Trustnet Magazine Issue 34 November 2017 | Page 8

/ JANUS HENDERSON /
DISCRETE PERFORMANCE
Performance
Jun 2016 - Jun 2017 Jun 2015 - Jun 2016
Jun 2014 - Jun 2015
Jun 2013 - Jun 2014
Jun 2012 - Jun 2013
Nav 14.50% 3.10% 6.40% 14.80% 23.90%
Price 16.60% 0.30% 7.20% 15.10% 21.50%
Source: © Morningstar 2017. Annual Return to 30/06/2017
WOULD YOU LIKE THAT
IN A SMALL, MEDIUM
OR LARGE, SIR?
Janus Henderson’s Neil Hermon offers three “pretty compelling
reasons” why it can be more lucrative to invest in smaller firms than
their larger counterparts
U
K-BASED INVESTORS
HAVE TENDED TO
FILL THEIR
PORTFOLIOS with
funds investing in the
large, liquid firms of the FTSE 100.
They are easy to buy in large
amounts, generally well established
in their sectors, and tend to have
strong governance and long histories
of creating shareholder value.
But history lends us evidence of
investments with even stronger
returns: the UK’s smaller companies.
These are firms in the bottom 30%
of the UK stock market by market
capitalisation – so the FTSE 250 and
smaller, or less than around £4bn.
The volatility for investors likely
contributes greatly to small-cap
reluctance – their share prices tend
to swing more wildly, setting nerves
affray, and they’ve been known to
disappear from time-to-time on
account of poor management.
But the long-term numbers –
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where investors should be focused
– speak for themselves: if you’d put
£100 in the FTSE All-Share in 1955,
by 2016 you would have received
£96,792; for the FTSE-Small-Cap
it would have been £597,433. The
latter is quite remarkable at six times
the former.
WHY IS SMALL MIGHTY?
Professors Elroy Dimson and Paul
Marsh of London Business School
developed the theory behind why
small-cap firms outperform larger
ones.
1) Organic growth – The growth
potential tends to be greater because
it’s much easier for small, more
ambitious companies, with profits
in the millions rather than billions
of pounds to double their business.
It’s partly a law of numbers: a firm
earning £1 million one year could
feasibly double that over the course
of the following year, but one that
earned £1 billion would have to
generate an additional billion
pounds over that time to achieve the
same growth rate.
Small companies also have more
options for increasing business.
They are inherently more nimble,
dynamic and innovative, and so are
more able to expand into new parts
of the country, launch new products
or services, or venture overseas
– and make a huge difference to
the bottom line. In contrast, new
initiatives for giant multinationals
are likely to affect only one of their
many subsidiaries or product lines.
And it’s a self-fulfilling prophecy – a
company that repeatedly delivers
on its earnings increasingly satisfies
investors who then place a higher
value on the business. This is known
as momentum.
2) Lack of research – The stock
market is a pricing mechanism
that takes into account all of the
trustnetdirect.com
publicly available information
there is regarding a firm’s finances
and its operations. The price is
informed by the work of analysts.
Big companies tend to be followed
by lots of analysts: it averages 24
per firm for those over £10bn.
Because their operations are so
extensively scrutinised it’s very
unlikely any great corporate
initiatives or managerial shake-
ups will pass under the radar, so
the share price tends to reflect the
business realities fairly accurately,
making it harder for fund managers
to find pricing anomalies.
In contrast, smaller firms have fewer
analysts following them, with those
under £500m averaging only two. It
means there’s more opportunity to
spot mispricing. Academics call this
the ‘neglected effect’. to major investments in such an
uncertain environment – but as
economic confidence has recovered,
they’ve been spending. According
to Dealogic, records were broken in
2015, with $4.7trn of deals. 2016 still
proved high at $3.8trn.
3) Mergers & acquisitions – One
of the big a ttractions of investing in
smaller companies is the likelihood
of a corporate action, usually when a
larger firm snaps them up. For large,
slow-growing companies, taking
over an attractive small firm is
probably the easiest way to expand
the business in a lucrative new
direction. M&A deals are viewed
as good news for shareholders in
the acquired company because as
owners of the business they will
receive payment, usually in the form
of cash or shares in the acquiring
company, or a mixture.
Many companies had built up
a war-chest of cash in the years
following the financial crisis,
having been reluctant to commit as the Trustees Executors and
Securities Insurance Corporation,
aiming to beat UK government
bonds. Its original Chairman
branched out into accountancy
services and eventually formed
Touche Ross, now a key part
of Deloitte – one of the biggest
accountancy firms in the world.
It was not until 1992 that
it started investing in smaller
companies and in 2000 only in
those from the UK. This makes it
one of the oldest investment trusts
there is: surviving, adapting and
evolving over many years.
In 2002, in the wake if the dotcom
crash, I became the Trust’s fund
manager. Much has happened
since: four prime ministers, various
A RICH HISTORY
The Henderson Smaller Companies
Investment Trust has not always
been in the business of smaller
companies. It was founded in 1887
“Small companies are inherently
more nimble, dynamic and
innovative, and so are more able
to expand”
The information should not be construed as investment advice.
Before entering into an investment agreement please consult a
professional investment adviser.
Past performance is not a guide to future performance. The value
of an investment and the income from it can fall as well as rise
and you may not get back the amount originally invested.
Issued in the UK by Janus Henderson Investors. Janus Henderson
Investors is the name under which Henderson Global Investors
Limited (reg. no. 906355), Henderson Fund Management Limited
trustnetdirect.com
polarising US presidents, oil prices
bucking between $30 and $140 a
barrel, Harry Potter and his famous
scar, a Middle Eastern melt-down,
a searing global financial crisis,
and the explosion of social media,
smartphones and apps.
Throughout these twists and
turns markets have gyrated, yet we
have delivered an average annual
return of 17.9%, outperforming the
benchmark in 13 of the last 14 years.
We know the past doesn’t predict
the future, but this would have
transformed £1,000 of your cash into
over £12,000.
We’ve done it through
consistency, consistency… you
get the idea – the method has
never changed. Now supported by
Indriatti van Hien, our focus is on
finding exceptional management
teams and good-quality businesses,
buying them at prices we think are
value for money (other small-cap
managers care less about firms
priced expensively against history
or otherwise, but we think this is a
key mistake). With Brexit-this and
interest rate-that, the UK market
seems on a more cautious footing:
now has probably never been a
better time for stock picking. 
(reg. no. 2607112), Henderson Investment Funds Limited (reg. no.
2678531), Henderson Investment Management Limited (reg. no.
1795354), AlphaGen Capital Limited (reg. no. 962757), Henderson
Equity Partners Limited (reg. no.2606646), Gartmore Investment
Limited (reg. no. 1508030), (each incorporated and registered in
England and Wales with registered office at 201 Bishopsgate,
London EC2M 3AE) are authorised and regulated by the Financial
Conduct Authority to provide investment products and services.
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