Another year of outperformance for Henderson Smaller Companies – Henderson Smaller Companies (HSL) has posted its annual report for the year to 31 May 2021. During the year, it delivered a NAV total return of 58.5% and a share price total return of 69.3%, outperforming both its Numis Smaller Companies Index benchmark and the AIC UK Smaller Companies sector average which returned 54.1% and 49.4% respectively.
HSL’s discount to NAV fluctuated widely over the year with highs and lows of 0.6% and 16.4% respectively, averaging at 8.0%, and ending the year at a 3.7% discount compared with 9.6% on 31 May 2020.
Meanwhile, the total revenue received from the portfolio fell from £14.2m to £12.3m over the year as investee companies cut their dividends in response to the challenges of the pandemic. However, the board proposes to continue its record of increasing the annual dividend each year in light of an improving outlook. Therefore, a final dividend of 16.75p per share has been declared, which together with the interim dividend of 7.00p per share makes a total dividend for the year of 23.75p per share (2020: 23.50p). This is an increase of 1.1% and marks an 18th consecutive year of annual increasing dividend.
Statement from the manager:
The Covid-19 outbreak dramatically changed expectations for global economic growth. The lockdown measures we have seen across the globe have had a profound effect on economic activity. Government actions to protect consumers and businesses from the worst impact of the shock softened the blow but ultimately can only be short term in nature given the scale of the bail-out required.
The virus will pass and the global economy is recovering. However, the shape and magnitude of the recovery are at this point uncertain, although confidence is rising that it will be pronounced and swift. The positive vaccine news announced in November 2020 and the subsequent successful vaccination programme have raised the very real possibility that life may return to some sort of ‘normal’ during 2021 with a consequent sharp recovery in economic activity.
One of the major concerns facing the equity market is the threat of higher inflation and the need for central banks to start tightening monetary policy. There is much debate as to whether current indications of inflation, led by commodities and logistics costs, are temporary or are of a more permanent nature with central bankers tending to lean towards the former view. A sustained pick-up in wage inflation would probably force monetary authorities to act more quickly, although at the time of writing there is no evidence of this.
Outside of Covid-19 there has been positive progress on key matters. The EU and the UK have finally agreed on a trade deal removing the threat of the damaging implications of a hard-deal Brexit. The US election outcome was closer than expected but a definitive resolution was reached. Hopefully a Biden presidency should see a more conciliatory and pragmatic approach to US foreign and trade policies.
In the corporate sector, conditions are intrinsically stronger than they were during the financial crisis of 2008-9. Balance sheets are, in particular, more robust. On the whole, so far, the UK corporate sector has performed well during the crisis and most companies are beating their initial post-Covid-19 earnings and cash expectations.
We are seeing a noticeable pick-up in corporate activity. The IPO market, after a quiet 2020, has exploded into life in recent months. Given the number of companies looking to float on public markets, it is important to remain disciplined when sifting through the multitude of new investment opportunities we have in front of us. Likewise, we are also seeing a significant increase in M&A activity as private equity, in particular, looks to exploit opportunities thrown up by Covid-19. We expect this upsurge to continue in the coming months as UK equity market valuations remain markedly depressed versus other developed markets.
In terms of valuations, the UK equity market is now trading in line with long-term averages if we apply pre-Covid-19 earnings. Corporate earnings were sharply down in 2020 although confidence in a sharp recovery in 2021 and beyond is rising.
Although uncertainty remains around short-term economic conditions, the virus will pass and we are seeing the green shoots of recovery. The movements in equity markets have thrown up some fantastic buying opportunities and we expect many listed companies to emerge stronger from the downturn. However, it is important to be selective, as any recovery will be uneven and strength of franchise, market positioning and balance sheet will determine the winners from the losers in a post-Covid-19 world.
In conclusion, the year under review has been an excellent one for the Company. Absolute performance was positive and the Company materially outperformed its benchmark. Our portfolio companies have performed robustly, are soundly financed and attractively valued. Additionally, the smaller companies market continues to throw up exciting growth opportunities in which the Company can invest. We remain confident in our ability to generate significant value from a consistent and disciplined investment approach.
HSL : Another year of outperformance for Henderson Smaller Companies