With UK mid-caps back in focus, we explore five reasons ISA investors may look to The Mercantile for diversified access to this dynamic area of the market.
UK plc is a core portfolio element for many ISA investors, and for good reason. This is a familiar, mature and well-regulated market with one of the world’s best-established dividend cultures.
Moreover, the FTSE All-Share Index performed strongly in 2025; it gained 24% over the year in total return terms – well ahead of the S&P 500 on 18%, as investors sought to broaden their exposure globally away from US tech mega-caps¹.
Looking ahead, there is an expectation that the rally in UK equities is not over yet, bolstered by the prospect of falling inflation and consequent gradual easing of domestic interest rates.
But the UK is a rich and diverse hunting ground for prospecting investors, and different parts of the market cap spectrum may perform quite distinctly from each other.
In particular, the medium-sized, typically more dynamic companies stabled in the FTSE 250 have historically tended to outperform their larger, more mature FTSE 100 peers over the long term.
For example, over the 20 years to mid-February 2026, the mid-cap index produced a total return of around 150%, compared with 80% for its blue-chip counterpart². Whilst there might be some short-term volatility, that longer-term performance reflects the greater potential for innovation, flexibility and long-term growth of medium-sized and smaller businesses.
The Mercantile Investment Trust (MRC) provides a simple way to access the best of the UK’s medium-sized and smaller businesses through a single investment. Below, we consider five features of the Trust that make it a strong choice for investors in this dynamic part of the market.
1) Mid-caps remain cheap
Despite their impressive long-term track record, in the higher interest rate environment of the past few years UK mid-caps and smaller companies have struggled relative to large companies.
The price-earnings (PE) ratio compares the current share price of a company (or index) to its earnings per share – so a falling PE ratio, for example, indicates that the index has become cheaper relative to its inherent value.
As of end December 2025, the FTSE 250 Index traded on a PE ratio of just 12x earnings – a 20% derating relative to its value six years earlier, when it sat on a PE ratio of 15x earnings. The FTSE 100, in contrast, saw a marginal increase in valuation from 13x earnings to 13.5x earnings over that period (meanwhile, the US S&P 500 index rose from 18x earnings to 22x earnings)³.
That derating leaves UK mid-caps still trading at attractive valuations relative to their long-term average, notwithstanding the past two years of strong total returns.
However, as and when interest rates normalise, helping to stimulate the economy and underpin growth, these businesses are likely to feel the benefit; indeed, the sector has already seen increasing support as overseas investor sentiment picked up during 2025.
There are other attractions to this part of the domestic market too. For instance, medium and smaller businesses tend to be focused primarily on the domestic market, thereby avoiding some of the risks currently associated with international investment (such as geopolitical flare-ups, currency movements and the unexpected imposition of hefty and disruptive tariffs on US imports).
2) Manager skill and conviction
Guy Anderson and Anthony Lynch have been at the helm of The Mercantile since 2012. The two have outperformed the Trust’s benchmark (FTSE All-Share ex 100 ex investment trusts) in net asset value terms over three, five and 10 years⁴, despite the sectoral headwinds.
Importantly, Anderson and Lynch are optimistic that while economic growth is forecast to remain subdued this year, individual businesses are feeling much more positive about their prospects. They base that conclusion on insights gleaned from the 400-plus company meetings conducted by the team each year.
Reflecting that positivity, MRC is currently 13.6% geared⁵, ahead of its peers in the Association of Investment Companies (AIC) UK All Companies sector. By borrowing to invest in this way, the managers can enhance returns for investors if their chosen stocks perform strongly, though losses will also be greater if things go wrong.
3) Active and flexible approach
The fact that the managers can draw on the extensive resources of J.P. Morgan Asset Management’s vast analyst team enables them to give this relatively less researched part of the market the scrutiny needed to sort the wheat from the chaff effectively.
Thus, although The Mercantile’s portfolio is deliberately diverse, comprising around 75 stocks across a broad range of sectors, it is the result of a disciplined and in-depth research process.
Nor are Anderson and Lynch afraid to deviate meaningfully from the benchmark where they see strong attractions in a particular sector or industry. Currently, for example, the portfolio is 6.6% overweight financials and 6.5% underweight real estate⁶.
4) Proven track record of picking winners
The management team has a clear sense of the kind of companies they believe will outperform over a five-year period. They target high-quality, attractively priced mid-cap and smaller companies, typically operating in growing markets and demonstrably capable of the flexibility needed to adjust as their environment evolves.
The Trust’s specific focus on this part of the market has proved a successful one on a long-term view: over 15 years to the end of January 2026, £10,000 invested in MRC would have delivered a total return of around £39,000 (on a share price basis) compared with the MRC benchmark of £32,000⁷.
Similarly, over the 10 years to the end of December 2025, the Trust delivered an average annualised return of 6.6%, comfortably ahead of the FTSE 250’s average annualised return of 5.3%⁴.
It’s so important to take a long term view of your ISA investments – and that includes The Mercantile - rather than dwelling on the day-to-day (or month-to-month) fluctuations that are an integral element of stock market investment.
5) Growing dividend
The Mercantile is not primarily an income-focused investment trust; the current yield is just under 3%⁸. However, the board has concentrated its efforts on ensuring a reliable payout for shareholders, with almost 12 consecutive years of rising dividends now chalked up.
That achievement puts The Mercantile among the ranks of the AIC’s highly regarded ‘next generation’ Dividend Heroes - those trusts that have more than 10 but less than 20 years of steady dividend growth.
For investors, that commitment to raising payouts each year contributes to income security, and means that even in years where share price growth is elusive, they are rewarded for their continuing loyalty.
Long-term perspective is key
Although the UK mid-cap arena can provide rich rewards over the long term, it’s undoubtedly the case that it tends to be more volatile than investing in bigger companies.
Rising UK interest rates, for instance, can pose a greater challenge for mid-caps, because they are more likely to have debt and are typically more affected by the health of the domestic economy.
However, for Anderson, Lynch and their team, the current environment is a particularly exciting one, given broad corporate strength and signs of improving prospects for the economy.
A further positive for share prices and an indication that investor interest is on the rise is the recent surge in UK merger and acquisition activity by corporate and private equity investors, on the back of persistently low valuations for attractive businesses.
In short, for ISA investors with a long-term perspective, this could be an outstanding opportunity to gain sensibly priced exposure to this exciting segment of UK plc.
