Final Results

RNS Number : 2896B

Henderson Smaller Cos Inv Tst PLC

13 August 2008

 



13 August 2008

MANAGEMENT REPORT

Chairman's Statement:

The year has been a difficult one. The net asset value per share at our year-end was 317.6p. This represents a negative total return of 18.6%. By comparison, our benchmark index returned a negative 21.2%. These figures are disappointing. However, our out-performance of the benchmark shows the strength of our management team, who have beaten the benchmark for five consecutive years.

The attribution of performance is estimated as follows:

		Year ended  31 May 2008
Net asset value per share total return		(18.6)%
Benchmark total return (note 1)		(21.2)%
		--------
Relative performance		2.6%
		--------
Made up:
Stock selection		4.9%
Gearing		(3.5)%
Share buy-backs		1.1%
Expenses		(0.5)%
Write-back of VAT		0.6%
		---------
		2.6%
		---------

Notes:

• The benchmark is the Hoare Govett Smaller Companies (excluding investment companies) Index.

• Source: Henderson Global Investors Limited.

It shows that stock selection was strongly positive, but was partially offset by the effect of gearing.

Revenue and dividend

The revenue return per share was 4.64p, more than double the 2.12p of the previous year. In part, this reflects the growth in income from our investments but, as I reported at the half-year stage, the most significant factor has been the expected refund of VAT borne on management fees. We propose a final dividend for the year of 2.20p per share (an increase of 29%) excluding the VAT refund and a special dividend of 1.60p per ordinary share in respect of the VAT refund. Both payments are subject to shareholder approval at the Annual General Meeting in September.

Share buy-backs

During the year we bought back 6.2 million shares, equivalent to about 7% of those in issue at 31 May 2007, at an average discount (calculated by valuing the debenture stock at par) of just over 18%. Despite the volume of share buy-backs, our Company remains one of the larger constituents of its sector.

MANAGEMENT REPORT, continued 

Board composition

As announced last year, Max Taylor will retire as a director at the conclusion of the Annual General Meeting. With his business expertise, broad interests and alert attention to detail, he has contributed to the Board for fifteen years; we shall miss him and wish him well for the future. I am pleased to report that James Nelson has agreed to take on the role of Senior Independent Director.

Mary Ann Sieghart was appointed to the Board in July 2008. She is well known as a journalist and commentator and was Assistant Editor of The Times until last year. I am delighted that she has joined us. She is new to investment trusts and so brings a fresh, independent and enquiring mind that adds diversity to the Board.   

Investment policy

The UKLA Listing Rules now allow investment trust companies to use short selling to enhance portfolio returns. The Board has concluded that the Company should be positioned to benefit from this.

The primary benefits of using these instruments will result from selling short the shares of companies that the Manager believes are overvalued or which have flawed business models and are likely to fall in value. Additionally, it will allow more flexibility in managing the Company's gearing.

We are therefore proposing that the Company's investment policy be modified to allow the Manager to invest in short positions, including financial derivative instruments such as CFDs (contracts for difference). This will enhance the range of tools that the Manager has available with which to maximise returns for shareholders. In the near term at least, this will be an enabling measure: our future will continue to be based on a portfolio of long term investments, actively managed to outperform the market. Shareholder approval of the new policy will be sought by means of an ordinary resolution at the Annual General Meeting. 

Management and performance fees

The Board and the Manager have reviewed the management fee arrangements for the three-year period beginning on 1 June 2008. We have agreed to leave the base management fee unchanged (at 0.35% per annum of the assets under management) but will increase the incentive that the performance fee arrangements are intended to provide. The changes are an increase in the cap on the total management fees payable in any one accounting year, from 1.0% to 1.5% of the Company's average net assets, and an increase in the cash cap from £2 million to £4 million. We have also agreed to pay a performance fee for out-performance in years when absolute performance is negative (but at two thirds of the rate that would otherwise apply and subject to a cap of 1.2% of average net assets). These changes reflect the Board's focus on long term out-performance of the benchmark. Shareholder approval of these changes will be sought by means of an ordinary resolution at the Annual General Meeting.

MANAGEMENT REPORT, continued 

Articles of Association

We are proposing to adopt new Articles of Association that reflect the changes to company law made by the Companies Act 2006, some important provisions of which come into effect on 1 October 2008. Shareholder approval of the new Articles will be sought by means of a special resolution at the Annual General Meeting. 

It is our intention to offer investors an attractive and efficient means of investing in UK smaller companies. We have a good track record with a 162.8% total return over the past five full years that our Fund Manager has been in place. In bad times we aim to do better than our competitors; and likewise in good times. That is why you invest in this Trust.

Fund Manager's Review

Market - year in review

After four years of excellent returns, both in a relative and an absolute sense, the year under review turned out to be a difficult one. The emergence of a global credit crunch, a run on and subsequent nationalisation of a major UK High Street bank, rapidly escalating oil and food prices and faltering Western economies provided a poor backdrop for equity markets. Unsurprisingly in this environment smaller companies had a tough time and underperformed large companies by over 12%.

Fund performance

The Trust had a mixed year in performance terms - falling in absolute terms but outperforming on a relative basis. The net asset value fell 18.6%, on a total return basis, which comes after a 224.4% rise over the previous four years. This compares to a fall of 21.2% (total return) from the Hoare Govett Smaller Companies Index (exluding investment companies) and 30.6% (total return) from the FTSE SmallCap Index (exluding investment companies). The Trust benefited from a combination of underlying positive portfolio performance and net asset value enhancing buy-backs. Gearing in the Trust was a negative contributor. The year under review was the fifth consecutive year of outperformance of our benchmark, the Hoare Govett Smaller Companies Index (excluding investment companies), during which period the Trust has produced total returns of 162.8% and outperformance of 48.5%.

In terms of positive contributors to fund performance, we saw excellent performances from Wellstream, the manufacturer of flexible pipes for the oil industry, Playtech, a provider of software for the on-line gaming industry, and John Wood Group, the oil service company. These companies all produced strong earnings growth above market expectations. Our holdings in Expro International, the oil service company, and Enodis, the catering equipment manufacturer, also saw big gains after takeover bids. W S Atkins, the engineering consultancy, performed strongly after it removed itself from running part of the London Underground, which allowed the market to appreciate strong trading at its core operations. International Ferro Metals rose 49% after the company began production and the price of ferro-chrome, its key output, rose sharply.

MANAGEMENT REPORT, continued 

Our exposure to stocks involved in the UK housing market proved to be a negative drag on performance. Housebuilders Bellway and Bovis, as well as buy to let mortgage provider Paragon and residential property investor Grainger Trust, all had disappointing years. The housing market has clearly deteriorated farther and faster than we expected and the outlook is for further price declines. The share prices of these companies, in our view, now reflect much of the potential downside and we intend holding on for the recovery. Additionally Informa, the business to business information provider and publisher, fell 32% as the market grew concerned over the vulnerability of profitability in a cyclical downturn and the company's high level of debt. We believe these fears are overstated and Informa will prove far more resilient than feared. 

Portfolio Activity

Trading activity in the portfolio implies an average holding period of five years. This is consistent with our approach which 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 cut out stocks that fail to meet these criteria.

In the year we have added to a number of existing positions in our portfolio. These include Melrose, the engineering conglomerate, Intermediate Capital, a provider of mezzanine finance to the LBO market, Victrex, a manufacturer of speciality chemicals, and WSP, an international engineering consultancy. All these companies have strong prospects which should lead to strong share price performance in the coming year.

New additions to our portfolio included:-

Care UK - this company provides health and social care services. The company develops and operates purpose-built nursing homes for the frail, elderly, mentally ill and for those with learning disabilities under long term contracts with Health Authorities and Social Services. This is a company we have tracked for some time, attracted by its strong and steady growth, defensive earnings profile and asset backing. A U-turn by the Government on the award of independent sector treatment centre contracts caused its share price to fall and provided us with an attractive entry point.

Croda - this company manufactures a diverse range of chemical and chemical products, including oleo and industrial chemicals. Croda acquired Uniqema in June 2006 from ICI which significantly boosted its position in oleo chemicals (used in personal care products). This deal has been a huge success, with Croda's excellent management team improving returns at Uniqema significantly. More synergy benefits from the deal are anticipated, boosting growth.

MANAGEMENT REPORT, continued

Oxford Instruments - this company produces advanced instrumentation equipment. Its products are used for scientific research, industrial and chemical analysis and diagnostic imaging. The company has always had an excellent reputation for technical excellence and innovation but had failed to translate this into financial success. A recent change of management has re-invigorated the business and has set an ambitious five year plan to grow sales significantly whilst improving margins materially. We believe these targets are achievable, providing material upside to the share price.

Senior - this company manufactures specialist engineering products for use in the aerospace, automotive and industrial markets. Products include flexible tubing, fluid transfer devices, de-icing systems and components for jet engines. Senior has an impressive track record and with strong trading momentum, full order books and exposure to growing aerospace programmes the future looks bright.

As well as making new investments we sold positions in companies that no longer fit our stringent quality threshold. In particular sales were made where our expectations for the company have not been fulfilled, such as Carter and Carter where a shock profit warning raised concerns over management control of the business, the pace of acquisitive activity and cashflow. The sale proved timely as the company subsequently went into receivership. We also sold our holding in Game Group, the electronic games retailer, where, although current trading is very buoyant, we are concerned that an increase in competition and a turndown in the games cycle will hit profitability.

Strong IPO (initial public offering) activity has been a feature of the UK market in the past few years. This reflects a desire for venture capitalists to trade on their more successful investments and a rush of new, young companies looking to raise capital for expansion. In the past year IPO activity has tailed off, especially as market conditions have become more difficult. IPOs that the Trust participated in included Eaga, a company which helps cut energy poverty among the most economically disadvantaged portion of the UK population, CVS Holdings, a veterinary chain, GlobeOp Financial Services, a provider of back office services to the hedge fund industry, and Valiant Petroleum, a North Sea oil and gas explorer and developer.

Although market conditions and the ability to raise debt have worsened over the year, take-over activity has remained strong across the small and mid cap space. This has come from a combination of foreign and UK corporates and private equity and reflects, to some extent, the openness of the UK stock market. The Trust benefited from the following completed bids during the year:-

Coda (acquired by Unit 4 Aggresso -  Holland)

Fun Technologies (acquired by Liberty Media - US)

Glotel (acquired by Spring Group - UK)

Gyrus (acquired by Olympus - Japan)

Inspicio (acquired by 3i - UK Private Equity)

Sondex (acquired by GE - US)

Umbro (acquired by Nike - US)

MANAGEMENT REPORT, continued 

Market outlook

In last year's market outlook we expressed some concern over the short term outlook for the market. However, we were clearly not cautious enough. As the year progressed the newsflow became steadily worse, with the US sub-prime mortgage crisis progressing to a fully fledged credit crisis. This combined with rampant commodity prices, a weakening housing market and a consumer under significant pressure has led to a steadily weakening economic environment. US and UK economic growth is slowing rapidly. Western European economies are holding up better (with the exceptions of Spain and Ireland) whist the emerging economies of Asia Pacific, India and Eastern Europe so far remaining relatively unscathed.

It is difficult to be positive about the economic situation in the short term. The rise in inflation is limiting central banks' ability to cut interest rates. Therefore there is little prospect of relief for the hard pressed consumer, especially given the weakness of the housing market and the rise in input costs. In addition there is little ability for the UK Government to provide a fiscal stimulus given the poor state of public finances. The UK economy is therefore likely to remain weak for the foreseeable future. In this environment, with weakening demand and input cost rises, corporate profitability will be under pressure. We will continue to ensure that the investments we make are in sound companies with strong balance sheets. Areas such as healthcare, exporters that are exposed to emerging economies and companies with long visible order books will be prime areas of focus. 

However there are reasons to be positive. The fundamentals for smaller companies remain sound. Valuations are attractive and certainly a lot cheaper than a year ago, although not at a discount to large caps. Corporate balance sheets and cashflows are in generally good order. Meanwhile there continues to be corporate activity, with foreign corporates in particular looking to pick up bargains in the quoted sector. 

In conclusion, whilst recognising this may be a difficult year for the economy, a well selected portfolio of UK smaller companies will provide a reasonable return. Our investments are generally trading well, are soundly financed and attractively valued. Additionally the small cap market continues to throw up exciting growth opportunities into which the Trust can invest. Whilst it is right to be cautious over short term prospects, I am optimistic on a medium term view.

Analysis of the portfolio by sector	31 May 2008 %		31 May 2007 %
Industrials	47.9		44.7
Financials	11.5		15.2
Consumer Services	10.6		13.8
Technology	9.7		9.5
Oil & Gas	7.4		5.0
Basic Materials	6.6		2.8
Health Care	3.3		3.8
Consumer Goods	3.0		5.2
	100.0		100.0

Investment Portfolio

Valuation as at					Valuation as at
31 May 2008			% of		31 May 2008			% of
	£'000		portfolio			£'000		portfolio
WSP	10,650		3.71		ITE Group	1,768		0.62
W S Atkins	9,794		3.41		Southern Cross Healthcare	1,747		0.61
Informa	9,414		3.28		Robert Walters	1,735		0.60
Interserve	7,875		2.75		Euromoney Institutional Investor	1,723		0.60
Domino Printing	7,224		2.52		Senior	1,673		0.58
Spectris	6,772		2.36		Venture Production	1,663		0.58
Balfour Beatty	6,217		2.17		Consort Medical	1,650		0.58
International Ferro Metals	6,080		2.12		Rathbone Brothers	1,625		0.56
Laird	5,704		1.99		Speedy Hire	1,592		0.55
Intermediate Capital	5,689		1.98		Greene King	1,566		0.55
10 largest	75,419		26.29		70 largest	240,913		83.99
Carillion	5,348		1.86		Ricardo	1,517		0.53
Wellstream	4,879		1.70		Halford	1,515		0.53
Mouchel	4,767		1.66		* ACP Capital	1,483		0.52
Victrex	4,707		1.64		Bluebay Asset Management	1,435		0.50
Premier Oil	4,647		1.62		EAGA	1,400		0.49
Bellway	4,230		1.48		John Menzies	1,384		0.48
Aviva	4,100		1.43		Hampson Industries	1,349		0.47
Phoenix	3,910		1.36		Chrysalis	1,314		0.46
Expro International	3,878		1.36		* Valiant Petroleum	1,304		0.45
Rotork	3,859		1.35		Telecity	1,265		0.44
20 largest	119,744		41.75		80 largest	254,879		88.86
Anite	3,856		1.34		* CVS	1,265		0.44
* Synergy Healthcare	3,715		1.30		Morgan Sindall	1,250		0.44
SIG	3,685		1.29		* Just Retirement	1,248		0.44
E2V Technologies	3,625		1.26		GlobeOp Financial Services	1,213		0.42
VT Group	3,597		1.25		* Hansteen	1,212		0.42
Charter	3,537		1.23		UTV Media	1,199		0.42
RPS	3,496		1.22		Kofax	1,129		0.39
BSS Group	3,411		1.19		Tribal	1,119		0.39
Croda	3,295		1.15		* Shed Media	1,117		0.39
* Playtech	3,163		1.10		* Goals Soceer Centres	1,117		0.39
30 largest	155,124		54.08		90 largest	266,748		93.00
Ultra Electronic	3,055		1.06		Oxford Instruments	1,102		0.38
Enodis	3,040		1.06		* The Clapham House	1,099		0.38
Costain	2,943		1.03		RM	1,055		0.37
Chemring	2,934		1.02		Hansard	1,044		0.37
Chloride	2,899		1.01		Kenmare Resources	983		0.34
Melrose	2,720		0.95		* Carluccios	979		0.34
Shaftesbury	2,634		0.92		Psion	959		0.33
Capital & Regional Properties	2,514		0.88		Aberdeen Asset Management	937		0.33
Grainger	2,408		0.84		Jarvis	875		0.31
Imperial Energy	2,401		0.84		Raymarine	859		0.30
40 largest	182,672		63.69		100 largest	276,640		96.45

Investment Portfolio, continued:

Bovis Homes	2,398		0.83		Chime Communications	839		0.29
* RWS Holdings	2,359		0.82		* Majestic Wine	836		0.29
NCC Group	2,310		0.81		DTZ Holdings	834		0.29
Big Yellow	2,272		0.79		Ted Baker	834		0.29
John Wood	2,230		0.78		Hargreaves Landsdown	824		0.29
Restaurant Group	2,171		0.76		* Augean	774		0.27
Paragon	2,113		0.74		LSL Property Services	707		0.24
Meggitt	2,087		0.73		* Next Fifteen Communications	686		0.24
Fidessa	2,078		0.72		New Star Asset Management	677		0.24
Savills	2,050		0.71		Northgate	676		0.24
50 largest	204,740		71.38		110 largest	284,327		99.13
Babock International	2,028		0.71		Ennstone	609		0.21
Forth Ports	2,019		0.70		Superglass Holdings	474		0.17
Keller	1,992		0.69		* Proximagen Neuroscience	457		0.16
Gem Diamonds	1,984		0.69		Topps Tiles	439		0.15
Renishaw	1,971		0.69		* Powerleague	426		0.15
* IBS Opensystems	1,955		0.69		* Pure Wafer	87		0.03
Talvivaara Mining	1,900		0.67
CSR	1,890		0.66		TOTAL	286,819		100.00
Headlam	1,878		0.65
Care UK	1,814		0.63
60 largest	224,171		78.16

There were no convertible or fixed interest securities at either 31 May 2008 or 31 May 2007.

*quoted on the Alternative Investment Market

The ten largest holdings at 31 May 2008 were all constituents of the portfolio at 31 May 2007 but were not all among the ten largest holdings at that date. 

MANAGEMENT REPORT, continued

Related Party Transactions

During the year ended 31 May 2008, no transactions with related parties took place that have materially affected the financial position or performance of the Company.  However, since the year end the Board and the Manager (Henderson Global Investors Limited) have agreed changes to the terms of the arrangements by which the Manager is rewarded for investment outperformance. 

Subject to shareholder approval at the Annual General Meeting, these changes will apply from 1 June 2008. The remaining terms of the fee arrangements with the Manager are to remain unchanged.

Principal Risks and Uncertainties

With the assistance of the Manager the Board has drawn up a risk matrix which identifies the key risks to the Company. These key risks fall broadly under the following categories:

Investment Activity and Strategy

An inappropriate investment strategy (for example, in terms of asset allocation or the level of gearing) may lead to underperformance against the Company's benchmark index and the companies in its peer group; it may also result in the Company's shares trading on a wider discount.  The Board manages these risks by ensuring a diversification of investments and a regular review of the extent of borrowings. The Manager operates in accordance with investment limits and restrictions determined by the Board; these include limits on the extent to which borrowings may be used. The Board reviews its investment limits and restrictions regularly and the Manager confirms its compliance with them each month. The Manager provides the directors with management information, including performance data and reports and shareholder analyses. The Board monitors the implementation and results of the investment process with the Fund Manager, who attends all board meetings, and reviews regularly data that monitors risk factors in respect of the portfolio. The Board reviews investment strategy at each Board meeting.

Portfolio and Market

Market risk arises from uncertainty about the future prices of the Company's investments. 

Accounting, Legal and Regulatory 

In order to qualify as an investment trust the Company must comply with section 842 of the Income and Corporation Taxes Act 1988 ('section 842'). A breach of section 842 could result in the Company losing investment trust status and, as a consequence, capital gains realised within the Company's portfolio would be subject to Corporation Tax. The section 842 criteria are monitored by the Manager and the results are reported to the directors at each Board meeting. The Company must comply with the provisions of the Companies Act 1985, and the Companies Act 2006 as it becomes enacted ('the Companies Acts'), and, as the Company's shares are listed for trading on the London Stock Exchange, the Company must comply with the UK Listing Authority's Listing Rules and Disclosure Rules ('UKLA Rules'). A breach of the Companies Acts could result in the Company and/or the directors being fined or becoming the subject of criminal proceedings. Breach of the UKLA Rules could result in the suspension of the Company's shares which would in turn lead to a breach of section 842. The Board relies on its company secretary and its professional advisers to ensure compliance with the Companies Acts and UKLA Rules.

MANAGEMENT REPORT, continued

Corporate Governance and Shareholder Relations

The Board seeks to reduce the risks arising from poor corporate governance by complying with best practice in this respect. The Board seeks to maintain open communications with shareholders.  

Operational and Financial

Disruption to, or failure of, the Manager's accounting, dealing or payment systems or the Custodian's records could prevent the accurate reporting and monitoring of the Company's financial position.  The Manager, Henderson Global Investors Limited, has contracted some of its operational functions, principally those relating to trade processing, investment administration and accounting, to BNP Paribas Fund Services UK Limited. The Board monitors the services provided by the Manager and its other suppliers, and the key elements designed to provide effective internal control. 

Directors Responsibility Statement under DTR 4.1.12
The directors of the Company each confirm to the best of their knowledge that:

(a) the financial statements, prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the subsidiary undertaking included in the consolidation taken as a whole; and

(b) the management report includes a fair review of the development and performance of the business and the position of the Company and the subsidiary undertaking included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

For and on behalf of the Board

J Dudley Fishburn

Chairman

12 August 2008

Consolidated Income Statement

for the year ended 31 May 2008

	Year ended 31 May 2008			Year ended 31 May 2007
	Revenue return	Capital return	Total	Revenue return	Capital return	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Investment income	7,086	-	7,086	6,654	-	6,654
Other income	108	-	108	148	-	148
(Losses)/gains on investments held at fair value through profit or loss	-	(70,417)	(70,417)	-	97,162	97,162
	----------	----------	----------	----------	----------	----------
Total income/(loss)	7,194	(70,417)	(63,223)	6,802	97,162	103,964
Expenses
Management and performance fees	(1,156)	-	(1,156)	(1,342)	(2,350)	(3,692)
Write -back of VAT	1,312	437	1,749	-	-	-
Other expenses	(373)	-	(373)	(371)	-	(371)
	---------	----------	---------	---------	----------	---------
Profit/(loss) before finance costs and
taxation	6,977	(69,980)	(63,003)	5,089	94,812	99,901
Finance costs	(3,109)	-	(3,109)	(3,133)	-	(3,133)
	---------	---------	--------	---------	---------	--------
Profit/(loss) before taxation	3,868	(69,980)	(66,112)	1,956	94,812	96,768
Taxation	-	-	-	-	-	-
	---------	----------	----------	----------	---------	--------
Profit/(loss) for the year	3,868	(69,980)	(66,112)	1,956	94,812	96,768
	======	======	======	======	======	=====
Earnings/(loss) per ordinary share  (note 2)	4.64p	(83.96)p	(79.32)p	2.12p	102.59p	104.71p
	======	======	=====	======	======	=====

The total column of this statement represents the Group's Income Statement, prepared in accordance with IFRS.  

The revenue return and capital return columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies. 

All items in the above statement derive from the continuing operations.

All income is attributable to the equity holders of The Henderson Smaller Companies Investment Trust plc, the parent company.  There are no minority interests. 

Consolidated and Parent Company Statements of Changes in Equity 

for the year ended 31 May 2008

	Consolidated Year ended 31 May 2008
	Called up share  capital £'000	Capital  redemption  reserve  £'000	Other  capital  reserves  £'000	Revenue reserve  £'000	Total £'000
Balance at 31 May 2007	21,657	23,759	287,650	6,634	339,700
Buy-backs of ordinary shares	(1,544)	1,544	(16,684)	-	(16,684)
(Loss)/profit for the year	-	-	(69,980)	3,868	(66,112)
Ordinary dividend paid	-	-	-	(1,433)	(1,433)
	----------	----------	----------	----------	----------
Balance at 31 May 2008	20,113	25,303	200,986	9,069	255,471
	======	======	======	======	======
	Consolidated Year ended 31 May 2007
	Called up share  capital £'000	Capital  redemption  reserve  £'000	Other  capital  reserves  £'000	Revenue  reserve £'000	Total £'000
Balance at 31 May 2006	25,047	20,369	229,525	6,012	280,953
Buy-backs of ordinary shares	(3,390)	3,390	(36,687)	-	(36,687)
Profit for the year	-	-	94,812	1,956	96,768
Ordinary dividend paid	-	-	-	(1,334)	(1,334)
	----------	----------	----------	----------	----------
Balance at 31 May 2007	21,657	23,759	287,650	6,634	339,700
	======	======	======	======	======
	Company Year ended 31 May 2008
	Called up share  capital £'000	Capital  redemption  reserve  £'000	Other  capital  reserves  £'000	Revenue reserve £'000	Total £'000
Balance at 31 May 2007	21,657	23,759	289,917	4,367	339,700
Buy-backs of ordinary shares	(1,544)	1,544	(16,684)	-	(16,684)
(Loss)/profit for the year	-	-	(69,980)	3,868	(66,112)
Ordinary dividend paid	-	-	-	(1,433)	(1,433)
	----------	----------	----------	----------	----------
Balance at 31 May 2008	20,113	25,303	203,253	6,802	255,471
	======	======	======	======	======
	Company Year ended 31 May 2007
	Called up share  capital £'000	Capital  redemption  reserve  £'000	Other  capital  reserves  £'000	Revenue reserve £'000	Total £'000
Balance at 31 May 2006	25,047	20,369	231,792	3,745	280,953
Buy-backs of ordinary shares	(3,390)	3,390	(36,687)	-	(36,687)
Profit for the year	-	-	94,812	1,956	96,768
Ordinary dividend paid	-	-	-	(1,334)	(1,334)
	----------	----------	----------	----------	----------
Balance at 31 May 2007	21,657	23,759	289,917	4,367	339,700
	======	======	======	======	======

Consolidated and Parent Company Balance Sheets

at 31 May 2008

	Consolidated 2008 £'000	Consolidated 2007 £'000	Company 2008 £'000	Company 2007 £'000
Non current assets
Investments held at fair value through
profit or loss	286,819	380,616	289,084	382,883
	-----------	-----------	-----------	-----------
Current assets
Other receivables	3,290	1,932	3,290	1,932
Cash and cash equivalents	672	1,360	672	1,360
	----------	----------	----------	----------
	3,962	3,292	3,962	3,292
	----------	----------	----------	----------
Total assets	290,781	383,908	293,046	386,175
	----------	----------	----------	----------
Current liabilities
Other payables	(1,806)	(4,153)	(4,071)	(6,420)
Bank loans	(13,500)	(20,046)	(13,500)	(20,046)
	----------	----------	----------	----------
	(15,306)	(24,199)	(17,571)	(26,466)
	----------	----------	----------	----------
Total assets less current liabilities	275,475	359,709	275,475	359,709
Non current liabilities
Financial liabilities	(20,004)	(20,009)	(20,004)	(20,009)
	----------	----------	----------	----------
Net assets	255,471	339,700	255,471	339,700
	======	======	======	======
Equity attributable to equity shareholders
Called up share capital	20,113	21,657	20,113	21,657
Capital redemption reserve	25,303	23,759	25,303	23,759
Retained earnings
Other capital reserves	200,986	287,650	203,253	289,917
Revenue reserve	9,069	6,634	6,802	4,367
	----------	----------	-----------	-----------
Total equity	255,471	339,700	255,471	339,700
	======	======	======	======
Net asset value per ordinary share	317.6p	392.1p	317.6p	392.1p
	======	======	======	======

Consolidated and Parent Company Cash Flow Statements

for the year ended 31 May 2008 

	Year ended 31 May 2008		Year ended 31 May 2007
	Consolidated £'000	Company £'000	Consolidated £'000	Company £'000
Operating activities
(Loss)/profit before taxation	(66,112)	(66,112)	96,768	96,768
Add: interest paid	3,110	3,110	3,128	3,128
Add: losses/(gains) on investments held at fair value
through profit or loss	70,417	70,417	(97,162)	(97,162)
Add: net sales of investments held
at fair value though profit or loss	23,409	23,409	34,213	34,213
Increase in other receivables	(1,752)	(1,752)	(158)	(158)
Decrease in amounts due from brokers	405	405	494	494
(Decrease)/increase in other payables	(2,423)	(2,423)	1,793	1,793
Increase in amounts due to brokers	76	76	1,363	1,363
Taxation on investment income	(11)	(11)	(2)	(2)
Net cash inflow from operating	---------	----------	---------	----------
activities before interest and taxation	27,119	27,119	40,437	40,437
Interest paid	(3,110)	(3,110)	(3,128)	(3,128)
	---------	----------	---------	----------
Net cash inflow from operating activities	24,009	24,009	37,309	37,309
	---------	----------	---------	----------
Financing activities
Equity dividend paid	(1,433)	(1,433)	(1,334)	(1,334)
Buy-backs of ordinary shares	(16,739)	(16,739)	(36,615)	(36,615)
(Repayment)/ drawn down of loans	(6,546)	(6,546)	1,046	1,046
Repurchase of preference stock	(5)	(5)	-	-
	---------	--------	---------	--------
Net cash outflow from financing	(24,723)	(24,723)	(36,903)	(36,903)
	---------	----------	---------	----------
(Decrease/)increase in cash and cash equivalents	(714)	(714)	406	406
Cash and cash equivalents at the start of the year	1,360	1,360	958	958
Exchange movements	26	26	(4)	(4)
	---------	--------	---------	--------
Cash and cash equivalents at the end of the year	672	672	1,360	1,360
	=====	=====	=====	=====

Notes to the Financial Statements

1.		Accounting Policies
	(a)		Basis of preparation The consolidated and parent company financial statements for the year ended 31 May 2008 have been prepared in accordance with International Financial Reporting Standards ('IFRS') and with those parts of the Companies Act 1985 applicable to companies reporting under IFRS. These comprise standards and interpretations approved by the International Accounting Standards Board ('IASB'), together with interpretations of the International Accounting Standards and Standing Interpretations Committee approved by the International Accounting Standards Committee ('IASC') that remain in effect, to the extent that IFRS have been adopted by the European Union. The financial statements have been prepared on a going concern basis on the historical cost basis, except for the revaluation of certain financial instruments. The principal accounting policies adopted are set out in the Company's Report and Accounts for the year ended 31 May 2008. Where presentational guidance set out in the Statement of Recommended Practice ('the SORP') for investment trusts issued by the Association of Investment Companies ('the AIC') in December 2005 is consistent with the requirements of IFRS, the directors have sought to prepare the financial statements on a basis consistent with the recommendations of the SORP.

	(b)		Basis of consolidation  The Group accounts consolidate the accounts of the Company and of its sole wholly owned subsidiary undertaking, Henderson Smaller Companies Finance Limited. The inter-group balances are eliminated on consolidation. The investment in the subsidiary is recognised at fair value in the financial statements of the Company.
2.		(Loss)/earnings per ordinary share The earnings per ordinary share figure is based on the net losses for the year of £66,112,000 (2007: gains of £96,768,000) and on 83,350,298 (2007: 92,418,217) ordinary shares, being the weighted average number of ordinary shares in issue during the year. The earnings per ordinary share figure detailed above can be further analysed between revenue and capital, as below. The Company has no securities in issue that could dilute the return per ordinary share. Therefore the basic and diluted earnings per ordinary share are the same.

		2008	2007
		£'000	£'000
	Net revenue profit	3,868	1,956
	Net capital (loss)/profit	(69,980)	94,812
		--------	--------
	Net total (loss)/profit	(66,112)	96,768
		=====	=====
	Weighed average number of
	ordinary shares in issue during
	the year	83,350,298	92,418,217
		========	========
		pence	pence
	Revenue earnings per ordinary
	share	4.64	2.12
	Capital (losses)/earnings per ordinary
	share	(83.96)	102.59
		---------	---------
	Total (losses)/earnings per ordinary share	(79.32)	104.71
		=====	=====

3.	Ordinary share capital  At 31 May 2008 there were 80,449,030 ordinary shares in issue (2007: 86,626,030). During the year ended 31 May 2008 the Company made market purchases for cancellation of 6,177,000 of its own issued ordinary shares (2007: 13,560,252).
4.	Net asset value per ordinary share The net asset value per ordinary share is based on the net assets attributed to the ordinary shares of £255,471,000 (2007: £339,700,000) and on the 80,449,030 ordinary shares in issue at 31 May 2008 (2007: 86,626,030). A further 998,984 shares were bought back for cancellation between 31 May 2008 and 12 August 2008.

5.	Dividends       Subject to approval at the annual general meeting, the recommended final dividend of 2.20p       per ordinary share and the special dividend of 1.60p per ordinary share will be paid on 3       October 2008 to shareholders on the register of members at the close of business on 29 August       2008.
6.	2008 financial statements         This condensed set of financial statements for the year ended 31 May 2008 does not         constitute the statutory accounts for that period.  It is extracted from the Group's financial         statements for the year, which have been audited but which not yet been delivered to the         Registrar of Companies.
7.	2007 Financal statements       The figures and financial information for the year ended 31 May 2007 are an extract of the       published financial statements and do not constitute the statutory accounts for that year. Those       accounts have been delivered to the Registrar of Companies and included the report of the       auditors which was unqualified and did not contain a statement under either section 237(2) or       section 237(3) of the Companies Act 1985.
8.	Annual report, circular and AGM       The full annual report and accounts will be posted to shareholders in the second half of August       2008 and copies will be available thereafter from the Secretary at the Company's Registered       Office, 4 Broadgate, London EC2M 2DA.        The Annual General Meeting will be held on Friday 26 September 2008 at 11.30 am.       Website

   9.          This document, and the financial statements referred to in notes 6 and 7, will be available on the following
                website: www.itshenderson.com or www.hendersonsmallercompanies.com

For further information please contact:

Neil Hermon
Fund Manager
The Henderson Smaller Companies Investment Trust plc
Telephone: [phone]

James de Sausmarez

Head of Investment Trusts

Henderson Global Investors

Telephone: [phone]

Sarah Gibbons-Cook
Investor Relations and PR Manager
Henderson Global Investors
Telephone: [phone]

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