Henderson Smaller Companies delivers 11.8% NAV return and raises dividend

Henderson Smaller Companies Investment Trust PLC has reported a positive year for shareholders, although its net asset value return finished just behind the benchmark.

For the year ended 31 May 2026, the investment trust generated a net asset value, or NAV, total return of 11.8%. That compared with 12.3% from the Deutsche Numis Smaller Companies Index excluding investment companies.

The gap was narrow, while the trust comfortably beat the 10.1% average NAV return from its UK smaller companies peer group. Its share price total return was slightly stronger at 12.6%.

There was also another dividend increase and a sizeable share buyback programme, although revenue, earnings per share and total net assets declined. Full details are available in the original company announcement.

Henderson Smaller Companies' key figures

Measure	2026	2025
NAV total return	11.8%	-5.1%
Share price total return	12.6%	Not disclosed in the performance attribution table
NAV per share	1,004.8p	926.2p
Share price	917.0p	841.0p
Discount to NAV	8.7%	9.2%
Total dividend per share	29.0p	28.0p
Revenue return per share	26.11p	27.89p
Dividend yield	3.2%	3.3%
Gearing	10.0%	10.2%
Ongoing charge	0.53%	0.45%
Total net assets	£559 million	£634 million

NAV is the value of the trust's underlying assets after liabilities. An investment trust's shares can trade above or below that figure, with a discount meaning the share price is lower than NAV per share.

A solid recovery, but not a clean benchmark win

The headline return is encouraging after the previous year's 5.1% NAV loss. Stock selection improved and the trust outperformed the sector's average NAV return by 1.7 percentage points.

However, shareholders should not overlook the 0.5 percentage point shortfall against the benchmark. The managers said the portfolio's growth style was a headwind as investors rotated towards value shares following renewed inflation and interest-rate concerns.

Performance attribution shows investment performance before gearing detracted 2.3 percentage points relative to the benchmark. Expenses cost another 0.5 percentage points. These negatives were partly offset by the gearing decision and, more significantly, share buybacks.

The longer-term figures also remain mixed. Over three years, NAV returned 21.4% against the benchmark's 39.3%. Over five years, NAV fell 13.9%, while the benchmark gained 17.9%. The ten-year NAV return of 75.1% also trailed the benchmark's 87.2% and the sector average of 89.2%.

This year's improvement matters, but investors will need to see it sustained before concluding that the longer period of relative weakness has been resolved.

Buybacks made a meaningful difference

Henderson Smaller Companies repurchased 12,899,062 shares during the year, equivalent to 18.8% of issued share capital excluding treasury shares. The company spent approximately £112 million on buybacks, which enhanced NAV per share by 1.7%.

Buying shares below NAV can benefit remaining investors because the trust acquires assets worth £1 for less than £1. It also reduces the number of shares entitled to future returns and dividends.

The discount averaged 9.2% during the year and ranged from 7.4% to 11.5%, before closing at 8.7%. That was slightly narrower than the previous year's 9.2% closing discount.

There is a trade-off. Total net assets fell from £634 million to £559 million despite the positive investment return, with the heavy buyback activity playing a major role. A smaller asset base can put upward pressure on the ongoing charge because fixed costs are spread across fewer assets.

The board also acknowledged that buybacks cannot solve weak demand for UK smaller companies on their own. A lasting reduction in the discount will depend on investment performance, confidence in UK equities, investor flows and marketing.

Dividend growth continues, but earnings declined

The total dividend increased by 3.6% to 29.0p per share, marking 23 consecutive years of annual dividend growth. This comprises the 7.5p interim dividend already paid and a proposed final dividend of 21.5p.

Subject to shareholder approval, the final dividend will be paid on 23 October 2026 to investors on the register on 2 October. The shares are due to trade ex-dividend on 1 October.

The record of dividend growth is a clear positive, but the underlying income picture softened. Portfolio revenue declined from £23.1 million to £18.5 million, while revenue earnings per share fell from 27.89p to 26.11p.

The 29.0p distribution is therefore above current-year revenue earnings per share. The board said it would use a modest contribution from the trust's substantial revenue reserves to support the dividend.

Investment trusts can retain income from stronger years and use those reserves to smooth future payments. That flexibility is useful, but repeated reliance on reserves would be less reassuring than dividend growth covered by recurring portfolio income.

Costs remain competitive despite rising

The ongoing charge increased from 0.45% to 0.53%. The company attributed much of the increase to a 16% fall in average net assets, alongside a 42% rise in other expenses, mainly because of higher marketing spending.

That increase deserves attention, particularly if the trust continues shrinking through buybacks. Even so, the reported charge remained materially below the peer-group average of 0.99%, which is an important competitive strength.

No performance fee was paid in either 2026 or 2025.

Portfolio changes and manager transition

Indri van Hien completed her first year leading the fund management team after Neil Hermon retired in September 2025. Cassie Herlihy joined as deputy fund manager in November.

The managers have refined the investment process to improve stock selection while retaining the strategy of seeking growth at a reasonable price. New holdings included CVS Group, Elixirr, Greencore, Mitie Group, Rosebank, Saga and SSP Group.

The trust also exited businesses where conviction had weakened, valuations looked stretched or artificial intelligence was considered a structural threat. Disposals included Future, MONY Group and PageGroup, while profits were taken from Cohort and Keller.

Oxford Instruments and Balfour Beatty were the largest holdings at 3.4% each. Other major positions included Paragon Banking, OSB Group, Vesuvius, Computacenter and Renishaw.

What investors should watch next

The annual results show genuine progress: positive absolute returns, sector outperformance, a narrower discount, effective buybacks and another dividend increase. Costs also remain low compared with peers.

The less comfortable points are benchmark underperformance, weaker long-term relative returns, declining revenue and partial use of reserves for the dividend. The trust also carries 10.0% gearing, meaning it uses borrowing to increase market exposure. This can boost returns when investments rise but magnify losses when markets fall.

Management describes UK small-cap valuations as generationally attractive, but a cheap market can remain cheap while investor outflows persist. The key test is whether improved stock selection can continue without relying as heavily on buybacks to support NAV performance.

For now, Henderson Smaller Companies has delivered a credible recovery year. The next annual period will show whether that improvement is becoming a durable trend.