The Merchants Trust is a stalwart investment fund with a history going back 135 years.
Yet there is nothing stale or fuddy-duddy about the £889million trust which continues to provide investors with a compelling mix of income and capital return from the UK stock market. Among its peers, it shines.
The trust is managed by Allianz Global Investors and benefits from a steady hand at the tiller in Simon Gergel, who has been in charge of investment for more than 18 years. He is supported in managing the portfolio by Richard Knight and Andrew Koch.
The trust’s performance numbers are impressive. Over the past one, three, five and 10 years, it has outgunned the average of its UK equity income peer group.
For example, over the past year it has produced a total return of 20 per cent compared to a peer group average of 18. Over five years, the outperformance is magnified – 70 per cent versus 38.
There is no magical formula behind its success – just a lot of hard work and a commitment to an investment style that focuses on identifying undervalued companies that the team believes will come good in the long term.
These companies tend to offer above market average dividend yields. The trust’s current annual yield is 4.8 per cent, which compares to a yield on the mainstream FTSE100 Index of 3.5 per cent.
Indeed, income is central to Merchants‘ investment proposition. Along with a small cohort of other investment trusts, it has a record of annual dividend growth going back decades.
Although other trusts have longer records – the likes of Alliance, Bankers and City of London – 42 years of consecutive annual dividend increases is impressive.
Gergel and the Trust’s board are keen to keep the record going, reassured by the fact that the fund has more than half a year’s income tucked away in reserves, to be used if dividends from existing holdings tail off.
Dividends are paid quarterly and the first payment for the current financial year was 7.2p a share, an increase of 0.1p on the equivalent payment 12 months earlier. The trust’s shares are priced just below £6.
The portfolio currently comprises just over 50 stocks with familiar dividend-friendly companies among its top holdings: the likes of oil companies BP and Shell and British American Tobacco.
Gergel and his team are brave investors, taking positions in businesses that have gone out of favour. Among the latest additions to the trust’s portfolio is luxury goods manufacturer Burberry – a business which has suffered from poor sales, culminating in the appointment of a new chief executive in Joshua Schulman.
Although the trust bought into the company before the boardroom turmoil and the suspension of its dividends,
Gergel says he is prepared to ‘hold strong business franchises through a restructuring period where we can see significant value’. Burberry’s shares are nearly 70 per cent lower than this time last year.
Gergel adds: ‘There is lots of value in the UK stock market, especially in companies like Burberry where their share price has been beaten up.’
Other recent additions to the portfolio include high tech engineering company Dowlais and student accommodation specialist Unite.
Gergel says: ‘Dowlais is an attractive business with a decent yield [6.5 per cent] while Unite continues to benefit from strong demand for student accommodation and its share price could go a long way.’
The trust’s total annual charges are competitive at 0.55 per cent. Its identification code is 0580007 and ticker MRCH.
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