THE HENDERSON SMALLER COMPANIES INVESTMENT TRUST PLC

HENDERSON INVESTMENT FUNDS LIMITED

LEGAL ENTITY IDENTIFIER: 213800NE2NCQ67M2M998

26 JANUARY 2022

THE HENDERSON SMALLER COMPANIES INVESTMENT TRUST PLC

Unaudited Results for the Half-Year Ended 30 November 2021

This announcement contains regulated information

"In the six months to 30 November 2021, smaller companies underperformed larger companies; principally due to the rise in bond yields and a gravitation towards value over growth stocks. Your Company outperformed its benchmark, continuing what has been a consistent strong long term track record."

Penny Freer

Chairman

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

·      Net asset value ('NAV') total return¹ of -2.1% compared to a total return from the benchmark² of -2.8%

·      Share price³ total return of -7.9%

·      Interim dividend⁴ of 7.0p (30 November 2020: 7.0p) 

TOTAL RETURN PERFORMANCE (including dividends reinvested)

Sources: Morningstar Direct, Janus Henderson, Refinitiv 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 7.0p (30 November 2020: 7.0p) to be paid to shareholders on 7 March 2022

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

CHAIRMAN'S STATEMENT

In my first statement as your Chairman, I would like to begin by paying tribute to Jamie Cayzer-Colvin's decade of leadership. Jamie stepped down as Chairman at our AGM on 1 October 2021 leaving your Company well positioned for the future.

COVID-19 continues to impact businesses and individuals. After a period of increasing positivity stemming from the vaccination rollout we have, more recently, again been affected by rising cases from new variants and a return to some measure of restrictions. Clearly the crisis is not over, although with greater numbers vaccinated and seemingly milder symptoms, we are gradually seeing a return to some degree of normality.

Performance

During the six months to 30 November 2021, UK equity markets were broadly flat, although smaller companies underperformed larger stocks as investor sentiment shifted from growth-oriented companies to those with more value type characteristics.  Against this backdrop, your Company's net asset value total return fell during the period under review by 2.1%, outperforming the Numis Smaller Companies Index by 0.7% over the period. However, it underperformed the AIC UK Smaller Companies sector average, which rose by 2.5% and the share price underperformed the NAV during the period, delivering a total return of -7.9%, as the discount widened to 9.5% (31 May 2021: 3.7%) reflecting weaker investor sentiment towards smaller companies. Nevertheless, the longer-term performance record of the Company remains consistently strong, reflecting an unchanged strategy adopted by the Fund Manager and his team.

Dividend

Your Board has decided to maintain the interim dividend at 7.0p per ordinary share (30 November 2020: 7.0p).This will be paid on 7 March 2022 to shareholders on the register on 11 February 2022. The shares will be marked ex-dividend on 10 February 2022. This dividend is to be paid from the Company's revenue account.

Additional Loan Notes

I am pleased to announce that the Board has agreed to issue a further £20 million of fixed-rate 30-year unsecured private placement notes (the "Notes") at an annualised coupon of 2.77%. These Notes will be in addition to the £30 million unsecured notes currently in issue. This transaction will obtain fixed-rate long-dated sterling-denominated financing at pricing that the Board and Manager consider attractive and is expected to enhance long term investment performance.

The funding date is expected to be 2 February 2022, subject to customary closing conditions, with interest payable semi-annually. The Notes are due to be repaid on 2 February 2052. The Notes will be unsecured, which gives the Company increased flexibility to manage its borrowings in the future. There has been no change in the Company's policy on gearing, as set out on page 17 of the 2021 Annual Report. Gearing ended the period under review at 10.6% (31 May 2021: 8.8%).

Outlook 

The economic background remains uncertain and changeable in the face of new COVID-19 variants, but corporate earnings continue to recover from the lows of 2020 and the health of the corporate sector is much better than during the 2008-9 financial crisis. Strong balance sheets and better than expected earnings recoveries post the initial impact of COVID-19 give cause for optimism. Corporate activity is high with M&A opportunities arising from the impact of the pandemic. Tempering this is the prospect of tightening monetary policy to counter higher inflation. Against this background, your fund management team maintains a disciplined, long term approach to investment and is focused on selecting the companies which will emerge stronger from this period.  I have confidence that your Company can continue to deliver successful outcomes for its investors in the years ahead.

Penny Freer

Chairman

FUND MANAGER'S REPORT

Market Review - Six Months to 30 November 2021

UK equity markets were broadly flat over the period. In the UK, whilst most COVID-19 restrictions were relaxed on "freedom day", rhetoric from the government remained cautious as the Delta variant continued to spread. Towards the end of the period, discovery of the new Omicron variant raised fears that restrictions would have to be re-introduced. Global bond yields oscillated during the period which resulted in a change of factor leadership in equity markets. In the US, the Federal Reserve stepped away from its initial view that inflation was transitory and became increasingly hawkish. In September it announced that asset purchase tapering would begin soon and by November the market was projecting three interest rate rises in 2022. In the UK, the Bank of England decided not to raise rates in November. Oil rallied initially but fell sharply in November while sterling depreciated against the dollar.

Smaller companies underperformed larger companies over the period. This was driven principally by a rise in bond yields and a gravitation towards value over growth stocks.

Fund Performance

The Company outperformed its benchmark during the period. The net asset value fell by 2.1% on a total return basis. This compares with a decline of 2.8% (total return) in the Numis Smaller Companies Index (excluding investment companies).

Gearing

Gearing started the period at 8.8% and ended it at 10.6%. Debt facilities are a combination of £30 million 20-year unsecured loan notes at an interest rate of 3.33% and £85 million of short term bank borrowings.

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

Future is a special interest media group; Impax Asset Management is a specialist fund manager; Marshall Motors Holdings is an automotive retailer; Watches of Switzerland is a luxury watch retailer; and CMC Markets is a financial derivatives dealer.

Principal Detractors

Playtech is a provider of technology and services to the gambling industry; Clinigen is a pharmaceutical services and products group; Investec is an international specialist bank and asset manager; Indivior is a pharmaceutical group; and Drax Group is a renewable power generation company.

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: Access Intelligence, a software provider for the public relations and marketing services industries; Bridgepoint, a private equity manager; Devolver Digital, a video game publisher; RPS, an engineering consultancy group; Sigmaroc, an aggregates and construction materials group; Stelrad, a steel radiator manufacturer; and Wickes, a home improvement retailer.

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 holdings in Coats, Go-Ahead Group, Johnson Service Group and Rotork. Additionally we sold our holdings in Sanne, St Modwen and Vectura, after these companies received agreed takeover bids.

Market Outlook

The COVID-19 outbreak dramatically changed expectations for global economic growth. The lockdown measures we have seen across the globe have had a profound effect on economic activity. Government actions to protect consumers and businesses from the worst impact of the shock softened the blow but ultimately can only be short term in nature given the scale of the bail-out required.

The positive vaccine news announced in November 2020 and the subsequent successful vaccination programme has meant life has returned to some sort of normality with a consequent rebound in economic activity. Conditions remain fragile though and subsequent 'waves' of COVID-19 and new variants of the virus serve as reminders that the crisis is not over.

One of the major concerns facing the equity market is the threat of higher inflation and the need for central banks to start tightening monetary policy. There is much debate as to whether current indications of inflation, led by commodity, energy and logistic costs, are temporary or are of a more permanent nature. A sustained pick up in wage inflation will probably force monetary authorities to act more quickly. The recent increase in UK base interest rates and indications from the Federal Reserve of higher rates gives a good indication as to the likely direction of central bank policy in 2022.

In the corporate sector, conditions are intrinsically stronger than they were during the financial crisis of 2008-9. Balance sheets, in particular, are more robust. On the whole, so far, the UK corporate sector has performed well during the crisis and most companies are beating their initial post COVID-19 earnings and cash expectations.

We are seeing a noticeable pickup in corporate activity. The IPO market, after a quiet 2020, has exploded into life in recent months. Given the amount of companies looking to float onto public markets it is important to remain disciplined when sifting through the multitude of new investment opportunities we have in front of us. Likewise, we are also seeing a significant increase in M&A activity as private equity, in particular, looks to exploit opportunities thrown up by COVID-19. We expect this upsurge 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 now trading in line with long term averages if we apply pre COVID-19 earnings. Corporate earnings were sharply down in 2020 although we have seen a  sharp recovery in 2021 which is likely to continue into 2022.

Although uncertainty remains around short term economic conditions, the virus will pass and corporate profitability and economies are recovering. The movements in equity markets have thrown up some fantastic buying opportunities and we expect many listed companies to emerge stronger from the downturn. However, it is important to be selective as any recovery will be uneven and strength of franchise, market positioning and balance sheet will determine the winners from the losers in a post COVID-19 world.

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 2021.

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:

·    the condensed set of financial statements has been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting; 

·      the Interim Management Report includes a fair review of the information required by Disclosure Guidance and Transparency Rule 4.2.7R (indication of important events during the first six months and description of the principal risks and uncertainties for the remaining six months of the year); and

·      the Interim Management Report includes a fair review of the information required by Disclosure Guidance and Transparency Rule 4.2.8R (disclosure of related-party transactions and changes therein).

For and on behalf of the Board

Penny Freer

Chairman

INVESTMENT PORTFOLIO

at 30 November 2021

STATEMENT OF COMPREHENSIVE INCOME

The total column of this statement represents 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