Companies: RWS    WSH   

With a degree in mathematics from Cambridge University, expert number cruncher Neil Hermon, previously head of smaller companies at Morley Fund Management, has over
ten years’ experience of managing smaller company funds, joining Henderson Global Investors in 2002.

Smaller companies enjoyed a very strong period between 2003 and 2007, but the past year has seen very difficult times for equity markets and the outlook remains rather bleak. Hermon comments, ‘Clearly, things are quite difficult economically and are likely to remain this way for some time, but I think the portfolio is quite well positioned to withstand what may be on the economic horizon. We have a good portfolio of companies trading on decent valuations.’

He explains, ‘Shares at the moment are trading on a reasonable discount and we have been buying back shares to enhance the trust’s net asset value.

Ours is pretty large and liquid compared to other smaller company investment trusts; we are the second-biggest in the sector, with a market cap of over £200 million. We also have a good long-term track record, having been one of the best-performing trusts in the sector over the past five years, so we are quite confident about its medium- to long-term prospects.’

Bottom-up style
With a bottom-up style of stockpicking, Hermon looks for individual companies that are reasonably priced, focusing more on growth than value. During his stint at Henderson Global Investors, Hermon has developed a unique selection process, which he refers to as ‘the Four Ms’.

‘In terms of how we assess companies, we follow criteria that we know as the Four Ms – model, management, money and momentum,’ explains Hermon. ‘We like companies with a very strong business model – those with a very strong management team, good balance sheet and cash flow characteristics and, lastly, strong momentum – the ability to surpass market expectations.’

Therefore, the trust seeks to invest in companies that have a competitive advantage or provide a unique or different product or service.

Sample holdings
One such example is engineering and design consultant WSP, the fully listed group that recently won an £85 million Highways Agency contract covering road networks across counties such as Northamptonshire, Bedfordshire and Hertfordshire.

Hermon elucidates, ‘WSP, which has been growing very rapidly, is our largest holding.

The company has a good international spread, a very strong order book and visibility, as well as a pretty strong balance sheet. I think it has good prospects going forward.’

On the AIM front, Hermon highlights support services company RWS Holdings, Europe’s leading provider of intellectual property support services and high-level technical, legal and financial translation services.

‘RWS is a very niche business with a large market cap of around £156.79 million, and as a company it has good long-term growth prospects, mainly because it is economically robust – the number of patent applications is not dependent on economic growth,’ he says. ‘Because the company deals primarily in euros, the recent devaluation of sterling into euro has been very beneficial.’

Around 30 per cent of Henderson’s Smaller Companies Investment Trust’s portfolio is made up of small-cap stocks. However, as Hermon points out, ‘The weighting in mid-cap is quite high at 30 per cent, and this just reflects the fact that some of the stocks we have bought were small-cap and have grown to be in the mid-cap area.’