A great year for Herald shareholders – over 2019, investors in Herald Investment Trust made returns of 37.7%. 27.5% of that came from the NAV return and the rest from a narrowing of the trust’s discount from 17.8% to 11.3%. The report says that over the same period the Numis Smaller Companies Index (of UK small and mid cap companies) returned 18.8% while the Russell 2000 small cap technology index returned 29.4%. As usual, there’s no dividend.
One pattern that emerged over the year was that larger companies outperformed smaller ones – investments with a market capitalisation in excess of $1bn at the year end had delivered a total return of 56.5%, with the investments with a market capitalisation below $1bn returning the lower but still good figure of 19.1%.
In the UK the manager noticed a liquidity drought in smaller stocks, but still managed to outperform. The US was strong, helped in part by takeovers but again large cap did better. The trust’s European and Asian portfolios also made significant contributions to returns – a good year all round.
The manager thinks that strong markets have been helped by the amounts of cash that private equity firms are looking to deploy. She also highlights the increasing lack of research coverage and the extra investor relations spend that these firms are having to use to maintain investor interest in their stock.
The report goes into some detail about the drivers of returns – far too much for us to reproduce here. We suggest that you read the annual report when it is available shortly.
[Katie Potts does not think that valuations in her sector are excessive. The trust has had a strong year despite the headwind of investor antipathy towards small and especially micro cap companies. This suggests to us that there could be considerable latent value building at the bottom end of Herald’s portfolio. What we can’t say is when that will be realised but, as the successful small caps grow into larger companies, this creates a domino affect where they attract more and more interest and valuation multiples expand. We can see the logic for a trust fishing patiently in that pool.]
HRI : A great year for Herald shareholders