Indriatti van Hien, The Henderson Smaller Companies Investment Trust PLC Fund Manager On Why Small Cap Shares In The UK Are Massively Undervalued

Holly Mead (00:01.026)
Welcome to Good Money Guide and the latest in our series of fund manager interviews where we aim to find out more about the people managing your money and where exactly they’re investing it. I’m Holly Meade and today I’m joined by Indriatti van Hien. She’s manager of the The Henderson Smaller Companies Investment Trust.

Indriatti van Hien (00:17.634)
Hello. Good afternoon.

Holly Mead (00:20.066)
Thank you very much for joining us. So I’ve got a very nice easy one to start you off with and that is, what does the trust do?

Indriatti van Hien (00:26.072)
Sure, Henderson Smaller Companies looks to provide investors with capital and income growth by investing in UK listed companies at the smaller end of the range. So what we’re trying to do is invest in businesses that we think are their most exciting point for growth. And we’re trying to look for this growth before anybody else does. so it means that, you know, we’re often investing in sort of niche innovators that are on their way to becoming national or even international champions. In that sentence, what you’re getting is that potent mix of earnings growth and expansion in the valuation that people are looking to pay for these businesses because they’ve gone from becoming hidden gems or relatively unknown companies to becoming well-known companies. So it’s that potent mix of earnings growth and valuation re-rating that we’re looking to give investors exposure to.

Holly Mead (01:17.9)
And how do these companies come onto your radar? Because whenever I look through a smaller company’s portfolio list, some of them is just, I have never heard of that.

Indriatti van Hien (01:28.494)
And we think that’s brilliant. That’s the money-making opportunity. I love that of our top ten, not many people will be able to name these companies. And they might not be able to name them today, but you know, in five, ten years’ time, they might be sitting in the FTSE 100. And lots of people have a lot of exposure to these businesses. So we find these companies through our long experience in this part of the market, we invest in

Well, our benchmark is the Deutsche Numis Smaller Companies Index. So that covers the bottom ten percent of the FTSE by market capitalisation. So that’s our hunting ground, really. That market plus aim gives us exposure to call it eight hundred to a thousand stocks to to look at. And then we use proprietary screens and and our own experience to to filter down and and kick the tires on roughly two hundred of these companies, which will then be filtered down further into about eighty, which make up our portfolio.

Holly Mead (02:29.678)
Excellent. So tell me about a couple of the holdings in your your top 10 and excite me with names I’ve not heard of but want to have heard of.

Indriatti van Hien (02:38.562)
So we could start with Renishaw. So Renishaw makes precision manufacturing tools. so these are sort of sensor probes that are on machines in factories that tell you whether or not two things are gonna fit together or whether or not you’re bolting one thing together properly. and that’s really important in a world of increased automation.

using newer, smaller parts. If you think about sort of an airline engine and all the bits that need to go into there and fit perfectly together, Renachore will provide the products that help you do that. You know, they also help provide position encoders that’s really hot space at the moment because this is the piece of equipment that you might use when you’re creating a semiconductor chip which are being used in

Lots of applications around AI. So, you know, this is a homegrown business started by two British families. They invest about sixteen percent of revenues into R D. It manufactures most of its output in the UK and exports to all over all over the world. So

Holly Mead (03:57.164)
something I always wonder about when you are investing in very niche and technical areas. I’m presuming you are not personally a manufacturing semiconductor expert. So how do you work out whether a company that is doing something so niche is doing it well enough to investing?

Indriatti van Hien (04:16.117)
Yeah, so well, number one, there’s just the track record of growth that the business has shown. You often get validation from doing channel checks and speaking to its customers. But a lot of it comes from just management themselves, which we think is a really important ingredient in investing, because you speak to them, you talk to them about their plans, and then they go away

And you can see whether or not they’ve delivered on that. And it’s that, you know, what we’re looking for is consistent outperformance against expectations. So the ability for a management team to underpromise and over-deliver tells you that, you know, there’s high control and high fidelity around what it is they’re they’re doing. so it really comes with track record alongside all the normal parts of analysis you do when you’re

looking at where a company fits in the supply chain and actually where in that value chain i its product sits.

Holly Mead (05:19.0)
So you’ve got about 80 holdings at any one time. How often are you cutting things or adding things?

Indriatti van Hien (05:25.464)
So turnover in the portfolio is roughly twenty to twenty five percent, which correlates to an average holding period of four to five years. But that’s an average. I mean, we’ve held stocks in the portfolio for well over ten years, but we really are, I think in that metric, taking a a long view and being patient with those stocks that we hold.

Especially in the small cap part of the market, you know, you need to give the market time to appreciate and believe, as you say, you know, are these companies good? You know, are they sustainably good? Believe in in the business and and cash they are ultimately generating.

Holly Mead (06:01.208)
So what is a relatively new name to the portfolio that you’re feeling excited about?

Indriatti van Hien (06:05.89)
Yeah, so in January we invested in saga. now saga

Holly Mead (06:11.118)
No one has put sangha

Indriatti van Hien (06:13.91)
Well, you should be really excited, by song.

Holly Mead (06:16.856)
No disrespect to Saga.

Indriatti van Hien (06:18.99)
If you think about just the aging demographics we’re seeing in this country and where all the wealth is in this country, you know, investors would be lucky to get themselves exposure to what we call the grey pound. so that is the the spending power of people that have probably paid down their mortgages or probably empty nesters and now looking to go out and enjoy their their retirement.

and Saga is a business that owns two cruise ships that were built relatively recently in 2019 and 2020. And they provide bespoke cruises for targeted at this market. So it’s a pretty unique product in that a car picks you up from your house and drives you to the port so you don’t have to fly. and that’s pretty crucial in in given recent news flow around the Middle East. And there are, you know.

There are cabins tailored to couples, or maybe at that stage in life, unfortunately, you no longer have a partner. So there are lot of singles, cabins, and an itinerary that is appropriate for that demographic to enjoy. You know, we’re excited about Saga because they’ve got these relatively new ships that are now more expensive. If you were to build that same ship today, you’d be paying sort of 30-40% more than than they paid.

which gives them good pricing power because people that are making ships today need to charge a certain amount for their ticket and saga can can now price more price more for theirs. And their business has, you know, got very high operating gearing, so a little bit on the top line can drive really strong earnings growth. So we’re excited about Saga.

Holly Mead (07:58.37)
Had that been on your watchlist for a while before you bought? Yes.

Indriatti van Hien (08:01.368)
So Saga, it it’s one of these businesses that had recently cleaned up its balance sheet. You know, we like businesses that are not overly complex for their size. At this part, in this part of the market, you shouldn’t be running an overly complex business given given the size. and it recently divested of its insurance business that was tying up a lot of capital and decided to focus on its cruise, river cruise, and holidays business. And we thought that sharpened focus.

that fixed balance sheet, let’s have a look. let’s have a think about how its consumer is feeling. And when I manage to get my cyself comfortable on all those things, we press the button in January.

Holly Mead (08:40.27)
And so you mentioned earlier that the sweet spot for you is finding something that’s on its way up before it becomes a big name of the future, but presumably when it does become that big name, you’re not allowed to own it anymore. Is that ever very hard cutting the apron strings?

Indriatti van Hien (08:54.57)
Is it is it quite sad to do that? No, I always feel quite a sense of pride when that happens because we’ve ridden a company that started in the FTSE small cap all the way to the FTSE one hundred, and you’re right, you know, we do commit to selling these companies within six months of them entering the FTSE one hundred. We’ve we’ve seen that happen on numerous occasions, whether it’s companies like Informa or Intermediate Capital. And no, I’m I’m happy to let them go. I’m happy to let new owners

take over from there, but really we make our money in that process of them getting to the FTSE one hundred rather than when they’re when they’re there, if that makes sense.

Holly Mead (09:33.602)
Yeah, yeah, I get that. Is there anything that you can’t invest in that you wish you could invest in as a stock out there that you just sort of go gooey over?

Indriatti van Hien (09:43.592)
No, I I I suppose my biggest wish is that there was more capital in our part of the market, being both the UK and the small cap space, to allow us to properly value the opportunities out there. Because such a such a big part of the story of the last ten years for UK small caps is the capital rushing out of the space and going towards this new exciting tech, S P five hundred, Nasdaq and

Yes, you know, hindsight fund is the best performing fund of the market. Wouldn’t have been great to have bought those, you know, back in twenty eighteen before all the hype started. But from where we are today, you know, I look at the the extraordinary value we’re seeing in our part of the market and just thinking, wouldn’t it be great to have more capital to put to work here?

Holly Mead (10:31.851)
It has been a long time that both the UK and small caps have been our favour. How frustrating is that when that is your remit and you can see the value?

Indriatti van Hien (10:43.864)
Frustrating is the wrong word. you know, as investors, there is never a period, a benign period for your asset class. That is, in essence, what we are paid to manage through. And investing through what we’d like to call a polycrisis in the UK over the last 10 years has been difficult, but you learn to adapt. You you realize that, you know, valuation cannot be the only reason that you own a stock. There needs to be catalysts and drivers for change within that business.

To ensure that that value is properly recognized by the market. But really, you know, what we should be seeing with the amount of inbound MA in this market is this virtuous circle and flywheel. So you should see a company get bid for, you know, in the case of Spectrus at 100% premium to its share price. You should then see comparable companies and the sector re-rate to say, you know what, the UK is not valuing this properly.

And then what you do is you take the money that you made from Spectrus and you reinvest that, usually, you know, pre pre-2016, in a new company that then comes to list in the UK because they think, right, the UK is now valuing industrials properly. And so you get new and innovative companies coming onto the market, which drives returns. Strong returns attract flow. More flow comes into the market, driving strong returns, and you get this virtuous circle.

of inflows into a market, a little bit like what you’ve seen in in the US. Instead, what we’ve seen is because of the headline risk around the UK, despite the fact that I think that many investors know that investing in UK stock markets, even at the smaller end, doesn’t mean investing in the UK economy. You know, 50% of revenues in our benchmarks still come from overseas.

Instead, what you’ve got is this sort of vicious circle of yes, you have companies being taken off the market, but there’s been a lack of replenishment. And because there have been outflows, instead of reinvesting your say Spectrus bid money in a in another company, it’s just meeting redemption. And something has to be done to arrest that decline. You know, intervention is welcome.

Indriatti van Hien (13:01.536)
In the backgrounds we are seeing a very positive picture for UK small caps, but at the moment again just been knocked over this year by headline risk around Iran and then headline risk around around domestic politics, which has been difficult, but n none of these challenges insurmountable. We still see huge value in the UK.

Holly Mead (13:23.434)
what is it going to take to change that cycle?

Indriatti van Hien (13:26.9)
Really, I think that, you know, a lot of lines written about potentially frothy tech bubbles in the US. What you need to see is a diversification and broadening out of equity ownership. And I think that the UK market offers you just that. you know, if I think about why everybody is excited about the S P, you know, it’s forecast to deliver you twenty percent earnings growth this year, but it’s trading on twenty times earnings, you know.

Our portfolio is forecast to live at 18% earnings growth this year, but it’s trading on eleven times earnings. You know, I think it takes just one or two banana skins of in the tech sector to make everyone think, gosh, this this market is too narrow and I’ve got to look elsewhere. And it’s that, you know, it’s that sad but really exciting stat of, you know, only four percent of equities are invested in the UK. So you get one percent of flow coming.

out of the seventy percent that’s invested in the US go into the UK and you can see market levels up by twenty five odd percent. Yeah. It could it could happen.

Holly Mead (14:32.59)
could happen. Bringing it back to the fund and your career so far, what has been your best ever investment?

Indriatti van Hien (14:43.938)
there have been so many, so many good experiences. I really like going on the journey with companies. When you meet them, you think that they’re undervalued for XYZ re reasons and then the market sees that and then they re rate. But a stock that I really feel like I’ve been on the journey with is is SoftCat. So we invested at IPO.

And we still hold it in the portfolio now, you know, 11 years on. SoftCat is a value-added reseller to UK SMEs. So, like, talk about an economy that in the last 10 years has seen it all with Brexit and and the rest. And this is a share price that has compounded at over 20% every year since then. And it’s done that through both earnings growth and re-rating. All the growth has been organic because in the time period in which

We’ve been invested in SoftCat. Investment in IT spend has gone from being viewed as discretionary. we’re spending a little bit more on IT these days, to being a utility. Like this is what we have to spend on IT. You know, this is our IT budget. It’s only going up. And in in order for us to, you know, unlock all those great productivity savings from AI, we have to spend more on IT. so that’s a that’s a

an investment that we continue to hold today, you know, the management team are tip top. Culture is so important to them. These are the type of people that, you know, sweat more over their employee engagement score than than anything else. You know, I’ve seen it through two big CEO transitions in that time. and yeah, just a company that one day I’m sure I will lose to the to the FTSE 100, but I’ll be glad to see that happen for them.

Holly Mead (16:33.902)
And what is, dare I ask, your worst investment?

Indriatti van Hien (16:37.624)
Yeah, there have been lots of those too. Equinity. Equinity is a stock that we invested in because it was a little bit cheap. And there were there was lots wrong with that business, lots wrong with the cash generation, that business, but I thought it’s cheap enough, you know, the market is going to look through all these issues. But ultimately, you know, you need the management team to be strong and

You know, when accounting is aggressive, I think it speaks to other poor quality indicators in the business and no, it wasn’t wasn’t the funnest time I’ve had.

Holly Mead (17:12.695)
How long did you end up holding it

Indriatti van Hien (17:14.677)
Yeah we in the end we only held it for roughly three years. we did sell it well, but, you know, should never have owned it in the first place.

Holly Mead (17:24.856)
So away from the day job, what kind of investor are you?

Indriatti van Hien (17:27.854)
I’m incredibly long term in the way that I think when I’m investing my own money, I I definitely look and check far less than I obviously do my you know, I scrutinize my own investments less than I do the my fund and my day job. and that’s ultimately because I think that investing in equities is about investing in growth and the future and if you can take a a long

time horizon and pick your entry points well, that that long-term view should should come good for you in the end. But fundamentals continue to be important and just remember that, you know, the market is ultimately mean reverting and asset bubbles are are real and and you know don’t get caught up in those those hype cycles.

Holly Mead (18:16.642)
When did you start investing? Did you do it personally before you did it professionally?

Indriatti van Hien (18:21.762)
yes, a little yes. obviously when I started work sort of post university, just a little bit around the edges, always quite difficult ’cause I started life at PwC, so you had to be careful about what stocks you were dealing ’cause obviously they’re often your clients, but so I actually tended to invest more in funds than in stocks for that for that reason.

But I think it’s really important to to start young, get your eye in, realize the power of compounding. And again, if you take a long view, and it’s something that I, you know, I love investing my children’s gyces more than I do my ISA, because they can take a really long view. and yeah, all about entry points. I have two children. One was born February 2020, so an excellent entry point with COVID, and the other born in March twenty-two, so another excellent entry point with Russia-Ukraine.

I really do time it well.

Holly Mead (19:18.074)
That’s what you associate the birth of your children with. Great time for the stock market.

Indriatti van Hien (19:24.311)
so yes, I think starting young is is very important, but actually for most people you’re not allowed to open training accounts until you’re eighteen.

Holly Mead (19:33.698)
So too young for them to probably be caring much about where their gycer is, but do you hope to instill that in the future?

Indriatti van Hien (19:41.33)
gosh, I mean they’re four and six. We’re not talking about it yet, but I’m sure I’ll bore them bore them about it. They’re not too far.

Holly Mead (19:48.28)
something to look forward to, Kibbs. So you mentioned earlier that news flow this year has obviously not made the life of a fund manager easy. What’s your kind of view on the next 12 months or so?

Indriatti van Hien (20:01.55)
Yeah, I mean, we have to expect continued volatility. I think it’d be wrong to to frame it any other way. But again, if you can take a long term view, I think that, you know, the fog is clearing. You know, people don’t like investing in small caps during periods of economic dislocation. But as we see it today, inflation has peaked, interest rates are coming down. Yes, bond yields have spiked up and everybody’s worried that

That rates are going to go up. I personally don’t see that happening. I think that the rate cutting cycle has been delayed, but by no means destroyed. And small caps are a massive beneficiary of those stimulating effects of of rates coming down from what are still very restrictive levels. So more volatility, great opportunities for us to pick up names that that we like.

But I think that the overall trend is the clouds clearing and a re rating able to happen in this part of the market. Yeah.

Holly Mead (21:01.442)
And you also mentioned earlier that sort of virtuous investment cycle that doesn’t seem to play out that much anymore. In your time since you started in this industry, that aside, what are some of the biggest changes?

Indriatti van Hien (21:14.414)
I mean that that really is the biggest one. This, you know, the small cap part of the market is structurally more inefficient and therefore more exciting and and a more opportunity for alpha generation. But because of that outflow dynamic that we’ve seen in the last ten years, and ten years is quite a neat period from this point because it was just after the referendum vote where you then saw outflows from the UK really turbocharge, that this market has become even more inefficient.

And you see that again in the MA that I’m talking about. Just the sheer amount of inbound MA we’re seeing tells you that this part of the market is cheap. But instead of the market reacting to that in a let’s sus let’s let’s sustainably re-rate the UK, it’s sort of just taking taking the they thought that stock was cheap on a case by case basis. You know, the MA we’ve seen isn’t just in one sector, it’s very broad based, and that tells you that the industry

the entire market is too cheap. So really it’s that outflow dynamic and it’s the, you know, the very narrow breadth that we’re seeing that has made the last ten years a a very different place to invest versus when I started, which was in Henderson in two thousand eleven.

Holly Mead (22:29.996)
And how do you think that sort of plays into the role of active managers? Because obviously, passives have become so popular, particularly in the last 10 years, but the sort of rule has been, well, in those periods of re-rating and volatility should be when active managers shine. You know, could we maybe see a bit of a rebound towards active because of this?

Indriatti van Hien (22:52.64)
No, you should do. And you know, that again, greater inefficiency in the market is a bigger opportunity for us, but actually the technical dynamic of outflows from this space makes it hard for that. You know, if you think about who the marginal buyer is and they are people investing in baskets or in ETFs, it doesn’t help with making the market more efficient. But that is, on a long term view, a massive opportunity for investors.

Holly Mead (23:22.52)
So something we always ask everyone is when you’re your investment chat with kids, friends and family at the weekend, what is a book that you recommend to anyone who’s interested in learning more about money or investing?

Indriatti van Hien (23:36.526)
gosh. I mean, if you’re gonna do this professionally, you know, it’s table stakes to do all the Benjamin Graham intelligent investor and it’s been so many years since I, you know, slogged my way through that book. I don’t actually I mean, I like reading books from other fund managers, not because not because necessarily you’re learning new things from them, but I enjoy the war stories and imagine the the emotions that they too were going through.

during it, which actually lands me at it’s such a well-known book but it’s brilliant. Michael Lewis Liars Poker. Why is that important? It’s because this book teaches you about greed, fear, and the emotions and motivations that drive markets. and that is ultimately you know really important when you’re thinking about investing, you know, how it is that you are going to play

play those periods and markets, which will lead me to my last point in saying actually, I think understanding the world and understanding people and what makes them tick is far more important than a technical book on investing. You know, is there a big herd mentality at the moment? Everybody’s falling over themselves to own AI stocks. Yeah, this is exciting, but actually have have valuations become completely disjoint with fundamentals.

Okay, I might be wrong selling it now, but am I gonna be wrong in a year’s time? Because when the froth comes out of that part of the market, what’s gonna what’s gonna be doing doing better?

Holly Mead (25:10.638)
How do you keep that distance? Because I think everyone knows the theory of herd mentality or whatever by low, sell high. I don’t know why I that the other way around. But actually knowing what you’re going to do in that moment and spotting yourself doing it is different.

Indriatti van Hien (25:29.348)
I just think, you know, my father always said, You’re at your most dangerous when you’re you’re most happy. And I’ve walked out of meetings before with management teams and thought, gosh, they’re really firing on all cylinders, aren’t they? You know, aren’t they? They’ve they’ve achieved this, they won that contract, they are on top of the world. And then I go back to my desk and I don’t sell out of it completely, but I just take some off at that point. Because you think

Is this as good as it gets? What’s the next how can they beat that? What can they show the market after that that’s gonna make that marginal buyer want to buy again? And equally if I didn’t own the stock, I’d go, kudos to them. I wished I owned that twelve months ago, but from here, you know, what’s gonna make me money?

Holly Mead (26:15.628)
I love that people have come in thinking they’ve had the best meeting ever with you you’re like lovely to meet yourself.

Indriatti van Hien (26:21.698)
But equally when they’re down in the dumps and and thinking, you know, nothing’s going my way, the government has just increased this tax, the consumer’s not feeling good, you sit there and you go, should probably add to that. But yes. I love that.

Holly Mead (26:38.71)
Let me round up by just asking you for anyone who’s on the fence about investing in your fund, why should they consider it?

Indriatti van Hien (26:46.802)
gosh, the small cap effect is real. Whether it’s over 25 years or 70 years, smaller companies outperform large companies over time. These are companies that are growing faster, exposed to new products and industries, more agile management teams. But most importantly, you just have less analysts covering more stocks. Like they are mispriced opportunities. I think that you’ve got a generational buying opportunity here in the UK.

Don’t ask me who’s gonna be our Prime Minister in six months’ time, but you know, in five years’ time, do I think that you’ve made good money as with this as your entry point? Absolutely.

Holly Mead (27:23.19)
Thank you so much for joining us. Thank you. And thank you for joining us too. And if you enjoyed this video, please do like it, share it and be sure to follow us at Good Money Guide for more.