What is The Henderson Smaller Companies Investment Trust?
Invests mainly in smaller companies listed in the United Kingdom. Some important features of the trust include:
The revenue from its portfolio of UK companies is derived from around the world.
Investment approach not constrained by an index.
Portfolio constructed on a bottom up, stock picking basis.
Benchmark: Numis Smaller Companies (ex Investment Companies) Index
Please note that the performance data does not reflect any ongoing charges or other fund expenses.
All Data as at 30 June 2015.
Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
IPOs: Conjecture aplenty, so are they or are they not a good investment?
Superficially the evidence is unsupportive. London Business School Professors Elroy Dimson and Paul Marsh, producers of the Numis Smaller Companies Index (NSCI), recently shed light on the matter in the NSCI’s 2015 annual review: two-year returns for post-IPO companies averaged -16%, since 2000.
Dimson and Marsh go on to show that over 25 years, companies that were more than 20 years old at the time of investment handed back 13 times more wealth than companies that were less than three years old.
There’s no doubting investments in new companies carry risk; there’s been little time for proof of concept. But surely experienced investors are discerning enough to account for this? Well-penned academic research points to behavioural factors at play: in the haze of excitement and hope of catching the world’s next Apple, irrational exuberance takes over and clouds the ordinarily logical mind.
It is possible to find great investments amid the poor performers though. During the resurgence in the IPO market in 2014 we invested and achieved a number of successes: Virgin Money, a challenger bank; SSP, an operator of food and beverage outlets in airports and railway stations run by the very capable Kate Swann, formerly of WH Smith; Sanne, a specialist in third party hedge fund administration; and Patisserie Holdings [Valerie], an artisan baker run by brilliant serial entrepreneur Luke Johnson.
Henderson’s size helps. Issuers come to us early on in the road-show and give us plenty of time to assess their companies, understand the business model and value them properly. But for the most part it comes down to employing the same disciplined approach as we would any stock-pick.
A process we’ve built over many years, it aims to put a floor under any potential downside. We look at four key areas of the business, the 4M’s: Model, businesses that display a strong economic franchise; Money, reliable cash-flows and strong balance sheets; Management, teams that are strategically innovative and apply good corporate governance; and Momentum, in the delivery of earnings and the avoidance of profit warnings.
IPOs can be a great source of high quality new companies; to this end they should not be overlooked.
Bull point – IPOs are a great source of high quality new investments
Bear point – Late in the economic cycle valuations are more expensive, requiring a discerning eye
Source: Numis Smaller Companies Index; Jan 2015
Nothing in this document is intended to or should be construed as advice.
Meet the Manager: Neil Hermon
Neil Hermon is the Co-Head of UK Equities at Henderson Global Investors and manages the UK Smaller Companies Fund as well as Henderson Smaller Companies Investment Trust.
Prior to joining Henderson, Neil was Head of UK Smaller Companies at General Accident (later to become CGU plc). He continued this role when he joined Henderson in 2002.
Neil graduated from Cambridge University with a BSc (Hons) in Mathematics. He is an Associate of the Institute of Chartered Accountants of Scotland (CA) and an Associate Member of the UK Society of Investment Professionals (UKSIP).
Inside the Mind: 5 reasons to be bullish on UK housebuilders
When the Office for National Statistics (ONS) surveyed the living situation of 20-34 yr olds in 2013 they highlighted the crisis of a lost generation: one in four[1] was firmly stuck in the nest. Polls showed that for the first time in a long time, sentiment had switched: more people than not thought rising house prices were a bad thing.
Seemingly aware, policymakers were trying to tackle the issue: the much publicised introduction of the help-to-buy scheme in support of first time buyers, but also in the overhauling of planning procedures with the introduction of the National Planning Policy Framework (NPPF), designed to strong-arm councils into approving more homes.
These policy approaches, plus ultra-low interest rates, did a lot to help the UK housebuilders in 2013, laying the foundations for easy credit and strong continuing housing demand for years to come. Investors in this area – ourselves included – benefitted considerably.
This year, however, capital returns have been somewhat flat and house price rises seem to be slowing. It has led some to consider whether the market has become speculatively over-inflated and due for a much-needed correction.
No home away from home
The drop in confidence seems to be based on certain areas of macroeconomic weakness: mortgage lending has recently dropped, wage growth stutters behind house prices effectively capping affordability, and a lack in global confidence has weakened foreign demand.
In addition the political parties have been scrambling to write ever-more progressive policies to tackle the so-called ‘housing crisis’, acutely aware that winning in this area will earn electoral favour at the polls next May. But it has added to the sector malaise on account of policy uncertainty. Ed Balls, for example, outlined an annual mansion tax on homes over £2m but only recently clarified his position on what this might entail (although again only in the £2m-£3m range, above £3m is currently anyone’s guess).
While these concerns are fair, my belief is that the sector has paused and that in reality it is structurally poised to deliver attractive returns for many more years to come. I base this view on five drivers which underpin the investment case.
Underpinning a nation
Policy support – It may be true that Ed Balls’ mansion tax has led to softness in the London market, but it could also be down to four years of surging house prices. The closer we draw to the election the more clear policy should become. One thing is important to remember: cross-party support actually prevails. All are acutely aware of the housing crisis, so electoral change is unlikely to deliver dramatic swings in policy positioning.
Loan availability growing – Total mortgage lending has slightly decreased year-on-year but first time buyer figures are looking healthy. This is helped by the growing availability of higher loan-to-value (LTV) mortgages – where buyers effectively pay a smaller deposit relative to the property’s value – and where significant pent-up demand exists from restrictions in this end of the market during the years following the financial crisis.
Industry consolidation – The squeeze has been on the smaller developers. In 1988 there were over 12,000[2] small housebuilders (classed as building less than 100 homes per year); by the end of 2013 there were less than 2,7003. Lack of bank financing for land purchases is the reason here, driving some to peer-to-peer lending but the majority out of the market entirely. It translates to less competition for land, lowering prices for the larger builders and increasing their margins. For these reasons they are generating a lot of cash.
Under-supply – One clear point made by Bank of England Governor Mark Carney when asked about over-heating in the housing sector was this: supply constraint has been the primary reason for price rises. Broad consensus is a target of 200,000 new homes annually; last year housebuilders barely managed 130,000[3]. Specifically, the problem has been building sufficient affordable homes. In a recent interview, Ted Ayres, the Chief Executive of one of our holdings Bellway, said the government should do more in this area. The NFFP was meant to encourage the building of more affordable homes but since its introduction in 2012, only 1 in 7 councils are compliant2. It means structural under-supply is likely to continue.
The economy – The sector is underpinned by powerful economic drivers. Wage growth remains muted but job growth is strong, GDP growth is robust and households hold lower levels of debt than they have held in a long time. Furthermore, with food and oil prices low, dampening inflation, expectations for interest rate rises have been pushed out: the first being expected in quarter 1 or 2 next year, but also making likely the on-going increases gradual. Confidence among consumers is therefore running high.
With structural advantages in mind, we have been interested in some of the larger housebuilders, investing in Bellway and Taylor Wimpey for the Henderson Smaller Companies Investment Trust. With strong management teams and economies of scale, valuations remain attractive on a number of metrics and they are handing back cash to shareholders where they can. Dividend yields are high and strong dividend growth appears set to continue.
Last year’s sector re-rating was certainly remarkable, but with valuations currently looking average rather than cheap relative to history, I think moving forward returns will be significantly more restrained. Powerful underlying drivers are in place here though. For these reasons I remain invested; after all, every Englishman needs his castle.
Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser.
The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.
Issued in the UK by Henderson Global Investors. Henderson Global Investors is the name under which Henderson Global Investors Limited (reg. no. 906355), Henderson Fund Management Limited (reg. no. 2607112), Henderson Investment Funds Limited (reg. no. 2678531), Henderson Investment Management Limited (reg. no. 1795354), Henderson Alternative Investment Advisor Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), Gartmore Investment Limited (reg. no. 1508030), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and
[1] ONS; Jan 2014/ [2] Liberum – Oct 2014/ [3] Citi – Sep 2014
Featured Henderson Investment Trusts:
Henderson Far East Income
Henderson European Focus Trust
Henderson Global Trust
The Bankers Investment Trust
Henderson High Income Trust
Lowland Investment Company
Henderson EuroTrust
Henderson Diversified Income
The City of London Investment Trust
Henderson International Income Trust
Henderson Opportunities Trust
The Henderson Smaller Companies Investment Trust
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