Investment Trust Awards 2013: UK Smaller Companies Trust
Winner: Henderson Smaller Companies
Henderson Smaller Companies Investment Trust had a stellar run in the 1990s, but by the time Neil Hermon took over in late 2002 it had suffered a major collapse. He has done a great job in restoring its fortunes, with the net asset value (NAV) per share increasing more than fivefold since he took charge.
Progress has been relatively steady, with the trust outperforming its benchmark index in all but one of its financial years since Hermon took charge. The exception was the year to 31 May 2009, when it had too much gearing in the 2008 downturn and then failed to join in the "dash for trash". But it has recovered strongly, and has been particularly impressive over the past 12 months. It has been helped by low fees and low turnover.
With this £320 million trust, an OEIC and the UK smaller companies section of Witan Investment Trust, Hermon is responsible for assets totalling over £500 million, and all have very similar portfolios. This encourages him to focus mainly on the upper, more liquid end of the Numis Smaller Companies Index (NSCI).
Although he cannot buy into shares which have grown too large to be included in the NSCI, he can run his winners until they have graduated into the FTSE 100 (UKX). As a result his FTSE 250 index weighting is the highest in the sector at 77%. This has been a big advantage over the past three years, as the FTSE 250 index has been far stronger than the FTSE Small Cap - though the latter has done well in the past 12 months.
Hermon is far more growth-oriented than most of Henderson's other UK trust managers. The price/earnings ratio on his portfolio is around 10% higher than on the NSCI, but he considers this justified because his holdings grew their earnings by 16% in 2012 and are expected to grow them by 10% in 2013, compared to averages of 8 and 3%, respectively, from the benchmark. He is not, however, prepared to retain even ultra-high-growth companies once the price soars.
He describes the style he adopts as "growth at a reasonable price". "If you want to add value, what you pay for a share is important," he says, adding that the strong gains of recent years have made value harder to find, though he is still doing so "selectively".
Hermon is prepared to compromise on quality when a particularly underpriced opportunity comes along.
"This is not a defensively positioned portfolio and never will be. My style has been the same for 20 years and will not change," Hermon says. But he warns that his approach tends to be less successful in market downturns.
Highly commended: Montanaro UK Smaller Companies Trust
Montanaro UK Smaller Companies Trust was the only other smaller company trust to beat the sector average in each of the past three years. As at the Henderson trust, the emphasis is on identifying quality growth businesses.
The managers are prepared to pay up for them within reason, and keep turnover and transaction costs low by focusing on prospects for industries and companies over the next five to 10 years. In recent years the trust has moved its focus up the size spectrum, and it now has a relatively high weighting in mid caps, at 69%.
Charles Montanaro, who founded Montanaro Investment Management in 1990, explains that he and his team decided that this section of its universe is where the better-quality companies are to be found. The team follows a very structured investment process, which means that any changes in personnel should have minimal impact on performance.
With a market capitalisation of around £140 million, the trust is much smaller than Henderson Smaller Companies, so can afford to be far more concentrated. Risks are limited by top-slicing holdings that exceed 3% of the portfolio.
Gearing is actively varied between nil and 10% depending on the short-term outlook. In both 2012 and 2013 the trust started the year with around 10% gearing, then paid most of it off after a strong first quarter. Montanaro says the trust will consider whether to raise gearing again at the back end of 2013.
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