MERCANTILE INVESTMENT TRUST chief: Why it’s time to be greedy… NOT defensive

The fortunes of the Mercantile investment fund are closely tied to the UK economy. If recession is averted, inflation is brought under control and the run of interest rate hikes ended, the £1.6bn trust could be on the cusp of a sustained period of strong investment returns.

But if the economy collapses, confidence could be in trouble. Many questions and few clear answers.

It’s a point Guy Anderson, who manages the trust with Anthony Lynch, readily accepts.

He says: ‘The outlook for the UK economy is important to the fund. Half of the revenue generated by the companies we have is domestic and it is fair to say that it has been a challenging time to deal with all the moving parts that have fueled inflation: the pandemic, a tight job market and the invasion of Ukraine and the increase energy prices.’

The challenges have affected the trust’s investment returns. Over the past three and five years it has underperformed its benchmark, the FTSE All-Share Index. For example, over the past five years, it has generated a return for shareholders of 9 percent, compared with 16 percent for the index.

But Anderson remains optimistic. “The narrative about the UK is negative,” he says. ‘I accept it, but the UK economy has been more resilient than many expected. Hopefully, a recession can be avoided, although what could continue to hurt the market is sticky inflation and more interest rate hikes.”

With a lot of economic negativity already priced into many UK stocks, Anderson’s view is that as an investment manager it is now “better to be greedy than defensive.” In other words, he buys stocks while they’re cheap.

It explains why the trust has used over £150m of loans to increase its exposure to UK companies. The average cost of borrowing is priced at just under 4.2 percent, which means assets purchased with loan financing must generate returns in excess of this figure for shareholders to benefit.

Anderson says that’s an achievable hurdle given the quality (and value for money) of the trust’s underlying holdings, half of which have been held for at least five years.

The fund has holdings in 67 companies with its two largest holdings in the industrial and consumer discretionary sectors. Among its key holdings are IMI and Rotork.

‘Both are resilient companies,’ says Anderson, ‘playing key roles in the energy sector. IMI’s critical engineering division supplies valves throughout the power industry, while Rotork is a high-quality engineer who benefits from increased spending by oil and gas companies.”

In the consumer space, key holdings include furniture giant Dunelm, which Anderson says has a “great track for future growth” thanks to strong stores and digital businesses.

WH Smith, like Dunelm in the top ten, remains due to its focus on the travel industry and the expansion of products available in its stores. “He sees himself as the retailer of yesterday,” says Anderson. That is an error.

A recent addition to the portfolio is the airline Jet2, supported by a buoyant travel market.

For the past ten years, the trust has increased its dividend each year, and for the past 30 years, it has not decreased. This financial year, Anderson expects an increase on last year’s payment of 7.15 pa per share. The first quarterly payment of 1.45 pence compares with 1.35 pence last year. Shares are trading at around £2.

The trust, part of the JP Morgan Asset Management stablecoin, has competitive annual charges of 0.46 percent. Its stock market identification code is BF4JDH5 and the market ticker is MRC.