Interview: Neil Hermon, manager of Henderson Smaller Companies Investment Trust
What is Henderson Smaller Companies Investment Trust?
Henderson Smaller Companies Investment Trust is a UK-listed company. Its objective is to maximise shareholder returns by investing in a portfolio of UK-listed companies with market caps below about £1.5 billion – so smaller and mid-cap [medium- sized] companies.
The aim is for the companies I invest in to grow faster than the market and the economy, although we do pay a dividend too.
Who is your typical investor?
In terms of individual investors, they are people looking for exposure to the UK smaller companies space who recognise that it can provide excellent long-term returns well above the market and who want to diversify their exposure to the equities market.
What do you look for when stockpicking?
I look for companies that will grow strongly over the long term. I also try to find ‘garp’ – growth at the right price.
I begin by looking for the four ‘Ms’: model – a strong business model; management – successful managers; money – a good balance sheet and cash flow; and momentum – an ability grow quicker than expected. Once that’s done, I make sure the valuation is right.
What companies have you recently bought?
I have bought Ascential, a business- to-business media provider in the events industry. I have also recently purchased Restore, a box storage company for businesses. We all think the world is going paperless, but it’s not. Lawyers, accountants and others still need to store information.
What companies have you recently sold?
At the end of last year, we sold The Restaurant Group, which owns of Frankie & Benny’s, Chiquito, and Garfunkel’s. It had been a really good performer for a number of years, it had strong positioning on leisure parks and solid brands, and we liked the management team.
What changed? There was a change of management, and we saw the impact of the minimum wage and rising costs. The other factor was an increase in competition. The brands became somewhat tired as fashions changed.
Has the referendum had an impact on the fund?
The markets sold off aggressively in the days after the Brexit vote but have since recovered. Plus about 50% of my portfolio constituents have overseas exposure and were therefore not affected by the vote.
NMC Health, for example, has felt no impact from Brexit whatsoever. It owns hospitals and pharmacies in the United Arab Emirates, so it is a strong global business. The UAE has an ageing population, so NMC Health has really good growth dynamics.
What has been your best investment?
The best opportunity I have had was following the 2008 financial crisis. We invested in a company called WSP, an engineering consultancy firm. Its share price had been savaged in the global financial crisis, and it had a degree of balance sheet debt. But we invested in it, and its share price went up tenfold before it was bought by a competitor.
Another good investment has been Vitrex, a specialist plastic manufacturer. It’s among our top 10 holdings and has been a great long-term performer.
What’s your worst investment?
I’ve never had a company go bust on me, and I’ve never had a valuation go all the way down to zero. However, a few investments have fallen in value.
We hold a company called Interserve, which has been a very poor performer in the past year because it has had an issue with the living wage increase, while there is concern over its Middle East operation, given the price of oil. However, we think it will pick up.
What’s your top tip?
Do your research. If you’re investing in a collective vehicle, such as this trust, back a manager with a long- term proven track record. And be long term in your approach.
Over the past 13 years, we’ve outperformed our benchmark by about 2% a year. Small cap is a relatively under researched market, so we can do the in-depth research for our investors.
The man behind the fund
Name: Neil Hermon
Managed the fund since: 2002
Background: He has been investing since he inherited a couple of shares from his grandmother when he was 15. He always wanted to work in investments, but he first qualified as a chartered accountant before moving into equities. He was a fund manager at Morley before moving to Henderson.
- Interview conducted 22 July 2016.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
A standard by which something is measured, usually the performance of investment funds against a specified index, such as the FTSE All-Share. Active fund managers look to outperform their benchmark index. Cautious fund managers aim to hold roughly the same proportion of each constituent as the benchmark, while a manager who deviates away from investing in the benchmark index’s constituents has a better chance of outperforming (or underperforming) the index.