manager of henderson uk smaller companies focuses on construction and insurance sectors
The manager of the Henderson Smaller Companies investment trust has more than halved a previously overweight exposure to technology since taking over 10 months ago.
Neil Hermon, who joined Hendersons from Morley last November with Theresa Wat, said the technology weighting had been reduced from more than 28% down to 10%-12%. He has directed the proceeds from selling technology stocks into building up exposure to previously ignored areas such as the insurance and construction sectors.
In total, there has been more than 50% turnover since he took over management of the fund from John Alexander last year.
Within the construction sector there is a bias toward housebuilding and PFI stocks.
'We believe housebuilding stocks have discounted a housing slump that is unlikely to happen,' he said, citing Westbury and Bellway as two of his holdings.
'Meanwhile, increased Government spending should benefit PFI-type stocks. An example of such a holding is Balfour Beatty.'
A previous high weighting towards media companies has been maintained. However, within that sector there has been a shift towards radio station stocks.
Hermon believes there will be consolidation in the sector on the back of the new Communications Bill.
'There are seven major radio players currently. We believe that will reduce quite rapidly, as did ITV back in the 1990s. Scottish Radio and Chrysalis are two stocks that are quite vulnerable to takeover,' he said.
Elsewhere in the media sector Hermon believes a pick-up in advertising spend due to economic recovery will benefit holdings such as Informa.
The trust holds around 100 stocks drawn from the Hoare Govett index, with an average target company size of £250m.
Hermon said he looks for companies displaying strong management and a business model that confers a competitive advantage and market leadership, as well as strong balance sheets and earnings momentum that is likely to lead to earnings upgrades.
The trust is 10%-12% geared, above the UK Smaller Companies sector weighted average of 0% but down from recent months as a rise in asset values has diluted the level of borrowings. There are no immediate plans to increase the level of gearing as Hermon believes a period of consolidation is imminent following strong performance.
Net asset value has risen by 25% over the three months to 20 August, and 48% over six months, against weighted sector average increases of 22% and 39% respectively.
Hermon, who also manages the Henderson UK Smaller Companies Oeic, expects smaller companies stocks will continue to outperform, despite anticipating a period of consolidation in the near term. Over one year he expects further gains of at least 10% in this sector.
Henderson Smaller Companies was trading at a discount of 10.8% on 20 August, below the sector average of 14.7%.
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