Henderson Smaller Companies urges investors not to rely on the future performance figures in the new ‘key information document’ it and other investment companies have had to publish.
Henderson Smaller Companies (HSL) has urged investors not to rely on the performance figures in the new ‘key information document’ it and all other investment companies have had to publish this year.
Jamie Cayzer-Colvin, chairman of the £670 million investment fund, is particularly concerned with the document’s performance scenario table which indicates that shareholders could lose nearly 20% a year in bad stock market conditions but make annual returns of 28.5% in favourable conditions.
Writing in the company’s half-year results, Cayzer-Colvin says these forecasts could be misleading and therefore are not ‘appropriate or helpful’. He says:
‘Along with all investment companies, we are required by new regulations introduced at the start of the year to provide investors with specific past performance scenarios, the calculation of which is prescribed by the regulation and is derived from the recent past performance of the trust.
‘However, we do not believe that this is an appropriate or helpful way to estimate future returns and for this reason the results shown in the new documents should not be used for this purpose.’
His intervention follows a hail of criticism from the Association of Investment Companies (AIC), analysts, fund managers and other commentators for the KID document which has been brought in under the Priips (European Union’s Packaged Retail and Insurance-based Investment Products) directive.
Although the EU’s original intention to improve the quality of information for investors was welcomed, critics says the implementation of KID hs been flawed. Despite the scenario table indicating a wide range of possible returns, the fear is that after a long bull market new investors may focus on the positive forecasts and get the wrong idea of what could happen to their money.
A lack of readiness by investment trusts with the new rules saw Hargreaves Lansdown temporarily remove 96 London-listed funds from its trading platform for not making the three-page document available in time.
Janus Henderson, the fund management group that runs the portfolio, appears to share these concerns. It has tucked away the investment trust KID documents on its website so they are less visible than the normal fact sheets it updates each month.
Comparison of the two documents reveals a discrepancy on costs for the investment trust, which has been another area of contention as fund managers have applied the rules to calculate the 'ongoing charges' differently.
The Janus Henderson fact sheet excludes its performance fee from the annual ongoing charges paid by shareholders, which it states at 0.43%, while the KID document includes the performance fee and states the charges at 1.08%.
Under fund manager Neil Hermon, Henderson Smaller Companies is one of the best performing trusts in its sector, generating a total shareholder return of 39% over one year and nearly 383% over the past decade. The average smaller company trust has delivered nearly 326% over 10 years, according to AIC data.
In the six months to 30 November, it continued to bounce back from the turbulence caused by the Brexit vote in June 2016. Both the net asset value of its investments and its share price grew 5.8%, with dividends reinvested, ahead of the Numis Smaller Companies index which gained 2.2%.
Although Hermon invests outside the multi-nationals of the FTSE 100, the portfolio is less exposed to the UK than is often thought, with half of its earnings generated overseas. Top performers in the period included NMC Health (NMC), the London-listed healthcare provider that operates in the Middle East; and Intermediate Capital (ICP), a specialist fund manager in debt and credit. AA (AAAA), the motorists' services group, and Melrose (MRON), the turnaround specialist currently bidding for GKN (GKN), were the main drag on returns as their shares fell.
Hermon expressed confidence in the fund’s outlook saying that away from the uncertainties over Brexit, the global economy was growing, stock market valuations were ‘roughly’ in line with long-term averages and he was finding plenty of ‘exciting growth opportunities’ in smaller companies.
Gearing – the borrowing that investment trusts can use to boost long-term returns – stood at a ‘moderate’ 8.7% of assets, he said.
At 898.5p today the shares trade nearly 11% below their underlying net asset value, a slightly narrower discount than the 14% average of the past year, according to Morningstar data.
This makes them potentially 'cheap' although Numis Securities has recently pointed out that UK smaller companies trusts in general suffer from wide discounts, with the sector average discount currently at 10%, because there are relatively fewer long-term private investors buying the shares.