Categories: Economy

THE MERCHANTS TRUST: The only way is up, says boss Simon Gergel

THE MERCHANTS TRUST: The only way is up, says boss Simon Gergel, who remains upbeat about his ability to generate returns for shareholders

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Although the outlook for the economy is looking bleak, the investment manager of UK fund Merchants remains remarkably upbeat about his ability to generate returns for shareholders. 

While acknowledging that there are short-term issues aplenty to unsettle the UK stock market, Simon Gergel believes we are ‘close to peak pessimism’. 

‘There are some encouraging signs out there,’ he says. ‘In recent weeks, both oil and gas prices have fallen as have freight costs and timber prices. At some point, interest rates will take a pause for breath and then will start to fall again.’ 

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Gergel, in charge of UK equities for investment giant Allianz Global Investors, runs a multi-faceted portfolio, built almost entirely around UK-listed companies. As a result, the £715million stock market-listed investment trust comprises big stakes in tobacco giants (BAT and Imperial Brands), exposure to energy companies (Shell and BP), as well as commodity businesses such as Rio Tinto. 

It also has holdings in a number of companies such as house builder Redrow which are currently horribly out of favour, but which Gergel believes will power ahead over the next three to five years as the economic outlook improves. ‘Our modus operandi is to invest in good businesses which are undervalued by the market,’ he adds. ‘We then hope that their stock market fortunes will improve in the fullness of time. Redrow fits this bill.’ 

Gergel says the house builder’s shares are ‘priced for disaster’ – they’re down nearly 40 per cent over the past five years. Other builders and housing related stocks held by Merchants include Bellway and building materials suppliers CRH and Grafton. 

The trust produces a healthy dividend, which it pays out quarterly. In the financial year to the end of January, it paid dividends totalling 27.3pence a share. So far this year, the two quarterly payments it has made – 6.85pence – are 0.05pence up on last year. Shares in Merchants are trading at £5.20. 

‘We don’t focus on dividends when picking stocks,’ says Gergel. ‘If we did that, we’d miss out on some good investment opportunities. But if we get our stock selections right, dividends usually take care of themselves.’ 

Merchants’ impressive dividend record is longstanding. It has built a 40-year record of annual dividend growth, although in the past two financial years it has had to dip into its income reserves to support payments to shareholders. It currently has the equivalent of 16pence a share tucked away in reserves – more than half a year’s dividends – which is reassuring for investors. 

‘UK-listed companies have done a good job in rebuilding their dividends since 2020,’ says Gergel. ‘It means we’re on course to meeting the dividends we pay our shareholders from the income we receive from the trust’s holdings.’ 

In terms of generating total investor returns, Gergel’s approach is proving effective. Over the past five years, the trust has delivered a return of 43 per cent. This compares to a 12 per cent return from the FTSE All-Share Index.

Apart from the attractive income on offer – equivalent to an annual 5.2 per cent – Merchants takes less in charges than many rival trusts. Annual charges total 0.55 per cent. The trust’s stock market identification code is 0580007 and the ticker MRCH. 

Investment trusts with a similar UK equity income bent to Merchants include City of London, JPMorgan Claverhouse and Murray Income. All three have grown their annual dividends for longer than Merchants – 56 years in the case of City of London. 

Jacky

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