The UK equity market has had plenty to react to over the past year, from tariff and budgets announcements to increasing merger and acquisition (M&A) activity. As the Mercantile Investment Trust navigates the shifting currents of UK equities, investing predominantly in mid and small cap companies, the investment team has made a few changes in recent months.

More financials and less consumer exposure

In the middle of the year, the investment team began to pick up on a change in tone from several company management teams in consumer-related businesses; they cited some slowing in consumer spending and concerns that looming tax increases might further temper consumption. Mercantile pared back some consumer positions, including housebuilding companies, and significantly increased exposure to financials. New positions in financials include IG Group, an online trading and investments platform, and Quilter, a wealth management company that is taking market share.

Mercantile also initiated a position in Just Group, a life insurance company, which is now in the process of being taken out at a premium. Alpha Group, another Mercantile holding, was acquired earlier in the year, illustrating how the trust is benefiting from from the pickup in M&A across the UK market. However, the portfolio is not participating in this trend as much as the benchmark because the companies being acquired are not always the types of higher-quality companies that Mercantile would normally own.

Stock-specific performance drivers

Unique company situations drove much of Mercantile’s performance over the past year ending 31 October 2025. The trust’s large position in Serco, a government outsourcing business, was one of the top contributors to returns. The company has improving sales momentum, good operational performance and strong bid pipeline. Serco also now derives a significant amount of profit from its defence business in North America, which the portfolio managers believe is not yet reflected in the company’s valuation. Mercantile’s large and long-held position in 3i Group, a private equity firm, was also a top contributor to returns.

Shares of Bytes Technology, a technology reseller that Mercantile had owned since 2015, declined during the period following an unexpected CEO change and restructuring of the salesforce that resulted in a major profit warning. Mercantile exited this position but retains a position in Softcat, which has a similar business yet continues to execute consistently.

Retailer WH Smith, which had been in the portfolio for over 10 years, also struggled with a management issue over the past year. The shares came under significant pressure due to concerns about the company’s true earnings power following news of an accounting review related to its North American business. The company announced that its CEO was leaving and Mercantile exited this position. 

Shares of Trainline reacted negatively to the pending government ownership of trains, which will include a ticket purchasing app. Despite the uncertainty, the company continues to deliver positive results and Mercantile retains a position.

Looking ahead

The Mercantile investment team meets with hundreds of management teams each year to find the most attractive mid and small cap UK companies. Importantly, the trust has the flexibility to hold some large cap companies, meaning it’s not forced to sell winners once they reach a certain market capitalisation.

The portfolio managers are looking for businesses that are not dependent on the macroeconomic environment, even though they believe the environment may not be as negative as the current sentiment; to that end the trust is currently 14% geared, representing a constructive view on the UK equity market.

Many smaller companies are still trading at a discount to larger UK companies, which is likely to keep M&A elevated and may also encourage flows back into the market, particularly if investors focus on the exceptional long-term performance of UK smaller companies.