JANUS HENDERSON FUND MANAGEMENT UK
LIMITED
THE HENDERSON SMALLER COMPANIES
INVESTMENT TRUST PLC
LEGAL ENTITY IDENTIFIER:
213800NE2NCQ67M2M998
THE HENDERSON SMALLER
COMPANIES INVESTMENT TRUST PLC
ANNUAL FINANCIAL RESULTS FOR
THE YEAR ENDED 31 MAY 2024
This announcement contains regulated
information.
KEY HIGHLIGHTS
§ Final
dividend increased to 19.5p per ordinary share (2023:
19.0p)
§ Share
price total return of 17.3% in the year
§ 21st
consecutive year of growth in the annual dividend
§ Outperformed the benchmark in 15 of the last 20
years
§ Over
the ten years to 31 May 2024, outperformed the benchmark by
25.1%
Neil Hermon, Fund Manager,
said:
"Despite the current geopolitical
and economic challenges facing stock markets, we believe the
portfolio is well positioned to withstand this backdrop and fully
participate in the anticipated upswing when it occurs. The recent
movements in equity markets have thrown up some fantastic buying
opportunities, however it is important to be selective as the
strength of franchise, market positioning and balance sheets will
likely determine the winners from the losers."
INVESTMENT OBJECTIVE
The Company aims to maximise
shareholders' total returns (capital and income) by investing in
smaller companies that are quoted in the United Kingdom.
PERFORMANCE
Total return performance for the years ended 31 May
2024
|
|
1 year
%
|
3 years
%
|
5 years
%
|
10 years
%
|
NAV1
|
14.5
|
-18.8
|
18.2
|
97.7
|
Benchmark2
|
18.2
|
0.0
|
29.7
|
72.6
|
Average sector NAV3
|
14.1
|
-1.7
|
28.0
|
88.6
|
Share price4
|
17.3
|
-24.6
|
18.8
|
109.1
|
AIC sector share price5
|
15.1
|
-2.5
|
30.6
|
97.3
|
FTSE All-Share Index
|
15.4
|
25.5
|
37.3
|
77.6
|
Performance
|
Year ended
31 May
2024
|
Year
ended
31 May
2023
|
NAV per share at year
end
|
1,003.1p
|
904.1p
|
Share price at year end
|
888.0p
|
785.0p
|
Discount at year
end6
|
11.5%
|
13.2%
|
Gearing at year end
|
11.5%
|
12.6%
|
Dividend for the year
|
27.00p7
|
26.00p
|
Revenue return per
share
|
29.85p
|
29.38p
|
Dividend
yield8
|
3.0%
|
3.3%
|
Total net assets
|
£747m
|
£675m
|
Ongoing charge9
|
0.45%
|
0.44%
|
1 NAV per ordinary share total return with income reinvested
2 Deutsche Numis Smaller Companies
Index (excluding
investment companies) total return
3 Average NAV total return of the Association of Investment Companies
("AIC") UK
Smaller Companies
sector
4 Share price total return using mid-market closing
price with
income reinvested
5 Average share price total return of the AIC UK Smaller Companies sector
6 Calculated using the NAV and mid-market share price at year
end
7 This represents an interim dividend of 7.5p and a proposed
final dividend of 19.5p, subject to shareholder approval at the
AGM
8 Based on the ordinary dividends paid and payable for the year
and the mid-market share price at year end
9 No performance fee is included in this calculation as no
performance fee was paid in 2024 or 2023
A glossary of terms and explanations of alternative performance
measures are
included in the Annual
Report.
Sources: Morningstar Direct,
Janus Henderson,
LSEG Datastream
CHAIR'S STATEMENT
Dear Shareholder
Performance
The year under review showed an
improved performance with strong absolute gains. The Company's net
asset value ("NAV") rose 14.5% and the share price increased 17.3%
in the year to 31 May 2024, on a total return basis. This compared
with the AIC UK Smaller Companies sector's average NAV and share
price total return which rose 14.1% and 15.1%,
respectively.
The financial year saw a marked
difference of performance in each half: after falling 7.7% in the
first six months, the Company's net asset value total return
rebounded strongly in the second half, climbing 24.0%. Despite this
strong absolute performance, the Company underperformed its
benchmark, the Deutsche Numis Smaller Companies Index (excluding
investment companies), by 3.7%. This mainly reflected some
company-specific issues that temporarily impacted a number of our
larger holdings. The Fund Manager's Report in the Annual Report
provides a detailed review of the year.
The UK market experienced a
volatile twelve months, with smaller companies outperforming
large-cap stocks as sentiment around the economy improved, aided by
the peak in interest rates at the end of 2023 coupled with falling
inflation. Corporate performance has been generally robust and
smaller companies have benefitted from the increased M&A
interest which the undervalued UK market has attracted.
We were pleased to see the strong
recovery in the second half of the financial year and are
optimistic that the portfolio is well positioned to benefit from a
continued recovery. Over the longer term, your Company's NAV total
return remains well ahead of the benchmark index; your Company
outperformed the benchmark by 25.1% over the ten years to 31 May
2024.
Dividend and earnings
Total revenue from your Company's
portfolio rose from £24.4m to £24.8m and earnings per share rose
from 29.4p to 29.9p, with the majority of our portfolio companies
taking advantage of their healthy financial performance to increase
dividend payments.
The Board is pleased to recommend
an increased final dividend of 19.5p per share which, subject to
shareholder approval at the Annual General Meeting, will be paid on
7 October 2024 to shareholders on the register at 30 August 2024.
When added to the interim dividend of 7.5p, this brings the total
dividend for the year to 27.0p per share, a 3.8% increase on 2023's
total dividend of 26.0p per share. This dividend will be fully
funded from current year revenues. As an 'AIC Dividend Hero', this
will be our 21st consecutive year of growth in the annual
dividend.
Share rating
Despite the improved investment
performance, your Company's share price discount to NAV fluctuated
during the year between 8.7% and 15.4%, averaging 12.9% and closing
the year at 11.5%. The share price over the year rose from 785.0p
to 888.0p, reflecting a narrowing of the discount to
NAV.
Share buybacks
The Company bought back 196,665
shares for cancellation in the year under review. This reflects our
view that the unusually wide discount to the NAV at which the
Company's share price trades presents an attractive opportunity to
enhance shareholder value. The buybacks are within the authority
granted at the last AGM which allows for the purchase of a maximum
of 14.99% of share capital. The shares bought back represent 0.3%
of the total number of shares in issue at the start of the
year.
Gearing
During the year, the Board renewed
its revolving credit facility with BNP Paribas for a further 12
months at a lower level of £70m (2023: £85m), following an
assessment of the Company's gearing requirements over the coming
year. Combined with long-term structural debt of £50m loan notes,
this takes your Company's total borrowing capacity to £120m (2023:
£135m). The Fund Manager reports on his use of gearing during the
year under review in the Annual Report.
Stewardship
The Company continues its
stewardship activities, and we report in detail in the Annual
Report on our fund management team's active engagement during the
year with portfolio companies on a range of topics, including
management of hazardous material by building companies and
decarbonisation by house builders.
Annual General Meeting ("AGM")
We are pleased to invite
shareholders to attend the AGM in person at our registered office
on Wednesday, 2 October 2024, at 11.30 am. We encourage
shareholders to attend for the opportunity to meet the Board, the
Fund Manager Neil Hermon and Deputy Fund Manager Indriatti van
Hien. Neil and Indriatti will give a presentation on the year under
review and their outlook for the year ahead. Shareholders unable to
join in person will be able to join the meeting by
videoconference.
We encourage all shareholders to
submit their votes on the resolutions, all of which come with the
Board's endorsement, ahead of the deadline of Monday, 30 September
2024, to ensure that their vote counts at the AGM, as there will be
live voting only for those physically present at the AGM. Please
see the AGM Notice in the Annual Report for more information on
joining and voting.
The Fund Manager discusses these
results and performance during the year in a video available from
9.00 am on the date of release of the year-end announcement at
www.hendersonsmallercompanies.com. If you have any questions for
the Board or the Fund Manager in advance of the AGM, please contact
us at itsecretariat@janushenderson.com.
Outlook
It has been an improved year and
we are pleased with the momentum seen in the second half of the
period. Dissatisfaction with the Conservative Party led to a
landslide win and large majority for the Labour Party in the July
2024 election. We now expect a period of greater stability. Recent
positive statements on business and growth from the new Labour
government give us optimism for an improvement in levels of
investment into the UK stock market.
The significant falls in inflation
have led to expectations of interest rate cuts. The exact timing is
uncertain, but the prospect of improved economic conditions should
support equity markets which are trading below long-term averages
and where the discount of smaller companies to their larger
counterparts is at an historic high, with many declaring dividend
increases and share buybacks funded from strong balance
sheets.
We are pleased to note that signs
of interest in the UK market have been growing, with an improvement
in the pace of merger and acquisition ("M&A") activity over the
past year. We were also encouraged by the successful initial public
offering ("IPO") of Raspberry Pi which highlights the possibilities
for the UK to be home to growth businesses in exciting sectors. We
hope this trend continues as the Financial Conduct Authority
("FCA") reforms the UK listing framework and creates a more
attractive proposition.
Your portfolio companies are
generally reporting robust performances, which are not reflected in
current depressed valuations, and they are taking advantage of
strong balance sheets to declare attractive dividend payments. The
outlook for 2024-2025 looks brighter, as the expectation of rate
reductions increases.
Smaller companies continue to
offer exciting opportunities. We remain confident in the ability of
our Fund Managers to draw on their consistent and disciplined
investment approach to generate significant long-term
value.
Penny Freer
Chair of the Board
FUND MANAGER'S REPORT
Fund performance
The Company had a mixed year in
performance terms, rising in absolute terms but underperforming its
benchmark. The share price rose by 17.3% and the net asset value by
14.5% on a total return basis. This compared with an increase of
18.2% in the Company's benchmark total return, the Numis Smaller
Companies Index (excluding investment companies). The
underperformance came from a combination of negative contributions
from stock selection and expenses offset by a positive contribution
from gearing. Negative contribution from stock selection was a
function of the underperformance of growth companies as they
de-rated in valuation terms due to market concerns about the impact
of rising interest rates and higher bond yields. In addition,
company-specific issues impacted a number of our larger holdings.
We believe these issues are temporary or more than fully reflected
in the underlying share price and expect these companies to recover
over time. The year saw a marked difference in our semi-annual
performance with net asset value (total return) falling 7.7% in the
first half of the financial year and a strong recovery in the
second half when net asset value (total return) rose 24.0%. Despite
it being a poor relative year for performance, the long-term record
of the Company remains strong, outperforming its benchmark in 16 of
the last 21 years.
Market -
year under
review
The year under review was a volatile but ultimately positive one for UK equity markets. The key driver of market returns
remained monetary policy. Central banks across the world, led by
the Federal Reserve, ECB and Bank of England, continued to increase
base rates in the first half of our financial year. The messaging
on the future path of base rates fluctuated between hawkish and
dovish which caused meaningful moves in sovereign bond yields in
both directions. However, the markets experienced a watershed
moment in the last quarter of 2023 as developed-market central
banks signalled that base rates had peaked and that their focus was
now shifting to when to make the first cut. This supported equity
markets, particularly in the second half of our financial
year.
Inflation continued to fall over
the year under review and is now much closer to official targets.
This has been principally driven by falling goods prices, whilst
services and wage inflation has remained stubbornly high. These
factors are causing central banks to debate when and how fast to
bring interest rates down and shifting expectations of the timing
and speed of rate reduction to the right.
Global economic conditions
remained mixed. In the UK economic growth has flatlined, following
the technical recession in the second half of 2023. Notwithstanding
that, corporate profit performance has remained generally robust.
In addition, there has been a heightened level of inward M&A
activity, particularly from private equity and foreign corporates,
highlighting the undervaluation of the UK equity market. Oil prices
rose, on account of the conflict in the Middle East and sterling
saw gentle appreciation against the US dollar.
Smaller companies outperformed
larger companies over the year driven by the prospect of interest
rate cuts and potentially improving economic conditions. Additional
support came from the M&A activity referred to above, which
principally occurred in the small and mid-cap space.
Gearing
Gearing started the year at 12.6%
and ended at 11.5%. Debt facilities are a combination of £30
million 20-year unsecured loan notes at an interest rate of 3.33%
issued in 2016, £20 million 30-year unsecured loan notes at 2.77%
issued in February 2022, and £70 million short-term bank
borrowings.
As markets rose, the use of
gearing was a positive contributor to performance in the year.
Gearing has made a significant positive contribution to investment
performance over the 21 years I have managed the investment
portfolio.
Attribution analysis
The following tables show the top
five contributors to, and the top five detractors from, the
Company's relative performance.
Principal contributors
|
12-month
return
%
|
Relative
contribution
%
|
Paragon
|
+67.4
|
+0.7
|
Close Brothers1
|
-44.1
|
+0.6
|
Playtech1
|
-20.4
|
+0.5
|
Aston Martin Lagonda1
|
-20.6
|
+0.5
|
Pets at Home1
|
-18.0
|
+0.5
|
1 Not owned by the
Company
Paragon Banking is a speciality
lender with a primary focus on providing buy-to-let mortgages to
professional landlords. The company enjoys a very strong capital
position, enabling it to pay higher dividends whilst buying back
some of its own stock. Regulations on complex underwriting and the
sophistication of its underwriting capability have allowed Paragon
to grow market share from non-bank lenders which have suffered in
this rising rate environment. As interest rates have risen Paragon
has been able to grow its net interest margin leading to strong
earnings growth.
Close Brothers is a specialist
financial services company involved in lending, asset management
services and securities market making. The company was hit by an
FCA review into the historic provision of loans in the auto finance
market which could require Close to make substantial provisions to
cover customer redress. The Company did not own a position in this
stock.
Playtech develops software
platforms and content for the online, mobile and land-based gaming
industry. Although operational performance has been solid the
company has been hit with a legal dispute with its Mexican JV
partner leading to the non-payment of fees to Playtech. The Company
did not own a position in this stock.
Aston Martin Lagonda is a
manufacturer of luxury automobiles. Operational weakness, high
leverage and a requirement to bolster the balance sheet by share
issuance impacted the share price over the period under review. The
Company did not own a position in this stock.
Pets at Home is a leading UK
retailer of pet products and provider of veterinary services. As
the Covid-induced boom in pet ownership has subsided, growth in its
retail business has slowed, compounded by a problematic move into a
new distribution centre which has caused stock availability issues.
Additionally, sentiment around the veterinary business has been
impacted by a Competition and Markets Authority enquiry into the
wider industry. The Company did not own a position in this
stock.
Principal detractors
|
12-month
return
%
|
Relative
contribution
%
|
Impax Asset Management
|
-35.4
|
-1.6
|
Team17
|
-20.6
|
-0.8
|
Carnival1
|
+67.6
|
-0.7
|
Oxford Instruments
|
-8.7
|
-0.7
|
Learning Technologies
|
-13.2
|
-0.5
|
1 Not owned by the Company
Impax Asset Management is an
environmentally and socially responsible focused asset manager
based in the UK. The company has delivered impressive earnings
growth over the last five years from a combination of asset inflows
and positive market performance. The last 12 months have been more
challenging, primarily due to higher interest rates and the
derating of growth companies that it typically invests in. The
business has also experienced mild outflows. This combination of
outflows and challenging investment performance has put pressure on
company profitability. Nevertheless, the strength of the brand and
long-term track record provides us with confidence about the growth
opportunities at the company over the medium term.
Team17 is a developer and
publisher of video games for PCs, consoles and mobile devices. The
company focuses on the independent games market and selectively
works with developers and third parties to launch new content on
multiple platforms. The group has a strong long-term performance
record driven by new releases and monetisation of the backlog of
portfolio games. More recent trading has been challenging with
profitability impacted by a poor release schedule and higher than
expected costs. Looking ahead, this business has several levers to
return to its historical earnings growth and we remain confident on
its medium-term outlook.
Carnival is a global provider of
cruise ship holidays. Strong demand from consumers, particularly in
the US, plus lower fuel costs saw profitability expand which drove
strong share price performance. The Company did not own a position
in this stock.
Oxford Instruments is a
manufacturer of advanced instrumentation equipment. The company
benefits from servicing a number of high-growth industries such as
semiconductors, quantum computing, life sciences and advanced
materials. In addition, its 'Horizon' programme of business
improvement has driven sales, profit and margin growth. The company
has a very strong balance sheet and, given a positive long-term
outlook for its end markets, it is well placed for the long term.
In the short term some end-market weakness, particularly in
semiconductors, more stringent licence controls on exports to China
and some supply chain issues have led to slower growth and share
price underperformance.
Learning Technologies is a
provider of software and services to the learning and human
resource development market. Lower demand for its services, caused
by constrained corporate spending due to global economic weakness,
has seen growth at the company slow and profit forecasts missed.
These issues are cyclical rather than structural and the company
should return to growth once economic conditions
improve.
Portfolio activity
Trading activity in the portfolio
was consistent with an average holding period of over five years.
Our approach is to consider our investments as long term in nature
and to avoid unnecessary turnover. The focus has been on adding
stocks to the portfolio that have good growth prospects, sound
financial characteristics and strong management, at a valuation
level that does not reflect these strengths. Likewise, we have been
employing strong sell disciplines to cut out stocks that fail to
meet these criteria.
Acquisitions
During the year we have added a
number of new positions to our portfolio. These include the
following:
Bloomsbury is a publisher of
children's, adults' and academic book titles. The group was
originally founded by Nigel Newton, the current CEO, as an
independent, medium sized and high-quality publisher of authors
with high potential. In this regard, the group is most famous for
its identification and publication of the Harry Potter series by
J.K. Rowling and more recently, the works of Sarah J. Maas. With
exciting new content from authors expected in the future, the group
has a strong growth profile over the medium term.
hVIVO is a clinical research
organisation specialising in human challenge trials for infectious
and respiratory disease products. These trials involve exposing
volunteers to characterised pathogens and offer pharmaceutical and
biotech companies a relatively cheap and effective way to undertake
accelerated drug development. The company has operations in the UK,
Ireland, France and the Netherlands. The barriers to entry in this
niche industry are high as the proprietary datasets about viral
loads can only be built through experience. The business is
focussed on both organic growth, through the development of
ancillary services, and inorganic growth. The company is
experiencing robust contract and order book momentum and has good
visibility on near-term growth. Cash generation is strong and
working capital requirements are negative in periods of order book
growth. Management has set ambitious medium-term revenue and margin
targets and our investment gives us exposure to structural growth
in this niche market.
Keller is a leading provider
of ground engineering services to the construction industry. It has
a global presence with operations in 37 countries. However, its key
territory is the US where it makes 80% of its profits and has a
leading market position. A new management team has transformed the
bidding disciplines and controls around contracts which has
materially improved financial performance. Increased profitability
has translated into strong cash generation which has de-levered the
balance sheet. This should allow more optionality over M&A
activity and/or capital returns to shareholders. With demand in its
key US market likely to remain robust and recovery potential in its
European and Australasian operations, prospects remain
strong.
Morgan Sindall is a
diversified construction services group with operations in office
fit-out, construction, infrastructure, social housing maintenance,
affordable housing and urban regeneration. The company, led by CEO
and founder John Morgan, has an exceptional track record of steady
dependable growth, over-delivery of expectations and strong cash
generation. Recent investment in its affordable housing division
looks well timed as the new Labour Government prioritises increased
housing production.
Telecom Plus is a
multi-service provider of utilities, insurance and cash-back cards
to over 1 million customers in the UK under its Utility Warehouse
Brand. The company's unique route to market, a partner referral
model, and differentiated product offering, bundled services, has
historically led to low customer churn. Its multi-service offering
gives the company a structural cost advantage versus competing
single-product utility providers. Our investment thesis is centred
on the belief that growth rates should accelerate following the
market and regulatory changes which were instigated by the energy
crisis in 2022 and which have reduced competition in this market.
The business is capital light and has a shareholder-friendly
approach to capital returns.
XPS Pensions is an insurance
consultancy business. Given regulatory change and increased
activity in the pension buy-out market, demand for their services
is likely to remain strong, driving superior earnings growth in the
medium term. Additionally, the balance sheet has de-levered
significantly, allowing more substantial returns to shareholders.
The sector has seen significant consolidation in recent years and
it would be unsurprising to see XPS involved in any further
activity either as an acquiror or acquiree.
Disposals
To balance the additions to our
portfolio, we have disposed of positions in companies which we felt
were set for poor price performance. We sold our holding in
Halfords, a cycle and
automotive parts retailer. Operational performance has been
disappointing and acquisitions in the automotive servicing area
have not lived up to expectations. With continued unfavourable
weather and weakness in consumer spending, we believe trading
conditions remain difficult. We also disposed of our holding in
Headlam, a floor coverings
distributor. Weakness in the housing market is impacting demand and
the company has seen profitability collapse and cash flow
deteriorate. With new competition and a long recovery ahead, the
outlook looks challenged. We sold our position in Restore Group, a box storage and
diversified business services group. Although the company has
appointed new management and has taken action to improve
underperforming parts of the business, we are concerned that the
group faces structural pressures as demand for paper-based services
falls in a digital world. We also sold our position, in line with
our stated policy, in Howden Joinery, a kitchen manufacturer and
retailer, as it was promoted to the FTSE 100.
Takeover activity
There was a decent level of
takeover activity in the portfolio. This was consistent with the
wider mid and small-cap equity markets aided by continued levels of
interest from private equity. A number of takeover bids were
received for: Blancco
Technology, a provider of data erasure software, from
Francisco Partners; Ergomed, a clinical research
outsourcer, from Permira; Gresham
House, a specialist alternative asset manager, from
Searchlight Capital Partners; Restaurant Group, a UK based restaurant
and pub group, from Apollo; Smart
Metering Systems, an owner of smart meter devices and
battery assets, from KKR; Spirent
Communications, a telecoms software and services provider,
from Keysight Technologies; and Tyman, a building materials group, from
Quanex.
Top ten positions
The following table shows the
Company's top ten stock positions and their active weight versus
the Deutsche Numis Smaller Companies Index (excluding investment
companies):
Top ten positions
at
31 May 2024
|
Portfolio
%
|
Index
weight
%
|
Active
weight
%
|
Paragon Banking
|
3.3
|
1.1
|
2.2
|
Mitchells and Butlers
|
3.1
|
1.2
|
1.9
|
Bellway
|
3.0
|
-
|
3.0
|
Oxford Instruments
|
2.7
|
1.0
|
1.7
|
Balfour Beatty
|
2.6
|
-
|
2.6
|
Future
|
2.5
|
0.8
|
1.7
|
OSB
|
2.5
|
-
|
2.5
|
Vesuvius
|
2.3
|
0.9
|
1.4
|
Gamma Communications
|
1.9
|
-
|
1.9
|
IntegraFin
|
1.8
|
0.8
|
1.0
|
A brief description of the largest
positions (excluding Paragon Banking and Oxford Instruments which
were covered earlier) follows:
Mitchells & Butlers is a
national owner and operator of pubs in the UK. Its major brands
include All Bar One, Browns, Harvester, Toby Carvery, O'Neill's,
Miller & Carter, Nicholson and Ember Inns. The vast majority of
its pubs are owned freehold, meaning it has substantial asset value
backing.
After a difficult trading period
impacted by lockdowns and restricted trading during Covid and then
pressures from significant inflation in energy, food prices and
labour costs, the outlook is looking brighter especially as
consumer demand remains strong and cost pressures have eased. The
company is steadily repaying its securitised debt, enabling a
transfer of value from debt to equity. Additionally, with its
pension deficit now cleared, cash flow is improving, allowing an
accelerated reduction in net debt.
Bellway is a national UK
housebuilder. The company has an excellent long-term track record
of controlled expansion, solid operational and financial
performance whilst maintaining a strong balance sheet. Recent
weakness in the housing market, caused by the economic downturn and
rising interest rates has put short-term profitability under
pressure as house prices soften and volumes contract. However, the
business remains well placed to benefit from any recovery.
Additionally, valuation support is provided by the discount to net
asset value at which the shares currently trade.
Balfour Beatty is an
international contractor and infrastructure investor. Management
has transformed the business over the last few years, driving
margins higher across all operational activities in the UK, US and
Hong Kong whilst maintaining the significant value of the
infrastructure investment portfolio. Significantly improved cash
flow has allowed the business to accelerate returns to shareholders
through ongoing share buybacks and increased dividends. Given
likely increased infrastructure investment in its key markets, the
company looks well placed to continue to deliver growth in
earnings, cash flow and returns to investors.
Future is a tech-enabled
global platform for specialised media which targets consumers and
business-to-business ("B2B") brands across Europe, America, and
Asia Pacific. The company creates specialised content to attract
and grow high-value audiences. These audiences are then monetised
through memberships and subscriptions, print and digital
advertising, e-commerce sales and events. In addition to these
verticals, the business owns Go.Compare, a price comparison website
which operates in the UK. Following a year of earnings downgrades
and management change, the company has renewed its focus on organic
growth and portfolio optimisation. Management is reinvesting in the
business to drive top line growth and the board has been proactive
about actively looking for options to accelerate value creation.
This in conjunction with a stabilisation in audience numbers has
driven a re-rating of the shares during the period under review.
Despite their strong run, the shares look undervalued on a
sum-of-the-parts basis and, notwithstanding potential structural
pressures driven by artificial intelligence ("AI"), we have renewed
confidence that the stock will continue to perform when the
consumer technology cycle turns or the board realises value through
the sale of one or more of its operating divisions.
OSB Group is a speciality
lender with a primary focus on providing buy-to-let mortgages to
professional landlords. Regulations on complex underwriting and the
sophistication of its underwriting capability have allowed OSB to
grow market share and, with landlord demand remaining robust, the
business is poised to see further growth. The company has built a
very strong capital position, and this is allowing it to return
significant cash to shareholders through share buybacks and
increased dividends.
Vesuvius is a materials
technology company. The company offers steel flow control, foundry
technologies, advanced refractories and metal processing products
and services to customers around the world. The business has gone
through significant rationalisation over recent years removing
excess capacity and improving returns on capital and margins. The
company has demonstrated excellent pricing power during the recent
inflationary period, validating its leading market position and
high value add of its products. Although the steel industry is
seeing the impact of global economic weakness, the business is well
positioned to enjoy strong growth once markets recover especially
as margins have clear scope to strengthen.
Gamma Communications provides
voice, data, mobile and internet-based telecoms to small and
medium-sized enterprises in the UK and Europe. The company is
focused on selling cloud-based telephony solutions, a market which
is rapidly growing as users switch to more flexible services. The
company has been highly successful with this approach in the UK and
has recently expanded, through acquisitions, into Germany, the
Netherlands and Spain to replicate this strategy. Overall, Gamma is
operating in a market with good long-term growth opportunities and
is in a strong position to win with its customer and
technology-focused approach.
IntegraFin operates an
investment platform business in the UK. This platform is designed
for independent financial advisers and their clients to hold and
manage their investment products in a cost efficient and easy to
use format. The high-quality customer service and attractive fee
rates act as differentiators against competition and as a result,
the business has seen impressive growth in assets on the platform
since the group's inception in 2000. With the company requiring
little capital to grow, IntegraFin is a high-returns business which
should be able to consistently return cash to
shareholders.
Portfolio weightings
As at 31 May 2024, the portfolio
was weighted by company size as follows:
|
Weighting %
|
|
31
May 2024
|
31
May 2023
|
FTSE 100
|
0.0
|
0.0
|
FTSE 250
|
77.7
|
70.2
|
FTSE Small Cap
|
12.6
|
14.3
|
FTSE AIM
|
21.2
|
28.1
|
Gearing
|
(11.5)
|
(12.6)
|
Market outlook
Whilst global inflation has fallen
significantly over the last year, it remains above official
targets. Hence central banks, led by the US Federal Reserve, have
retained their generally hawkish stance. However, it is clear we
have reached the end of the monetary policy tightening cycle and
the next movement in rates will be downwards. What is not clear is
the timing of when rates start to fall and the speed of their
descent. So far in 2024, economic data, particularly services and
wage inflation and labour market activity, has surprised
negatively, pushing expectations of interest rate cuts further into
the future. In the meantime, the delayed transmission mechanism of
rising interest rates and their impact means that economic
conditions are likely to remain challenging in the short term.
Notwithstanding this, the prospect of a monetary easing cycle is
likely to support global equity markets and allow valuation
multiples to expand.
Geopolitics remain challenging,
with the ongoing conflicts in Ukraine and the Middle East and
heightened tensions between China and the US. The longer-term
economic implications of this are material. There is an urgent need
to reduce European dependence on Russian oil and gas supplies and a
requirement to decrease China's influence on the global supply
chain through investment in nearshoring capability. In addition,
domestic politics are likely to be an area of volatility. Up to
half the global population is going to the polls in 2024 with key
elections in the UK, USA, France, India, Mexico, South Korea and
the EU. In the UK, a surprise early election has resulted in the
expected Labour landslide win, mostly due to dissatisfaction with
the incumbent Conservative Government rather than enthusiasm for
the Labour Party. The strong majority should allow for a stable
government, and one that is less reliant on the fringes of their
party. We see this result as a clearing event for the market and
expect the political premium associated with the UK to reduce over
time. We welcome Labour's commitment to 'boost investment' and in
particular their pledge to 'increase investment from pension funds
in UK markets'. Any incremental flow into the UK could breathe life
into a generally under-owned and, more importantly, undervalued UK
equity market.
In the corporate sector, we are
encouraged by the fact that conditions are intrinsically stronger
than they were during the Global Financial Crisis of 2008-2009. In
particular, balance sheets are more robust. Dividends have
recovered strongly post-pandemic and we are seeing an increasing
number of companies buying back their own stock.
The IPO market has been
exceptionally quiet as equity market confidence has diminished.
There are some signs that this is likely to improve in the short to
medium term, with the recent successful float of Raspberry Pi
providing evidence that the UK equity market remains open for
attractive, growing businesses. M&A activity has remained
robust as acquirors, particularly private equity, look to exploit
opportunities thrown up by the recent equity market falls. We
expect this to continue in the coming months as UK equity market
valuations remain markedly depressed versus other developed
markets.
In terms of valuations, the equity
market is trading below long-term averages. In addition, smaller
companies are trading at a historically high discount to their
larger counterparts. A sharp rebound in corporate earnings
following the pandemic-induced shock in 2020 has now faded. Weak
economic activity led to subdued corporate earnings growth in 2023
compounded by rising interest costs and a higher corporate tax
burden. The outlook for 2024 looks more favourable as cost
pressures ease and demand remains generally robust.
Although uncertainty remains
around short-term economic conditions, we think that the portfolio
is both well positioned to withstand current challenging economic
conditions and participate in the upswing as it occurs. The
movements in equity markets have thrown up some fantastic buying
opportunities. However, it is important to be selective as the
strength of franchise, market positioning and balance sheets will
likely determine the winners from the losers.
In conclusion, the year under
review has been a mixed one for the Company. Absolute performance
was positive although the Company underperformed its benchmark. The
operating performance of our portfolio companies, however, has been
robust. The companies are soundly financed and attractively valued.
Additionally, the smaller companies market continues to offer
exciting growth opportunities in which the Company can invest. We
remain confident in our ability to generate significant value from
a consistent and disciplined investment approach.
Neil Hermon
Fund Manager
INVESTMENT PORTFOLIO at 31 May 2024
Company
|
Principal
activities
|
Valuation
£'000
|
Portfolio
%
|
Paragon Banking
|
Buy-to-let
mortgage provider
|
27,198
|
3.26
|
Mitchells & Butlers
|
Hospitality operator
|
25,487
|
3.06
|
Bellway
|
Housebuilder
|
25,039
|
3.00
|
Oxford
Instruments
|
Advanced instrumentation
equipment
|
22,330
|
2.68
|
Balfour Beatty
|
International contractor
|
21,541
|
2.59
|
Future
|
Specialist internet,
website and
magazine company
|
21,200
|
2.54
|
OSB
Group
|
Buy-to-let
mortgage provider
|
20,416
|
2.45
|
Vesuvius
|
Ceramic engineering
|
19,520
|
2.34
|
Gamma Communications1
|
Telecommunications
|
15,972
|
1.92
|
IntegraFin
|
B2B
financial platform
|
14,918
|
1.79
|
10 largest
|
|
213,621
|
25.63
|
Computacenter
|
IT
reseller
|
14,482
|
1.74
|
Impax
Asset Management1
|
ESG-focused investment
manager
|
14,322
|
1.72
|
Chemring
|
Technology products
and services
|
13,896
|
1.67
|
Just
Group
|
Enhanced annuity provider
|
13,623
|
1.63
|
GB
Group1
|
Data intelligence services
|
13,087
|
1.57
|
Volution
|
Producer of ventilation products
|
12,651
|
1.52
|
Serco
|
Outsourcing services
|
12,446
|
1.49
|
Renishaw
|
Precision measuring
and calibration
equipment
|
12,385
|
1.49
|
Ascential
|
Exhibition organiser
|
12,235
|
1.47
|
Bodycote
|
Engineering group
|
12,064
|
1.45
|
20 largest
|
|
344,812
|
41.38
|
Genuit
|
Building products
|
11,713
|
1.41
|
Tyman
|
Building products
|
11,632
|
1.40
|
Softcat
|
Software
reseller
|
11,620
|
1.39
|
Pagegroup
|
Recruitment company
|
11,440
|
1.37
|
Savills
|
Property transactional
consulting services
|
11,400
|
1.37
|
Foresight
|
Specialist fund manager
|
11,376
|
1.37
|
Team171
|
Games software developer
|
11,284
|
1.35
|
Next Fifteen Communications1
|
PR and
media services
|
10,957
|
1.31
|
Qinetiq
|
Defence services
|
10,840
|
1.30
|
Workspace
|
Real estate investment and services
|
10,700
|
1.28
|
30 largest
|
|
457,774
|
54.93
|
Learning Technologies1
|
Learning services and software
|
10,655
|
1.28
|
Bytes
Technology
|
Software
reseller
|
10,626
|
1.28
|
Victrex
|
Speciality chemicals
|
10,609
|
1.27
|
Spectris
|
Electronic
control and process instrumentation
|
10,131
|
1.22
|
Crest
Nicholson
|
Housebuilder
|
9,988
|
1.20
|
Redde
Northgate
|
Commercial vehicle hire
|
9,838
|
1.18
|
Watches of Switzerland
|
Luxury
watch retailer
|
9,830
|
1.18
|
Hunting
|
Oil
equipment and services
|
9,695
|
1.16
|
Hollywood
Bowl
|
Ten
pin bowling
operator
|
9,570
|
1.15
|
MONY
|
Price comparison website
|
9,442
|
1.13
|
40 largest
|
|
558,158
|
66.98
|
1
Quoted on the Alternative Investment
Market
Company
|
Principal
activities
|
Valuation
£'000
|
Portfolio
%
|
SigmaRoc1
|
Aggregates supplier
|
9,141
|
1.10
|
Alpha
Financial Markets1
|
Investment management
consultancy
|
9,000
|
1.08
|
Rathbones
|
Private client wealth manager
|
8,726
|
1.05
|
Trainline
|
Online ticket retailer
|
8,597
|
1.03
|
Midwich1
|
Audio-visual equipment distributor
|
8,417
|
1.01
|
Luceco
|
Electrical products
|
8,307
|
1.00
|
XP
Power
|
Electrical power products
|
7,980
|
0.96
|
Serica Energy1
|
Oil
& gas
exploration and
production
|
7,923
|
0.95
|
Morgan Advanced Materials
|
Engineering group
|
7,339
|
0.88
|
Burford
Capital1
|
Litigation finance
|
7,267
|
0.87
|
50 largest
|
|
640,855
|
76.91
|
Clarkson
|
Shipping services
|
7,193
|
0.86
|
Harbour Energy
|
Oil
and gas
exploration and
production
|
6,930
|
0.83
|
Keller
|
Ground
engineering
|
6,826
|
0.82
|
Synthomer
|
Speciality chemicals
|
6,718
|
0.81
|
Wickes
|
DIY
retailer
|
6,622
|
0.79
|
Harworth
|
Urban regeneration and property investment
|
6,364
|
0.76
|
RWS
Holdings1
|
Patent translation services
|
5,822
|
0.70
|
Avon Protection
|
Defence products
|
5,799
|
0.70
|
SThree
|
Recruitment company
|
5,784
|
0.69
|
Wilmington
|
B2B
information provider
|
5,738
|
0.69
|
60 largest
|
|
704,651
|
84.56
|
JTC
|
Fund administrator
|
5,400
|
0.65
|
Auction Technology
|
Online auction software
provider
|
5,272
|
0.63
|
Morgan
Sindall
|
Diversified building
contractor
|
5,222
|
0.63
|
Moonpig
|
Online
card and gift retailer
|
5,049
|
0.61
|
Videndum
|
Broadcast
and camera systems
|
5,031
|
0.60
|
GlobalData1
|
B2B
information provider
|
5,005
|
0.60
|
AB
Dynamics1
|
Automotive testing and measurement products
|
4,927
|
0.59
|
DFS
|
Furniture retailer
|
4,600
|
0.55
|
Liontrust Asset Management
|
Specialist fund management
|
4,349
|
0.52
|
Telecom Plus
|
Provider of consumer services
|
4,287
|
0.51
|
70 largest
|
|
753,793
|
90.45
|
Bloomsbury
Publishing
|
Consumer
and academic publisher
|
4,227
|
0.51
|
Bridgepoint
|
Private equity fund manager
|
4,111
|
0.49
|
Stelrad
|
Radiator manufacturer
|
4,060
|
0.49
|
Empiric
|
Student
accommodation
|
3,847
|
0.46
|
RM
|
Education
software and services
|
3,816
|
0.46
|
XPS
Pensions
|
Pensions consultancy
|
3,795
|
0.46
|
Helical
|
Office
property investor and developer
|
3,472
|
0.42
|
Essentra
|
Industrial distributor
|
3,337
|
0.40
|
CLS
|
Real estate investment and services
|
3,077
|
0.37
|
ME
Group
|
Vending equipment
|
2,925
|
0.35
|
80 largest
|
|
790,460
|
94.86
|
1
Quoted on the Alternative Investment
Market
Company
|
Principal
activities
|
Valuation
£'000
|
Portfolio
%
|
Advanced Medical Solutions1
|
Medical supplies manufacturer
|
2,875
|
0.34
|
Benchmark
Holdings1
|
Aquaculture services
|
2,873
|
0.34
|
Grainger
|
Residential property investor
|
2,869
|
0.34
|
Young & Co's share class A1
|
Pub
operator
|
2,778
|
0.33
|
Severfield
|
Structural steel products
|
2,736
|
0.33
|
Pebble1
|
Promotional products
and services
|
2,666
|
0.32
|
YouGov1
|
Market
research and data services
|
2,579
|
0.31
|
Domino's Pizza
|
Franchise operator of pizza outlets
|
2,493
|
0.30
|
Young & Co's share class NV1
|
Pub
operator
|
2,464
|
0.30
|
Eurocell
|
Building products
|
2,318
|
0.28
|
90 largest
|
|
817,111
|
98.05
|
Pulsar1
|
Marketing services software
provider
|
2,238
|
0.27
|
Capricorn Energy
|
Oil
and gas
exploration and
production
|
2,021
|
0.24
|
Alliance Pharma1
|
Pharmaceutical products
|
1,979
|
0.24
|
Alfa Financial Software
|
Leasing software
|
1,978
|
0.24
|
Tribal1
|
Educational support
services and
software
|
1,964
|
0.24
|
Hill & Smith
|
Fabricated metal products
|
1,578
|
0.19
|
Spirent Communications
|
Telecom testing services
|
1,536
|
0.18
|
Thruvision1
|
Detection technology
|
1,125
|
0.13
|
hVIVO1
|
Clinical trial services
|
1,113
|
0.13
|
Oxford
Biomedica
|
Gene and cell therapy
|
725
|
0.09
|
100 largest
|
|
833,368
|
100.00
|
Total equity investments
|
|
833,368
|
100.00
|
There were no convertible or fixed
interest securities at 31 May 2024 (2023: None).
1
Quoted on
the Alternative Investment Market
PRINCIPAL RISKS AND UNCERTAINTIES
The Board, with the assistance of
the Manager, has carried out a robust assessment of the principal
and emerging risks facing the Company which relate to the activity
of investing in the shares of smaller companies that are listed (or
quoted) in the United Kingdom. The directors seek assurance that
the risks are appropriately evaluated, their possible outcomes
considered, and that effective mitigating controls are in place. To
support this process, the Audit and Risk Committee ("ARC")
maintains a detailed risk matrix which identifies the substantial
risks to which the Company is exposed and methods of mitigating
against them as far as practicable. The ARC considers the Company's
principal and emerging risks at each meeting, with a thorough
review at least once per year, using heat maps derived from the
detailed risk matrix. Every year each director undertakes an
individual assessment of each risk. The individual ratings are
collated and reviewed at a meeting, which triggers fresh critical
debate. The Board regularly considers these and does not consider
the principal risks to have changed during the course of the
reporting period and up to the date of this report.
Throughout the year the Board has
considered the impact of macroeconomic events with a global impact
and heightened market volatility, including the ongoing
ramifications of the Russia/Ukraine war and conflict in the Middle
East. The Board has had regard to the impact of mitigation measures
on manufacturing supply lines and on heightened uncertainty in the
business environment. The Board has also considered the wider
consequences of economic uncertainty, disruption to markets and
society through artificial intelligence ("AI"), the UK General
Election, the cost-of-living crisis in the UK, and the UK banks'
appetite for lending to the corporate sector.
While uncertainty remains around
short-term economic conditions, the Board has concluded that the
Company's portfolio and the Manager's investment approach should
prove resilient. The Fund Manager's long-standing philosophy is
that, over the long term, smaller companies are able to deliver
superior returns than the broader market, driven by his fund
management team's fundamental, qualitative analysis, engagement
with management teams and strong valuation discipline.
The principal risks fall broadly
under the following categories:
Risk
|
Controls and mitigation
|
Investment activity and strategy
Poor long-term investment
performance (significantly below agreed benchmark or market/
industry average)
Loss of the Fund Manager or
management team
Impact of political,
environmental, health or other emergencies (e.g. pandemics, war and
a changing macroeconomic environment) on the Company's
investments
Unmanaged ESG activities and
material climate-related (physical and transition) impacts within
portfolio companies
Market appetite - investment
objective and/or policy not appropriate in the current market or
not sought by investors resulting in a wide discount
|
The Board reviews investment
strategy at each board meeting. An inappropriate investment
strategy (for example, in terms of asset allocation or the level of
gearing) may lead to underperformance against the Company's
benchmark and the companies in its peer group; it may also result
in the Company's shares trading at a wider discount to net asset
value ("NAV") per share. The Board manages these risks by ensuring
a diversification of investments and a regular review of the extent
of borrowings. The Manager operates in accordance with investment
limits and restrictions determined by the Board; these include
limits on the extent to which borrowings may be used. The Board
reviews its investment limits and restrictions regularly and the
Manager confirms its compliance with them each month. The Manager
provides the directors with management information, including
performance data and reports and shareholder analysis. The Board
monitors the implementation and results of the investment process
with the Fund Manager, and regularly reviews data that monitor
portfolio risk factors.
The Fund Manager reports to each
board meeting on his close oversight of the portfolio, and more
frequently in the event of a crisis. Performance is monitored by
JHI's internal teams, any of which would escalate directly to the
Board in the event of matters of concern. At each meeting, the
Board reviews the Fund Manager's ESG engagement with portfolio
companies and their governance structures, ESG risks reports, and
votes cast against management. The Board also reviews JHI's
ESG-related marketing activity specific to the Company.
The performance of the Company
relative to its benchmark and its peers and the discount/ premium
to NAV per share are key performance indicators measured by the
Board on a continual basis and are reported on in the Annual
Report.
The Board obtains assurances from
the Manager that the UK Smaller Companies team is suitably
resourced, and the Fund Manager is appropriately remunerated and
incentivised in this role. The Board also considers the succession
plan for the fund management team on an annual basis.
See the Annual Report for a
description of the engagement with shareholders and potential
investors undertaken by the Board and Manager to keep the market
informed about Company developments.
|
Legal and regulatory
Loss of
investment trust status
Breach
of company law or Listing Rules resulting in suspension
|
In order to qualify as an
investment trust, the Company must comply with s1158 Corporation
Tax Act 2010 ("s1158"). A breach of s1158 could result in the
Company losing investment trust status and, as a consequence,
capital gains realised within the Company's portfolio would be
subject to corporation tax. The s1158 criteria are monitored by the
Manager and the results are reported to the directors at each board
meeting. The Company must comply with the provisions of the
Companies Act 2006 (the "Act") and, as the Company has a listing in
the closed-ended investment funds category of the FCA's UK Listing
Rules and trades on the main market of the London Stock Exchange,
the Company must comply with the UK Listing, Prospectus and
Disclosure Guidance and Transparency Rules of the FCA.
A breach of the Act could result
in the Company and/or the directors being fined or becoming the
subject of legal proceedings. A breach of the FCA Rules could
result in suspension of the Company's shares which would in turn
lead to a breach of s1158. The Board relies on its corporate
secretary and its professional advisers to ensure compliance with
the Act and FCA Rules.
|
Operational
Failure of, disruption to or
inadequate service levels by key third-party service
providers
Cyber crime leading to loss of
confidential data
Breach of internal
controls
Impact of political,
environmental, health or other emergencies (e.g. pandemics, war and
a changing macroeconomic environment) on the Company's operations
and those of its service providers
|
Disruption to, or failure of, the
Manager's accounting, dealing or payment systems or the custodian's
records could prevent the accurate reporting and monitoring of the
Company's financial position. The Manager has contracted some of
its operational functions, principally those relating to trade
processing, investment administration and accounting, to BNP
Paribas. Details of how the Board monitors the services provided by
Janus Henderson and its other suppliers, and the key elements
designed to provide effective internal control and risk management,
such as review of service providers' assurance reports, are
explained further in the Annual Report.
Cybersecurity is closely monitored
by the ARC as part of quarterly internal controls reports, and the
ARC receives an annual presentation from Janus Henderson's Chief
Information Security Officer.
The Board monitors effectiveness
and efficiency of service providers' processes through ongoing
compliance and operational reporting. There were no disruptions to
the services provided to the Company in the year under
review.
|
Financial instruments and the management of
risk
|
By its nature as an investment
trust, the Company is exposed in varying degrees to market risk
(comprising market price risk, currency risk and interest rate
risk), liquidity risk and credit and counterparty risk. An analysis
of these financial risks and the Company's policies for managing
them are set out in note 15 in the Annual Report.
|
EMERGING RISKS
At each meeting, the Board
considers emerging risks which it defines as potential trends,
sudden events or changing risks which are characterised by a high
degree of uncertainty in terms of occurrence probability and
possible effects on the Company. Once emerging risks become
sufficiently clear, they may be treated as specific risks and enter
the Company's matrix of significant risks.
During the year, the directors
agreed that emerging risks would include:
●
major general elections globally during the year;
●
possible global conflict owing to escalated violence in the
Middle East;
●
high levels of government debt, leading to increased
government spending on interest costs; and
● a
further decline in voting by retail shareholders who own their
shares via platforms. This is a risk common to the investment
company sector. The Board considers that it is taking all
reasonable actions possible at this time to mitigate the risk
through its increased focus on promotion to retail
shareholders.
The Board receives reporting on
risks from the Manager and other service providers in addition to
any ad hoc reports on specialist topics from professional advisors.
The Board monitors effectively the changing risk landscape and
potential threats to the Company with the support of regular
reports and ad hoc reports as required, the directors' own
experience and external insights gained from industry and
shareholder events.
VIABILITY STATEMENT AND CONTINUATION VOTE
The Company is a long-term
investor. The Board believes it is appropriate to assess the
Company's viability over a five-year period in recognition of the
Company's long-term horizon and what the Board believes to be
investors' horizons, taking account of the Company's current
position and the potential impact of the principal risks and
uncertainties as documented in the Strategic Report.
The assessment has considered the
impact of the likelihood of the principal risks and uncertainties
facing the Company, in particular investment strategy and
performance against benchmark, whether from asset allocation or the
level of gearing, and market risk, in severe but plausible
scenarios, and the effectiveness of any mitigating controls in
place.
The Board took into account the
liquidity of the portfolio and the borrowings in place when
considering the viability of the Company over the next five years
and the Company's ability to meet liabilities as they fall due.
This included consideration of the duration of the Company's loan
and borrowing facilities and how a breach of any covenants could
impact the Company's NAV and share price, recognising the current
strength of the covenants, liquidity of the portfolio and capital
reserves available. The Board used a five-year cash-flow forecast
and sensitivity analysis to support its deliberations.
The Board considers revenue and
expense forecasts at each meeting, with additional focus at the
time of reviewing half-year and year-end results. At the same time
the Board discusses the impact on the Company of decreases in
revenue and the impact that would have on revenue and capital
reserves available to pay dividends.
The Board does not expect there to
be any significant change in the principal risks and adequacy of
the mitigating controls in place, nor does the Board envisage any
change in strategy or objective or any events that would prevent
the Company from continuing to operate over the next five years;
the Company's assets are liquid, its commitments are limited and
the Company intends to continue to operate as an investment trust.
In coming to this conclusion, the Board has considered rigorously
the continued macroeconomic and geopolitical uncertainty following
Russia's invasion of Ukraine, heightened tensions between the US
and China, conflict in the Middle East, the current cost-of-living
crisis and the new government in the UK. The Board considers that
these events have highlighted the advantages of holding an
investment trust.
The Board does not believe that
these factors will have a long-term impact on the viability of the
Company and its ability to continue in operation, notwithstanding
the short-term uncertainty these events have caused in the markets
and specific shorter-term issues, such as supply chain disruption,
inflation and labour shortages.
The continuation vote at the 2022
AGM was passed with support of 99.2% of votes cast and the Board
expects shareholders to support continuation at the 2025 and 2028
AGMs, which are within the viability assessment period.
Based on their assessment, the
directors have a reasonable expectation that the Company will be
able to continue in operation and meet its liabilities as they fall
due over the next five years to 31 May 2029.
FUTURE DEVELOPMENTS
The future success of the Company
is dependent primarily on the performance of its investment
portfolio, which will, to a significant degree, reflect the
performance of the stock market and the skill of the Manager. While
the Company invests in companies that are listed (or quoted) in the
United Kingdom, the underlying businesses of those companies are
affected by external factors, many of an international nature. The
Board's intention is that the Company will continue to pursue its
stated investment objective and strategy as explained in the Annual
Report. The Chair's Statement and the Fund Manager's Report
give commentary on the outlook for the Company. Other information
on recommended dividends and financial risks is detailed in the
Strategic Report and in notes 9 and 15 to the financial
statements.
RELATED-PARTY TRANSACTIONS
The Company's transactions with
related parties in the year were with the directors and the
Manager. There were no material transactions between the Company
and its directors, and the only amounts paid to them were in
respect of remuneration and expenses. Remuneration is paid
quarterly in arrears and amounts for April and May 2024 were
therefore accrued as at the year end. There were no other
outstanding amounts payable at the year end. Directors'
shareholdings are listed in the Annual Report.
In respect of the Manager's
service provision during the year, other than fees payable by the
Company in the ordinary course of business and the facilitation of
marketing activities with third parties, there were no material
transactions with the Manager affecting the financial position of
the Company. More details on transactions with the Manager,
including amounts outstanding at the year end, are in the Annual
Report.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
Each director who is listed in the
Annual Report confirms that, to the best of his or her
knowledge:
·
|
the financial statements, which
have been prepared in accordance with International Accounting
Standards in conformity with the requirements of the Companies Act
2006 on a going concern basis, give a true and fair view of the
assets, liabilities, financial position and profit/loss of the
Company; and
|
·
|
the Strategic Report and financial
statements include a fair review of the development and performance
of the business and the position of the Company, together with a
description of the principal risks and uncertainties that it
faces.
|
On behalf of the Board
Penny Freer
Chair of the Board
STATEMENT OF COMPREHENSIVE
INCOME
|
|
Year ended 31 May
2024
|
Year
ended 31 May 2023
|
|
Notes
|
|
Revenue
return
£'000
|
Capital
return
£'000
|
Total
£'000
|
Revenue
return
£'000
|
Capital
return
£'000
|
Total
£'000
|
|
2
|
Investment income
|
24,656
|
-
|
24,656
|
24,295
|
-
|
24,295
|
|
3
|
Other income
|
190
|
-
|
190
|
95
|
-
|
95
|
|
|
Gains/(losses) on investments held
at fair value through profit or loss
|
-
|
75,521
|
75,521
|
-
|
(127,252)
|
(127,252)
|
|
|
Total income/(loss)
|
24,846
|
75,521
|
100,367
|
24,390
|
(127,252)
|
(102,862)
|
|
|
Expenses
|
|
|
|
|
|
|
|
4
|
Management fees
|
(679)
|
(1,584)
|
(2,263)
|
(710)
|
(1,657)
|
(2,367)
|
|
Other expenses
|
(647)
|
-
|
(647)
|
(731)
|
-
|
(731)
|
|
Profit/(loss) before finance costs and
taxation
|
23,520
|
73,937
|
97,457
|
22,949
|
(128,909)
|
(105,960)
|
|
|
Finance costs
|
(1,235)
|
(2,882)
|
(4,117)
|
(997)
|
(2,325)
|
(3,322)
|
|
|
Profit/(loss) before taxation
|
22,285
|
71,055
|
93,340
|
21,952
|
(131,234)
|
(109,282)
|
|
|
Taxation
|
5
|
-
|
5
|
(5)
|
-
|
(5)
|
|
|
Profit/(loss) for the year and total comprehensive
income
|
22,290
|
71,055
|
93,345
|
21,947
|
(131,234)
|
(109,287)
|
|
5
|
Earnings/(loss) per ordinary share - basic and
diluted
|
29.85p
|
95.14p
|
124.99p
|
29.38p
|
(175.68p)
|
(146.30p)
|
|
|
|
|
|
|
|
|
|
|
| |
The total columns of this
statement represent the Statement of Comprehensive Income, prepared
in accordance with UK- adopted International Accounting Standards
in conformity with the requirements of the Companies Act
2006.
The revenue return and capital
return columns are supplementary to this and are prepared under
guidance published by the Association of Investment
Companies.
All revenue and capital items in
the above statement derive from continuing operations. No
operations were acquired or discontinued in the year.
The profit attributable to
Ordinary shareholders for the year disclosed above represents the
Company's total Comprehensive Income. The Company does not have any
other Comprehensive Income.
STATEMENT OF CHANGES IN EQUITY
|
|
|
|
|
Retained
earnings
|
Notes
|
Year ended 31 May 2024
|
Share
capital
£'000
|
Capital
redemption
reserve
£'000
|
Capital
reserves
£'000
|
Revenue
reserve
£'000
|
Total
equity
£'000
|
|
Total equity at 1 June
2023
|
18,676
|
26,745
|
612,810
|
17,156
|
675,387
|
|
Total comprehensive
income:
Profit for the year
|
-
|
-
|
71,055
|
22,290
|
93,345
|
|
Transactions with owners, recorded
directly to equity:
|
|
|
|
|
|
|
Buyback of shares for
cancellation
|
(49)
|
49
|
(1,598)
|
-
|
(1,598)
|
6
|
Ordinary dividends paid
|
-
|
-
|
-
|
(19,794)
|
(19,794)
|
|
Total equity at 31 May 2024
|
18,627
|
26,794
|
682,267
|
19,652
|
747,340
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
Notes
|
Year ended 31 May 2023
|
Share
capital
£'000
|
Capital
redemption
reserve
£'000
|
Capital
reserves
£'000
|
Revenue
reserve
£'000
|
Total
equity
£'000
|
|
Total equity at 1 June
2022
|
18,676
|
26,745
|
744,044
|
13,134
|
802,599
|
|
Total comprehensive
income:
(Loss)/profit for the
year
|
-
|
-
|
(131,234)
|
21,947
|
(109,287)
|
|
Transactions with owners, recorded
directly to equity:
|
|
|
|
|
|
6
|
Ordinary dividends paid
|
-
|
-
|
-
|
(17,925)
|
(17,925)
|
|
Total equity at 31 May 2023
|
18,676
|
26,745
|
612,810
|
17,156
|
675,387
|
BALANCE
SHEET
Notes
|
|
At 31
May
2024
£'000
|
At 31 May
2023
£'000
|
|
Non-current assets
|
|
|
|
|
Investments held at fair value
through profit or loss
|
833,368
|
760,156
|
|
Current assets
|
|
|
|
Receivables
|
11,763
|
3,187
|
|
Cash and cash
equivalents
|
9,249
|
13,338
|
|
|
21,012
|
16,525
|
|
Total assets
|
854,380
|
776,681
|
|
Current liabilities
|
|
|
|
Payables
|
(1,514)
|
(851)
|
|
Bank loans
|
(55,744)
|
(50,672)
|
|
|
(57,258)
|
(51,523)
|
|
Total assets less current liabilities
|
797,122
|
725,158
|
|
Non-current liabilities
|
|
|
|
Financial liabilities
|
(49,782)
|
(49,771)
|
|
Net assets
|
747,340
|
675,387
|
|
Equity attributable to equity shareholders
|
|
|
7
|
Share capital
|
18,627
|
18,676
|
|
Capital redemption
reserve
|
26,794
|
26,745
|
|
Retained earnings:
|
|
|
|
Capital
reserves
|
682,267
|
612,810
|
|
Revenue
reserve
|
19,652
|
17,156
|
|
Total equity
|
747,340
|
675,387
|
8
|
Net asset value per ordinary share
|
1,003.1p
|
904.1p
|
|
|
|
|
| |
STATEMENT OF CASH FLOWS
|
|
Year ended
|
Notes
|
|
31 May
2024
£'000
|
31 May
2023
£'000
|
|
Operating activities
|
|
|
|
Profit/(loss) before
taxation
|
93,340
|
(109,282)
|
|
Add back interest
payable
|
4,117
|
3,322
|
|
Profit/(loss) on investments held
at fair value through profit or loss
|
(75,521)
|
127,252
|
|
Purchases of
investments
|
(89,274)
|
(109,395)
|
|
Sales of investments
|
91,583
|
114,384
|
|
Decrease/(increase) in
receivables
|
36
|
(38)
|
|
Decrease in amounts due from
brokers
|
506
|
1,394
|
|
Increase in accrued
income
|
(9,113)
|
(316)
|
|
Decrease in payables
|
(54)
|
(66)
|
|
Increase/(decrease) in amounts due
to brokers
|
579
|
(2,081)
|
|
Net cash inflow from operating activities before interest and
taxation
|
16,199
|
25,174
|
|
|
Interest paid
|
(3,968)
|
(3,303)
|
|
Net cash inflow from operating
activities1
|
12,231
|
21,871
|
|
Financing activities
|
|
|
|
Buyback of ordinary
shares
|
(1,598)
|
-
|
6
|
Equity dividends paid
|
(19,794)
|
(17,928)
|
|
Drawdown of bank loans
|
5,072
|
404
|
|
Net cash outflow from financing activities
|
(16,320)
|
(17,524)
|
|
(Decrease)/increase in cash and cash
equivalents
|
(4,089)
|
4,347
|
|
Cash and cash equivalents at the
start of the year
|
13,338
|
8,991
|
|
Cash and cash equivalents at the end of the
year
|
9,249
|
13,338
|
|
|
|
| |
1 In accordance with IAS 7.31 cash inflow from dividends was
£24,346,000 (2023: £24,000,000) cash inflow from interest was
£198,000 (2023 £74,000)
NOTES TO THE FINANCIAL STATEMENTS
1
|
Accounting policies: Basis of preparation
The Henderson Smaller Companies
Investment Trust plc (the "Company") is a company incorporated and
domiciled in the United Kingdom under the Companies Act 2006 (the
"Act"). The Company is a single reporting entity and there is no
ultimate controlling party. The financial statements of the Company
for the year ended 31 May 2024 have been prepared in accordance
with UK-adopted International Accounting Standards in conformity
with the requirements of the Act. These comprise standards and
interpretations approved by the International Accounting Standards
Board ("IASB"), together with interpretations of the International
Accounting Standards and Standing Interpretations Committee
approved by the IFRS Interpretations Committee ("IFRS IC") that
remain in effect, to the extent that IFRS have been adopted by the
United Kingdom.
The financial statements have been
prepared on a going concern basis and on the historical cost basis,
except for the revaluation of certain financial instruments held at
fair value through profit or loss. The principal accounting
policies adopted are set out below. These policies have been
applied consistently throughout the year. Where presentational
guidance set out in the Statement of Recommended Practice (the
"SORP") for investment trusts issued by the Association of
Investment Companies (the "AIC") is consistent with the
requirements of IFRS, the directors have sought to prepare the
financial statements on a basis consistent with the recommendations
of the SORP.
Going concern
The assets of the Company consist
of securities that are readily realisable and, accordingly, the
directors believe that the Company has adequate resources to
continue in operational existence for at least twelve months from
the date of approval of the financial statements. In coming to this
conclusion, the directors have also considered the continued
macroeconomic and geopolitical uncertainty following Russia's
invasion of Ukraine, heightened tensions between the US and China,
conflict in the Middle East, the current cost-of-living crisis, a
new government in the UK, the nature of the Company's covenants,
the strength of the Company's distributable reserves and the
liquidity of the portfolio. They have concluded that they are able
to meet their financial obligations, including the repayment of the
bank loan, as they fall due for a period of at least twelve months
from the date of issuance.
Having assessed these factors, the
principal risks and other matters discussed in connection with the
Viability Statement in the Annual Report, the Board has determined
that it is appropriate for the financial statements to be prepared
on a going concern basis. The Company's shareholders are asked
every three years to vote for the continuation of the Company. An
ordinary resolution to this effect was put to the Annual General
Meeting ("AGM") held on 30 September 2022 and passed by a
substantial majority of the shareholders. The next continuation
vote will take place at the AGM in 2025.
|
2
|
Investment income
|
|
|
|
Income from companies listed or
quoted in the United Kingdom:
|
2024
£'000
|
2023
£'000
|
Dividends
|
23,182
|
22,553
|
Special dividends
|
602
|
1,177
|
Property income
distributions
|
872
|
565
|
|
Total investment income
|
24,656
|
24,295
|
|
|
3
|
Other income
|
|
|
|
|
2024
£'000
|
2023
£'000
|
Bank and other interest
|
190
|
95
|
|
190
|
95
|
|
4
|
Management fees
|
|
|
|
2024
|
2023
|
|
|
Revenue
return
£'000
|
Capital
return
£'000
|
Total
return
£'000
|
Revenue
return
£'000
|
Capital
return
£'000
|
Total
return
£'000
|
Management fee
|
679
|
1,584
|
2,263
|
710
|
1,657
|
2,367
|
|
679
|
1,584
|
2,263
|
710
|
1,657
|
2,367
|
A summary of the management
agreement is given in the Annual Report.
|
5
|
Earnings/(loss) per ordinary share
The earnings per ordinary share
figure is based on the net profit for the year of £93,345,000
(2023: net loss of £109,287,000) and on 74,684,351 (2023:
74,701,796) ordinary shares, being the weighted average number of
ordinary shares in issue during the year.
The earnings per ordinary share
figure detailed above can be further analysed between revenue and
capital, as below:
|
|
|
|
|
2024
£'000
|
2023
£'000
|
Net revenue profit
|
22,290
|
21,947
|
Net capital profit/(loss)
|
71,055
|
(131,234)
|
|
|
|
Net
total profit/(loss)
|
93,345
|
(109,287)
|
|
|
|
Weighted average number of ordinary
shares in issue during the year
|
74,684,351
|
74,701,796
|
|
|
|
|
2024
|
2023
|
Revenue earnings per ordinary
share
|
29.85p
|
29.38p
|
|
Capital earnings/(loss) per ordinary
share
|
95.14p
|
(175.68p)
|
|
|
|
|
|
Total earnings/(loss) per ordinary share
|
124.99p
|
(146.30p)
|
|
The Company has no securities in
issue that could dilute the return per ordinary share. Therefore
the basic and diluted earnings per ordinary share are the
same.
|
|
|
|
|
|
|
|
|
|
| |
6
|
Ordinary dividends
|
|
|
|
|
|
|
Record
Date
|
Pay date
|
2024
£'000
|
2023
£'000
|
Final dividend 19.0p (2023: 17.00p)
for the year ended 31 May
2023
|
25
August 2023
|
9
October 2023
|
14,193
|
12,699
|
Interim dividend of 7.50p
(2023: 7.00p)
for the year ended 31 May
2024
|
9
February 2024
|
5 March
2024
|
5,603
|
5,229
|
Unclaimed dividends
|
|
(2)
|
(3)
|
|
|
|
19,794
|
17,925
|
|
|
|
Subject to approval at the AGM,
the proposed final dividend of 19.5p per ordinary share will be
paid on 7 October 2024 to shareholders on the register of
members at the close of business on 30 August 2024. The shares will
be quoted ex-dividend on 29 August 2024.
The proposed final dividend for
the year ended 31 May 2024 has not been included as a liability in
these financial statements. Under IFRS, the final dividend is not
recognised until approved by shareholders.
|
|
The total dividends payable in
respect of the financial year which form the basis of the test
under section 1158 of the Corporation Tax Act 2010 are set out
below:
|
|
|
|
2024
£'000
|
2023
£'000
|
|
|
Revenue available for distribution
by way of dividends for the year
|
22,290
|
21,947
|
|
|
Interim dividend for the year ended
31 May 2024: 7.5p (2023: 7.0p)
|
(5,603)
|
(5,229)
|
|
|
Final dividend for the year ended 31
May 2023: 19.0p (based on 74,701,796 shares in issue at 1 August
2023)
|
|
-
|
|
|
Proposed final dividend for the year
ended 31 May 2024: 19.5p (based on 74,385,131 shares in issue at 29
July 2024)
|
(14,505)
|
(14,193)
|
|
|
Transfer to reserves
|
2,182
|
2,525
|
|
|
|
|
|
|
|
|
| |
7
|
Share capital
|
|
|
|
|
2024
£'000
|
2023
£'000
|
Allotted, issued, authorised and
fully paid:
|
|
|
74,505,131 ordinary shares of 25p
each (2023: 74,701,796)
|
18,627
|
18,676
|
|
|
|
During the year the Company
purchased 196,665 of its own issued ordinary shares (2023: nil) at
a cost of £1,598,000 (2023: £nil). Since the year end 120,000
shares have been bought back for cancellation at a cost of
£1,051,000.
|
|
8
|
Net
asset value ("NAV") per ordinary share
|
|
The NAV per ordinary share is
based on the net assets attributable to the ordinary shares of
£747,340,000 (2023: £675,387,000) and on the 74,505,131 ordinary
shares in issue at 31 May 2024 (2023: 74,701,796). The Company has
no securities in issue that could dilute the NAV per ordinary
share.
The movement during the year of
the net assets attributable to the ordinary shares was as
follows:
|
|
|
2024
£'000
|
2023
£'000
|
Net assets attributable to the
ordinary shares at 1 June
|
675,387
|
802,599
|
Buyback of shares for
cancellation
|
(1,598)
|
-
|
Net gains/(losses) for the
year
|
93,345
|
(109,287)
|
Ordinary dividends paid in the
year
|
(19,794)
|
(17,925)
|
|
|
|
|
Net
assets attributable to the ordinary shares at 31
May
|
747,340
|
675,387
|
|
|
9
|
2024 Financial information
|
|
The figures and financial
information for the year ended 31 May 2024 are extracted from the
Company's annual financial statements for that period and do not
constitute statutory accounts. The Company's annual financial
statements for the year to 31 May 2024 have been audited but have
not yet been delivered to the Registrar of Companies. The
Independent Auditor's Report on the 2024 annual financial
statements is unqualified, does not include a reference to any
matter to which the auditor drew attention without qualifying the
report, and does not contain any statements under s498(2) or
s498(3) Companies Act 2006.
|
|
|
|
| |
10
|
2023 Financial information
|
|
The figures and financial
information for the year ended 31 May
2023 are compiled from an extract of the
published financial statements for that year and do not constitute
statutory accounts. Those financial statements have been delivered
to the Registrar of Companies, include the unqualified Independent Auditor's Report on the 2023 annual
financial statements, do not include a
reference to any matter to which the auditors drew attention
without qualifying the report, and do not contain any statements
under s498(2) or s498(3) Companies Act 2006.
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11
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Annual Report
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The Annual Report for the year
ended 31 May 2024 will be sent to shareholders in August 2024 and
will be available on www.hendersonsmallercompanies.com.
Thereafter copies will be available from the corporate secretary at
the Company's registered office: 201 Bishopsgate, London EC2M
3AE.
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12
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Annual general meeting ("AGM")
The Company's AGM will be held at
11.30 am on Wednesday, 2 October 2024. The Board invites
shareholders to attend the meeting at the registered office at 201
Bishopsgate, London EC2M 3AE, or via videoconference if preferable.
Only shareholders present in person or by proxy will be able to
participate in the vote. The Fund Manager and Deputy Fund Manager
will present their review of the year and thoughts on the future
and will be pleased to answer your questions, as will the
Board.
Instructions on attending the
meeting in person or virtually, and details of resolutions to be
put to the AGM, are included in the Notice of AGM in the Annual
Report and will be available at www.hendersonsmallercompanies.com. If
shareholders would like to submit any questions in advance of the
AGM, they are welcome to send these to the corporate secretary at
itsecretariat@janushenderson.com.
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13 General Information
Company Status
The Henderson Smaller Companies
Investment Trust plc is a UK domiciled investment trust
company.
ISIN number/SEDOL Ordinary Shares:
GB0009065060/0906506
London Stock Exchange (TIDM) Code:
HSL
Global Intermediary Identification
Number (GIIN): WZD8S7.99999.SL.826
Legal Entity Identifier (LEI):
213800NE2NCQ67M2M998
Registered Office
201 Bishopsgate, London EC2M
3AE
Directors and Secretary
The directors of the Company are
Penny Freer (Chair of the Board), Kevin Carter (Senior Independent
Director), Alexandra Mackesy (Audit and Risk Committee Chair),
Victoria Sant, Michael Warren and Yen Mei Lim.
The Corporate Secretary is Janus
Henderson Secretarial Services UK Limited, represented by Johana
Woodruff.
For further information please
contact:
Neil Hermon
Fund Manager
Janus Henderson
Investors
Telephone: 020 7818
4351
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Dan Howe
Head of Investment
Trusts
Janus Henderson
Investors
Telephone: 020 7818
4458
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Harriet Hall
Investment Trust PR
Director
Janus Henderson
Investors
Telephone: 020 7818
2919
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Neither the contents of the Company's website nor the
contents of any website accessible from hyperlinks on the Company's
website (or any other website) are incorporated into, or form part
of, this announcement.