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The Mercantile Investment Trust continues to deliver

Despite the recent market volatility, the portfolio of smaller and mid-sized UK companies and has consistently outperformed its benchmark and grown its dividend.

Adding financial and construction stocks

Unprecedented changes in US trade policy have produced sharp swings in financial markets. The Mercantile Investment Trust’s portfolio manager, Guy Anderson, recently shared that he was able to use the broad-based market sell-off in April to add a few positions at attractive valuations.

The biggest change to the portfolio has been a notable increase in exposure to the financials sector. It’s now Mercantile’s largest sector overweight position vs. the FTSE 250 ex IT as of 30 April 2025, from an underweight at the end of January. Additions in the investment banking and brokerage sub-sector have driven much of the increase.

One company, Plus 500, operates a derivatives trading platform, which can benefit in a volatile environment. The business features strong margins and cash generation. In addition, the company has demonstrated its ability to retain customers and has become more geographically diversified. IntegraFin, an investment platform for UK financial advisers and their clients, is another recent addition, while alternative asset managers Intermediate Capital Group and 3i Group remain significant positions in this sector. Beazley, a non-life insurance company, is also now one of the top active positions in the portfolio.

Anderson also added to Mercantile’s exposure to construction-related and homebuilding stocks, which he believes will benefit as the UK economic environment improves and genuine policy reforms are implemented. Some recent additions include Volution, which provides ventilation solutions for buildings, and Ibstock, a brickmaker. The trust’s large holding in homebuilder Bellway, which has been active in the land market.

To fund some of these changes, Anderson reduced exposure to industrial support services businesses, such as staffing companies Page and Hays, and Auto Trader, a leading UK digital auto marketplace.

Positioning reflects optimism on the UK

While the changes in the portfolio are modest, they reflect a positive outlook for the UK economy and equity market. Consumer spending is a key driver of UK economic growth. On average, consumers are healthy, with recent trends of real wage growth and increased savings; yet they have not been confident enough to increase their spending. Indeed, after rebounding sharply off pandemic-era lows, consumer confidence and business confidence have ticked down slightly following the UK budget and tariff announcements. As headlines around trade subside, consumer confidence and sentiment are likely to improve. Mercantile’s large active positions in Cranswick, a leading food producer, and Games Workshop Group provide exposure to the potential increase in consumer spending.

Improving or better-than-expected corporate reporting may boost confidence in UK companies and the economy. The construction-related part of the market is looking towards recovery from the nadir last year while many consumer-related companies have reported good trading updates. Many of these companies have a more domestic focus and the proportion of Mercantile’s exposure to domestic revenues has also risen to 60%. As a result, the portfolio has slightly less exposure to some industrial companies; many of these are more international and management outlooks have been more cautious, reflecting high levels of uncertainty.

The general resilience of UK companies and an improving domestic outlook are positive for UK equities and valuations for smaller and mid-size companies look particularly attractive. The FTSE 250 ex IT, which typically commands a healthy premium to the FTSE 100, is trading at slight discount. Mercantile’s current level of gearing is 13.5%, reflecting Anderson’s view that he continues to find more stocks that he wants to buy for the trust vs. sell.

Income outlook remains strong

Mercantile has produced consistent excess returns for its shareholders over one, three, five and 10 years, annualised. At the same time, Mercantile has provided dividend growth of 8.5% annually. The investment trust should be able to maintain this robust income track record, with more than one year’s worth of dividends in reserve, allowing the investment team to focus on choosing the all-around most attractive UK stocks.

Summary Risk Indicator

The risk indicator assumes you keep the product for 5 year(s). The risk of the product may be significantly higher if held for less than the recommended holding period.

Investment objective: Aims to achieve capital growth through investing in a diversified portfolio of UK medium and smaller companies. It pays quarterly dividends and aims to grow its dividend at least in line with inflation. The Company’s gearing policy is to operate within a range of 10% net cash to 20% geared.

Key Risks: External factors may cause an entire asset class to decline in value. Prices and values of all shares or all bonds and income could decline at the same time, or fluctuate in response to the performance of individual companies and general market conditions. This Company may utilise gearing (borrowing) which will exaggerate market movements both up and down. This Company may also invest in smaller companies which may increase its risk profile. The share price may trade at a discount to the Net Asset Value of the Company. The single market in which the Company primarily invests, in this case the UK, may be subject to particular political and economic risks and, as a result, the Company may be more volatile than more broadly diversified companies. Companies listed on AIM tend to be smaller and early stage companies and may carry greater risks than an investment in a Company with a full listing on the London Stock Exchange.