The Merchants Trust (LSE: MRCH)

Last close As at 18/03/2024

GBP5.18

−2.00 (−0.38%)

Market capitalisation

GBP772m

The Merchants Trust (MRCH) is managed by Simon Gergel at Allianz Global Investors. Its investment objective is to provide an above-average level of income and income growth, together with long-term growth of capital, through investing mainly in higher-yielding large-cap UK companies (although up to 10% of the fund can be invested in overseas companies). He employs a disciplined bottom-up stock selection strategy to construct a portfolio of 40–60 holdings.

Equity proposition

Below are the four key points of its investment story.

1. MRCH offers the prospects of an above-average level of income and income growth as well as long-term capital appreciation.

Launched in 1889, MRCH is a well-established fund offering an attractive dividend yield, which is consistently appreciably higher than that of the UK market. The trust now has 41 consecutive years of annual dividend increases, earning it 12th place in the AIC’s prestigious list of 20 dividend heroes, which are funds that have achieved at least 20 consecutive years of higher dividends. Reflecting the board’s confidence in MRCH’s income generation, the trust’s dividend growth rate is on course to accelerate from a relatively low level in FY23.

2. MRCH’s manager, Simon Gergel at Allianz Global Investors, employs an unconstrained approach, seeking high-quality companies that are trading at a discount to their estimated intrinsic value.

The manager has demonstrated a disciplined approach, adhering to his successful long-term investment process, even during periods when there have been strong performance headwinds. Gergel’s fundamental stock-selection strategy is based on three pillars: fundamentals (a focus on a company’s industry structure and competitive position, its financial metrics and ESG factors); valuation (in absolute and relative terms, along with dividend yield); and themes (industry and secular issues, the macroeconomic outlook and the stage of the business cycle). The manager cites data that show over the long term, higher-yielding stocks outperform those with lower yields; however, his focus is on a company’s total return potential rather than dividend yield alone.

3. MRCH has a commendable performance record and there is high demand for its shares.

MRCH has outperformed its broad UK market benchmark over the medium and long term. The trust’s NAV total returns also rank near the top of its AIC UK Equity Income peer group, which contains a relatively large number of funds, over the last three and five years. In an uncertain economic environment, where investment company discounts are wider than historical averages, MRCH regularly trades at a premium and there is regular share issuance, indicating strong investor demand.

4. The UK market looks very attractively valued.

The UK has been out of favour with investors in recent years, which has resulted in very attractive valuations in both absolute and relative terms. Gergel highlights the dispersion in valuations within the UK market, with companies trading at the high and low end of the range with relatively few in between. The manager is genuinely excited about the wide range of interesting opportunities available, with many attractive businesses trading on modest valuation multiples.

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The Merchants Trust_resized

Equity Analyst

Melanie Jenner

Mel Jenner

Director, Investment Trusts

Key Management

  • Colin Clark

    Chairman

  • Simon Gergel

    Fund manager

Share Price Performance

Price Performance
% 1M 3M 12M
Actual 0.0 (3.2) (8.6)
Relative (3.3) (6.2) (11.3)
52 week high/low 586.0p/477.5p

Overview

The Merchants Trust (MRCH) manager, Simon Gergel at Allianz Global Investors, has been at the helm for the last 17 years during a variety of market environments. He has remained true to his investment process, seeking high-quality companies with solid fundamentals that are trading on reasonable valuations. The manager is very encouraged by the current valuation backdrop as, in aggregate, the UK market is trading at the low end of its 20-year range and within the market there is a wide dispersion of valuation multiples. A large proportion of UK stocks, including those of quality businesses, are trading on forward P/E multiples of less than 10x, providing Gergel with a large pond in which to fish. His approach has proved successful with mid- and long-term outperformance of MRCH’s broad UK market benchmark. With the trust’s dual mandate of income and capital growth, it offers an attractive 5.2% dividend yield and has grown its annual dividends for the last 41 consecutive years.

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