Look to Henderson Smaller Companies for consistent returns

Under the tenure of current manager Neil Hermon, who has run the fund since 1992, this trust has outperformed its benchmark in 13 of its past 14 financial years, which has also resulted in good cumulative returns. The trust has substantially beaten its benchmark, Numis Smaller Companies Index excluding Investment Companies, over one, three and five years, with share price returns of 42 per cent, 63 per cent and 164 per cent respectively, compared with 21 per cent, 43 per cent and 96 per cent for the index. The trust has also outpaced its peer group average over these periods.

Mr Hermon has a good record of smaller company investing dating back to 1993. According to research company FE Trustnet, he has delivered a cumulative total return of 259.9 per cent over 10 years, compared with 156.5 per cent for a composite of his peer group.

Both Mr Hermon and the trust's deputy manager, Indriatti van Hien, have backgrounds in accountancy so are experienced in analysing balance sheets and accounts. They focus on finding quality growth companies at the right valuation, with a market cap of at least £100m. They tend to run winners, holding stocks for four years on average, so the trust has low portfolio turnover meaning trading costs eat less into returns.

Henderson Smaller Companies has a mid-cap bias and had nearly two-thirds of its assets in FTSE 250 shares as at the end of July, according to broker Winterflood, and is well diversified with 115 holdings. Although the trust invests in UK-listed companies about half of its underlying earnings come from overseas, including the US, Europe, Asia and emerging markets. And over the past year its managers have been reducing exposure to more UK-focused companies.  

Research company Morningstar has recently upgraded the trust from a bronze to a silver rating. "We think the trust is a strong candidate for investors seeking exposure to a broad range of UK smaller companies from the Alternative Investment Market through to the FTSE 250," says David Holder, senior analyst at Morningstar. "The team is stable and the manager vastly experienced, which leads to a consistent and effective process."

The trust has a performance fee of 15 per cent of any outperformance of its benchmark on a total return basis. However, there is a limit on the total management fees payable in any one year of 0.9 per cent of the average value of the trust's net assets during the year. And its very low basic ongoing charge of 0.43 per cent means that even with the performance fee added in this rises to 1.01 per cent, which is not unreasonable given the strong outperformance and smaller companies focus. 

The uncertainty surrounding the UK's withdrawal from the European Union could have a negative effect on domestically facing companies, while companies that are doing well could still experience a decline in their share prices around the time of and after the exit.

This could also have an effect on the share prices of UK smaller company trusts. Henderson Smaller Companies is trading on a discount to net asset value of around 11 per cent, but has traded at wider levels, at times going out beyond 18 per cent, so is not at its cheapest. And if there is volatility around Brexit the discount could widen again.

However the trust's overseas earnings exposure and its manager's long history of outperformance suggest it will be better able to cope than some of its peers if the economic and market picture worsens. And if investors recognise this then any discount widening may reduce again.

So if you can invest for the long term and ride out potential volatility, Henderson Smaller Companies Investment Trust's consistent performance and experienced manager mean it could be one of the better ways to maintain exposure to UK smaller companies. Buy. EA

Henderson Smaller Companies Investment Trust (HSL)

Source: Winterflood Securities as at 05/12/17  *Janus Henderson as at 31/10/17  **Association of Investment Companies

Performance

Source: Winterflood Securities as at 05/12/17

Top 10 holdings as at 31/10/17 (%)

Source: Janus Henderson Investors

Sector breakdown as at 31/10/17 (%)

Source: Janus Henderson Investors