In managing The Henderson Smaller Companies Investment Trust strategy, I tend to take a step back from short-term macroeconomic concerns and the resulting gyrations in the markets and instead focus on the opportunities created.  What is apparent to me, is that there are advantages from the current market volatility, particularly in the mid- cap space with investment opportunities in online gaming, challenger banks and healthcare.

Deal or no Deal

Online gaming continues to be a successful area of investment for the strategy. This sub-sector has generally enjoyed strong growth, high profit margins and solid cash generation; characteristics to which we are naturally drawn.

According to a recent Solitaire Cash review, Playtech provides software and analytics to the vast majority of the online gaming industry, discover more now. Its leadership in technology, customer relationship management (CRM) and analytics has enabled it to build a powerful market position with significant pricing power in a growing industry.

Management has recently made a number of acquisitions of trading platforms such as Plus500 and TradeFX that deal in contracts-for-difference (CFD) – an agreement between two parties to pay the difference between the opening and closing price of a specified financial instrument. This is another fast growing and high margin area where Playtech should be able to apply its core technology and CRM expertise. The company’s current valuation looks compelling to us, as does its strong balance sheet and the multiple channels it earns money.

Facing a challenge 

The UK high street has been dominated by a handful of large retail banks for a number of years but this is slowly changing to increase competition in the banking sector, encouraged by the financial regulators and the government as well as businesses and retail customers who are increasingly looking beyond the traditional high street banks. This dynamic has created a number of exciting investment opportunities in challenger banks.

We first invested in Aldermore Group during its March 2015 initial public offering. It has proved to be a good investment with strong loan book growth, driven by asset finance and buy-to-let mortgages; areas underserved by the ‘big banks’. We believe profit margins should continue to remain resilient, helped by their efficient online deposit-taking model, and for write-downs to remain benign.

Caring overseas

There are a handful of companies listed on the FTSE 250 whose only connection to the UK is the geography of their listing and the corporate governance regime in which they operate. NMC Health is a good example of this. NMC owns a number of hospitals and clinics across the United Arab Emirates. These are seeing very strong growth in demand, driven by ageing populations and the increasing prevalence of mandatory employer-provided health insurance in these business regions. We think the stock’s valuations do not yet reflect the structural organic growth opportunity nor the potential for further consolidation in attractive end-markets.

An opportune time

Many investors have been fixated on the slowdown in the Chinese economy, the knock-on impact on other emerging markets and the interlinked concern of impending monetary tightening in the US. While keeping a watchful eye on macroeconomic concerns, we prefer to focus most of our time on identifying attractive investment opportunities created by these periods of market dislocation.

Neil Hermon is fund manager of The Henderson Smaller Companies Investment Trust plc

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