Henderson Smaller Companies Investment Trust PLC — Interim / Quarterly Report 2020

Nov 30, 2019

THE HENDERSON SMALLER COMPANIES INVESTMENT TRUST PLC

Update for the half-year ended 30 November 2019

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.

This update contains material extracted from the unaudited half-year results of the Company for the six months ended 30 November 2019. The unabridged results for the half-year are available on the Company's website:

www.hendersonsmallercompanies.com

The image is based on Custom House in King's Lynn

Performance

Performance for the six months to 30 November 2019

NAV1 7.5%	Benchmark2 4.9%	Share Price3 16.0%	Dividend4 7.7%
NAV per share at period end		Share price at period end
30 Nov 2019	31 May 2019	31 May 2019 30 Nov 2019
1,011.4p	958.7p	975.0p	858.0p
Net Assets
30 Nov 2019	£755.6m	31 May 2019	£716.1m

Total Return Performance (including dividends reinvested)

	6 months %	1 year %	3 years %	5 years %	10 years %
NAV¹	7.5	18.3	48.4	81.7	399.0
Benchmark²	4.9	9.6	23.0	46.2	203.7
Share price³	16.0	30.0	70.2	101.9	508.4
Average sector NAV5	1.4	7.0	25.7	61.3	259.1
Average sector share price6	4.3	8.1	38.9	71.8	313.2
FTSE All-Share Index	5.8	11.0	24.0	37.0	120.4

Sources: Morningstar Direct, Janus Henderson

¹ Net asset value ('NAV') per ordinary share total return with income reinvested

² Numis Smaller Companies Index (excluding investment companies) total return

³ Share price total return using mid-market closing price

⁴ Interim dividend of 7.0p (30 November 2018: 6.5p) to be paid to shareholders on 9 March 2020

⁵ Average NAV total return of the AIC UK Smaller Companies sector

⁶ Average share price total return of the AIC UK Smaller Companies sector

Financial Summary

	Half-year ended
Extract from the Statement of Comprehensive Income (unaudited)	30 November 2019 Revenue return £'000	30 November 2019 Capital return £'000	30 November 2019 Total return £'000	30 November 2018 Total return £'000
Investment income	9,354	-	9,354	8,345
Other income	14	-	14	51
Gains/(losses) on investments held at fair value through profit or loss	-	47,876	47,876	(121,889)
Total income/(loss)	9,368	47,876	57,244	(113,493)
Expenses, finance costs & taxation1	(874)	(4,643)	(5,517)	(2,389)
Profit/(loss) for the period	8,494	43,233	51,727	(115,882)
Earnings per ordinary share	11.37p	57.87p	69.24p	(155.13)p

¹Expenses, finance costs and taxation include provision for a performance fee when the relevant criteria have been met. For the six months to 30 November 2019 the performance fee provision is £3,275,000 (30 November 2018: £nil; May 2019: £nil). Any provision for a performance fee is charged 100% to capital. The actual performance fee, if any, payable to Janus Henderson for the year to 31 May 2020 will depend on outperformance over the full financial year, subject to a cap on the total fees paid to Janus Henderson of 0.9% of the average value of the net assets of the Company during the year. No performance fee is payable if on the last day of the accounting year the Company's share price or NAV is lower than the share price and NAV at the preceding year-end. Details of the performance fee arrangements are set out in the Annual Report for the year ended 31 May 2019.

	Half-year ended		Year ended
Extract from Balance Sheet (unaudited except May 2019 figures)	30 November 2019 £'000	30 November 2018 £'000	31 May 2019 £'000
Investments held at fair value
through profit or loss	824,007	694,819	776,233
Net current liabilities	(38,627)	(10,020)	(30,265)
Non current liabilities	(29,829)	(29,818)	(29,823)
Net assets	755,551	654,981	716,145
Net asset value per ordinary share	1,011.4p	876.8p	958.7p

At long last the political uncertainty regarding Europe and Westminster seems to have abated with Boris Johnson's resounding victory in the General Election. However, we still have a long way to go, but we do have a Prime Minister who is clear on his intent and has the mandate and political power to finally "Get Brexit Done". As I have commented in previous statements, the uncertainty that has hung over the United Kingdom these past three years has not been helpful to British businesses. Local investment has not been forthcoming and foreign investors have bypassed the United Kingdom. This is beginning to change with the principal beneficiary being the smaller companies sector as investors seek the good value and growth opportunities that can be found in this area.

Performance

I am pleased to report that for this reporting period our Company's net asset value has risen on a total return basis by 7.5%, 2.6% more than the Numis Smaller Companies Index (excluding investment companies), which rose by 4.9%. Our Company's share price rose by 16.0% on a total return basis for the period, outstripping its peer group, which increased by an average of 10.7%. The Company's discount narrowed from 10.5% at 31 May 2019 to 3.6% at 30 November 2019. I am delighted to say that the Company's share price has more than doubled over the past five years, rising by 101.9% on a total return basis.

Dividend

The Board has decided to increase the interim dividend by 7.7% to 7.0p per share (30 November 2018: 6.5p). This reflects the continuing strong growth in dividend payments from our portfolio companies. In the absence of any unforeseen circumstances, it is expected that the Board will also increase the final dividend. The final dividend for the year ended 31 May 2019 was 16.5p.

Jamie Cayzer-Colvin Chairman 28 January 2020

Market Review – Six Months to 30 November 2019

UK equity markets rose in the period. Boris Johnson won the Conservative Party leadership contest and was installed as Prime Minister. A revised Withdrawal Agreement was negotiated with the EU. Parliament, however, refused to debate the bill within the time frame required to get approval by 31 October 2019. Consequently, an extension to Article 50 was requested by the UK and granted by the EU; the new deadline is 31 January 2020. With the risk of "no deal" Brexit avoided once again, sterling strengthened. Elsewhere the US Federal Reserve cut base rates in what was deemed a "mid-cycle adjustment to policy" which dampened investors' hopes of a more aggressive cycle of monetary easing. Mario Draghi warned that the global economy faced "protracted weakness" going into 2020 at his last meeting as President of the ECB. Stalling trade negotiations between the US and China, in conjunction with deteriorating economic data and flattening yield curves, increased global recessionary fears.

Smaller companies outperformed larger companies over the period. This was driven principally by investors taking a more positive view on the outlook for the UK economy and an end to political and Brexit uncertainty which favoured the more domestically focused smaller company universe over the more internationally diverse constituents of the FTSE 100.

Fund Performance

The Company outperformed the benchmark during the period. The net asset value rose by 7.5% on a total return basis. This compares with an increase of 4.9% (total return) in the Numis Smaller Companies Index (excluding investment companies). The outperformance came from a combination of underlying positive portfolio performance and a positive contribution from gearing in the Company.

Gearing

Gearing started the period at 8.4% and ended it at 9.1%. Debt facilities are a combination of £30 million 20-year unsecured loan notes at an interest rate of 3.33% and £60 million of short-term bank borrowings.

Attribution Analysis

The tables below show the top five contributors to, and detractors from, the Company's relative performance. Some of the following stocks are included in the benchmark index but not held by the Company. These have an effect on relative performance.

Top five contributors	6 month return %	Relative contribution %
Bellway	25.4	0.6
Learning Technologies	43.0	0.5
Intermediate Capital	19.6	0.5
Sirius Minerals¹	-76.9	0.4
Ferrexpo¹	-34.9	0.4

Top five detractors	6 month return %	Relative contribution %
Burford Capital	-52.5	-1.0
Cineworld	-21.6	-0.7
Clinigen	-13.1	-0.5
Mitchells and Butlers	62.1	-0.4
Rank Group1	67.1	-0.3

In benchmark index but not held by the Company.

Principal Contributors

Bellway is a national UK housebuilder; Learning Technologies is a provider of e-learning services and technologies; Intermediate Capital is a provider and asset manager of alternative credit; Sirius Minerals is a mining development company; and Ferrexpo is a Ukrainian ironore producer.

Principal Detractors

Burford Capital is a provider of litigation finance; Cineworld is an international cinema chain; Clinigen is a provider of pharmaceutical services and specialist drugs; Mitchells and Butlers is a UK pub chain; and Rank Group is a UK bingo and casino operator.

Portfolio Activity

Our approach is to consider our investments as longterm 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 we feel have further catalysts to drive strong performance.

New additions to the portfolio include AB Dynamics, an advanced testing and measurement products business for the automotive industry; Chemring, an energetic materials, countermeasures and sensors products company for the defence industry; Frontier Developments, a computer games developer and publisher; Liontrust, an investment management company; and Volution, an international manufacturer and supplier of ventilation products.

To balance the additions to our portfolio, we have disposed of positions in companies which we felt were set for poor price performance or where the valuation had become extended, including the holdings in AJ Bell, Ibstock and Unite. Additionally we sold our holding in Tarsus, after the company had received an agreed takeover bid, and our position in Aveva, after the company was elevated to the FTSE 100 Index.

Market Outlook

The Conservative election victory has given a significant boost to the UK small and mid-cap equity market. The result has provided political clarity and removed the risk of a market unfriendly Corbyn government. It has also provided more certainty to our negotiations over Brexit. However, it is still unclear as to what our future trading relationship with Europe is and what trade deal can be negotiated.

The UK economy has been flirting with recession. The political and Brexit uncertainty has weighed on consumer and business confidence, delaying and postponing investment and purchasing decisions, and dampening economic growth. One would hope that now some of this uncertainty has cleared, the UK economy will strengthen, helped also by potential tax cuts and boosts to public spending.

Globally economic conditions are challenging. Europe, in particular, is showing signs of economic weakness. Trade tensions are providing additional negative commentary and the volatility of relations between the US and China is not helpful. However, recent progress on a stage 1 deal raises hopes that trade tensions can be de-escalated in 2020. After a rise in US interest rates last year, 2019 has seen that policy reverse although the commentary from the Federal Reserve would now indicate we are currently in a mid-cycle pause.

In the corporate sector, conditions are intrinsically stronger than they were during the financial crisis of 2008-9. Balance sheets are more robust and dividends are growing.

In terms of valuations, the equity market is now trading below long-term averages. M&A remains a supportive feature for the smaller companies sector. If corporate confidence improves, M&A will increase, especially as little or no return can currently be generated from cash and the cost of debt is historically low. We have seen significant interest in UK corporates from abroad and from private equity, and given the relatively low valuation of UK equities and a weak currency, we expect this trend to continue.

Neil Hermon Fund Manager 28 January 2020

Investment Portfolio at 30 November 2019

Position	Company	Valuation £'000	Portfolio %
1	Intermediate Capital	29,089	3.53
2	Bellway	25,877	3.14
3	Clinigen Group¹	17,420	2.11
4	Paragon	17,348	2.11
5	RWS¹	16,400	1.99
6	Oxford Instruments	16,339	1.98
7	John Laing	16,295	1.98
8	Ultra Electronic	15,019	1.82
9	Dechra Pharmaceuticals	14,597	1.77
10	Victrex	14,375	1.74
10 largest		182,759	22.17
11	Cineworld	14,338	1.74
12	Renishaw	13,997	1.70
13	Learning Technologies Group¹	13,725	1.67
14	GB Group¹	13,646	1.66
15	Gamma Communications¹	13,218	1.60
16	TI Fluid Systems	12,711	1.54
17	Sanne	12,455	1.51
18	SoftCat	12,153	1.47
19	Vesuvius	11,907	1.45
20	IntegraFin	11,860	1.44
20 largest		312,769	37.95
21	OneSavings Bank	11,610	1.41
22	St Modwen Properties	10,968	1.33
23	Balfour Beatty	10,819	1.31
24	Synthomer	10,502	1.27
25	Consort Medical	10,450	1.27
26	SIG	10,205	1.24
27	Team 17¹	10,050	1.22
28	Cairn Energy	9,895	1.20
29	Euromoney Institutional Investor	9,610	1.17
30	Countryside Properties	9,480	1.15
30 largest		416,358	50.52

¹Quoted on the Alternative Investment Market (AIM)

Investment Portfolio (continued)

Position	Company	Valuation £'000	Portfolio %
31	Avon Rubber	9,414	1.14
32	CLS	9,203	1.12
33	Spectris	9,110	1.11
34	Premier Oil	8,903	1.08
35	Future	8,898	1.08
36	Impax Asset Management¹	8,880	1.08
37	Brewin Dolphin	8,876	1.08
38	Computacenter	8,850	1.07
39	Grainger	8,721	1.06
40	Ascential	8,712	1.06
40 largest		505,925	61.40
41	Midwich¹	8,673	1.05
42	Just Group	8,215	1.00
43	Coats	8,182	0.99
44	Jupiter Fund Management	8,106	0.98
45	Scapa¹	8,004	0.97
46	Codemasters¹	7,975	0.97
47	Savills	7,891	0.96
48	Northgate	7,584	0.92
49	Bodycote	7,573	0.92
50	Rotork	7,048	0.86
50 largest		585,176	71.02
51	GoCo	7,035	0.85
52	Hunting	7,027	0.85
53	Vitec Group	6,902	0.84
54	XP Power	6,784	0.82
55	Helical	6,557	0.80
56	DFS	6,372	0.77
57	SDL	6,351	0.77
58	Restore¹	6,230	0.76
59	Hyve	6,215	0.75
60	Howden Joinery	5,991	0.73
60 largest		650,640	78.96
Remaining 46		173,367	21.04
Total portfolio		824,007	100.00

¹Quoted on the Alternative Investment Market (AIM)

Dividends

The Board has declared an interim dividend of 7.0p (30 November 2018: 6.5p) to be paid on 9 March 2020 to shareholders on the register at the close of business on 14 February 2020. The ex-dividend date will be 13 February 2020. No provision has been made for the interim dividend in these condensed financial statements.

The final dividend of 16.5p per ordinary share, paid on 8 October 2019, in respect of the year ended 31 May 2019, has been recognised as a distribution in the period.

Share Capital

At 30 November 2019 there were 74,701,796 ordinary shares in issue (30 November 2018: 74,701,796; 31 May 2019: 74,701,796). During the half-year ended 30 November 2019 the Company did not buy back or issue any shares (half-year ended 30 November 2018: nil; year ended 31 May 2019: nil). No shares have been bought back or issued during the period.

Principal Risks and Uncertainties

The principal risks and uncertainties associated with the Company's business fall broadly under the following categories:

• · investment activity and strategy;
• · accounting, legal and regulatory;
• · operational; and
• · financial instruments and the management of risk.

Detailed information on these risks is given in the Strategic Report and in the Notes to the financial statements in the Company's Annual Report for the year ended 31 May 2019.

In the view of the Board these principal risks and uncertainties are as applicable to the remaining six months of the financial year as they were to the six months under review.

Related Party Transactions

During the first six months of the current financial year, no transactions with related parties have taken place which have materially affected the financial position of the Company during the period. Details of related party transactions are contained in the Annual Report for the year ended 31 May 2019.

Going Concern

Having reassessed the principal risks and uncertainties, the directors consider that it is appropriate to continue to adopt the going concern basis in preparing the financial statements. The assets of the Company consist almost entirely of securities that are readily realisable and, accordingly, the Company has adequate financial resources to continue in existence for the foreseeable future.

Directors' Responsibility Statement

The directors confirm that, to the best of their knowledge:

• · the condensed set of financial statements has been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting;
• · the Interim Management Report includes a fair review of the information required by Disclosure Guidance and Transparency Rule 4.2.7R (indication of important events during the first six months and description of the principal risks and uncertainties for the remaining six months of the year); and
• · the Interim Management Report includes a fair review of the information required by Disclosure Guidance and Transparency Rule 4.2.8R (disclosure of related party transactions and changes therein).

For and on behalf of the Board Jamie Cayzer-Colvin Chairman 28 January 2020

The Henderson Smaller Companies Investment Trust plc 201 Bishopsgate London EC2M 3AE

This report is printed on cocoon silk 50% recycled, a recycled paper containing 50% recycled waste and 50% virgin fibre and manufactured at a mill certified with ISO 14001 environmental management standard. The pulp used in this product is bleached using an Elemental Chlorine Free process (ECF). The FSC® logo identifies products which contain wood from well managed forests certified in accordance with the rules of the Forest Stewardship Council®.

If undelivered please return to the above address

Printed by Leycol