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Merchants Trust: May 2021 update

Senior Investment Analyst David Holder shares our analysis on the manager, process, culture, cost and performance of 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.

  • Simon Gergel is an experienced income investor and has managed Merchants Trust since 2006
  • He is part of a well-resourced team at Allianz Global Investors
  • The focus is on providing a high level of income with longer term capital growth

How it fits in a portfolio

Merchants Trust invests mainly in larger UK companies with an aim to provide a high level of income, and to grow the income and capital over the long term. It could therefore fit as part of an income-focused investment portfolio or add larger UK companies exposure to a broader, diversified portfolio.

Manager

Merchants Trust has been managed by Simon Gergel since 2006. He works closely with Matthew Tillett and Richard Knight and with the wider investment resource at Allianz Global Investors (AGI). They carry out individual company analysis in addition to looking after the management of the trust.

Gergel is Chief Investment Officer for UK equities and is head of the UK Equity Income & Value Team. He joined AGI in 2006 from HSBC and previously began his career managing UK equities at Phillips & Drew. He also co-manages the open-ended Allianz UK Equity Income fund. Tillett joined AGI in 2006 and manages the Allianz UK Opportunities fund and Brunner Investment Trust, which also invests overseas. Knight joined AGI in 2014 and is co-manager of the Allianz UK Equity Income fund with Gergel and deputy manager of the UK Opportunities fund with Tillett.

The team can also draw upon the wider group’s research and analysis in the credit, Environmental, Social and Governance (ESG) and macroeconomic areas. They can also use “grassroots”, which is an established, on-the-ground research and information gathering program to help provide real world insight.

Process

Merchants Trust mainly invests in larger UK companies with a small allocation to some overseas companies. Gergel looks for quality companies, which can be bought at a reasonable share price and pay a high dividend. If they don’t pay a high dividend now, they are bought on the basis they will do in the near term.

Gergel’s investment process focuses on three key areas. Firstly, he aims to understand the fundamentals of a company, including its competitive position and financial strength. Valuation is a key element, and the managers aim to buy shares at a price he believes is much lower than what the company will be worth in future. They look at valuations compared with both the company’s own history and its peers. Finally, they consider industrial and consumer themes together with the economic outlook. Investments are sold if the share price no longer offers enough value, if there is a change in investment circumstances or if there are better opportunities elsewhere.

The main focus is on individual company analysis, but there are also a number of themes in the portfolio. These include a UK recovery, which could benefit house builders and home improvements businesses, so investments in Redrow and DFS are held. Other themes include digital “winners” such as Next, which has a strong online platform, and IG Group, which could benefit from increased financial trading. There are also ESG-related companies, such as National Grid and SSE, which could have a positive impact on the environment through their development and use of renewable energy sources.

Over the past 12 months Gergel has made new investments in some more defensive companies that offer good value and others with sustainable dividends. Examples include RELX, which provides business support and analytics, RSA, a general insurer, and Close Brothers, which provides banking and wealth management services. He reduced investments in companies with higher levels of debt. Companies negatively affected by the COVID pandemic were sold, including National Express and exhibitions group Informa.

The Board, which oversees the running of the trust for investors, recently changed the trust’s guidelines so it can invest up to 10% in overseas companies. As at April 2021 around 4% was invested overseas. This is just in European companies currently, including insurers SCOR and Swiss Re, pharmaceuticals company Sanofi and French energy company Total.

Investors should be aware the trust can borrow money to invest with the intention of increasing returns (known as gearing), but this could magnify losses in a falling market and increases risk. The manager can also use derivatives, which if used adds risk.

Culture

Allianz Global Investors (AGI) is the asset-management arm of Allianz SE, the German-based financial services and insurance company. As with any large asset manager, the investment resources are substantial and spread globally across asset classes. AGI manage a number of investment trusts and Kleinwort Benson, which was acquired by AGI, were appointed to manage Merchants Trust at launch in 1889.

ESG factors have become increasingly prominent within the investment community over recent years. AGI has incorporated ESG into company analysis since 2000, which makes them somewhat of a pioneer in this area. As long-term stewards of investor capital it makes sense for them to closely consider these factors.

Cost

The annual ongoing charge to January 2021 was 0.61%. Investors should refer to the latest annual reports and accounts, and Key Information Document for details of the risks and charging structure. If held in a SIPP or ISA the HL platform fee of 0.45% per annum (capped at £200 per annum for a SIPP and £45 for an ISA) also applies. Our platform fee doesn’t apply if held in a Fund and Share Account.

Part or all of the annual charge is taken from capital rather than income generated, increasing the potential for your investment’s capital value to be eroded.

Performance

The trust has performed well over Gergel’s tenure. The board have increased the annual dividend every year since 1982, which is one of the longest records in the UK Equity Income sector. Although this shouldn’t be taken as an indication for future payments and past performances is not a guide to the future.

Income funds had a tough 2020 as the COVID pandemic severely impacted many companies’ ability or willingness to pay dividends. In the financial year to the end of January 2021 the trust paid dividends totaling 27.2p per share, a 0.4% increase from the prior year. This was despite revenue falling by 38% over the period. The trust could do this by using revenue reserves. These are used by investment trusts to help boost income during tough times for the market. The Board has indicated the dividend is likely to increase again (for the 40th consecutive year) for the year ended January 2022. There are of course no guarantees.

In the first half of 2020 the trust fell 28.6%* compared to -17.5% for the FTSE All Share. Companies whose prospects were linked to the health of the economy (cyclical sectors) were in the eye of the storm and fared the worst, such as travel & leisure, banks and oil. In addition, during this period the companies gearing detracted from returns. Holdings in Real Estate such as Hammerson and Land Securities detracted, as did not owning AstraZeneca, which performed well.

The second half of 2020 saw markets recover. Positive signs of a COVID vaccine, a Biden victory in the US presidential election and the perceived resolution of Brexit helped to improve investor sentiment. Some of the more cyclical sectors such as mining, travel & leisure and general retailers performed strongly whilst healthcare, utilities and oil & gas underperformed. In this period the trust returned 20.1% vs the FTSE All Share return of 9.3%. Investments in industrials and financials such as Tyman and Barclays performed well.

Over 12 months to the end of April 2021, Merchants returned 39.5% vs the FTSE All Share return of 26.0%. Investment in financials such as St James’s Place and Entain in travel and leisure helped this performance.

Past performance isn’t a guide to future returns.

Annual percentage growth
Apr 16 -
Apr 17
Apr 17 -
Apr 18
Apr 18 -
Apr 19
Apr 19 -
Apr 20
Apr 20 -
Apr 21
Merchants Trust 20.2% 14.5% 1.0% -16.8% 39.5%
FTSE All Share 20.1% 8.2% 2.6% -16.7% 26.0%

Past performance is not a guide to the future. Source: *Lipper IM to 30/04/2021.

Find out more about Merchants Trust including charges

Merchants Trust Investment Company Key Investor Information

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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