The difficult market conditions of 2020 have highlighted the strong performance of mid and small-cap stocks across different sectors. As Guy Anderson, lead investment manager of The Mercantile Investment Trust says, ‘our choice of sectors and stocks determines the relative performance we’re able to deliver for investors’ and ‘because we’re active investors, we can target those segments of the market that we think have the best opportunities’. We examine some of the trust’s most exciting holdings.
Let’s get digital - Aveva
The UK is not renowned for tech household names but over the last decade tech has consistently been among the largest overweights in The Mercantile portfolio, and one of the biggest drivers of excess returns above the benchmark. One tech holding with great growth potential is engineering software pioneer Aveva. Following its value-raising 2017 merger with Schneider Electric, its evolution from upfront licensing and maintenance to a software as a service provider positions it to capitalise on industrial software’s structural growth trend.
Free to grow - Avast
With over 435 million users1, Avast is the world’s largest antivirus software provider. Operating on a fremium model, and with a mere single-figure percentage of paying users, Avast has massive revue growth potential if it can increase its premium penetration. ‘Avast has many of the positive attributes that we like in a business’, says Anderson. ‘It has incredibly high margins and it’s very cash-generative, so it can reinvest in driving further growth.’ That growth could come providing security software for a range of IoT devices, from phones to smart homes, few of which are presently secure.
Remote chances - Softcat
Softcat is a value-added distributor of hardware and software to SMEs. The company has achieved almost 60 quarters of organic revenue growth and healthy profit margins thanks to increased demand for remote network access, cyber security and cloud data storage solutions. Softcat looks set to capitalise on increased demand for IT to support the coronavirus-driven shift to remote working.
Retail holds up
While lockdown shuttered the UK’s high streets earlier this year, with headline-making sector casualties, the throngs of post-lockdown shoppers show the perennial appetite for retail purchases. However, just as with many other areas of life, the coronavirus crisis has accelerated existing retail trends, for example, the necessary move to omnichannel, and the growth of online-only providers. This offers opportunities for active managers.
Home comforts - DFS and Dunelm
Sofa retailer DFS underlined its competitive advantage during lockdown with its flexible cost base and omnichannel proposition. Already boasting the largest online presence in the sector, it looks set to boost its current 35% market share.
With its 169 superstores, home furnishing retailer Dunelm has a bricks and mortar base but, like DFS, it has in fact got, as Anderson describes, ‘a fantastic online business that’s been growing tremendously well’.
Physical strength - B&M
With a product range from foodstuffs to furniture, B&M is a purely physical retailer. Yet the high-volume bargain store’s open doors allowed them to trade incredibly well through during lockdown. One of the success stories of discount retailing’s stunning growth over the last decade, B&M has been on The Mercantile portfolio since its 2014 IPO.
It’s quite a record that 15% of The Mercantile portfolio — all companies that the trust has owned since their mid-cap days — now trade on the FTSE 100. This, and the success of stocks as diverse as Aveva and B&M, shows that Anderson and The Mercantile team have a passion and skill for finding future leaders.