March 2025
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The Mercantile Investment Trust: Rich Pickings Abound in the UK Market
The UK market has been deeply out of favour with investors for many years now, with UK-listed mid- and smaller-cap companies particularly unloved. But for Guy Anderson, manager of the £2.1 billion1 The Mercantile Investment Trust (The Mercantile), that backdrop is providing great openings to buy exactly the kind of robust, high-quality businesses that he and his team prize most highly.
Indeed, The Mercantile has beaten its FTSE All-Share (ex FTSE 100, ex Inv Companies) benchmark over one, three and 10 years.2 It has grown shareholders’ investments by over 120% in the decade to end January 20252 - a difficult one for the UK by any standards – and cemented its reputation as one of the top-performing UK mid-cap trusts.
What is that long-term success rooted in? Anderson believes it’s a reflection of an excellent team and a disciplined investment process, following a tried and tested investment philosophy.
“We’re looking for structurally strong businesses operating in attractive consumer markets, where we see the opportunity for positive change and can buy at a sensible price,” he explains.
In practice, separating real ‘positive change’ from short-term ‘noise’ can be quite a challenge. “Most activity is noise, but it can feel very significant at the time, so our primary task is to find areas of genuine rather than temporary development,” he adds.
However, although that robust philosophy remains a guiding constant, the team continually strives for marginal improvements in the way it makes investments.
For example, says Anderson: “A couple of years ago we started explicitly incorporating expected trading costs when we were thinking about how big investments should be. It wasn’t a big reset, but it resulted in incremental improvements in returns for shareholders, and that’s what we’re always aiming for.”
Mergers and acquisitions (M&A)
Over the year to end January The Mercantile returned 14% in NAV terms, while the share price rose by 19%2: a good year by any long-term standards. Much of that success came from longstanding holdings such as the financial businesses 3i and Intermediate Capital, and the games manufacturer Games Workshop.
But Anderson also picks out potentially less well-known names such as Cranswick and Premier Foods, two food processing companies that also had an excellent year.
Of course, the year also brought its challenges. As well as the occasional inevitable stock-specific disappointments that any manager must live with – one example being Watches of Switzerland, which was sold – The Mercantile faced a notable headwind in the form of high levels of mergers and acquisitions.
In the FTSE 250 Index of mid-caps, 19 companies received takeover bids in the course of 2024, the large majority successful. “That’s well up on the three FTSE 250 company takeovers of 2023”3 says Anderson. “It speaks to both the value and the quality of businesses on offer,” he acknowledges.
But M&A has not been a positive for The Mercantile overall. “We focus on companies that are performing well; but often takeovers target those with operational challenges, so we tend not to own them, and that can be a bit of a headwind in terms of relative performance [because of the uplift to share prices involved].”
Moreover, M&A further deplete the number of businesses listed on the stock exchange – and that number is already on a worrying downward trend.
As Anderson observes: “Twelve years ago, my benchmark contained almost 400 constituents; today, that has fallen to under 300, so we have seen quite dramatic de-equitisation.”
Despite that longer-term decline in absolute numbers of listed companies, however, he emphasises the wealth and quality of choice currently available on the UK stock market.
“There are still many really compelling UK-listed businesses that are providing us with lots of opportunity. At the moment, we want to buy shares in more companies than we want to sell shares in, which is very exciting. But in the long term we want to see more companies coming to market and listing in the UK.”
Sector position - an output of stock selection
Against that background of dwindling choice and in what’s widely billed as a difficult time for UK plc, where is the portfolio overweight?
It’s important to remember, first of all, that The Mercantile operates very much on the basis of individual stock selection – so every holding is in the portfolio on the basis of a specific investment case, and any that don’t live up to expectations are likely to lose their place in the line-up.
“We are quite disciplined, so there is no tail of holdings that are in the portfolio today simply because they were in it yesterday,” Anderson stresses.
Sector weightings are therefore shaped by that bottom-up approach, although they are also influenced to some extent by the team’s top-down views on the economy and markets.
At present the portfolio is modestly overweight both domestic and consumer-facing businesses, with almost 60% of the portfolio in domestic stocks and the balance in international-facing holdings. That might come as a surprise, suggests Anderson, given the negativity surrounding both the UK market and consumer sentiment in general.
“The reality is that UK consumption is neither particularly weak nor especially strong,” he explains. “It’s ticking along and bearing in mind that real wages and consumer balance sheets are both in pretty good shape, we think that if consumer confidence returns, some of these companies could do very well.”
While there's a large exposure to consumer-focused businesses and financials, the portfolio’s biggest overweight is to technology. Again, that might be a surprise for investors, given that the UK is not widely associated with tech opportunities.
However, Anderson says that there are some great businesses in the mid-cap and small-cap part of the market, especially for software and computer services: “It’s been one of the most longstanding and most significant overweights for the portfolio.”
Looking ahead, perhaps the clearest indicator of Anderson’s confidence in the strength of its portfolio is the current level of gearing, financed securely by long-term fixed debt and currently towards the upper end of its range at 17%4.
In essence, it reflects the fact that both macroeconomic uncertainty internationally and negativity for the UK are providing him with outstanding opportunities to buy and hold the kind of resilient, high-quality companies best placed to thrive through bad times as well as good.
