Moneywise First 50 Funds interview: Neil Hermon, Henderson Smaller Companies

28 June 2019
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Neil Hermon is manager of Henderson Smaller Companies. Edmund Greaves talks to him about exciting acquisitions, the upside of Brexit, and his top tips for experienced and new investors

What is Henderson Smaller Companies?

It’s a 130-year-old investment trust, which focuses on investing in UK mid-size and small companies. That is, companies in the bottom 10% of the UK market by market capitalisation [total value of a company’s listed shares], and ones valued below around £1.5billion.

For us it’s all about finding quality companies to invest in over the longer term.

What’s your top holding?

A company called Bellway, a UK housebuilder. It’s not your typical growth investor story, but I think it fits well with the Growth at a Reasonable Price (GARP) idea.

Bellway has had several very good years. It’s a very successful builder, certainly helped by the robust nature of the UK housing market. Help to Buy is a key driver as well as the government’s push to increase the housing supply.

We like Bellway because it has seen good growth in the past, and it’s building and expanding across the UK. It has a good management team, very consistent, very steady. The strategy is very well defined and worked out. The balance sheet is strong and has typically met and beat expectations on momentum.

What have you recently bought?

The most recent is Savills, a well-known property business. We’ve taken advantage of weakness in the share price around Brexit. As you look closer beneath the bonnet it’s quite a diverse business. People think of it very much as UK domestic-centric stock, but it’s got good diversification. It’s a business we’ve admired for a long time.

How has Brexit affected the UK stock market?

Brexit has been front and centre for the past three years now. But the UK stock market is very international by nature. Over 70% of the earnings of FTSE companies come from overseas. Even in our portfolio around half of the sales of our companies come from overseas.

We’ve got some balance in the portfolio regarding international versus UK domestic exposure. Even if the UK economy isn’t growing particularly quickly, there are some great UK businesses to invest in.

What’s your best investment decision?

The poster child of the portfolio in the last few years has been NMC Health. We invested in 2012 when it IPO’d [offered shares to the public for the first time in an Initial Public Offering] around £2 per share. We sold it last year at £36, an 18-fold return over the course of six years.

NMC is a Middle Eastern healthcare operation, but it’s listed in the UK. We liked the market, it was fast growing in an undeveloped area with the lack of government healthcare, and a growing and ageing population.

And the worst?

I’ve never had a company go bust on me (Neil taps the wooden table at this point). But we’ve had several companies that have fallen substantially.

One example would be London Mining. This is kind of a case in point of not straying too far from areas you understand. It was essentially a greenfield/brownfield start-up of an iron ore mine in Sierra Leone.

I mean, why did I do that? I don’t really know. The management team had done very well with a similar project in Brazil, so there was a degree of credibility there.

But it was too far away from our comfort zone. We didn’t really understand the dynamics of the market it was operating in. Mining ventures tend to cost twice as much [as projected] three years too late.

We haven’t invested in any greenfield start-up mining companies since that happened.

Did you go to Sierra Leone?

No, but it would have been a good idea wouldn’t it? On paper, it looked like an attractive investment, but with hindsight you reflect on that and think: “Actually that was a mistake I made, let’s not repeat those mistakes.”

Since then we’ve never invested in any other mining small-cap company. Frankly it’s a verboten for me going forward because the risks are too high for the reward you might get.

What’s the first thing you ever invested in?

What got me interested in this job was that I inherited a couple of shares from my grandmother when I was in my mid-teens, a long time ago.

That really piqued my interest in the stock market and fund management and I got addicted to reading the business section of the paper and looking at Teletext.

Quite sad, really – I should have been out dating girls! It gave me a real interest and from that I realised it’s what I wanted to do for a career.

What’s your top tip for a beginner investor?

First: if it’s too good to be true, it usually is. If the returns allegedly on offer are exceptional they usually carry excessive risk. Those stocks or investments that look like they’re going to make you 10 times your money usually lose you 90%.

Second: run your winners. Good companies tend to remain good companies. Always reflect on your investments – but taking a long-term approach to investing and trying to find buy-and-hold-forever stocks is the best thing you can do.

Henderson Smaller Companies key stats:

Launched: 1887
Fund size: £683 million
Ongoing charge (OCF): 0.42%

Yield: 2.38%
Source: Janus Henderson Investors, March 31 2019

The manager behind the fund

Neil Hermon is director of UK Equities and a fund manager at Janus Henderson Investors, a position he has held since 2013. He joined Henderson in 2002 as head of UK smaller companies. Prior to this, he served as head of UK smaller companies for General Accident Investment Management (later to become CGU plc). He began his career at Ernst & Young as a chartered accountant. Neil received an MA (Hons) in mathematics from Cambridge University. He is an associate member of the Society of Investment Professionals (ASIP) and has 30 years of financial industry experience.

 

Sector breakdown

Five-year discrete performance of Henderson Smaller Companies investment trust plc (HSL)

Year 0-12 months 12-24 months 24-36 months 36-48 months 48-60 months
HSL share price (total return %) 1.8 25.11 22.96 3.9 11.19
Benchmark: Numis Smaller Cos Ex Invmt Cos (total return %) -3.42 7.14 22 1.82 6

Source: Janus Henderson Investors, 30 April 2019

 

Top holdings

 

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