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

While the outlook for the economy looks bleak, the investment manager at UK Merchants fund remains remarkably optimistic about his ability to generate returns for shareholders.

While acknowledging that there are enough problems in the short term to disrupt the UK stock market, Simon Gergel believes we are ‘close to peak pessimism’.

“There are some encouraging signs,” he says. ‘Over the past few weeks, both oil and gas prices have fallen, as have freight costs and timber prices. At a certain point, interest rates take a breather and then start to fall again.’

Gergel, who is responsible for UK equities for investment giant Allianz Global Investors, has a versatile portfolio built almost entirely around UK-listed companies. As a result, the £715 million publicly traded investment trust includes large stakes in tobacco giants (BAT and Imperial Brands), positions in energy companies (Shell and BP), as well as commodities companies such as Rio Tinto.

It also has stakes in a number of companies, such as homebuilder Redrow, which are currently horribly out of favor, but which Gergel believes will move forward over the next three to five years as the economic outlook improves. “Our modus operandi is to invest in good companies that are undervalued by the market,” he adds. ‘We hope that their stock market fortunes will improve in due course. Redrow fits this picture.’

Gergel says the homebuilder’s stock is “priced for disaster” — they’ve fallen nearly 40 percent in the past five years. Other construction and housing-related inventories held by Merchants include Bellway and building materials suppliers CRH and Grafton.

The trust provides a healthy dividend, which is paid quarterly. In the financial year to the end of January, the dividend paid out a total of 27.3 pence per share. So far this year, the two quarterly payments it has made – 6.85 pence – 0.05 pence are higher than last year. Shares in Merchants are trading at £5.20.

“When choosing stocks, we don’t focus on dividends,” Gergel says. “If we did that, we would miss out on some good investment opportunities. But if we do our stock selections right, dividends usually come naturally.’

Traders’ impressive dividend record has been around for a long time. It has built a 40-year record of annual dividend growth, although it has had to dive into its earnings reserves in the past two fiscal years to support payments to shareholders. It currently has the equivalent of 16 pence per share in reserves – more than half a year’s dividend – which is reassuring for investors.

“UK-listed companies have done a good job of rebuilding their dividends since 2020,” says Gergel. “It means we are on track to pay 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 proves to be effective. Over the past five years, the trust has delivered a return of 43 percent. This compares to a 12 percent return on the FTSE All-Share Index.

Aside from the attractive income on offer – equivalent to 5.2 percent per annum – traders take on fewer fees than many competing trusts. The annual cost is 0.55 percent. The trust’s stock exchange identifier is 058007 and the ticker is MRCH.

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