Henderson Smaller relents and buys back shares at 15% discount

Board of £600m Henderson Smaller Companies trust drops its earlier reluctance to buy shares, making its first stock repurchases in 13 years.

Henderson Smaller Companies (HSL ) has started buying back shares for the first time in 13 years after deciding tackling the deep discount warranted the risk of shrinking the £600m investment trust.

Stock exchange filings show that when its shares fell to 15% below net asset value (NAV) in late March, the board stepped in for the first time since 2011, spending £746,523 repurchasing its shares in 10 transactions.

In a statement the board, chaired by Penny Freer, said its goal was enhancing the trust’s NAV by buying the shares cheaply.

‘This reflects our view that the current combination of the deep value of the underlying portfolio alongside the discount to its net asset value at which HSL’s share price trades presents an attractive opportunity for shareholder value enhancement.

‘The buyback is within the authority granted at the last AGM which allows for a maximum of 14.99% of the share capital to be acquired,’ the board said.

The trust had become an outlier in resisting buybacks, which surged to a record £4bn in the investment companies sector last year, as boards responded to the derating of their shares caused by high inflation and interest rates.

In the trust’s half-year report  in January, Freer said an increase in investor confidence in the UK and strong investment performance would be key factors in narrowing the £593m trust’s discount.

Fund manager Neil Hermon was also sceptical, telling Citywire last October that when Henderson Global Investors, as it was known then, took on the trust in the early 2000s it had bought back 4% of the equity from November 2002 to 2011.

‘It had little to no impact,’ Hermon said, adding that the effect of buybacks typically wore off in a month and he was concerned that sustained buybacks risked shrinking a trust to ‘irrelevance’

Henderson Smaller is not the only trust to have had a change of heart on buybacks. As we reported yesterday, Schroder Income Growth (SCF ) last month bought back some shares for the first time in 16 years, although it has undertaken only one purchase so far.

The board said the transaction demonstrated its confidence in the portfolio and confirmed it would continue to buy back shares to enhance asset value per share.

It’s possible Henderson Smaller is responding to shareholder pressure. According to Refinitiv data, after wealth manager Evelyn Partners on 8%, its largest backers are value investors Lazard and Allspring Global Investments, which hold 4.4% and 4.1% and would be keen on any measures to narrow the discount.

Since Henderson Smaller first bought back stock on 27 March, shares in the £694m portfolio have risen almost 4%, with the discount narrowing slightly to 14%.

In the past three years, the trust has been one of the worst performers in its sector with NAV falling 23% and shareholders suffering a total loss of 30% as a result of the share price discount. Over the same period, the Deutsche Numis Smaller Companies ex investment companies index has declined 4%.

In the March factsheet, Hermon said the UK smaller company market had quietened down, with flotations tailing off since the first quarter, while weak economic activity has led to subdued corporate earnings growth in 2023 compounded by rising interest costs and a higher corporate tax burden.

However, he pointed to the portfolio’s robust balance sheets, meaning its companies would be well positioned to withstand an economic downturn. Its top holdings are Paragon Banking Group (PAG), housebuilder Bellway (BWY) and construction and infrastructure group Balfour Beatty (BBY), all of which are Citywire ‘Elite’ stocks held by leading fund managers.


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