The shares a small-company star investor has been buying and selling

Henderson Smaller Companies investment trust, one of interactive investor’s Super 60 choices, had a busy 2020 in terms of portfolio activity.

The £765 million Henderson Smaller Companies (LSE:HSL) investment trust, one of interactive investor’s Super 60 choices, had a busy 2020 in terms of portfolio activity, as manager Neil Hermon saw stocks become takeover targets and added a handful of promising new names.

Over the six months to 30 November 2020, Hermon bought a number of new stocks and boosted exposure to existing holdings. New additions included banknote supplier De La Rue (LSE:DLAR), Empiric Student Property (LSE:ESP), asset manager Gresham House (LSE:GHE), floor-coverings distributor Headlam Group (LSE:HEAD), manufacturing and power specialist Volex (LSE:VLX), and Youngs Brewery (LSE:YNGA)

He exited positions where valuations looked stretched or performance uncertain, including Safestore (LSE:SAFE), Scapa (LSE:SCPA, and Tekmar (LSE:TGP). He also sold AA Group and Urban & Civic after they agreed takeover bids, and Intermediate Capital (LSE:ICP) following its promotion to the FTSE 100.

The trust delivered a net asset value (NAV) total return per share of 20.6% over the reporting period, beating the Association of Investment Companies (AIC) UK Smaller Companies sector average, but slightly lagging the index. The company’s share price rose by 27.7% on a total return basis, while the discount narrowed from 9.6% in May to 4.5% in November, although it has since moved back out to stand at 8.6% today.

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‘Strength will be tested’

Smaller companies staged a comeback over the six-month reporting period, following a challenging time during the early stages of the pandemic. At the stock level, among the top contributors to returns were Egyptian gold miner Centamin (LSE:CEY), equipment manufacturer Renishaw (LSE:RSW), Impax Asset Management (LSE:IPX), and video-game developers Codemasters (LSE:CDM) and Team17 (LSE:TM17). Detractors included pharma group Clinigen (LSE:CLIN), William Hill (LSE:WMH), advertising firm S4 Capital (LSE:SFOR), translation company RWS Holdings (LSE:RWS) and online electrical retailer AO World (LSE:AO.).

Corporate conditions are now looking stronger, and company balance sheets are more robust, says Hermon. “However, the scale of economic shock means that this ‘strength’ will be severely tested and key questions for investors today revolve around a company’s available liquidity, leverage, bank covenants and ability to see the economic downturn through. On the whole, so far, the UK corporate sector has performed well during the crisis and most companies are beating their initial, post-Covid-19, earnings and cash expectations.”

The UK stock market is now trading below its long-term average in valuation terms, but no one knows how much recovery will happen in 2021, and a lot of companies have suspended or cancelled dividends, he adds. In its six-month report, the trust’s board said it will maintain its interim dividend of 7p per share. 

‘Fantastic buying opportunities’

“Although much uncertainty remains around short-term economic conditions, the virus will pass and we should see a recovery. The movements in equity markets have thrown up some fantastic buying opportunities and we expect many listed companies to emerge stronger from the downturn. However, it is important to be selective as any recovery will be uneven and strength of franchise, market positioning and balance sheet will determine the winners from the losers in a post Covid-19 world,” Hermon says.

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Analysts’ views

Investment trust analyst Numis says Henderson Smaller Companies is one of the largest and most liquid UK smaller companies trusts, making it a good core holding for investors wanting exposure to this asset class. “Neil Hermon has a strong long-term track record through building a diversified portfolio with a focus on growth at a reasonable price,” says Numis. “Investors benefit from low fees with an ongoing charges figure of 0.42% (plus a performance incentive). It remains one of our core recommendations within the UK equity universe…[and] is trading at a 9% discount to NAV, which we believe offers some value.”

ii’s view

The Henderson Smaller Companies trust is one of interactive investor’s Super 60 choices. Hermon’s ‘growth at a reasonable price’ approach has helped the 100-stock portfolio build an enviable track record of regularly outperforming its benchmark, the Numis Smaller Companies index.

The trust has delivered a share price total return of 23.2% over the last three years, and 87.3% over five years.