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Merchants Trust: October 2020 update

In this investment trust update, Head of Investment Analysis Emma Wall shares our analysis on the manager, process, culture, cost and performance of the Merchants Trust.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

  • The managers have nearly 40 years’ experience investing for income
  • The trust typically targets a higher yield than the UK market
  • Performance in recent years has struggled as value-style stocks have been out of favour

How it fits into a portfolio

This trust targets higher yielding stocks, which could be attractive for an income-focused portfolio. As it has a value-bias, it could work well among trusts invested for growth, for style diversification or those which invest in global stocks for geographical diversification. Investors in investment trusts should be aware that they can trade at a discount or premium to net asset value (NAV).


This trust has been managed by Simon Gergel since 2006. Gergel’s experience goes back decades, focusing on both income-paying assets and UK stocks. He is supported by four other members of the UK equities team, with a combined experience across the desk of more than 80 years. As well as running the Merchants Trust, Gergel manages the Allianz UK Equity Income Fund, is Chief Investment Officer, and is head of the value and income investment style team. We consider these roles to be complimentary and for Gergel to be adequately resourced.


Merchants Trust is a value-style UK equity income closed-ended fund. The trust invests in high-risk small and mid-sized companies that the manager considers to be undervalued by the market. Typically the yield on the trust is higher than the average trust in the peer group – although income is not guaranteed. Because of the nature of the underlying holdings, volatility tends to be higher than the sector average too.

The managers look to build a portfolio that has a broad range of sectors represented, aiming to diversify risk and income.

Investments fall into four buckets; high yield – where returns will be boosted by income and share price growth, cyclical growth – stocks which are sensitive to economic conditions and rerate as the economy grows, defensive growth – stocks which should grow over time regardless of the economic backdrop, and special situations – companies undergoing a turnaround or restructuring.

They like to target world-leading businesses which are currently out of favour where they believe there is a catalyst for positive change. It may take time for the market to come around to their view, as has recently been the case with some stocks, which can hurt performance.

Despite headwinds in recent years, the managers are committed to value investing, and currently consider UK stocks to be good value compared to historical averages, and UK value stocks particularly so. The stock market volatility earlier this year provided an opportunity for them to add to defensive stocks that they believe still offered good value, and buy into what they consider “safer” income producers, selling out of more economically sensitive stocks and highly leveraged companies. Sales included insurer Prudential, publishing firm Informa and housebuilding company Vistry.

The trust uses gearing with the aim to enhance income and potential returns, but which can mean greater volatility and risk of greater losses when the market falls. The trust also has the flexibility to uses derivatives which if used increases risk.


Merchants Trust is run by Allianz Global Investors, part of Allianz Group, a German multinational financial services company headquartered in Munich but with offices in 70 different countries.

We like that the managers’ are rewarded based on longer-term performance, and that bonuses are split between cash and what is known as a variable bonus; shares in the parent company and the funds that they manage. This variable element is tied up for three years. We think this helps align the managers’ interests with the investment horizons of their investors.

The managers of the Merchants Trust consider environmental, social and governance (ESG) concerns part of good active management, and work with companies they invest in to improve these factors. In the financial year to 31 January 2020, the team engaged with 22 companies 29 times on ESG concerns.


The trust has an ongoing charge of 0.59% a year. The trust charges 65% of its fee to the capital account and 35% to revenue; which could result in a higher level of income but capital growth will be impacted as a result. If held in a SIPP or ISA the HL platform fee of 0.45% (capped at £200 per annum for a SIPP and £45 per annum for an ISA) per annum also applies. Our platform fee doesn’t apply if held in a Fund and Share Account.


Performance has been challenged in recent years, as value investing has fallen from favour – underperforming growth stocks by some way. There have been UK specific headwinds adding to economic uncertainty, such as Brexit, and the added global market pressure from coronavirus. Longer-term returns, although volatile, have seen years of outperformance against the FTSE All Share benchmark over the past decade, but year to date* has been particularly difficult for the trust. Past performance isn't a guide to future returns.

Investors should be aware that the style bias has an impact on returns. That said, it is important to hold a range of investments that perform differently in different market conditions.

Annual percentage growth
Sep 15 -
Sep 16
Sep 16 -
Sep 17
Sep 17 -
Sep 18
Sep 18 -
Sep 19
Sep 19 -
Sep 20
Merchants Trust 7.4% 19.85% 9.83% 0.82% -26.6%
FTSE All-Share 16.82% 11.94% 5.87% 2.68% -16.59%

Past performance is not a guide to the future. Source: *Lipper IM to 30/09/2020.

More on Merchants trust, including charges

Merchants Trust Key Information Document

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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