THE HENDERSON SMALLER COMPANIES INVESTMENT TRUST PLC

JANUS HENDERSON FUND MANAGEMENT UK LIMITED

LEGAL ENTITY IDENTIFIER: 213800NE2NCQ67M2M998

THE HENDERSON SMALLER COMPANIES INVESTMENT TRUST PLC

Unaudited Results for the Half Year Ended 30 November 2024

This announcement contains regulated information.

"The Board is delighted to announce that Indriatti van Hien has been appointed Co-Fund Manager of the Company. Since becoming the Company's Deputy Fund Manager in 2016, Indriatti has been a source of demonstrable expertise and investment acumen. This decision recognises her significant contribution throughout those eight years which will continue in her new enhanced capacity."

Penny Freer

Chair of the Board

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 SUMMARY (for the six months ended 30 November 2024)

·      Net asset value ("NAV") total return¹ of -3.8%

·      Share price² total return of -5.8%

·      Interim dividend³ of 7.5p (30 November 2023: 7.5p) 

TOTAL RETURN PERFORMANCE (including dividends reinvested)

Sources: Morningstar Direct, Janus Henderson, LSEG Datastream

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

2 Share price total return using mid-market closing price

3 Interim dividend of 7.5p (30 November 2023: 7.5p) to be paid to shareholders on 7 March 2025

4 Deutsche Numis Smaller Companies Index (excluding investment companies) total return

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

CHAIR'S STATEMENT

Dear Shareholder

Over the past six months, the Company has faced headwinds to performance, driven primarily by rising bond yields which continue to hamper economic recovery and put pressure on company valuations. A strong start to the period under review was soon undermined by the impact of the Labour Government's first Budget and some stock specific issues. Following a recovery in UK business and consumer confidence, the Government's decision to meaningfully increase employers' national insurance and remove tax incentives for business owners will likely put pressure on corporate profit margins, prove costly to inflation and economic growth and in the short term has delayed the recovery in UK small-cap equities. 

Performance

Your Company's net asset value ("NAV") total return fell during the six months ended 30 November 2024 by 3.8%, while the Deutsche Numis Smaller Companies ex-Investment Companies Index rose by 0.8%, and the AIC UK Smaller Companies sector average NAV fell by 1.1%. Your Company's share price total return fell by 5.8% during the six months.

Gearing was stable during the period, starting and ending at 11.5%.

Dividend

The Board is pleased to declare an interim dividend of 7.5p (30 November 2023: 7.5p) per share, following continued strong cash generation in the underlying portfolio. This will be paid on 7 March 2025 from the Company's revenue account to shareholders on the register at 7 February 2025. The shares will be marked ex-dividend on 6 February 2025.

Share rating

During the period, the Company's shares remained at a discount to NAV, with the discount widening from 11.5% at 31 May 2024 to 13.5% at 30 November 2024. This was largely reflective of deteriorating sentiment towards the UK economy following the Budget and the widening average discount levels seen across the investment trust sector as a whole, with the AIC UK Smaller Companies sector similarly finishing the period at an average discount of 13.4%.

Share buybacks

The Company bought back 242,166 shares during the six months under review: 122,166 shares to be held in Treasury and 120,000 shares for cancellation. With both the underlying portfolio and share price trading at wider discounts to historic valuations and net asset values respectively, this intervention reflects the Board's view that the 'double discount' provided a compelling 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. Since the period end and as at 24 January 2025, a further 713,453 shares have been bought back representing 1.0% of share capital.

Appointment of Co-Fund Manager

The Board is delighted to announce that Indriatti van Hien has been appointed Co-Fund Manager of the Company alongside Neil Hermon, effective immediately. Indriatti has 18 years of financial industry experience, has been a valued member of the Janus Henderson team since 2011 and, since becoming the Company's Deputy Fund Manager in 2016, has been a source of demonstrable expertise and investment acumen. This decision recognises her significant contribution throughout those eight years which will continue in her new enhanced capacity.

Outlook

Performance continued to be challenged during the period under review, but there is evidence that too much doom and gloom has been priced into the market following the Budget. Whilst interest rates may be cut more slowly, in contrast to the last decade, their relatively high starting point provides a strong and stimulating lever for policy makers to pull on should economic activity slow further. In the meantime, the Fund Managers are confident that starting valuations remain compelling and continued in-bound merger and acquisition activity suggests that the Budget has not deterred domestic or international buyers.

The Board continually assesses the drivers of the Company's performance. Following a protracted period of underperformance, it has undertaken a detailed review of the Fund Managers' investment process, which has delivered excellent performance over the long term. The Board has concluded that the Fund Managers have continued to follow a disciplined and unchanged long-term approach, which is focused on bottom-up stock selection through a thorough assessment of a company's market proposition, balance sheet strength and management. The Board continues to closely monitor the Fund Managers' approach and performance.

The Board remains confident that our portfolio of quality companies is well positioned to prosper as economic conditions and market sentiment improve and we share our Fund Managers' belief that the Company is well positioned to deliver strong total returns in this environment.

Penny Freer

Chair of the Board

FUND MANAGERS' REPORT

Market review - six months to 30 November 2024

The broad UK equity market modestly rose over the period. Market concerns focused around inflation, monetary policy, continued geopolitical turmoil and the potential for a global economic downturn. Global interest rates started to fall with the Bank of England announcing its first interest rate cut in four years in August, lowering its benchmark rate by 25 basis points (bps) to 5.0%. This was followed by another cut of 25 bps in November. Likewise in the US, the Federal Reserve made a larger-than-expected cut of 50 bps in September, followed by another 50 bps of combined cuts in November and December.

In the UK, the Labour Party resoundingly won the general election, providing political stability for the medium term. However, talk of a fiscal 'black hole' by the Government led to a fall in business and consumer confidence and a subsequent flatlining of UK economic growth. The Budget delivered in October was focused on taxes, spending and investing with a view to fixing the foundations of the economy, but businesses reacted negatively to the additional tax burden from increased National Insurance payments for employers.

In the US, Donald Trump won a second term as US President alongside a clean sweep as the Republicans took control of Congress. Both the US election results and the UK Budget were seen as inflationary events, which alongside the requirement for additional significant gilt and Treasury issuance caused bond yields to rise. Economists are now forecasting that interest rate cuts in 2025 will be more modest and slower than was anticipated six months ago. After rising strongly in the early months of the period, Sterling fell against the US Dollar to end the period broadly unchanged. Oil prices fell with the prospect of increased production plus weak global demand offsetting escalating geopolitical tensions in the Middle East.

Smaller companies marginally underperformed their larger counterparts, with the Deutsche Numis Smaller Companies ex Investment Companies Index up 0.8% against a rise in the FTSE All-Share Index of 1.9%.

Fund performance

The Company had a disappointing period in performance terms, falling in absolute terms and underperforming its benchmark. The share price fell by 5.8% and NAV by 3.8% on a total return basis. This compared with the Deutsche Numis Smaller Companies ex Investment Companies Index rise of 0.8% in total return terms. The underperformance came from a combination of negative contributions from stock selection, gearing and expenses. The negative contribution from stock selection was a function of rising bond yields having a detrimental impact on the valuations of our predominantly pro-cyclical and interest rate sensitive portfolio. In addition, there were a small number of negative company-specific issues which impacted performance. We believe these issues are temporary or more than fully reflected in the underlying share prices and expect these companies to recover over time.

Gearing

Gearing started the period at 11.5% 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%, £20m 30-year unsecured loan notes at 2.77% and £70 million short-term bank borrowings. As the net asset value fell, the use of gearing was a negative contributor to performance in the period.

Attribution analysis

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

Principal contributors

Ascential is a B2B media group. John Wood is an oil and power contracting services group. Balfour Beatty is an international construction, support services and infrastructure investor group. Indivior is a speciality pharmaceuticals company. Just Group is a provider of individual and group annuities.

Principal detractors

Next15 is a marketing services, data and communication group. Playtech is a software and services provider to the gaming industry. Zegona Communications is a Spanish telecoms company. Impax Asset Management is an ESG-focused asset manager. Mitchells and Butlers is a UK pub and restaurant group.

Portfolio activity

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 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.

New additions to the portfolio include: Cohort, an electronics equipment provider for the defence sector; Currys, an electrical goods retailer; FRP Advisory, a restructuring and administrations consultancy practice; Kitwave, a distributor of food and drink products to the retail sector; Johnson Services Group, a workwear and linen rental services provider; Raspberry Pi, a computer products provider; and Trustpilot, an online reviews provider.

In addition, we added to our existing positions in: Domino's Pizza, a master franchise operator of pizza take-away restaurants; Hill and Smith, a provider of fabricated metal products and services; and Telecom Plus, a provider of utility services, such as energy, telecoms and mobile communications, to residential UK customers.

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 holding in Liontrust Asset Management. Additionally, we sold our holdings in Alpha Financial Markets, Ascential, Spirent and Tyman after these companies received agreed takeover bids.

Market outlook

Inflation has fallen significantly, and we have seen the start of interest rate cuts around the globe. What is not clear is the timing of when rates will be cut further and the speed of their descent. Optimism for a rapid decline in rates has faded, particularly in the UK and US, as a consequence of the inflationary impacts of the recent UK Budget and the Trump and Republican 'red sweep' election victory in the US. In the meantime, the delayed transmission mechanism of past interest rates and their impact means that economic conditions are set to remain challenging in the short term. Notwithstanding this, the prospect of a monetary easing cycle is likely to support global equity markets and slowly allow valuation multiples to normalise.

Geopolitics remain challenging with the ongoing conflicts in Ukraine and the Middle East and continuing tensions between China and the US. In the US, Donald Trump will start his second term as President with a full agenda focused on cutting domestic taxes and government spending, raising tariffs, cutting immigration, de-regulation and the ending of current global military conflicts. This will probably lead to significant volatility for global financial markets. In the UK, the Labour Government's 'honeymoon period' post its landslide election victory was short-lived culminating in a poorly received Budget which was perceived as anti-business and potentially inflationary. We, however, welcome Labour's commitment to 'boost investment' and in particular its 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. Company balance sheets are more robust and, in recognition of the deep undervaluation of their own equity, we are seeing an increasing number of companies buying back stock.

The initial public offering ("IPO") market has been exceptionally quiet as UK equity market confidence has diminished. The successful float of Raspberry Pi in June, however, did provide evidence that the UK equity market remains open for attractive, growing businesses. Merger and acquisition ("M&A") activity has remained robust as acquirers, 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 its long-term averages. In addition, smaller companies are trading at historically wide discounts to their larger counterparts. The sharp rebound in corporate earnings following the pandemic-induced shock in 2020 has now faded. Weak economic activity and higher interest costs are leading to currently subdued corporate earnings growth.

Although uncertainty remains around short-term economic conditions, we think that the portfolio is well positioned both to withstand current challenging economic conditions and to participate in any potential upswing. The movements in equity markets have thrown up some fantastic buying opportunities. However, we believe it is important to be selective as the strength of franchise, market positioning and balance sheets will likely determine the winners from the losers.

Neil Hermon and Indriatti van Hien

Fund Managers

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;

• 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 2024.

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.

DIRECTORS' RESPONSIBILITY STATEMENT

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

On behalf of the Board

Penny Freer

Chair of the Board

INVESTMENT PORTFOLIO

at 30 November 2024

STATEMENT OF COMPREHENSIVE INCOME

The total columns of this statement represent the Statement of Comprehensive Income, prepared in accordance with UK adopted International Accounting Standards.

The revenue return and capital return columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies.

The accompanying notes are an integral part of these financial statements.

STATEMENT OF CHANGES IN EQUITY