HENDERSON INVESTMENT FUNDS LIMITED

THE HENDERSON SMALLER COMPANIES INVESTMENT TRUST PLC

LEGAL ENTITY IDENTIFIER: 213800NE2NCQ67M2M998

THE HENDERSON SMALLER COMPANIES INVESTMENT TRUST PLC

ANNUAL FINANCIAL RESULTS FOR THE YEAR ENDED 31 MAY 2021

This announcement contains regulated information.

18^th consecutive year of dividend increase and outperforming again for the 16^th year in the last 18 years

KEY HIGHLIGHTS

The Henderson Smaller Companies Investment Trust plc has outperformed its benchmark by 4.4% (on a NAV total return basis) and is increasing its final dividend to 16.75p per share (2020: 16.50p), leading to a dividend increase for the year.

Neil Hermon, Fund Manager, said:

"The Company had an excellent year of performance, rising significantly in absolute terms and materially outperforming its benchmark. This marks the 16^th year of outperformance in the 18 years I have been managing the portfolio, and it is also the 18^th consecutive year of dividend increase."

INVESTMENT OBJECTIVE

The Company aims to maximise shareholders' total returns (capital and income) by investing in smaller companies that are quoted in the United Kingdom.

PERFORMANCE

1 Net asset value ("NAV") per ordinary share total return with income reinvested

2 Share price total return using mid-market closing price with income reinvested

3 Numis Smaller Companies Index (excluding investment companies) total return

4 Average NAV total return of the AIC UK Smaller Companies sector

5 Average share price total return of the AIC UK Smaller Companies sector

6 Calculated using the NAV and mid-market share price at year end

7 This represents an interim dividend of 7.00p and a proposed final dividend of 16.75p, subject to shareholder approval at the AGM

8 Based on the ordinary dividends paid and payable for the year and the mid-market share price at year end

A glossary of terms and explanations of alternative performance measures are included in the Annual Report.

Sources: Morningstar Direct, Janus Henderson, Refinitiv Datastream

CHAIRMAN'S STATEMENT

I am very pleased to report that the optimism I expressed in my half-year report has proved to be well founded. The recovery in your Company's share price and net asset value continued through the second half of the year resulting in significant outperformance against our benchmark. This is the eighteenth consecutive year in which we have increased our total dividend. The vaccine rollout in the UK has proved to be swifter and more efficient than in most other countries and this has stimulated a fast recovery for UK smaller companies. Even more pleasing is the long-term performance track record of your Company. Since Neil Hermon was appointed as the lead Fund Manager, your Company has outperformed its benchmark in 16 of the past 18 years. Performance over the last ten years, during which I have had the honour of being your Chairman, has been particularly impressive. The annualised net asset value ("NAV") total return over that period has been 15.2%, outperforming the benchmark average by 5.0% per annum. The consistency of this outperformance reflects the quality of the investment style and approach of Neil Hermon and his team, Indriatti van Hien and Shivam Sedani.

Performance

Your Company performed very well in the year under review with a NAV total return of 58.5% outperforming our Numis Smaller Companies Index benchmark by 4.4%. This performance also compared favourably with the AIC UK Smaller Companies sector average which returned 49.4%. The share price total return was even better at 69.3%, reflecting a narrowing of the share price discount to NAV.

Revenue and dividend

The total revenue received from your Company's portfolio fell from £14.2m to £12.3m over the year as investee companies cut their dividends in response to the challenges of the pandemic. Your Board believes that as the UK economy continues to recover, the level of dividend income will return to previous levels.

Notwithstanding this lower level of income received, your Board proposes to continue its record of increasing the annual dividend each year in light of the improving outlook. Accordingly, your Board is pleased to recommend a final dividend of 16.75p per share (2020: 16.50p), which together with the interim dividend of 7.00p per share makes a total dividend for the year of 23.75p per share (2020: 23.50p), being an increase of 1.1%. This will be funded from a combination of current year revenue, the revenue reserve and a small amount from the capital reserve.

Discount

Your Company's share price discount to NAV fluctuated widely over the year with highs and lows of 0.6% and 16.4% respectively, averaging 8.0%. This compares favourably with the sector average of 14.2%. The Company ended the year at a 3.7% discount compared with 9.6% on 31 May 2020. Your Board continues to monitor the discount and will consider the merits of buying back shares as markets evolve, although we do not currently believe that share buy-backs represent the most effective way of generating long-term shareholder value. During the reporting year, no shares were bought back.

Performance fee

Your Company's management fee arrangements consist of a very low base fee of 0.35% and a performance fee arrangement which is subject to various restrictions, including a performance hurdle and the requirement for an improved absolute return and share price compared with the prior year. There is also a cap ensuring that investment management fees, including the performance fee, cannot exceed 0.9%. This year, the strong investment performance has resulted in a performance fee being paid. Full details are given in the Annual Report.

Board

As I explained in my half-year report, I shall be retiring as your Chairman at the conclusion of the 2021 AGM and will be succeeded by Penny Freer. Penny has spent over 25 years in investment banking, providing advice to management teams. She has extensive experience of leadership at board level and, having been on our Board since 2018, I have no doubt she will be an outstanding Chairman. Our succession planning continues, and this is reflected in the appointments to the Board of Kevin Carter and Michael Warren which I also reported in my half-year report.

Annual General Meeting ("AGM")

We are pleased to invite shareholders to attend the AGM in person at our registered office on Friday, 1 October 2021 at 11.30 am. We encourage shareholders to attend for the opportunity to meet the Board, see a presentation from your Fund Manager reviewing the year and looking forward to the year ahead, and to ask questions and debate with Neil and the Board. For any shareholders unable to travel, we will also be welcoming you to join by conferencing software Zoom. As is our normal practice, there will be live voting for those physically present at the AGM. Due to technological restrictions, we cannot offer live voting by Zoom, and we therefore request all shareholders, and particularly those who cannot attend physically, to submit their votes by proxy, ahead of the deadline of 29 September 2021, to ensure that their vote counts at the AGM.

Outlook

At the time of writing, the vaccination roll-out continues at pace and the data is suggesting that a full exit from lockdown measures should be possible this summer, which should accelerate further the sharp recovery in economic activity. Economic and sentiment indicators continue to be positive with corporate activity picking up, and UK smaller companies generally have performed well during the crisis. The UK Government has agreed a trade deal with Europe and is starting to agree trade deals with other countries which should prove beneficial for British trade and therefore UK smaller companies. Against this background, I see no reason why your Company cannot continue the success of the last ten years in the years ahead.

Jamie Cayzer-Colvin

Chairman

FUND MANAGER'S REPORT

Fund performance

The Company had an excellent year in performance terms, rising significantly in absolute terms and materially outperforming its benchmark. The share price rose by 69.3% and the net asset value by 58.5% on a total return basis. This compared with an increase of 54.1% (total return) by the Numis Smaller Companies Index (excluding investment companies). The outperformance came from a positive contribution from gearing partially offset by a small negative contribution from expenses and stock selection. This year marks the 16th year of outperformance of the benchmark in the 18 years in which I have managed the investment portfolio, and it is also the 18th consecutive year of dividend increase.

After another extraordinary year of navigating the challenges of running a business in a pandemic, we would like to offer our sincere thanks to the boards, management teams and their colleagues of our portfolio companies for all their hard work and resilience during this time. We have always kept an open dialogue with the management and boards of all our portfolio companies, and in many ways the pandemic increased the need for and ability to communicate as we worked to provide support for businesses. We invite you to read more about our company engagement in the ESG section in the Annual Report.

Market - year under review

The year under review was a volatile but ultimately extremely positive one for equity markets as Covid-19 headlines dominated news flow. Rising virus caseloads globally in the summer and the discovery of new highly contagious mutant strains of the virus in the winter resulted in a stop-start reopening of the UK economy. Corporate and consumer sentiment was dampened by the re-imposition of stricter measures at various points in the year including local and national lockdowns. Consequently, governments globally were forced to provide continued support to their economies, while corporates looked to issue more equity to withstand the disruption to trading caused by new lockdowns.

It was the news in November 2021 that three separate vaccine trials had passed the first efficacy and safety hurdles that marked a turning point in the world's fight against Covid-19. This caused animal spirits to return to boardrooms, living rooms and trading floors alike. Equity markets rallied sharply as investors regained the confidence to look through short-term trading conditions and put multiples on the future earnings of pandemic-stricken sectors such as travel, leisure and retail.

Politics briefly took centre stage at the turn of the year. After taking talks to the brink, the impasse was broken and the UK and EU finally agreed a trade deal, averting the much-feared "no-deal" Brexit scenario. Sterling strengthened materially as a result. Elsewhere, in the US, after a protracted vote count Joe Biden was proclaimed the winner of the presidential election and the Democrats took control of Congress and the Senate which raised hopes of further fiscal stimulus.

In the UK, the vaccination programme that started in December 2020 was a notable success both in terms of the speed of roll-out and evidence of high efficacy rates. This allowed the Government to set out a roadmap to the "irreversible" reopening of the economy, causing equity markets to rally further. Elsewhere, vaccination rates gained pace in the US and Israel whilst Europe initially lagged behind developed market peers. Vaccination progress in conjunction with the continued fiscal support from governments increased global growth and inflation expectations. Oil and commodity prices rose along with bond yields. Value stocks rallied at the expense of defensive and growth stocks as investors started to position themselves for reflation.

Smaller companies materially outperformed larger companies over the year. The Numis Smaller Companies Index (excluding investment companies) outperformed the FTSE All-Share Index for the first time since 2015-16.

Gearing

Gearing started the year at 11.0% and ended it at 8.8%. Debt facilities are a combination of £30 million 20-year unsecured loan notes at an interest rate of 3.33% and £85 million short-term bank borrowings. As markets rose, the use of gearing was a positive contributor to performance in the year. Gearing has made a significant positive contribution to investment performance over the 18 years I have managed the investment portfolio.

Attribution analysis

The tables below show the top five contributors to, and the top five detractors from, the Company's relative performance.

¹ Not owned by the Company

Impax Asset Management is an environmentally and socially responsible focused asset manager based in the UK. The company was formed in 1998 by the current CEO Ian Simm, and has several funds spanning public equities, bonds and private equity assets. Demand for these types of funds is growing as the sustainability agendas have become top priorities for governments, consumers and investors alike. Consequently, the business has seen continued rapid growth in assets under management, and we expect this to continue as the group's strong performance track record and distribution agreements should lead to further inflows.

Centamin is an Egyptian gold miner. The company reported reduced production output after a period of disruption. Furthermore, the shares de-rated as investor appetite for gold and other safe haven assets waned following the positive vaccine news and the sharp rebound in economic activity as economies began to recover from the effects of Covid-19. The Company did not own a position in this stock.

Codemasters is a video games developer. The company saw strong growth driven by its premier title, Formula One. The company was a major beneficiary of its customers being housebound during the early stages of Covid-19. The company also received a takeover offer from Electronic Arts at a substantial premium to the prevailing share price.

Future is a tech-enabled global platform for specialised media which targets consumers and business-to-business ("B2B") brands across Europe, America and Asia Pacific. The company creates specialised content to attract and grow high-value audiences. These audiences are then monetised through memberships and subscriptions, print and digital advertising, e-commerce sales and events. Future has both an organic and inorganic growth strategy. Management is focused on purchasing new brands and titles to leverage its scalable technology and drive digital growth using its revenue optimisation model. The company was a big beneficiary of its customers' overnight shift to consumer spending online and increasing allocation of corporate marketing budgets spent on digital marketing during the early stages of the pandemic.

Luceco is a manufacturer and distributor of electrical products. It has substantial UK market shares in portable power and wiring accessories. The company has benefited from increased RMI (repair, maintenance and improvement) demand driven by Covid-19, market share gains and materially improved margins driven by cost improvement. With a rapidly de-leveraging balance sheet, prospects look strong, driven by further revenue growth and the potential for value enhancing acquisitions.

¹ Not owned by the Company

Clinigen is a global speciality pharmaceutical services business. Its core activity is providing comparator drugs and other services for clinical trials and providing market access for drugs that are difficult to obtain or yet to be licensed. It also has a speciality pharmaceutical division, which looks to acquire niche drugs from major pharmaceutical companies, where management thinks it can enhance performance through additional regulatory approval or increased targeted marketing. The company suffered from the impact of Covid-19 on its portfolio of oncology drugs, as diagnosis and treatment of cancer declined, and from delays to the clinical approval of a new treatment which uses one of Clinigen's major drugs.

RWS is a translation-services business with particular strengths in intellectual property, life sciences and technology. The company has demonstrated long-term sustainable growth through a combination of organic and acquisitive expansion which has generated substantial shareholder returns over the long term. During the period under review RWS acquired SDL, a translation-services competitor, which put technical pressure on the stock due to a large number of shares issued to fund the deal.

AO World is an online retailer of electrical products in the UK and Europe. Revenues grew substantially in the period under review as consumers refocused their expenditure towards the home and away from leisure and holiday spend. The company also took market share as physical retailers were forced to close for a significant part of the year due to Covid-19 restrictions. The Company did not own a position in this stock.

S4 Capital is a provider of digital marketing and advertising services. The company has enjoyed rapid growth from client wins and a series of acquisitions. The Company did not own a position in this stock.

William Hill is a licensed betting company. The company was taken over by Caesars Entertainment principally to boost its exposure to the nascent US gambling market. The Company did not own a position in this stock.

Portfolio activity

Trading activity in the portfolio was consistent with an average holding period of over five years. Our approach 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.

During the year we have added a number of new positions to our portfolio. These include the following:

Auction Technology Group is an online marketplace and platform company that serves auctioneers and bidders in the industrial, commercial and antique auction markets. The company is benefitting from a transition from physical-only auctions to an online hybrid format, with this trend accelerating during the Covid-19 pandemic. With strong growth prospects from further online penetration and targeted complementary acquisitions, the outlook for the company is positive.

Bytes Technology is the eighth largest UK IT reseller with just 3% market share and lots of white space to penetrate. It specialises in software sales and therefore benefits from the recurring revenues arising from the SaaS (Software as a Service) models it sells. The company is benefitting from the structural growth in IT spending by both the private and public sector. The group's strategy is straightforward and is centred around selling more to existing customers and winning new customers.

Foresight Group is an alternatives asset manager specialising in infrastructure and regional private-equity investments. We invested in Foresight as it offered relatively cheap exposure to growing fund allocations towards alternative assets. The company is highly cash generative and intends to spend money on bolt-on M&A (mergers and acquisitions) alongside returning cash to shareholders.

Moonpig is an online card and gifting retailer operating in the UK and the Netherlands. The group has more than 60% market share of the online card market. It is a structural grower benefitting from the offline-to-online transition in card purchasing. Moonpig's negative working capital profile and capital-light business model mean cash generation is strong and returns are high. Management is using data analytics to increase customer stickiness and encourage the attachment of gift purchases to card purchases to augment top-line growth.

Pebble Group provides advertising services to global enterprises. The group primarily designs and supplies branded promotion products to large corporates for use in marketing campaigns. The company also offers a purchasing platform tool for smaller US businesses, which is recurring and highly profitable income. Pebble is demonstrating good growth as it wins new enterprise contracts and attracts customers on to its purchasing platform. We expect this positive momentum to continue as the group has a strong pipeline of new business opportunities.

Young & Co's is an owner and operator of premium unbranded pubs in the South of England. It has significant net asset value backing with 84% of its pubs either owned freehold or with long-term peppercorn rents. We took the opportunity to initiate a position when the company raised equity in June 2020 to bolster its balance sheet to withstand the impact of Covid-19. As the economy re-opens, Youngs should benefit from its favourable geographic exposure, a well-invested estate and a strong balance sheet which will enable it to acquire new sites.

To balance the additions to our portfolio, we have disposed of positions in companies which we felt were set for poor price performance. We sold our holding in Cineworld, a global cinema operator, after the shares recovered strongly from post-pandemic lows. The forced closure of its business throughout most of 2020 and early 2021 has left the balance sheet over-indebted. Additionally, moves from the film studios to shorten the exclusive period that movies are shown at cinemas, and the rise in premium video-on-demand leaves the shape of recovery in trading at Cineworld open to question. We also disposed of our holding in Tekmar, a provider of products to the offshore wind, oil and gas industries. We had become increasingly concerned by the outlook for earnings and the poor corporate governance in the company. We sold our positions in Safestore, a self-storage company, and Zotefoams, a speciality foams manufacturer, as strong recoveries in both companies' share prices left them fully valued. We also sold our position, in line with our stated policy, in Intermediate Capital, an alternative finance provider and asset manager, as it was elevated to the FTSE 100.

There was a heightened level of takeover activity in the portfolio, particularly in the latter part of our financial year. This was consistent with the wider mid and small-cap equity market aided by the removal of Brexit uncertainty and heightened levels of interest from private equity. A number of takeover bids were received: for AA, a roadside assistance and insurance group, from Towerbrook and Warburg Pincus; for Codemasters, a video games company, from Electronic Arts; for GoCo, a price comparison website, from Future; for John Laing, an infrastructure investor, from KKR; for SDL, a language services group, from RWS; for Spire Healthcare, a hospital operator, from Ramsay Health; for Urban & Civic, an urban regeneration business, from Wellcome Trust; and for Vectura, a medical device development company, from Carlyle.

Portfolio outlook

The following table shows the Company's top 10 stock positions and their active positions versus the Numis Smaller Companies Index (excluding investment companies) at 31 May 2021:

A brief description of the largest active positions (excluding Impax Asset Management, Future, Clinigen and RWS, which were covered earlier) follows:

Bellway is a national UK housebuilder. Before the pandemic, the UK new-housing market was robust due to low interest rates and government initiatives, particularly the "Help to Buy" scheme. Although the housing market slowed temporarily due to Covid-19, it has bounced back very strongly, helped by stamp duty relief and a desire by consumers to own larger properties as the working-from-home trend becomes more prevalent. Bellway is also benefitting from other structural factors, such as a benign land market due to the reduction in competitors from the previous cycle, the under-supply of housing in the UK and the capital discipline Bellway and its peers are displaying. Bellway is looking to exploit these conditions by expanding its national footprint, whilst maintaining a strong land-bank and balance sheet.

Mitchells & Butlers is a national pub and restaurant owner and operator. Although Covid-19 severely impacted the business, as operations were either closed or operating under severe restrictions, the company has come through this tough period intact and with a strong balance sheet, aided by an equity issue during the year. Prospects for recovery look strong as Covid-19 restrictions are eased and consumers will look to spend the substantial personal savings built up in the last year. Additionally, competition has diminished as the number of licensed operators has declined and in the short term the inability to travel abroad should boost 'staycation' spend in the UK.

Team17 is a developer and publisher of video games for PCs, consoles and mobile devices. The company focuses on the independent games market and selectively works with developers and third parties to launch new content on multiple platforms. The business listed in 2018 and has had a strong record of growth driven by well-received new releases, the monetisation of new content and improved profitability as the portfolio expands. With a balance sheet in a net cash position, the company is well placed to acquire complementary assets in the sector.

Gamma Communications provides voice, data, mobile and internet-based telecoms to small and medium-sized enterprises in the UK and Europe. The company is focused on selling cloud-based telephony solutions, a market which is rapidly growing as users switch to more flexible services. The company has been highly successful with this approach in the UK and has recently expanded through acquisitions in Germany, the Netherlands and Spain to replicate this strategy. We expect this positive growth to continue both organically and through further acquisitions in Europe.

Oxford Instruments is a manufacturer of advanced instrumentation equipment. The company benefits from servicing a number of high-growth industries such as semiconductors, quantum computing, life sciences and advanced materials. In addition, its 'Horizon' programme of business improvement is driving sales, profit and margin growth. With a very strong balance sheet and a positive outlook for its end-markets the company is well placed for the future.

Watches Of Switzerland is a leading retailer of luxury watches and jewellery in the UK and US. The group trades under the banner of four prestigious retail brands: Watches of Switzerland, Mappin & Webb, Goldsmiths and Mayors. The group has a 40% share of the UK luxury watch market and 9% share of the US luxury watch market. Over 50% of revenues are generated from the sale of Rolex watches. In addition to driving sales densities across existing stores through improved marketing and stock availability, management's growth strategy is centred around expansion in the US where the potential for market share gains is most apparent.

As at 31 May 2021, the portfolio was weighted by company size as follows:

Market outlook

The Covid-19 outbreak dramatically changed expectations for global economic growth. The lockdown measures we have seen across the globe have had a profound effect on economic activity. Government actions to protect consumers and businesses from the worst impact of the shock softened the blow but ultimately can only be short term in nature given the scale of the bail-out required.

The virus will pass and the global economy is recovering. However, the shape and magnitude of the recovery are at this point uncertain, although confidence is rising that it will be pronounced and swift. The positive vaccine news announced in November 2020 and the subsequent successful vaccination programme have raised the very real possibility that life may return to some sort of 'normal' during 2021 with a consequent sharp recovery in economic activity.

One of the major concerns facing the equity market is the threat of higher inflation and the need for central banks to start tightening monetary policy. There is much debate as to whether current indications of inflation, led by commodities and logistics costs, are temporary or are of a more permanent nature with central bankers tending to lean towards the former view. A sustained pick-up in wage inflation would probably force monetary authorities to act more quickly, although at the time of writing there is no evidence of this.

Outside of Covid-19 there has been positive progress on key matters. The EU and the UK have finally agreed on a trade deal removing the threat of the damaging implications of a hard-deal Brexit. The US election outcome was closer than expected but a definitive resolution was reached. Hopefully a Biden presidency should see a more conciliatory and pragmatic approach to US foreign and trade policies.

In the corporate sector, conditions are intrinsically stronger than they were during the financial crisis of 2008-9. Balance sheets are, in particular, more robust. On the whole, so far, the UK corporate sector has performed well during the crisis and most companies are beating their initial post-Covid-19 earnings and cash expectations.

We are seeing a noticeable pick-up in corporate activity. The IPO market, after a quiet 2020, has exploded into life in recent months. Given the number of companies looking to float on public markets, it is important to remain disciplined when sifting through the multitude of new investment opportunities we have in front of us. Likewise, we are also seeing a significant increase in M&A activity as private equity, in particular, looks to exploit opportunities thrown up by Covid-19. We expect this upsurge to continue in the coming months as UK equity market valuations remain markedly depressed versus other developed markets.

In terms of valuations, the UK equity market is now trading in line with long-term averages if we apply pre-Covid-19 earnings. Corporate earnings were sharply down in 2020 although confidence in a sharp recovery in 2021 and beyond is rising.

Although uncertainty remains around short-term economic conditions, the virus will pass and we are seeing the green shoots of recovery. The movements in equity markets have thrown up some fantastic buying opportunities and we expect many listed companies to emerge stronger from the downturn. However, it is important to be selective, as any recovery will be uneven and strength of franchise, market positioning and balance sheet will determine the winners from the losers in a post-Covid-19 world.

In conclusion, the year under review has been an excellent one for the Company. Absolute performance was positive and the Company materially outperformed its benchmark. Our portfolio companies have performed robustly, are soundly financed and attractively valued. Additionally, the smaller companies market continues to throw up exciting growth opportunities in which the Company can invest. We remain confident in our ability to generate significant value from a consistent and disciplined investment approach.

Neil Hermon

Fund Manager