MERCANTILE INVESTMENT TRUST: Chief Guy Anderson says it’s time to be greedy…NOT defensive

The ups and downs of investment trust Mercantile strongly linked to the British economy. If a recession is avoided, inflation is tamed and the wave of interest rate hikes ends, the £1.6bn trust could be on the brink of a sustained period of strong investment performance.

But when the economy bombs, confidence can take a hit. Lots of if-ands and few clear answers.

It’s a point that 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 own is domestic and it’s fair to say it’s been a challenging time dealing with all the moving parts that have fueled inflation – the pandemic, a tight labor market and the invasion of Ukraine and rising energy prices.’

The challenges have taken their toll on the trust’s investment returns. Over the past three and five years, it has underperformed its benchmark, the FTSE All-Share Index. For example, it has delivered a shareholder return of 9 percent over the past five years, compared to the index’s 16 percent.

But Anderson remains optimistic. “The story about the UK is negative,” he says. I accept that, but the UK economy has proved more resilient than many expected. Hopefully a recession can be avoided, although continued inflation and more rate hikes could continue to hurt the market.”

With a lot of economic negativity already priced into many UK stocks, Anderson believes that as an asset manager it is now ‘better greedy than defensive’. In other words, buy stocks while they are cheap.

It explains why the trust has used more than £150 million in loans to increase its exposure to UK companies. The average cost of the loans is priced at just under 4.2 percent, meaning that the assets purchased with the loan must generate a return in excess of this figure to benefit shareholders.

It’s a hurdle that Anderson says is achievable 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 holds interests in 67 companies with its two largest sector holdings in industrials and consumer staples. Key holdings include IMI and Rotork.

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

On the consumer front, the main holdings are furniture giant Dunelm, which Anderson says has a “massive runway for future growth” thanks to strong retail and digital businesses.

WH Smith – like Dunelm a top ten holding company – is being kept due to its focus on the travel industry and a broadening of the store offerings. “It’s seen as yesterday’s retailer,” says Anderson. “That’s a misconception.”

A recent addition to the portfolio is airline Jet2 – on the back of a booming travel market.

For the past ten years, the trust has increased its dividend every year — and has not cut it for the past 30 years. This fiscal year, Anderson expects an increase over last year’s payment of 7.15 pa share. The first quarterly payment of 1.45p has been compared to last year’s 1.35p. The shares are trading for around £2.

The trust, part of JP Morgan Asset Management’s stable, has a competitive annual fee of 0.46 percent. The exchange ID code is BF4JDH5 and market ticker MRC.