Moneywise’s Helen Knapman delves into the details of the Henderson Smaller Companies Investment Trust – one of our First 50 Funds for beginners – and meets its manager, Neil Hermon.
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.