Smaller company potential still to come through

FY25 performance was driven by stock selection, including the impact of continuing takeover activity, with additional contributions from accretive repurchases and structural gearing in the strongly rising market. Market takeover activity has continued apace, especially involving small- and mid-cap companies, and for a second year this crystallised the significant value in some of LWI’s smaller company holdings. While private equity investors, often located overseas, and trade buyers are recognising the value of UK companies, this is not true of the broader market, especially for smaller companies. The top 100 UK-listed companies continue to lead market performance. These represent c 50% of LWI’s portfolio, half the weight of its broad market benchmark. If, as the portfolio managers expect, the value in smaller companies becomes more widely recognised, it should support further outperformance and a higher asset base from which to grow dividends.

Despite strong gains, investors continue to be wary of UK equities and valuations remain attractive. The trailing P/E of LWI’s portfolio (c 12x) is below the historical average and the UK market in general (c 14x), which in turn compares with a US P/E of c 20x. Meanwhile, the shares can still be bought at a discount to NAV. The UK economy continues to face multiple challenges, but is not alone in that, while market performance shows that UK-listed equities are not a proxy for the economy. This may be more true of smaller companies, but many are well managed and have conservative balance sheets with leading or growing market positions. These are in many casesthe types of businesses on the receiving end of bids.

Multi-cap income growth

LWI seeks to provide investors with a higher-than-average return, with growth in both capital and income over the medium to long term by investing in a broad spread of predominantly UK companies. The trust measures its performance against the broad UK market, although it invests across the whole range of market capitalisations, unconstrained by index weightings. This flexible, multi-cap approach enables the trust to invest in companies that have greater growth potential, usually but not always small- and mid-cap, increasing the capital base of the portfolio and distributable income over time and thereby supporting the progressive dividend strategy. In this respect, LWI is clearly differentiated from the majority of peers in the AIC UK Equity Income sector, which typically have a greater focus on traditional ‘income’ areas of the market.

The trust was established in 1963 and is managed jointly by James Henderson (since 1990) and Laura Foll (since 2013) of Janus Henderson Investors (JHI). In turn, they are supported by the broader resources of the JHI equity team. The managers consistently apply a patient, long-term, bottom-up investment strategy, with a strong valuation overlay. They seek companies that have an underlying strength that is yet to be realised by the market. In many cases, these may be small- or mid-sized companies but may also be turnaround situations (‘self-help’) where a route to improvement can be clearly identified. Small- and mid-sized companies are often at a relatively earlier stage of their development, with the potential to deliver stronger sales and earnings growth than their larger peers and, over time, faster dividend growth. They are often under-researched and overlooked, and more likely to trade at valuations that are yet to reflect their potential. Larger sector peers typically provide more immediate dividend income and are often to be found in more defensive industries such as pharmaceuticals and utilities, with the potential to mitigate risks in challenging market conditions. In general, they have much more internationally focused businesses, providing diversification opportunities compared with the broader UK market.

Summary of the investment case

We highlight the following key reasons to consider an investment in LWI at this time, explored in detail in this report:

• Sentiment towards UK equities is poor and although the market has been rising, the level of valuation remains low in historical and relative terms. For smaller companies this is even more so. LWI calculates that the trailing P/E for its portfolio was 11.7x, at the end of August, well below the 10-year average of c 13x, and well below the broader UK market valuation of 13.7x and c 20x for the US market.
• While the valuation opportunity in UK equities has not yet been widely recognised in the market, low valuations are being underpinned by a continued high level of takeover activity, usually at a significant premium to market value. This has included many LWI investments in the past two years, most recently H&T, Renold, IPF and Epwin.
• There are good reasons for investors to remain cautious about the UK economy, including relatively high inflation, the prospect of rising taxes, the full impact of trade tariffs and seemingly sclerotic growth. However, UK-listed equities do not represent the UK economy, which is particularly the case for larger companies. While smaller companies are typically more exposed to the UK economy, expectations and valuations are low. There are many businesses that are well managed and have conservative balance sheets with leading or growing market positions. These are in many cases the types of businesses on the receiving end of bids.
• LWI has a strong commitment to dividends, which have been maintained or increased each year since it was established in 1963, including through the pandemic. Quarterly DPS increased to 1.625p in respect of Q424 (+2.8%) and three quarterly dividends have been declared or paid at this level in FY25 to date. The Q4 DPS will be declared with the FY25 results, which are expected to be published in early December. The board has reiterated its commitment to a progressive dividend policy and has said that it expects to recommend a final dividend at least in line with previous quarters.

Balancing income and growth

By market capitalisation, the trust’s portfolio is typically split between larger, medium and smaller companies in equal parts, intended to optimise the balance between immediate income and income growth over time. The weighting towards the largest 100 UK-listed companies is rarely above 50% and was last reported at 48% at end-September, well below the benchmark level of 87%. Conversely, LWI’s investment in small- and mid-cap stocks and AIM-listed stocks is well ahead of the benchmark weight, and it is here where the managers continue to identify the best combination of growth and value.

Progressive dividends

LWI aims to pay progressive dividends over time, with each quarterly distribution equal to or greater than the previous one. Over the 25 years to end FY24, DPS growth averaged 6.8% per year.

Even during the pandemic, LWI did not reduce dividends, instead utilising revenue reserves to smooth out distributions, one of the advantages of the investment trust structure. This was not the case for all peers. With dividend cover being rebuilt, five-year DPS growth (to end-FY24) was relatively pedestrian (at an average c 1.5% per year versus a peer group average of c 2.7%) but this began to accelerate in FY23 (+2.5%) and FY24 (+2.8%). Based on the current quarterly rate of DPS, with no further upwards adjustment in Q425, LWI expects DPS for the year to increase again, to no less than 6.50p in FY25.

Third successive year of strong outperformance

During the year to 30 September 2025 (FY25), LWI’s NAV total return (at fair value, cum income) of 20.8% was 460bp above that of its benchmark, the broad UK equity market index. It has significantly outperformed for three consecutive fiscal years and in four of the last five fiscal years. LWI’s performance is particularly impressive given its strategic overweighting versus its benchmark in smaller companies, which have continued to underperform their larger peers, and this is primarily the result of successful stock selection.

Over five years (FY21–FY25), the NAV total return of c 112% is c 280bp ahead of its benchmark, although this is flattered somewhat by the strong FY21 post-pandemic recovery in AIM-listed and other smaller companies. The 10-year performance better reflects the sustained underperformance of smaller companies, with LWI’s NAV total return of c 94% trailing the benchmark by c 240bp. The 25-year performance record is impressive, reflecting the managers’ ability to take advantage of the tendency for smaller stocks to outperform over the long term.

Although smaller companies have a tendency to outperform larger companies, this has not been so over the past 10 years. This period of underperformance by smaller companies broadly coincided with the Brexit vote, which appeared to trigger a downwards assessment of UK economic prospects. Meanwhile, a progressive shift towards larger, more liquid stocks has coincided with retrenchment on the part of private investors. The charts below show the contrasting share price returns of larger companies and their smaller counterparts, represented by the mid-250 companies and the Numis Smaller Companies Index, including AIM but excluding investment companies (NSCIAEX). Even though this underperformance continued in the 12 months to 30 September (LWI’s FY25 year), there was a stark contrast between the first half of the period and the second. During H125, the broad market total return was 4.1%, led by the top 100 companies (up c 6%) while smaller company returns were on average negative, with the mid-250 stocks and the NSCIAEX returning c -6% and -7%, respectively. In H225, the c 11% return generated by the top 100 companies was eclipsed by small companies, with a mid-cap stock return of c 16% and an NSCIAEX return of c 17%. During H1, the market was concerned about UK GDP growth while the US dollar rose, disproportionately benefiting larger stocks. During H2, US tariff uncertainty has hung over larger stocks while UK growth figures, though muted, have been better than had been expected.

For the reasons cited above, LWI’s managers see strong prospects for selected smaller companies, where market expectations and valuations are low. Notwithstanding H225, LWI’s outperformance has not as yet benefited from any general improvement in smaller company performance.

Breaking the performance down into discrete years provides an insight into returns in different market conditions over the past 10 years. We note the tendency for LWI to outperform the benchmark when investor sentiment is positive and the broad market is rising strongly. With the UK equity market showing strong returns over the past three years, LWI’s performance is consistent with the longer-term trend.

Also of interest in the discrete fiscal year data is LWI’s significant underperformance in FY22. As Exhibit 6 shows, in FY22 smaller companies significantly underperformed in what was a weak market.

Stock selection is driving performance

Given the performance drag created by LWI’s market-cap weightings, it is clear that stock selection has been strong, and the driver of outperformance. In the rising market, gearing will also have been beneficial, and so too share buybacks at a discount to NAV.

As we show below, LWI is strongly weighted towards large-cap banks, insurance companies and other financials, and these will have been key drivers of recent outperformance. The banks have been benefiting from interest rates remaining somewhat higher for longer, which has a positive impact on net interest margins. Meanwhile, credit losses have remained benign.

The wave of takeovers in the UK market has been another driver of outperformance. During FY25, four of LWI’s holdings (H&T, Renold, IPF and Epwin), accounting for c 5% of the portfolio at the start of the year, were bid for, in each case at significant premiums to market values.

The investment managers attribute the preponderance of transactions involving LWI investments to the types of companies they typically hold: generally established, well-managed, cash-generative businesses, which display leadership in their own, sometimes niche, market segments. These are all elements that are likely to attract bidders of all types.

Buybacks and discount management

Over the past one and three years, the LWI share price has risen strongly, slightly outpacing the growth in NAV, yet the shares are still trading at a discount to NAV (at fair value, cum income) of 10.2%, which is towards the higher end of its AIC UK Equity Income peer group average discount of 3.7%. Given the strong absolute and relative investment performance and significant share repurchases, this is somewhat perplexing.

Over the past year, the discount has averaged 9%, with a low of 6% and a high of 13%. Over three years, the average discount has been 11%, within a range of 5–15%.

Although LWI has no formal discount control mechanism, the board has been willing to use buybacks opportunistically when it believes this is likely to maximise shareholder returns. Between January and July this year LWI repurchased c 50.2m shares, c 19% of the authorised share capital, at an average c 8% discount to NAV. No shares have been repurchased since July, which we believe reflects the substantial share price rise in recent months.

The board’s long-held view is that a formal discount control mechanism would negate some of the benefits of the closed-end structure, as well as potentially shrink the size of the trust, reducing the audience of potential investors, increasing the ongoing charges ratio and reducing liquidity in the shares. It believes that the best way to close or eliminate the discount is to provide attractive returns and to engage as broadly as possible with investors. We share this view.

Of the 50.2m shares repurchased to date, 37.4m were acquired under the authority granted by shareholders at the 2025 AGM on 28 January, allowing up to 15% of the outstanding shares, or c 38.6m, to be repurchased up to the 2026 AGM. With the repurchase authority substantially exhausted, in September 2025, a general meeting of shareholders approved the repurchase of a further 15% of the outstanding shares, or c 33.0m, in the period up to the 2026 AGM, in addition to the residual authority to acquire c 1.2m shares.

Long-term, bottom-up stock selection with a strong valuation overlay

The portfolio managers, James Henderson and Laura Foll, are focused on long-term returns, with investment decisions driven by a selective, bottom-up approach with a strong valuation overlay. Henderson joined the industry in 1982 and the company in 1984, and Foll joined the industry and the company in 2009.

Using a range of valuation metrics, the managers seek to invest in companies that are trading at a discount valuation, in some cases compared with their trading history and in others compared with their peer group. There can be many reasons for a valuation discount, including disappointing recent financial performance, balance sheet or management concerns, and these alone are insufficient reasons to invest. The managers want to see a route to recovery from whatever issues the company is facing, with the prospect of delivering sales, earnings and dividend growth, and their assessment of company leadership is one of the most important factors in making this judgement. They comment that a good management team can navigate a difficult economic backdrop, while poor management can get it wrong even in the good times.

As a result of the investment process, the portfolio managers engage with hundreds of companies every year. In doing this they are supported by the deep resources of JHI, where both are members of the JHI global equity team and work closely with the UK smaller and mid-sized company teams.

Portfolio positioning

Portfolio diversification is a key element of risk management, primarily within the smaller company portion of the portfolio, and there are typically 100–120 individual holdings. As at 30 September, nine of the top 10 holdings were top 100 UK companies, with a focus on higher-yielding financials and oil and gas producers. Also, within the top 10 holdings was the non-life insurer FBD. In aggregate, the top 10 represented 25% of the portfolio, with the balance broadly diversified across more than 100 other holdings. The portfolio is available in full on the company’s website.

With stock selection being bottom up, sector weightings are substantially an output rather than a deliberate target. However, sector trading conditions and valuations will nonetheless have an impact on where the managers identify the best opportunities. Financials and industrials account for almost 60% of the portfolio, around 15pp above the benchmark. The financials holdings are skewed towards large-cap banks and insurers, except for FBD and M&G, whereas the industrials holdings have a larger exposure to a broad range of mid- and small-cap companies.

Recent activity and current opportunities

Share repurchases in FY25 amounted to c £70m or c 16% of the opening portfolio value, for which the proceeds from takeover bids for portfolio holdings provided useful funding. Additionally, as is their usual practice, the investment managers, have continued selling or reducing exposure to companies where they believe the future prospects are becoming discounted, enabling LWI to maintain an appropriate level of gearing while adding to selected existing holdings (particularly on dip), and continuing to refresh the portfolio by investing in new opportunities.

In recent months, LWI has trimmed positions in strong performers such as Babcock, Tesco, Marks & Spencer and some of the banks; it has added to existing holdings in Marshalls and Norcross; and it has taken new positions in Vesuvius, a producer of consumables for the steel industry, and Segro, the industrial property company.

Peer group comparison

LWI is a constituent of the AIC UK Equity Income sector. Its multi-cap investment policy and significant exposure to mid- and small-cap stocks differentiates it from most peers. The Diverse Income Trust and abrdn Equity Income Trust are perhaps the closest comparators. We have also pointed to LWI’s greater exposure to domestic UK earnings and cyclicals, areas where it aims to identify attractive investment opportunities and which are more highly represented within the mid- and small-cap sectors.

In terms of NAV total return, it has been consistently one of the top performing trusts over one, three, five and 20 years, and a little below the average over 10 years.

As noted above, it is currently trading at one of the highest discounts to NAV in the sector, and based on other metrics, ongoing charges are lower than the average, the trailing dividend yield is broadly in line and gearing is the highest.

Additional company details

Fees and charges

Management fees are paid on a sliding scale, reducing as net assets increase and allowing investors to benefit from the growth in the size of the fund and economies of scale. Fees are calculated at a rate of 0.5% on the first £325m of net assets and 0.40% thereafter, split equally between the capital and revenue account. There is no performance fee. The ongoing charges ratio for FY24 was 0.66% and in H125 it was 0.74%, with share buybacks creating some upwards pressure.

Gearing

Henderson and Foll have been keen to maximise the benefits of LWI’s investment trust structure, one of which is the ability to use gearing, and this has had a positive impact on performance. The board has set a limit on gearing of no more than 20% at the point of draw-down, but in practice it has been well below this level, averaging c 13% over the past five years within a range of c 11% to c 15%.

Net gearing was c 12% at end-August 2025^[1] (end-H125: 13.8%; end-FY24: 11.0%). As noted above, the managers have sold assets to maintain an appropriate level of gearing as shares are repurchased. Structural borrowing is provided by £30m of long-term unsecured loan notes, due to mature in 2037, at a highly attractive fixed interest rate of 3.15% pa, well below the portfolio yield of c 3.6%. Flexible, more tactical borrowing is provided by a floating rate £40m unsecured short-term revolving credit facility (RCF), at a margin of 90bp above the SONIA base rate. Just over £19m of the RCF had been drawn at end-FY24.

The board

The board currently consists of five members, all independent, who collectively bring a range of relevant experience, including senior management in the public and private corporate world, investment management expertise and investment trust management.

Since the 2025 AGM, the board has been chaired by Helena Vinnicombe, when she replaced Robert Robertson, who had been chair since 2017. She brings significant investment experience, having been a senior partner at Evelyn Partners (formerly Smith & Williamson) where she chaired the Asset Allocation Committee, as well as being a member of the Investment Strategy Group and Investment Process Committee. Currently, she is also a director of Lindsell Train Investment Trust, a Trustee for Child Health Research CIO and a member of the Advisory Committee for the M&G Charity Multi-Asset Fund.

The other board members are Duncan Budge, a former chief operating officer at RIT Capital Partners, a chair of two investment companies and a non-executive director at a further two trusts; Gaynor Coley, a chartered accountant who has worked at senior levels in the public and private sectors across a range of industries, and is a board member for three other investment companies; Thomas Walker, a chartered accountant and former fund manager with Martin Currie, who sits on the board of a further two investment trusts; and Mark Lama, an experienced chair and board director of top 100 and mid-cap UK listed companies, with commercial experience across a range of market sectors, including a strong understanding of technology, having formerly been chief technology and information officer for Openreach, the telecommunications infrastructure provider.

LWI’s approach to ESG

LWI’s managers view responsible investing as a long-term process that depends not just on businesses meeting current legislative standards, but also on operating with an understanding of changing societal attitudes towards issues such as climate change, pollution and working conditions. While ESG risks do not preclude ownership of a stock, they are a key consideration in arriving at an appropriate valuation and position size. Where evidence of poor practice emerges, the managers will engage with the company to discover how the problem is being addressed and will monitor progress to assess evidence of improvements. Specifically on governance, LWI always votes at the AGMs of investee companies, and the managers seek to work constructively with firms on appropriate executive remuneration structures to ensure the best alignment of the interests of management and shareholders.

Rather than relying on external ratings, which may be absent in the case of smaller companies or based on flawed, outdated or incomplete data, the managers review each new investment idea for potential ESG shortcomings. Any material issue they discover is discussed with JHI’s governance and sustainable investing team and/or the company itself before an investment is made.

A detailed description of the trust’s ESG policies can be found here.