Brexit plays don’t come much clearer than the Henderson Smaller Companies Investment Trust. The thinking is straightforward and effectively two-pronged. Not only will British businesses perform better than expected after the departure from the European Union, so the argument goes, but smaller companies will tend to outperform their larger peers over time.
Add in the widely held view that the UK stock market looks cheap and that midcap domestically focused enterprises are less susceptible to the fluctuations of the US dollar and the case for looking at the sector, and the trust within it, looks stronger still.
That’s the theory at least; whether it works out that way in practice might be another matter.
The trust is one of the UK stock market’s oldest vehicles, having been around since 1887. It aims to generate growth in both capital and income for shareholders by investing in smaller quoted companies, which effectively means those outside the FTSE 100. It had 107 holdings at last year’s end and its benchmark is the Numis Smaller Companies Index, with investment companies stripped out. The portfolio looks interesting and highly diversified — between them, the top ten holdings account for less than a quarter of the assets and the biggest position in Bellway, the housebuilder, amounts to only 2.7 per cent of the total value.
A little over half the holdings are in midcap FTSE 250 companies, with the remainder split between Aim shares, at about 30 per cent, and small-cap stocks at about 15 per cent.
Stakes that stand out include Team17, the digital games developer that has performed strongly during the pandemic, and Impax Asset Management, the environmentally driven investor. There is also RWS Holdings, the translation specialist, whose shares have been weak since its merger with the rival SDL late last year, but which has historically delivered very solid returns.
The manager, who has been running the trust for the past 18 years, actively trades the portfolio and has been happy to buy into some seriously struggling sectors, including pub operators. This increases the risk, of course, but also means that the trust will do well if a recovery materialises and the leisure sector takes off again.
Over the six months to the end of November, the trust made some moves that in retrospect look smart, such as buying into De La Rue, the banknotes printer, which last month upgraded its profit forecast, while selling AA, the roadside recovery group, and the property company Urban & Civic on relative highs.
On the other hand, the trust would have been held back by not owning Entain, the bookmaker that received a bid approach; S4 Capital, the fast-growing marketing and advertising group; and AO World, the online appliances retailer, whose shares have rocketed in the past 12 months.
The investment performance over both the short and the longer term is undeniably impressive. Based on both share price and net asset value, it has comfortably beaten the Numis Smaller Companies Index over six months and a year, and over a three, five and ten-year period.
The shares, up 2p or 0.2 per cent to £10.86 yesterday, have fared well over the past four months and are almost at the pre-coronavirus high of last January. That implies that the trust’s existing owners are optimistic about how well performance will hold up.
In short, there is obvious allure to this trust for investors who share that view. The shares trade at a discount to the net value of the assets of just under 4.8 per cent and carry a respectable dividend yield of a little over 2.2 per cent. They look like a worthy addition to a portfolio.
ADVICE Buy
WHY Strong performance over a lengthy time and well placed to benefit from an economic recovery
Volution
This supplier of ventilation products to homes and businesses specialises in improving air quality, but it is also big on energy, noise efficiency and sustainability.
Few companies can boast of agreeing a credit facility with their lending banks whose repayment terms are linked to sales of low-carbon products and use of recycled materials in its plastics.
Volution was formed at the end of 2002 through a management buyout of the air movement and cable management divisions of Smiths Group, the FTSE 100 engineer.
As well as in Britain, it operates in continental Europe, Australia and New Zealand through brands such as Airtech, Manrose and Ventair. It mostly sells through trade suppliers and builders merchants.
There are several parts to the investment case for Volution, which is mainly built on our rising desire not to clog up our lungs.
Healthy organic revenue growth, an estimated 7.7 per cent in the six months to the end of January, is boosted by regular acquisitions. In the past two months it has bought two ventilation and air quality companies, in the Netherlands and Sweden, paid for with cash.
And it believes its good growth rates are underpinned by legislative moves, already in train in the UK, to improve ventilation and energy efficiency in homes, which should bolster demand for its products.
Covid might well accelerate all of these trends, but not without first bringing some setbacks. Revenues and profits in the year to the end of July were brought down by the shutdowns of the housing market and industry and the dividend was temporarily suspended. Orders have bounced back quickly since and Volution is confident that it will meet its target of having an operating margin of 20 per cent. Brokers, including at Liberum and Berenberg, have been lifting their profit targets in recent weeks, mindful of management’s reputation for being conservative about the outlook.
The shares, up by 3p or 0.1 per cent to 333p, have had a very strong recent run. They are valued at 19.5 times Liberum’s forecast earnings for a prospective yield of just above 1.5 per cent. Worth holding.
ADVICE Hold
WHY Good growth prospects and acquisitions to come
