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 2023

This announcement contains regulated information.

"The period under review was a challenging one for the Company, but we do believe that inflation is moderating and expect interest rates to decline during 2024. Our portfolio of quality companies is well positioned to prosper in this environment. The Board is encouraged by the strong performance seen in the final months of the period under review and since the period end."

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 2023)

·      Net asset value ("NAV") total return¹ of -7.7% compared to a total return from the benchmark² of -0.2%

·      Share price³ total return of -5.8%

·      Interim dividend⁴ of 7.5p (30 November 2022: 7.0p) 

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 Numis Smaller Companies Index (excluding investment companies) total return

3 Share price total return using mid-market closing price

4 Interim dividend of 7.5p (30 November 2022: 7.0p) to be paid to shareholders on 5 March 2024

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

The Company continued to face significant headwinds during the six months ended 30 November 2023, with performance being disappointing in both relative and absolute terms. The broader UK equity market was affected by continuing concerns surrounding inflation and high interest rates; this and a challenging geopolitical backdrop led to significant market volatility and ultimately a broadly flat performance over the period.

Performance

Your Company's net asset value ("NAV") total return fell by 7.7% during the six months ended 30 November 2023, while the Numis Smaller Companies ex-Investment Companies Index (the "Benchmark") was almost flat, and the AIC UK Smaller Companies sector average NAV declined by 3.7%. Your Company's share price total return fell by 5.8% during the six months. The underperformance during the period was largely due to compressed valuations and deratings in the challenging market environment for smaller UK businesses. Growth stocks continued to remain out of favour.

On a more positive note, it does seem as though October 2023 may have marked a low point of sentiment towards the UK equity market. Since then, we have had a well-received Autumn Statement from the UK Chancellor  and the performance in the second quarter showed a marked improvement compared with returns achieved in the first quarter. The longer-term performance record of the Company remains consistently strong, reflecting an unchanged and proven investment strategy adopted by the Fund Manager and his team.

Dividend

Reflecting our confidence in the underlying portfolio and underpinned by performance since the period end, your Board has decided to pay a higher interim dividend of 7.5p per ordinary share (30 November 2022: 7.0p) due to strong income growth, and with a view to balancing interim and final dividends. This will be paid on 5 March 2024 from the Company's revenue account to shareholders on the register at 9 February 2024. The shares will be marked ex-dividend on 8 February 2024.

Share rating and discount

During the period, the Company's shares remained at a discount to NAV, but the discount narrowed from 13.2% at 31 May 2023 to 11.8% at 30 November 2023.

We did not buy back shares during the period and no new shares were issued. The Board regularly reviews this position; we continue to believe that, with the small and mid-cap market returning to favour, an increase in investor confidence in the UK and strong performance by the Company are all likely to be key factors in narrowing the discount.

Outlook

The period under review was a challenging one for the Company, but we do believe that inflation is moderating and expect interest rates to decline during 2024. Our portfolio of quality companies is well positioned to prosper in this environment and we share our Fund Manager's belief that we have the potential to deliver strong total returns as the economic background improves.

The Fund Manager has continued to follow a disciplined and unchanged long-term approach which is focused on bottom-up stock selection through a thorough assessemnet of a company's market proposition, balance sheet strength and management. The Board is encouraged by the strong performance seen in the final months of the period under review and since the period end. In December 2023 your Company's NAV rose by 12.4% compared with the Benchmark return of 9.4%, while the three-month NAV performance to 31 December 2023 was 12.5% compared with the Benchmark return of 8.3%, all on a total return basis.

The Board remains confident in the Fund Manager's ability to create a portfolio which will benefit from the opportunities that will progressively emerge as conditions continue to improve.

Penny Freer

Chair of the Board

FUND MANAGER'S REPORT

Market review - six months to 30 November 2023

The broad UK equity market was flat over the period. Market concerns focused around inflation, monetary policy tightening and the potential for a global economic downturn with a consequent corporate-earnings contraction. In the UK, GDP fell by 0.1% over the third quarter following 0.2% growth in the second quarter. There is a reasonable probability the UK economy will enter a technical recession in the fourth quarter of 2023. The UK annual inflation rate fell to a two-year low of 4.6% in October. Central banks across the world, led by the Federal Reserve, European Central Bank and Bank of England, held interest rates over the period, although messaging on their future path remained generally hawkish. However, global economic indicators continued to point to a slowdown in economic activity which supported the building consensus view that the monetary policy tightening cycle was complete. Investor debate is now focused on when, and how quickly, rates will be cut. Sterling gained modestly against the US dollar. Oil prices rose, with the market focusing on the conflict in the Middle East potentially impacting supply, even though the short-term demand picture looks unclear.

Smaller companies underperformed their larger counterparts, with the Numis Smaller Companies ex-Investment Companies Index down 0.2% against a rise in the FTSE All-Share Index of 1.6%.

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 7.7% on a total return basis. This compared with the Numis Smaller Companies Index (excluding investment companies) fall of 0.2% in total return terms. The underperformance came from a combination of negative contribution from stock selection, gearing and expenses. Negative contribution from stock selection was a function of the underperformance of growth companies as they de-rated in valuation terms due to rising interest rates and higher bond yields. In addition, negative company-specific issues impacted a number of our larger holdings. We believe these issues are temporary or more than fully reflected in the underlying share price and expect these companies to recover over time.

Gearing

Gearing started the period at 12.6% and ended at 13.0%. 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 £85 million short-term bank borrowings. As markets 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

Playtech is a software and services provider to the gaming industry. Computacenter is a global supplier of IT equipment and services. S4 Capital is a digital advertising and marketing services group. Aston Martin Lagonda is a luxury car manufacturer. Ascential is a diversified media group.

Principal detractors

Team17 is a computer games developer and publisher. Impax Asset Management is an ESG-focused asset manager. Oxford Instruments is a manufacturer of advanced scientific equipment. OSB Group is a specialist provider of buy-to-let mortgages. Deliveroo is an online food delivery platform.

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 have 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: Bloomsbury Publishing, a leading consumer and educational publisher; and Hill and Smith, a provider of fabricated metal products and services. In addition we added to our existing positions in: Clarkson, a leading global provider of services to the shipping industry; Genuit, a diversified building materials group; and PageGroup, a global recruitment consultancy.

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 Safestyle. Additionally we sold our holdings in Blancco Technology, Ergomed, Gresham House and Restaurant Group after these companies received agreed takeover bids.

Market outlook

Whilst inflation has fallen significantly over the last year, it remains elevated against official targets. Central banks led by the US Federal Reserve have, therefore, retained their hawkish stance. However, 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. What is not clear is the timing of when rates start to fall and the speed of their decrease. In the meantime, the delayed transmission mechanism of rising interest rates and their impact means that economic conditions are likely to remain difficult in the short term. Notwithstanding this, the prospect of a monetary easing cycle is likely to support global equity markets and allow valuation multiples to expand.

Geopolitics remain challenging, with the ongoing conflicts in Ukraine and Gaza and continued tensions between China and the US. The longer-term economic implications of this are material. There is an urgent need to reduce European dependence on Russian oil and gas supplies and a requirement to decrease China's influence on the global supply chain through investment in nearshoring capability. In addition, domestic politics are likely to be an area of volatility with up to half of the global population going to the polls in the coming 12 months in key elections in UK, USA, India, Mexico, South Korea and the EU.

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. In particular, balance sheets are more robust. Dividends have recovered strongly and we are seeing an increasing number of companies buying back their own stock.

After an active 2021, the initial public offering ("IPO") market has become considerably quieter as equity market confidence has diminished. There are no signs this is likely to change in the short-term. Merger and acquisition ("M&A") activity has remained robust as acquirors, 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 long-term averages. In addition, smaller companies are trading at a historically high discount to their larger counterparts. A sharp rebound in corporate earnings following the pandemic-induced shock in 2020 has now faded. Weak economic activity has led to subdued corporate earnings growth in 2023 compounded by rising interest costs and a higher corporate tax burden. These dynamics are unlikely to change in 2024. However, the view that the UK economy is entering a moderate recession is now consensual and the debate is now focused on whether the trough will be deeper than expected.

Although uncertainty remains around short-term economic conditions, we think that the portfolio is well positioned to withstand an economic downturn and exploit any opportunities this would present. The movements in equity markets have thrown up some fantastic buying opportunities. However, 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

Fund Manager

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 2023.

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 2023

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

        BALANCE SHEET

STATEMENT OF CASH FLOWS

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

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