The smaller firms champion forecasting a big future

After two difficult years, UK smaller companies manager Neil Hermon is convinced that ‘things can only get better’.

Echoing the words of D:Ream’s 1997 Labour election anthem, he believes an improving economic backdrop in the UK is great news for the companies that the investment trust he runs has in its portfolio. 

The £642million fund in question is stock market listed Henderson Smaller Companies.

‘Most of the holdings in the trust are businesses geared towards the UK,’ says Hermon. 

‘So a stronger domestic economy is good for them, consumers and hopefully our shareholders.’

Certainly, all the economic numbers are now looking more positive. Last week, the Office for National Statistics said that in the year to April, annual inflation fell to 2.3 per cent.

The International Monetary Fund also upgraded its growth forecast for the UK economy this year from 0.5 per cent to 0.7 per cent. 

It also said there was scope for the Bank of England to cut interest rates between now and the end of the year – two or three cuts of 0.25 percentage points. 

The fund currently has just below 100 holdings and is focused entirely on the UK stock market.

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The market capitalisation of the largest companies it has stakes in are around £1.5 billion, which means it holds businesses that form part of the FTSE250 Index.

‘We like to run with our winners,’ says Hermon. ‘The only risk controls we apply are that no individual holding can represent more than four per cent of the trust’s assets. Also, if a company is so successful that it joins the FTSE100 index, we will offload it.’

The last position it was forced to rewind was kitchen supplier Howden Joinery Group when it became a constituent of the FTSE100 late last year.

Economy apart, Hermon also believes that many UK smaller companies remain undervalued – despite the top end of the stock market (the FTSE100 Index) reaching new record highs.

‘There are 50-plus charts I could show you that prove UK smaller companies are cheap in stock market terms,’ he says.

‘Private equity companies and international companies have been buying UK businesses because they see them as good value for money. What I can’t tell you is when shares in UK smaller companies will be re-rated upwards.’

The trust’s performance numbers have improved in recent months. Over the past year, the fund has generated a total return of 12.3 per cent, compared to respective losses of 5.6 and 28.2 per cent in the year to May 24, 2023 and May 24, 2022. One appealing feature of the trust is its income.

The trust now has 20 successive years of annual dividend growth under its belt and that is likely to become 21 when the final dividend for the current financial year is announced in August. 

Among smaller companies trusts, only Athelney (21), BlackRock Smaller Companies (21) and Global Smaller Companies (53) have longer records of dividend growth.

‘It’s an important part of the total return we deliver,’ says Hermon. The income, paid semi-annually, is equivalent to a dividend of just under three per cent.

Janus Henderson, the fund management group that stands behind the trust, has £1.2 billion of assets in UK smaller companies.

Recent portfolio additions include healthcare company hVivo and engineering business Keller.

The trust’s ongoing charges are 0.91 per cent (source: Hargreaves Lansdown) and the stock market identification code is 0906506. Its market ticker is HSL. Hermon is supported on the trust by deputy Indriatti van Hien.