Small caps main driver for Lowland trust
Mr Henderson, fund manager and director of value and income at Henderson Global Investors, said the third of the portfolio in smaller company stocks, particularly recovery situations, had performed strongly.
He said: "Other people are going to small caps usually solely for capital growth, but there are a lot of decent smaller companies that are never going to be FTSE 100 companies and have no ambition to be. That kind of company often trades at a discount to its inherent value because it’s never going to be an exciting growth stock.
"If you are paying attention to the area then you have an advantage because there is systematic underpricing of that type of business at various times in the market."
The investment trust, currently ranked second in the AIC UK Growth and Income sector, produced a net asset value total return of 44.7 per cent in the year to June 3 2011, compared with 27 per cent from the average trust in the sector, according to Morningstar.
Mr Henderson said p/e ratings of stocks with below £100m market cap were low, yet earnings and dividend growth could be very good.
"What is happening at the moment is people are not looking at companies below £150-200m and this is a good place to be paying attention. Lowland has 8 per cent in Aim stocks at the moment, and that is in this area which I think is neglected and under-researched."
He also argued performance of small-cap stocks could continue for longer than people might expect.
"You have to resist the temptation to take profits too early - the upswing in these things can go on for much longer, as the operational gearing in them is greater than you ever envisage. These companies are going to come through over the next few years, so actually turnover is pretty low at the moment."
The manager said he was unlikely to look overseas for investment opportunities as there was still plenty in the UK, particularly in the industrials space, which accounted for approximately 33 per cent of Lowland's portfolio, including 11 per cent in aerospace and defence.
He argued although developing markets were growing at a fast pace, these regions still needed expertise in areas such as aerospace, which only developed markets could provide.
"That's throwing up real opportunities. The ratings are undemanding and we're going to see further surprises I think on margin expansion and profits," he added.