Henderson Smaller Companies (HSL ) has seen six-month performance scuppered by its growth bias but its dedication to a ‘growth at a reasonable price’ strategy may now be starting to reap rewards.

The £683m portfolio of UK smaller companies run by Neil Hermon reported a ‘disappointing’ six months to the end of November, as the net asset value (NAV) fell 7.7% and the share price ticked 5.8% lower versus a 0.2% fall in the Numis Smaller Companies index and a 1.6% rise in the FTSE All Share.

Hermon blamed gearing, which increased to 13% from 12.6% over the period, as well as ‘the underperformance of growth companies as they de-rated in valuation terms due to rising interest rates and higher bond yields’.

The biggest detractor over the period was video games developer Team17 (TM17) as shares plunged 57% after it warned that certain games had been failing to perform as well as expected. Poor interim performance and volatile markets also sent the shares of Impax Asset Management (IPX) 34% lower over the period.

Hermon has remained committed to adding companies with ‘good growth prospects’ and bought stakes in publisher Bloomsbury (BMY) and fabricated metal products provider Hill & Smith (HILS).

To balance the portfolio, he disposed of companies he felt were ‘set for poor price performance or where the valuation had become extended’, including uPVC window and door group Safestyle, which entered administration in October. Hermon also sold data security firm Blancco Technology (BLTG), asset manager Gresham House (GHE), and Restaurant Group (RTN) after they all agreed to takeover bids.

Ash Nandi, analyst at Numis, the corporate broker for the company, said some of the recent underperformance ‘has been reversed post-period end’ and the fund is the best performer in its Numis UK Smaller Companies peer group over the last three months ‘albeit following a challenging period which has dampened the fund’s recent track record’.

Over the past three months, the NAV has climbed 21.4% while the shares are up 21.6%, leaving the shares trading at a 14% discount.

‘The long-term track record is still intact, and Henderson Smaller Companies remains one of our top picks within the UK smaller companies sector,’ she said.

Over five years the company has seen underlying growth of 16.1%, with the share price up 9.6% compared to a 15.6% rise in the Numis Smaller Companies, ex-investment companies index and a 11.5% drop in the FTSE All Share. The 10-year numbers are better with a total 78.1% rise in NAV and 81.3% total shareholder return, compared to 55.9% from the Numis index and just 0.7% in the All Share. 

‘We continue to rate the management team highly,’ said Nandi.  ‘[We] believe that following a period of poor performance over the last two years, the manager is starting to reap the rewards of sticking to the “growth at a reasonable price” investment approach and believe that it is well placed to continue its recent resurgence.’

Hermon (pictured)  is confident that long-awaited monetary easing in the US and UK will ‘support global equity markets and allow valuations multiples to expand’.

‘It is clear we are at the end of the monetary policy tightening cycle and even the chair of the Federal Reserve conceded that rate cuts were being debated by the committee,’ said Hermon.

However, he added the ‘delayed transmission mechanism of rising interest rates and their impact means that economic conditions are likely to remain difficult in the short term’.