Interactive Investor

The UK shares this smaller company star investor has bought

This fund manager, who has a great track record of beating the market, has been shopping for bargains.

27th January 2022 11:32

Kyle Caldwell from interactive investor

This fund manager, who has a great track record of beating the market, has been shopping for bargains. 

Neil Hermon, fund manager of the Super 60 rated Henderson Smaller Companies Investment Trust (LSE:HSL), has moved to take advantage of “fantastic buying opportunities” that have emerged following the recent underperformance of smaller companies.

Hermon, who has steered the trust to outperform the Numis Smaller Companies Index in 16 of the last 18 years, revealed in the trust’s half-yearly report that he had bought a number of new stocks over the period to 30 November 2021.

The new holdings are Access Intelligence (LSE:ACC), a software provider for the public relations and marketing services industries; Bridgepoint Group When Issue (LSE:BPT), a private equity manager; Devolver Digital (LSE:DEVO), a video game publisher; RPS Group (LSE:RPS), an engineering consultancy firm; SigmaRoc (LSE:SRC), an aggregates and construction materials group; Stelrad Group (LSE:SRAD), a steel radiator manufacturer; and Wickes (LSE:WIX), a home improvement retailer.

Hermon said: “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 dispose of stocks that fail to meet these criteria.

“During the period, we have added to a number of positions in our portfolio and increased exposure to those stocks which we feel have further catalysts to drive strong performance.”

Shares exiting the portfolio include Coats Group (LSE:COA), Go-Ahead Group (LSE:GOG), Johnson Service Group (LSE:JSG) and Rotork (LSE:ROR). Sanne, St Modwen and Vectura were also sold after the companies received and agreed takeover bids.

Commenting on the outlook for markets, Hermon pointed out that corporate conditions are looking stronger. He notes that most companies are beating their initial post Covid-19 earnings and cash expectations.

He adds: “Although uncertainty remains around short-term economic conditions, the virus will pass and corporate profitability and economies are recovering. 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.”

The trust delivered a net asset value (NAV) total return per share of -2.1% over the reporting period versus -2.8% for the Numis Smaller Companies Index. It lagged the  Association of Investment Companies (AIC) UK Smaller Companies sector average, which was up 2.5%.

The company’s share price fell further than the NAV, a loss of 7.9% on a total return basis. The share price was negatively impacted by the trust’s discount widening from 3.7% at the end of May to 9.5% at the end of November. As of close of trading on 26 January, the trust’s discount stood at 7.3%.

In its six-month report, the trust’s board said it will maintain its interim dividend of 7p per share. 

Smaller companies underperformed larger companies over the period. Hermon said this was driven principally by a rise in bond yields and the market rotating towards value over growth stocks.

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