic growth delivered has been one of the strongest in the capital goods sector. It has expanded its operations by diversifying into healthcare and additive manufacturing markets, both of which offer long term attractive growth. In the short term the company is enjoying the recovery in industrial capital expenditure, new investment in the smartphone production chain and, as a major exporter, the competitive benefits of a weaker pound. Renishaw, with a very strong balance sheet and a well invested production base, is superbly positioned for the long term.
e2v Technologies manufactures high technology electronic components. Although e2v is a company with significant technology and high margins, it has historically struggled to deliver consistent growth. This led to an undervaluation of the business. The appointment of a new chairman and CEO led to a re-focusing of the business with cost taken out, a new customer-focused approach and de-cluttering of the organisation’s processes. After initial positive results from this new approach, the company received an agreed bid from Teledyne Technologies, a US company, at a significant premium.
Clinigen is a global speciality pharmaceutical services business. Its core activity is providing comparator drugs and other services for clinical trials and providing market access for drugs that are difficult to obtain or yet to be licensed. It also has a speciality pharmaceutical division which looks to acquire niche drugs from major pharmaceutical companies, where management think they can enhance performance through additional regulatory approval or increased targeted marketing. The company has seen strong growth since its IPO in 2012 and this is likely to continue given the strength of the management team and the positive structural growth of its end markets.
The main detractors from relative performance were stocks not owned by the fund that did well. most of these were in the resources sector.
Principal detractors 12 month return % Relative contribution %
Evraz(1) +99.8 -1.1
Vedanta Resources(1) +150.3 -1.1
Essentra -30.2 -0.9
Kaz Minerals(1) +147.4 -0.7
Electrocomponents(1) +74.3 -0.6
(1) Not owned by the Company. Returns shown are for the seven month period to 31 December 2016 when the stock ceased to be included in the benchmark index.
Evraz is a Russian steel producer. The Company had no holding in Evraz. After a prolonged period of weakness, commodity markets rebounded in 2016 with robust Chinese economic growth and production cutbacks aiding a recovery in oil and metal prices. Consequently the mining sector performed extremely well, after significant underperformance in 2015. The Company has typically had an underweight position in this sector due to the volatile nature of commodity prices, the high leverage these companies usually employ, their position as price takers with little influence over the value of their output and their poor corporate governance.
Vedanta Resources is an Indian diversified oil and metals group. The Company had no holding in Vedanta. The comments made about Evraz also apply to Vedanta Resources.
Essentra is a diversified industrial group involved in the manufacture and distribution of industrial components, cigarette filter production and healthcare packaging. The company had an extremely difficult year as poor integration of acquisitions in the packaging division and delayed and cancelled orders in filters led to a sharp fall in profitability. The CEO was removed and the company sold its Porous Technologies division to reduce debt. After falling significantly, the shares have made a good recovery since the appointment of a well respected new management team. We sold our position towards the year-end as we believe the recent rally in the share price already discounts a significant recovery in profits.
Kaz Minerals is a Kazakhstan based producer of copper. The Company had no holding in Kaz Minerals. The comments made about Evraz also apply to Kaz Minerals.
Electrocomponents distributes electronic components and maintenance products. The Company had no holding in Electrocomponents. The company has performed well, growing profits substantially through a combination of improving end market demand and margin enhancement from rationalisation and cost control.
HSL : Henderson Smaller Companies beats benchmark despite resources underweight