How we find growth at a reasonable price and three stock picks | Summary and Q&A

TL;DR

Neil Herman, Fund Manager of Henderson Smaller Companies Investment Trust, discusses the focus on growth and valuation in investing, the qualities sought in businesses, and the trust's approach to consistent dividend growth.

Key Insights

• 💪 Growth investing involves seeking companies with strong growth potential at a reasonable valuation.
• 👨‍💼 The trust focuses on a company's business model, competitive advantage, management, and earnings and cash flow momentum.
• ⌛ Dividend growth is a result of investing in profitable cash-generating companies with increasing dividends over time.
• 🍉 Long-term winners and market dislocations offer investment opportunities.
• 🫵 Mitchell and Butler and The Gym Group are viewed as potential post-pandemic recovery winners.
• 💗 Impax Asset Management benefits from the growing interest in ESG investing.
• 🛄 The trust aims for total return, combining capital gains and income.

Transcript

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Questions & Answers

Q: How do you find investments that offer growth at a reasonable price?

The trust utilizes a screening process for specific financial characteristics and meets with over 300 companies annually to assess their potential. They prioritize a strong business model, competitive advantage, capable management, and positive momentum in earnings and cash flow.

Q: Does the trust specifically target dividend-paying companies to achieve a rising level of income?

Rather than targeting income alone, the focus is on total return, including both capital gains and income. They do, however, prefer profitable cash-generating companies that pay dividends, as these businesses often exhibit strong growth in dividends over time.

Q: How has the portfolio been adjusted in response to the post-pandemic recovery and changing market conditions?

The trust takes a long-term approach with an average holding period of around five years, favoring consistency in returns. While they seize opportunities during market dislocations, such as the undervalued names after the market sell-off in 2020, they primarily focus on long-term growth structural winners.

Q: Can you name some companies added during the recovery period and long-term structural winners that you find attractive?

Mitchell and Butler, a well-known pub company with 650 pubs across the UK, has been added as they anticipate a sharp recovery in trade due to pent-up demand and reduced competition. The Gym Group, a low-cost leisure operator, is expected to see a strong bounce-back in demand and growth opportunities. Impax Asset Management, an ESG investor, benefits from the increasing allocation of funds towards ESG portfolios, and they anticipate significant earnings growth in the future.

Summary & Key Takeaways

• Neil Herman emphasizes the focus on growth at a reasonable price in their investment approach, employing a filtering process and leveraging their team's extensive experience.

• The trust looks for four key characteristics in companies: a strong business model, a competitive advantage or franchise, capable management, and positive momentum in earnings and cash flow.

• Henderson Smaller Companies Investment Trust prioritizes total return, combining capital gains and income, and has achieved consistent dividend growth since 2003.