Henderson Smaller Companies (HSL) aims to maximise shareholder returns over the longer term by investing in a diversified portfolio of UK companies listed on the FTSE 250, FTSE Small Cap and FTSE AIM indices.
The manager, Neil Hermon, is a bottom-up stock picker, following a ‘growth at a reasonable price’ (GARP) investment process. This means that the manager considers himself a growth investor, but applies value principles so as not to overpay for the above-average earnings growth he is looking to find.
The strategy involves looking at what Neil refers to as the ‘Four Ms’:
- 'Model' reflects the pricing power of the company and its competitive advantage
- 'Management' assesses the strength and vision of the management team
- 'Money' refers to the balance sheet strength and cash flow of the company, and
- 'Momentum' analyses the company's earnings momentum and whether it is likely to outperform expectations.
Since Neil took over managing the trust in November 2002 performance has been strong. As we discuss in the performance tab, the trust has outperformed both its IA and AIC UK Smaller Companies peers and its Numis Smaller Companies ex Investment Trust benchmark over the period. Nevertheless performance has been rocky in recent times due to the political turmoil in the UK and the high levels of gearing employed by the manager and board.
Alongside capital appreciation a key part of the investment proposition is income generation. Currently yielding 2.7%, the trust offers investors a unique way to diversify income, and the team has an impressive record of dividend growth, which we discuss in the dividend section.
The trust’s discount is wide relative to its peers, despite the long-term track record of outperformance. Currently the trust is trading at a discount of 11.5% (see discount section for more detail).