The fund that has outperformed in 14 of the last 15 years

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The fund that has outperformed in 14 of the last 15 years
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The acid test for any fund manager is how consistently he can beat his benchmark, so when someone successfully does this for 14 out of 15 years it is worth taking note. Neil Hermon’s excellent long-term track record in charge of the Henderson Smaller Companies investment trust (LON: HSL) has transformed the fund into a suitable core holding for anyone who wants exposure to this part of the market.

In the 12 months to the end of May, Hermon achieved a NAV total return of 15.9%, which was well ahead of the 5.3% increase in the Numis Smaller Companies ex ICs index and the 9.3% average gain achieved by the smaller companies sector. Since he took over the fund in 2002 his diversified portfolio with a focus on growth at a reasonable price has outperformed the benchmark in 14 out of the 15 financial years. 

Good growth prospects, sound financial characteristics and strong management

Hermon looks forbusinesses with ‘good growth prospects, sound financial characteristics and strong management, at a valuation level that does not reflect these strengths’. His hunting ground is the bottom 10% of the UK stock market by valuation, although he tends to stick to the larger and more liquid constituents and will hold onto his winners, hence the fact that 57% of the portfolio is currently invested in the FTSE 250 mid cap segment.

At the end of May the fund had a diversified portfolio of 114 holdings with the largest positions including housebuilder Bellway, alternative finance provider Intermediate Capital Group, and the cinema owner Cineworld. Amongst the new stocks added during the year were: Impax AM, a sustainability-focused asset manager; the investment platform IntegraFin; and Spire Healthcare, a private hospital operator.

The performance during the last 12 months was helped by the fact that there were 8 bids in the portfolio with the targets including the challenger bank Aldermore and Fenner, the mining equipment provider. Outside of these special situations he normally adopts a long-term investment approach and has an average holding period of four years.

The dividend has now been increased for 15 consecutive years

Henderson Smaller Companies will mainly be of interest to investors looking for capital growth, although the dividend has now been increased for 15 consecutive years with the shares offering a reasonable prospective yield of 2.3%.

The fund has the lowest base fee in the sector with an annual management charge of just 0.35% of net assets, but the performance fee, which is based on 15% of NAV returns in excess of the benchmark (subject to a cap), lifts the ongoing charges to 0.99%. Net gearing is a prudent 9%.

With a market cap of £692m, Henderson Smaller Companies is one of the largest and most liquid investment trusts operating in the Smaller Companies sector. The shares are currently trading on a discount to NAV of 11%, which is broadly in line with its peer group. Hermon’s excellent long-term track record makes it a reliable core holding for anyone who wants exposure to this part of the market.

Comments (3)

  • john says:

    When discount to NAV goes over 10% why doesn’t trust buy back its own shares and cancel them thus increasing discount to NAV

  • TonyA says:

    Blackrock Throgmorton (THRG) invests in the same sector and has the added tweak of using CFDs to soften losses. Its Sharpe and Alpha are better than HSL over 1, 3 and 5 years, and it has significantly better NAV returns too. The discount is around 7%, compared with its sister company BRSC which is on an ambitious 2% discount. The yield on THRG is only 1% however compared to HSL’s 2.3%.

  • Tony Airey says:

    Not only this column (ST Money is also a good example), but I often wonder about journalistic nepotism. Or maybe it’s just lazy research?

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