The Merchants Trust has reported positive performance over the six months to the end of July with a NAV total return (with debt at fair value) of 19.8 per cent, ahead of the benchmark return of 12.6 per cent.
This strong performance continued the recovery that started in the second half of the previous financial year.
The portfolio outperformed significantly with a total return of 16.2 per cent, compared to a return of 12.6 per cent for the FTSE All-Share Index. Most of the outperformance was driven by individual stock selection, although there was some benefit from industry selection, with a low exposure to the weak personal care sector helping relative performance. Many of the top ten positive contributors were companies that benefit from economic recovery, rising financial markets and increasing interest rate expectations.
For the first half of this financial year the dividend has been maintained at a consistent level with 2020, with a total distribution declared of 13.6p. The board has declared a second quarterly dividend of 6.8p per ordinary share, payable on 11 November 2021 to shareholders on the register at close of business on 8 October 2021
As noted in the latest annual report, the board remains committed to the payment of a progressive dividend to shareholders, having now raised the dividend for 39 consecutive years and being one of the AIC’s ‘Dividend Heroes’, an elite group of investment trust companies that have increased their dividends each year for 20 years or more.
The board authorised earlier this year for up to 10 per cent of the portfolio to be invested in overseas listed securities. The aims are to allow the manager more flexibility to diversify the portfolio, to seek new diverse sources of income and to access sectors where there are limited or no opportunities in the UK market. At the end of the reporting period the portfolio had around 4 per cent invested in overseas shares and in particular this flexibility has allowed access to the re-insurance sector.
Companies have been returning to paying dividends, with many taking the opportunity to rebase payments to a lower starting point. The portfolio revenue earnings per share (EPS) for the six months were up 49 per cent over the corresponding period last year to 13.3p (2020: 8.9p), however still behind the (pre-Covid) 2019 figure of 16.1p.
Against this backdrop the trust’s revenue reserves continue to provide a practical buffer to allow the flexibility to draw on them to support our key objective of paying a high and rising dividend to shareholders. As at 31 July 2021 revenue reserves were 17.6p per share (2020: 22.6p).
Colin Clark, Chairman, says: “The world remains a strange place. Some days one might be forgiven for thinking we were ‘back to normal’ whilst other times we are issued stark reminders of the ongoing pandemic which we are very much still struggling to get to grips with on a global scale. Economic recovery, whilst positive, is also bringing with it the spectre of rising inflation as governments throw the weight of policy behind supporting their economies and input prices rise. Markets seem to be acting in a reasonably stoic manner though and for some time now the question around recovery seems to have been one of trajectory and timescale rather than ‘if’.
“As manager Simon Gergel notes that the UK stock market remains considerably cheaper than major global peers, even with the removal of political and Brexit uncertainty that has caused downward pressure over the past five years or so. In addition, there remains further apparently indiscriminate pressure on any company not viewed as high growth by the market. Ultimately this all spells opportunity for skilled stock pickers and should provide a good hunting ground for the investment manager to maintain a portfolio which can meet Merchants’ long term objectives of capital growth plus a high and rising income for investors.”
Simon Gergel, Portfolio Manager, says: “At the end of July, the UK stock market was almost back at the level it reached before the pandemic. However, the UK remains one of the cheapest major countries, having underperformed most European and US markets significantly since the Brexit referendum in 2016. Furthermore, there remains a high level of dispersion, with many shares trading on very modest valuations. As the pandemic has only had a limited impact on the longer-term prospects for most industries, this set of circumstances has created interesting investment opportunities. The low valuations of many fundamentally sound companies in the UK have not gone unnoticed. There has been a large number of takeover bids in the UK this year, typically from private equity investors or other corporations, and often at substantial premiums to the prevailing share price. If the stock market fails to fairly price companies, we can expect more of these bid approaches.
“The high dispersion of UK company valuations has created a good environment for stock picking. Merchants holds a portfolio of fundamentally sound businesses, trading on attractive valuations, where we see supportive structural trends or other themes. The portfolio is diversified across industries, geographic end markets and degrees of economic sensitivity. We believe that this portfolio is capable of delivering a level of income and long-term capital growth in line with Merchants’ objectives.”
